Affiliated Adviser and Broker-Dealer Settle Charges Concerning Flawed Information Policies and Procedures
Commentary by Steven Lofchie
The Chicago-based broker-dealer and investment adviser affiliates of an asset management firm settled SEC charges that they failed to maintain and enforce policies and procedures to prevent the misuse of material nonpublic information. An SEC order ("Order") stated that the affiliates violated Securities Exchange Act Section 15(g)("Registration and Regulation of Brokers and Dealers") and Investment Advisers Act Section 204A ("Prevention of Misuse of Nonpublic Information"), respectively.
The Order stated that the broker-dealer and investment adviser affiliates:
- repeatedly shared information between themselves as to trading positions and strategies regarding an Exchange-Traded-Note in which the broker-dealer was a market maker, in violation of their firm's policies and procedures;
- met extensively to discuss issues regarding the note and its potential reopening of new issuances; and
- caused the asset management firm to profit from a market opportunity that "it should not have received."
The Order found that: (i) the affiliates violated the firms' policies and procedures to prevent the misuse of material nonpublic information and (ii) the affiliates' information sharing exposed deficiencies in the firms' policies and procedures, including "vague provisions and inadequate guidance, monitoring or surveillance of potential information sharing."
Commentary
This is an interesting case because the firms were NOT charged with a violation of Securities Exchange Act Rule 10b-5, for trading on material non-public information. The only charges brought against them were procedural; i.e., that the affiliated firms either violated their own policies, or that the policies were not clear as to what actions were intended, or that there were not adequate procedures in place to enforce the policies. (At one point in the order, there is a statement that the firms acted as they did despite "contrary instructions" from a third party, but it is not clear that these contrary instructions were in the nature of an agreement to keep information confidential, and the absence of a Rule 10b-5 claim would suggest that there were no such agreements.)
Firms should review this enforcement action very carefully and consider (i) the extent to which affiliated entities may share information, (ii) whether their compliance procedures are consistent with their determinations as to the extent of appropriate information sharing and (iii) whether their supervisory procedures are sufficient to catch conduct that may be violative of their compliance procedures.