SEC ALLEGES BROKER FAILED TO PROPERLY HANDLE NONPUBLIC INFORMATION

Nonpublic information can sometimes be used by insider traders. The following case of alleged mishandled information is an excerpt from the SEC website:

“Washington, D.C., July 11, 2011 – The Securities and Exchange Commission announced today that it brought and settled charges that Philadelphia-based broker-dealer Janney Montgomery Scott LLC failed to establish and enforce policies and procedures to prevent the misuse of material, nonpublic information, as required by law.
Janney, without admitting or denying the findings, agreed to be censured and to pay an $850,000 penalty to settle the SEC’s administrative proceeding. It also agreed to cease and desist from committing or causing any violations of Section 15(g) of the Securities Exchange Act of 1934, which seeks to prevent the misuse of material, nonpublic information.

According to the Commission’s order instituting proceedings, from at least January 2005 through July 2009, Janney’s policies and procedures for its Equity Capital Markets division, which encompassed its equity sales, trading, syndicate and research departments, were deficient in a number of ways. In some instances, Janney did not enforce its policies and procedures and in others, it failed to follow them as written, creating the risk that material, nonpublic information could be used for insider trading.
“Establishing and enforcing robust policies and procedures to detect potential insider trading at broker-dealer firms is critically important because insider trading undermines confidence in the markets and creates an uneven playing field,” said Elaine C. Greenberg, Associate Regional Director of the SEC’s Philadelphia Regional Office. “Broker-dealers such as Janney must take these duties seriously, because failing to do so can result in the misuse of confidential information to the detriment of investors.”
The Commission’s order found that, in certain instances, Janney failed to:
adequately monitor trading in the securities of companies on the firm’s Watch List that its investment bankers were advising, where the potential for insider trading existed
maintain an adequate email “firewall” between its investment banking and research staff, which posed the risk that material, nonpublic information could be exchanged and misused
enforce its policies and procedures to prohibit noncompliance personnel from chaperoning meetings between investment banking and research staff
revise its policies and procedures to address its use of analysts in multiple roles, such as helping investment bankers explore business opportunities and conferring with them on deals
require its investment bankers to seek pre-clearance for personal trades
enforce its policy that all Janney employees receive approval to maintain brokerage accounts at firms other than Janney
obtain annual questionnaires identifying employees with brokerage accounts at firms other than Janney
review the brokerage account activity of employees with brokerage accounts at firms other than Janney
In addition to the censure, penalty and cease-and-desist order, Janney agreed to hire an independent compliance consultant to conduct a comprehensive review and make recommendations regarding its policies, practices and procedures relating to Section 15(g) of the Exchange Act, including the prevention of the misuse of material, nonpublic information. The independent consultant also will prepare written reports and certify in writing that Janney has established and continues to maintain policies, practices and procedures pursuant to Section 15(g) of the Exchange Act that are consistent with the findings of the Order.
Assistant Regional Director Colleen K. Lynch, Senior Counsel Lynn H. O’Connor and Investigator John S. Rymas, all of the SEC’s Philadelphia Regional Office, conducted the investigation.”