Investment Banks Must Have and Enforce Policies to Prevent Misuse of Material, Nonpublic Information


The Securities and Exchange Commission recently settled charges that a Philadelphia-based broker-dealer (the “Broker-Dealer”) failed to establish and enforce policies and procedures to prevent the misuse of material, nonpublic information, as required by law. The Broker-Dealer, 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 (the “Exchange Act”) and agreed to retain a consultant to develop such policies and procedures.

The SEC’s Order reinforces the need for broker-dealers to have effective informational firewalls and policies and procedures, as well as the need to enforce existing procedures. Section 15(g) of the Exchange Act, requires brokers and dealers registered with the SEC to establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of such broker’s or dealer’s business, to prevent the misuse, in violation of the Exchange Act or the rules or regulations thereunder, of material, nonpublic information by such broker or dealer or any person associated with such broker or dealer. Section 15(g) does not prescribe particular procedures. In response, the financial industry implemented or enhanced their existing “Chinese Walls,” which are intended to be “self-enforced informational barrier[s] consisting of systematic, as opposed to ad hoc, procedural and structural arrangements . . . designed to stem the flow of knowledge (in particular, unpublished price sensitive information) between different divisions within a multi-capacity financial intermediary with conflicting interests and obligations.” In 1990, the SEC’s Division of Market Regulation issued a report on informational barriers within financial firms, and it has been consistent in policing Section 15(g) violations. The Order once again demonstrates the consequences of failing to have strong policies or to enforce existing ones.

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