Broker-Dealer/Adviser Sanctioned for Inadequate Insider Trading Procedures


On July 11, 2011, the Securities and Exchange Commission accepted an offer of settlement from Janney Montgomery Scott LLC (“Janney”) to settle allegations that Janney willfully violated Section 15(g) of the Securities Exchange Act of 1934 the (“Exchange Act”), which requires registered brokers and dealers 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 of material nonpublic information by such broker or dealer and certain associates. Without admitting or denying the SEC’s findings, Janney consented to the entry of an order instituting administrative and cease-and-desist proceedings pursuant to Sections 15(b) and 21C of the Exchange Act. Pursuant to the Order, Janney will pay a civil penalty of $850,000 and will retain an independent compliance consultant to review Janney’s policies and procedures and report to the SEC. Although Janney was sanctioned for violating the Exchange Act, other regulated entities that are required to adopt insider trading procedures, such as registered investment advisers, should expect similar regulatory interest. A copy of the Order can be found here.

The SEC alleged that Janney, which was dually-registered as a broker-dealer and investment adviser, failed to maintain and enforce written policies and procedures that were intended to place a firewall between Janney’s equity analysts and their investment advisers to prevent the misuse of material nonpublic information. Among other things, Janney failed to enforce its written protocol for chaperoned meetings between analysts and investment bankers, the firewall intended to prevent email communication between analysts and investment bankers was repeatedly violated, and Janney failed to sufficiently monitor employees’ trading activities.

Chaperone Process Not Followed

A written policy manual developed by Janney in 2005 permitted analysts and investment bankers to meet only when chaperoned by a member of the compliance or legal departments. Despite this requirement, a number of unchaperoned contacts between analysts and bankers allegedly occurred. Moreover, after a change in the compliance manager at Janney, the SEC determined that the new compliance manager was allegedly “less rigorous” in his enforcement of the chaperone protocol than the former manager (e.g., the new manager did not take steps to familiarize himself with deals on the watch list or companies in the industry segments that were the topic of the meetings that he chaperoned and failed to create adequate documentation of meetings he was involved with).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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