$850,000 Penalty Hits Broker-dealer for Lax Housekeeping of Nonpublic Information

Jack Humphrey, Regulatory journalist
July 12, 2011 /

A broker-dealer has settled charges brought up by the Securities and Exchange Commission (SEC) over allegations that it failed to establish and enforce policies and procedures to prevent the misuse of material, nonpublic information.

Philadelphia-based broker-dealer Janney Montgomery Scott LLC did not admit or deny the charges, but agreed to pay $850,000 in settlement of the SEC’s administrative proceeding. The broker-dealer 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.

The SEC’s order instituting proceedings stated that from at least January 2005 to July 2009, Janney’s policies and procedures for its Equity Capital Markets division, which encompassed its equity sales, trading, syndicate and research departments, lacked enforcement of its policies and procedures, for instance, and in another occasion failed to follow them as written, creating the risk that material, nonpublic information could be used for insider trading.

Elaine Greenberg, Associate Regional Director of the SEC’s Philadelphia Regional Office, said in a statement: “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.

In addition to the censure, penalty and cease-and-desist order, the broker-dealer said it will 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 will be tasked to prepare written reports and certify in writing that the broker-dealer 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.

“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,” Greenberg added.

The SEC found that the broker-dealer failed to adequately monitor trading in the securities of companies on the its Watch List that its investment bankers were advising, which could lead to insider trading.

Janney also failed to 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.

The broker-dealer allegedly did not enforce its policies and procedures to prohibit noncompliance personnel from chaperoning meetings between investment banking and research staff, nor did it 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.

Additionally, investment bankers have not been required by the broker-dealer to seek pre-clearance for personal trades.

There was also a lack in enforcement of its policy that all Janney employees receive approval to maintain brokerage accounts at firms other than Janney.

The broker-dealer also failed to obtain annual questionnaires identifying employees with brokerage accounts at firms other than Janney and to review the brokerage account activity of employees with brokerage accounts at firms other than Janney.

 

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