New York, NY – Last week, the Security and Exchange Commission settled charges with Philadelphia-based investment bank, Janney Montgomery Scott, for failing to establish and enforce policies preventing the potential misuse of material nonpublic information.
The SEC’s Charges
The commission charged that between January 2005 and July 2009, Janney “failed to adequately establish, maintain and enforce policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of material, nonpublic information.”
During that period, the SEC contends that Janney’s investment banking personnel and research analysts met regularly without compliance professionals in attendance to plan business strategy and to leverage research analysts’ insight to help to solicit trading business. In the aftermath of the 2003 Global Research Analyst Settlement, investment bankers and equity research analysts are supposed to be kept separated by “chinese walls”.
In one instance cited in the settlement, a Janney analyst supposedly recommended a stock of a company that was working with the firm’s investment banking unit, to at least three institutional clients who subsequently bought the stock of the company. This analyst had previously met with Janney’s investment bankers involved in advising the company about an upcoming merger.
Terms of the Settlement
Without either admitting or denying guilt, Janney Montgomery Scott agreed to be censured by the SEC and to pay a fine of $850,000. In addition, the broker-dealer agreed to “cease and desist from committing or causing any further violations of Section 15(g) of the SEC Act of 1934”, which prohibits the misuse of insider information.
Also under the terms of the settlement, Janney agreed to hire an independent compliance consultant to conduct a comprehensive review of its policies regarding the handling of material, nonpublic information and to adopt the policies and procedures recommended by that consultant at the end of a 180-day period.
Participants’ Comments on the Charges
Elaine C. Greenberg, the associate director of the SEC’s Philadelphia regional office explained, “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.”
“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,” stated Greenberg.
Karen Shakoske, a spokeswoman for Janney Montgomery Scott, said that the charges in the SEC’s order were “limited to policies and procedures and there were no charges of insider-trading.”
Integrity’s Take on the Settlement
We find the Janney settlement to be particularly interesting as it marks the third time in the past nine months that a registered broker-dealer has found itself in hot water with US regulators for failing to enforce its written compliance policies and procedures regarding the handling of material nonpublic information.
In addition to last week’s settlement with Janney Montgomery Scott, the SEC reached a settlement with Buckingham Research in mid-November 2010 for similar mishandling of compliance policies and procedures regarding material nonpublic information. Another registered broker-dealer that ran initially afoul of the SEC in November 2010 regarding inside information was expert network provider Primary Global Research.
However, some asset managers continue to mistakenly believe that registered broker-dealers have less compliance risk around their research than independent research providers. We will admit that compliance policies and procedures are well established for broker-dealer research, whereas there are few rules for independent research providers. Yet, recent regulatory and legal action suggests that the research produced by registered broker-dealers is no less fraught with risk than the research provided by their “independent” brethren.