Policies and Procedures Are Not Enough – Insider Trading Investigations Continued


New York – Having written internal procedures in place is not enough protection against insider trading allegations – you also need to implement them.  In a case published this month, FINRA censured and fined Midtown Partners & Co. LLC, an investment bank, for the amount of US$30,000 for the alleged failure to effectively prevent the misuse of material, nonpublic information.

FINRA’s findings, which were not admitted or denied by the bank, establish that it “failed to have a supervisory system reasonably designed to detect and prevent the misuse of material, nonpublic information by employees through an information barriers system.” The summary of FINRA’s findings and accusations are pasted below.

Of special relevance in this case is the existence of certain internal procedures in the bank. However, FINRA found that these procedures were insufficient or inadequately implemented in reality. The bank was supposed to fulfill three requirements related to information barriers (established in the “91-45 NASD/NYSE Joint Memo on Chinese Wall Policies and Procedures”):

1) Written procedures for maintenance of a watch list;

2) Restricted list documentation that includes the date and time a security was added to or deleted from the restricted list and the name of a contact person who can answer specific questions regarding the timing of the addition or deletion of the security from the restricted list;

3) Monitoring of employee trading in outside accounts for transactions in securities listed on either the watch or restricted list.

In addition to the above, the bank was bound by securities rules to have effective procedures to restrict the flow of material, non-public information.

Midtown Partners & Co. partially fulfilled these requirements since it did have procedures in place, a restricted list, and a procedure to monitoring employees. However, the actual implementation did not convince FINRA of the existence of effective information barriers at the bank. According to the Order Accepting Offer of Settlement, “the Firm did maintain a restricted list during the referenced period. However, the Firm did not maintain this list in the manner required by the firm’s own procedures…. Moreover, the Firm did not adequately monitor employee trading outside the firm for transactions in the restricted list securities… In addition, the Firm had no procedures to restrict the flow of material, nonpublic information.”

In conclusion, the outcomes of the insider trading investigations should remind interested parties that having robust policies and procedures related to material non-public information is not enough. It is necessary to implement them and to be able to prove that such strict implementation is in place.


Summary of FINRA’s action in the Midtown Partner’s case:

Midtown Partners & Co., LLC (CRD #104223, New York, New York) submitted an Offer of Settlement in which the firm was censured and fined $30,000. Without admitting or denying the allegations, the firm consented to the described sanctions and to the entry of findings that it failed to have a supervisory system reasonably designed to detect and prevent the misuse of material, nonpublic information by employees through an information barriers system. The findings stated that the firm did not have WSPs addressing the creation or distribution of a watch list, which is a list of securities whose trading is subject to close scrutiny by a firm’s compliance or legal department, and the firm did not maintain any list of this nature. The findings also stated that the firm maintained a restricted list but it was not maintained in the manner its own procedures required; securities were added to the list in a haphazard manner, often after the issuer had signed a private placement agent agreement with the firm. The findings also included that the list did not reflect when a security was added or deleted from the list, and did not identify the contact person.FINRA found that the firm did not adequately monitor employee trading outside the firm for transactions in the restricted-list securities; the firm permitted employees to maintain securities accounts with other broker-dealers, requiring any employee to have duplicate confirmations and account statements sent to the firm. FINRA also found that firm employees were required to disclose their outside accounts to the firm upon hire and annually in an attestation form, but the firm failed to obtain annual attestations from some employees and did not ensure that it was receiving the required duplicate confirmations and account statements. In addition, FINRA determined that because the firm failed to maintain a watch list, to timely add securities to its restricted list, to 12 Disciplinary and Other FINRA ActionsAugust 2011record the required restricted list information, and to obtain confirmations and account statements for employee accounts, it could not reasonably monitor its employees’ trading for transactions in restricted or watch-list securities. Moreover, FINRA found that the firm did not have procedures to restrict the flow of material, nonpublic information and routinely shared restricted-list information with unregistered individuals who were firm owners, and occasionally shared with these unregistered individuals the details of investment banking contracts; consequently the firm’s procedures were not reasonably designed to prevent violation of securities rules prohibiting insider trading. (FINRA Case #2008012242901)


About Author

Leave A Reply