Transcript Misuse of Non-Public Information and Other Security Law Issues

Use of Non-Public
Information and Other
Securities Law Issues
Trading Ahead of Research
Reports
• FCMs and IBs may not trade
based on an as yet unpublished
research report
• Firewalls should be used
Case Study
Trading Ahead of Research Reports
Block Trading
• FCMs and IBs:
– May not trade security futures based on
knowledge of an imminent block
transaction in the underlying security
– May not trade the underlying security
based on knowledge of an imminent block
transaction in security futures
Members may offset risk
before a privately negotiated
block transaction is reported
under exchange rules
Does not apply to
transactions on electronic
exchanges or ECNs with
automatic execution
Other NFA Rules
• Applicable to Notice-Registered
Broker-Dealers:
– Compliance Rule 2-37(a): must comply
with Sections 9(a), 9(b), and 10(b) of the
Exchange Act
– Compliance Rule 2-37(b): must have
procedures for complying with securities
laws
Sections 9(a) and 9(b)
of the Exchange Act
prohibit manipulation
Section 10(b) of the Exchange
Act and SEC Rule 10b-5
prohibit fraud, including
certain insider trading
Prohibited
Insider Trading
• Buying or selling a security
• In breach of a fiduciary duty or
other relationship of trust and
confidence
• While in possession of material,
non-public information
Targets of Investigations
• Officers, directors, and employees
• Lawyers, investment bankers,
financial printers
• Those who receive the tip
Typical Procedures
• Identify situations where employee
may be a potential tip receiver or
fiduciary
• Review employee’s trading activity
in these securities
Identifying Potential
Inside Traders
• Ask about relationships to public
companies on customer account
forms
Identifying Potential
Inside Traders
• Require employees to notify
registrant of relationships with
public companies by employee
and family members
• Maintain a list of these affiliations
(including customer and familial)
for each employee
Typical Procedures
• Regularly review employees’
trading activity
• Query unusual trading activity
Typical Procedures
• Investigate suspicious trading
activity, and take disciplinary
action when appropriate
• Notify regulators of prohibited
insider trading
Controlling
Person Liability
• Knowingly or recklessly
disregarded potential insider
trading
• Knowingly or recklessly failed to
establish, maintain and enforce
procedures
Case Study
Insider Trading
Section 15(f) of the Exchange
Act requires broker-dealers
to have procedures to prevent
employees from misusing
material non-public
information
Typical
Procedures Include
• Restrictions on and review of firm
trading
• Restrictions on and review of
employee trading
• Training
• Firewalls
QUESTIONS?