The news of the past few weeks highlights the continued need to stress to employees at all levels that insider trading policies and procedures must be maintained, understood, and followed. Because broker-dealers may be dually During the Relevant Period, Merrill maintained supervisory and compliance procedures that governed the management of information barriers and wall crossings. Physical and electronic information barriers to restrict and manage the flow of MNPI between employees who regularly acquire or develop such information, employees who buy, sell, or recommend securities and employees that do not have a need to know MNPI. The staff plans to continue its review of information barriers in future examinations. Attorney Advertising. The absence of historical audit trails and the general informal nature of controls surrounding virtual data rooms was concerning to the staff. Controls to minimize misdirected emails include: Among the gaps identified by the staff in some firms’ email review process were: The staff observed a trend toward requiring pre-clearance of personal trades by contingent workers (e.g., consultants or others employed by a third party), as well as by firm employees with control/support functions, if they have access to MNPI. [email protected], © 2021 Law Business Media | Terms | Privacy | Login, Consumer Finance Protection Bureau (CFPB), Federal Energy Regulatory Commission (FERC), General Data Protection Regulation (GDPR). Some firms use an “above-the-wall” classification for certain senior management, research or syndicate. Because these types of contacts are viewed as too numerous to document, firms rely on general proscriptions and directives to self-report. Creating pop-up messages alerting employees to external distribution. The Firm has adopted an Information Barrier Policy and related MNPI Procedures (together, the “Insider Trading Policy and Procedures”). created to prevent misuse of MNPI are commonly referred to as “information barriers.” Other federal securities laws may impact information barriers in place at broker-dealers. Below is a summary of some specific concerns and effective practices highlighted by the staff. Merely noting that a trade was reviewed is insufficient. In addition to identifying repeat violations, pattern analysis may create exceptions based on: Surveillance personnel are being provided greater access to deal developments: The staff noted that some firms do not have mechanisms to identify transactions that are removed from the database and subsequently reactivated. Parties participating in M&A, capital markets or loan transactions. Many of these senior executives had managerial responsibilities for sales and trading. In the absence of systems to automatically notify the control room, some firms conduct lookback reviews to account for possible reporting delays. Controls utilized at some firms include: Granting access only to potential lenders appearing on a list of credible investors, and. 104 Old Kings Hwy N 1 These U.S. Information Barrier Standards are designed to ensure that Prudential’s … Information reported to the control room is assessed for materiality to determine whether a company should be placed on a monitoring list. There must be clear and effective protocols for notifying the control room promptly, however the MNPI is sourced. Some effective barriers noted by the staff include: Automated systems within investment banking to limit information access to approved deal members. Even as an increasing number of employees must work remotely, such MNPI compliance linchpins must continue. The SEC’s staff just released a report[1] of its observations following an examination of 19 brokerage firms’ programs to protect against the misuse of material nonpublic information (MNPI). Millbrook, NY – 17a-4 llc has released a review of FINRA’s guidance concerning Supervision and Information Barriers with regards to corporate messaging compliance. The absence of any documentation or controls raises serious concerns about the ability of broker-dealers to guard adequately against misuse of MNPI in firm and customer trading. Practices that result in delay in placement on a monitoring list, including waiting for a formal mandate, can be problematic. Other firms rely on detailed status updates provided to control group personnel by the deal team and input into the control database. The absence of any documentation or controls raises serious concerns about the ability of broker-dealers to guard adequately against misuse of MNPI in firm and customer trading. Control procedures typically specify the information that may be provided based on the type of confidentiality agreement obtained: oral with an email confirmation by the broker-dealer, oral with an affirmative email reply from the investors or a written agreement. Most broker-dealers have written policies in this regard which are supported by protocols for documenting deal team members and public-side over-the-wall staff who have access to MNPI. Possession of such information will restrict bondholders from trading in their securities. Clifford Chance. [3]  Originally enacted as Section 15(f) and renumbered by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 15(g) of the Exchange Act requires registered broker-dealers to establish, maintain and enforce written policies and procedures reasonably designed, taking into account the nature of their business, to prevent the misuse of MNPI by the firm or its associated persons in violation of the Exchange Act. | [2] The reviews assessed each broker-dealer’s information barriers for compliance with Section 15(g) of the Exchange Act[3] and evaluated how each firm integrated new business activities, structures and technologies into its compliance protocols. As noted in the summary, informal discussions between private-side and public-side employees create the potential for unauthorized disclosure of MNPI. In some cases, firms are creating tailored exception reports taking into account the different characteristics of the information. With the impending retirement of the London Interbank Offered Rate (LIBOR), financial institutions around the world are now faced with that question. Granting access only upon purchase of a loan interest, Removing access upon sale (some firms review trading reports to identify sellers), and. DISCUSSION_____________________________________________________________________. Identifying lenders’ designated contacts and requiring user email addresses that include the institution’s name. The staff also noted a lack of physical barriers surrounding some groups that support private-side areas, such as IT, operations or loan site monitors. Section 204A of the Investment Advisers Act of 1940 (the “Advisers Act”) places similar obligations on registered investment advisers. Resolving exceptions without independent confirmation was considered problematic by the staff, as was a lack of in-depth analysis of trading, e.g., whether an account traded in multiple securities indicating a specific source of information, a position built over time in a security or trading correlated with deal developments. Some broker-dealers did not review trading within accounts of institutional customers, assets management affiliates, or retail customers; or did not conduct any review when MNPI came through business activities outside of the investment banking department – such as participation in bankruptcy committees, employees serving on public company boards, changes in research ratings or company insiders placing unusual trades. Access to virtual data rooms requires a unique log-on and audit trails are maintained of the accessing of information, but they are not necessarily maintained after a transaction closes. An information barrier commonly referred to as a “firewall” is the most widely used approach for preventing the communication of material nonpublic information within firms. The staff noted a failure at some firms to document when the cross-selling group was given access to the investment banking information, as well as the lack of adequate physical barriers surrounding the group. 11. Additionally, some firms lacked a process for identifying when private corporations became public through the issuance of securities. Parties participating in M&A, capital markets or loan transactions. For instance, more limited informational restrictions may be beneficial in connection with a spe-cific investment that raises novel MNPI concerns only for a prescribed period of time. The staff identified several concerns with the adequacy of physical barriers. Similarly, the absence of systematic reviews of employee transfers from private-side areas to public-side business units raised staff concern. [3] Originally enacted as Section 15(f) and renumbered by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 15(g) of the Exchange Act requires registered broker-dealers to establish, maintain and enforce written policies and procedures reasonably designed, taking into account the nature of their business, to prevent the misuse of MNPI by the firm or its associated persons in violation of the Exchange Act. Accounts that have not historically traded in a security. Documentation should at least include a brief description of the basis for resolution. Failing to monitor internal communications through chat rooms. Identifying lenders’ designated contacts and requiring user email addresses that include the institution’s name. The staff also noted a lack of physical barriers surrounding some groups that support private-side areas, such as IT, operations or loan site monitors. In some cases, firms are creating tailored exception reports taking into account the different characteristics of the information. Business groups are classified as “public-side” or “private-side,” with private-side groups that have routine access to MNPI typically being physically segregated and restricted from trading in securities about which the group has MNPI. Surveillance personnel are being provided greater access to deal developments: Some firms provide compliance personnel with direct access to investment banking deal management systems. A significant amount of interaction between groups that have MNPI and internal and external groups that have sales and trading responsibilities occurred on an informal (undocumented) basis, making it difficult to trace inadvertent (or even intentional) disclosures. FTI Consulting, Inc. What happens when “the most important number in finance” is eliminated? material nonpublic information in connection with the purchase or sale of securities. However, if the firm had implemented a legally sufficient information barrier between the distressed debt and high-yield credit fund teams prior to receipt by the distressed fund team of MNPI, the high-yield credit fund team would still be able to trade public bonds of the issuer, even after receipt by the distressed fund team of MNPI. and “public side” (trading) functions behind robust information barriers that permanently segregate relevant departments and business lines (requiring separate decision making, separate IT access and separate physical locations). The staff observed that broker-dealers are enhancing their controls, although gaps in controls and informal control practices remain problematic. The absence of any documentation or controls can be problematic. We use cookies on our website to enhance your browsing experience. The staff also expressed concern about informal discussions between public-side employees and external parties, such as corporate insiders or consultants who may have MNPI. Permanent vs. Six of the largest brokerage firms were examined by the SEC and an additional 13 firms were examined by the NYSE or FINRA. Although firms are moving more groups into separate physical spaces with key card access, some private-side areas have glass walls allowing visual access to information. | Please indicate that you consent to our use of cookies in accordance with our policy, or you may opt to browse without cookies. While the staff did not offer any recommendations in this regard, we suggest firms assess their lookback procedures and training protocols with this issue in mind. Granting access only to potential lenders appearing on a list of credible investors, and. Accordingly, the OCIE Report stresses that firms have an obligation to “continually assess” potential sources of MNPI and the adequacy of their information barrier controls. [2]  Examinations were conducted by examiners from the SEC, FINRA and NYSE’s Division of Market Regulation, all of whose observations were incorporated into the report. Disabling the ability to download information to removable storage. Exams, MNPI and Restricted Lists (Part One of Two)” (Sep. 17, 2015). All Rights Reserved. Perhaps the most important function of an information barriers program is to limit the spread of MNPI. Following the summary is a more in-depth discussion of the staff’s findings. In practice, most large financial institutions handle MNPI by ensuring separation of their “private side” (advisory, lending, etc.) Formal and documented discussions may occur between internal business groups, in which MNPI is provided to sales, trading or research personnel for business purposes. The staff noted that some firms lacked controls to address absence or delays in notice. The staff observed a trend toward requiring pre-clearance of personal trades by contingent workers (e.g., consultants or others employed by a third party), as well as by firm employees with control/support functions, if they have access to MNPI. For example, if a structured product references a security about which the firm has MNPI, the firm may need to have controls to prevent the issuance of the structured product from being based on MNPI. Most broker-dealers have written policies in this regard that are supported by protocols for documenting deal team members and public-side over-the-wall staff who have access to MNPI. Firms are also expanding their reviews to take into account all products that could be used to profit from MNPI. Because these types of contacts are viewed as too numerous to document, firms rely on general proscriptions and directives to self-report. The staff noted that broker-dealers are developing control procedures over providing information to both private institutional investors, including private equity, and public institutional investors, including hedge funds. As noted in the summary, informal discussions between private-side and public-side employees create the potential for unauthorized disclosure of MNPI. The staff noted that MNPI may be provided based on informal confidentiality agreements. Broker-dealers are developing processes that differentiate between types of MNPI based on the source (e.g., business unit) from which the information originated or the nature (e.g., transaction type) of the information. The staff noted a failure at some firms to document when the cross-selling group was given access to the investment banking information, as well as the lack of adequate physical barriers surrounding the group. The staff noted that the use of emails to transmit MNPI between persons working on a transaction is common. Controls around capital markets transactions include provision of limited information, made available only shortly prior to public disclosure. Darien, CT 06820 Some broker-dealers have established cross-selling groups between asset management and investment banking. In some cases, broker-dealers were not conducting any focused review of the trading that occurred after traders were provided with MNPI. SUMMARY_____________________________________________________________________. The staff plans to continue its review of information barriers in future examinations. There must be clear and effective protocols for notifying the control room promptly, however the MNPI is sourced. The article says that private funds investing in the debt or equity of a company are entitled to legitimately obtained MNPI in the ordinary course of managing their investments. Other firms rely on detailed status updates provided to control group personnel by the deal team and input into the control database. P: 844 889-8822 Technology barriers were not sufficient at some firms to prevent access to MNPI … Positions in monitoring list securities that constitute a substantial percentage of the account. Below is a summary of some specific concerns and effective practices highlighted by the staff. Granting access only upon purchase of a loan interest, Removing access upon sale (some firms review trading reports to identify sellers), and. Most broker-dealers have written policies in this regard which are supported by protocols for documenting deal team members and public-side over-the-wall staff who have access to MNPI. Technological barriers. Information within a firm’s own research, sales, trading or asset management groups. [2] Examinations were conducted by examiners from the SEC, FINRA and NYSE’s Division of Market Regulation, all of whose observations were incorporated into the report. Some broker-dealers did not review trading within accounts of institutional customers, assets management affiliates, or retail customers; or did not conduct any review when MNPI came through business activities outside of the investment banking department – such as participation in bankruptcy committees, employees serving on public company boards, changes in research ratings or company insiders placing unusual trades. The following is a summary of 17a-4’s white paper. Positions in monitoring list securities that constitute a substantial percentage of the account. While most firms compare executions against pre-clearances obtained, many were less effective in tracking and/or responding to multiple failures to pre-clear. The absence of historical audit trails and the general informal nature of controls surrounding virtual data rooms was concerning to the staff. The staff expressed concern about persons or groups above-the-wall receiving MNPI where physical barriers, documentation or other controls may be limited or non-existent. The staff noted that broker-dealers are developing control procedures over providing information to both private institutional investors, including private equity, and public institutional investors, including hedge funds. The staff expressed concern about persons or groups above-the-wall receiving MNPI where physical barriers, documentation or other controls may be limited or non-existent. Some effective barriers noted by the staff include: The staff noted that MNPI may be provided based on informal confidentiality agreements. The following offers highlights from 17a-4’s white paper on Supervision and Information Barriers. © 2021 Proskauer Rose LLP. The absence of any documentation or controls can be problematic. Courts have interpreted section 10(b) and Rule 10b-5 to prohibit the purchase or sale of securities on the basis of material nonpublic information where there has been a breach of a duty to disclose such information or abstain from trading.6 2. “Information within Research, such as the initiation of research coverage or changes in price targets, may be MNPI. While materiality determinations are judgment calls, the staff believes that broker-dealers should monitor and evaluate the reasonableness of those determinations. Firms should revisit what is considered “private” information and how that can get a little grey and nuanced in the private markets sector. Some firms pre-qualify institutional investors, including the appropriate contact person or procedure. [2] The reviews assessed each broker-dealer’s information barriers for compliance with Section 15(g) of the Exchange Act[3] and evaluated how each firm integrated new business activities, structures and technologies into its compliance protocols. manage MNPI. The staff identified gaps in oversight coverage at most broker-dealers. The staff emphasized the importance of identifying information flows – the sources of potential MNPI: Primary access points within the firm for receipt of MNPI: Public company clients, through M&A, capital markets, derivative sales or credit. Managed accounts are typically exempt from pre-clearance, but the staff had concerns about use of external managers where there was no scrutiny over an employee’s ability to influence trading in the account. In the absence of systems to automatically notify the control room, some firms conduct lookback reviews to account for possible reporting delays. Eliminating access to potential investors with a history of accessing sites without participating. Merely noting that a trade was reviewed is insufficient. As a sort of firewall in conjunction with safeguards against the spread of MNPI, it notes, a firm can adopt a restricted list of companies in which certain individuals and teams at the firm are barred from investing. Six of the largest brokerage firms were examined by the SEC and an additional 13 firms were examined by the NYSE or FINRA. Temporary Barriers A permanent information barrier may not be appropriate for all advis-ers in light of their size or the scope of their activities. Neil Barlow On May 26, 2020, private fund manager Ares Management LLC (“Ares”) paid a $1 million penalty to settle charges brought by the U.S. Securities and Exchange Commission (“SEC”) alleging that the firm failed to implement and enforce its policies and procedures designed to prevent misuse of material, nonpublic information (“MNPI”) while a member of its deal team sat on a portfolio company’s … You will find more information on our Cookie Policy here. Formal and documented discussions may occur between internal business groups, in which MNPI is provided to sales, trading or research personnel for business purposes. [1] Staff Summary Report on Examinations of Information Barriers: Broker-Dealer Practices under Section 15(g) of the Securities Exchange Act of 1934 (Exchange Act) by the Staff of the Office of Compliance Inspections and Examinations of the United States Securities of Exchange Commission (SEC), September 27, 2012. Some firms provide compliance personnel with direct access to investment banking deal management systems. McNees Wallace & Nurick LLC. 17a-4 provides industry insights for corporate messaging compliance. The economic challenges brought about by the sudden and wide-ranging economic impact of the coronavirus have resulted in boards facing unprecedented situations and challenges ahead. Directors, irrespective of whether appointed by a financial sponsor or other stakeholder, need to act in accordance with their fiduciary duties, as determined by, among other things, the laws of a corporation's state of incorporation and a corporation's governing documents. Information Barriers. During the unprecedented events of 2020, some may have forgotten about the upcoming phaseout of LIBOR at the end of 2021 – but now is a good time for borrowers to refamiliarize themselves with the potential ramifications of the change. Functional, technological and physical controls are necessary to establish effective information barriers. Some firms have policies to reverse trades made without pre-clearance, even if the trade would have been approved, which the staff believes may be an effective deterrent. Accounts that trade in multiple securities on the monitoring lists. Failing to review emails of compliance and IT, Reviewing the names of the senders and recipients, but not the emails’ content, and. Section 204A of the Investment Advisers Act of 1940 places similar obligations on registered investment advisers. Controls around capital markets transactions include provision of limited information, made available only shortly prior to public disclosure. The staff identified gaps in oversight coverage at most broker-dealers. At some broker-dealers, senior executives, referred to as “above-the-wall,” received MNPI without its documentation and with no monitoring or restrictions. Access to virtual data rooms requires a unique log-on and audit trails are maintained of the accessing of information, but they are not necessarily maintained after a transaction closes. | Requiring private-side employees affirmatively to identify emails as appropriate for transmission outside the department or the firm, Disabling the auto complete function so employees must type in a full email address, and. Because broker- According to the staff, monitoring was difficult at firms that either failed to memorialize transactions deemed immaterial or to document the basis for a determination of immateriality, lacked specific factors to assess materiality or failed to identify later receipt of MNPI. -Lots of informal, undocumented interaction between departments with MNPI (material nonpublic information) and sales/trading departments that could abuse that information -Having senior executives that supervise multiple departments and could spread MNPI from one department to another without oversight, due to being “above” the information barriers Public company clients, through M&A, capital markets, derivative sales or credit. Control procedures typically specify the information that may be provided based on the type of confidentiality agreement obtained: oral with an email confirmation by the broker-dealer, oral with an affirmative email reply from the investors or a written agreement. According to the staff, monitoring was difficult at firms that either failed to memorialize transactions deemed immaterial or to document the basis for a determination of immateriality, lacked specific factors to assess materiality or failed to identify later receipt of MNPI. Federal securities laws prohibit trading securities on the basis of MNPI and require Prudential to establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of MNPI by Prudential or any Prudential employee. Resolving exceptions without independent confirmation was considered problematic by the staff, as was a lack of in-depth analysis of trading; e.g., whether an account traded in multiple securities indicating a specific source of information, a position built over time in a security or trading correlated within deal developments. 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