The SEC’s Office of Compliance Inspections and Examinations has issued a report on broker-dealers’ handling of confidential information.  The SEC’s examiners looked at broker-dealers’ compliance with the requirements governing the misuse of material nonpublic information, and evaluated new business practices, technologies and controls relating to compliance.

Broker-dealers have access to nonpublic information, and owe a duty of trust and confidence to the client or other involved parties. Registered broker-dealers must have policies and procedures that are reasonably designed to prevent its misuse, and, when broker-dealers are dually registered as investment advisers, they must consider additional controls as well.

The Staff is concerned about the lack of documentation regarding material nonpublic information provided to senior executives, and incentives relating to business success. The absence of monitoring or other controls raises serious concerns about the broker-dealers’ ability to prevent the misuse of the information in firm and customer trading.  The Staff also found that, in some instances, broker-dealers were not conducting focused reviews on the trading that occurred after traders were provided with material, nonpublic information.  The Staff found various gaps in oversight at most of the broker-dealers, for example, some broker-dealers did not conduct any reviews when the information came from activities outside of their investment banking department.  The Staff also noted that these concerns are not necessarily violations, but broker-dealers should consider this issue when reviewing their policies and procedures.

The Staff also pointed out effective practices as well.  For example, some broker-dealers created tailored exception reports to reflect the different types of information they receive, and expanded the range of instruments they reviewed for misuse of material nonpublic information.

In short, the Staff will, most likely, monitor these practices in future examinations for potential enforcement actions.