SEC Initiates Charges for Insider Trading
The SEC today announced that it is charging the mayor of Beaufort, South Carolina with insider trading on non-public information he obtained while doing consulting work for a California biotechnology firm. According to the SEC, the individual was given information about new technology. The information was provided in confidence and had not been made publicly available. Shortly after receiving the information, the individual purchased shares in the company that would have netted more than $20,000 had he sold out. The individual agreed to pay $20,708 in disgorgement, $2,576 in prejudgment interest, and a $20,708 penalty.
“This case underscores how important it is for consultants provided with non-public information to be mindful of the duties of confidentiality owed to companies that hire them," stated Marc J. Fagel, Regional Director of the SEC's San Francisco Regional Office, in the SEC press release.
RIA Compliance Consultants, Inc. would like to use this as an example for registered investment advisor firms which often have clients that are or work for publicly traded companies. Due to these types of client relationships, registered investment advisors can often find themselves in receipt of material, non-public information (i.e. inside information). Acting on inside information is a serious violation of federal securities laws. In fact, Section 204A of the Investment Advisers Act of 1940 requires all federally and state registered investment advisors to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by the registered investment advisor or any person associated with the registered investment advisor. In other words, federal regulators require registered investment advisors to implement policies and procedures designed to prevent their associated persons from engaging in activities that the mayor of Beaufort, South Carolina was charged for. Further, registered investment advisors should have procedures designed to prevent the registered investment advisor from enabling a client to act on inside information.
RIA Compliance Consultants, Inc. can help your firm understand its responsibility to prevent insider trading. We also provide services designed to ensure compliance with the SEC’s Code of Ethics and personal securities transactions policies and procedures. Give us a call to learn more.
“This case underscores how important it is for consultants provided with non-public information to be mindful of the duties of confidentiality owed to companies that hire them," stated Marc J. Fagel, Regional Director of the SEC's San Francisco Regional Office, in the SEC press release.
RIA Compliance Consultants, Inc. would like to use this as an example for registered investment advisor firms which often have clients that are or work for publicly traded companies. Due to these types of client relationships, registered investment advisors can often find themselves in receipt of material, non-public information (i.e. inside information). Acting on inside information is a serious violation of federal securities laws. In fact, Section 204A of the Investment Advisers Act of 1940 requires all federally and state registered investment advisors to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by the registered investment advisor or any person associated with the registered investment advisor. In other words, federal regulators require registered investment advisors to implement policies and procedures designed to prevent their associated persons from engaging in activities that the mayor of Beaufort, South Carolina was charged for. Further, registered investment advisors should have procedures designed to prevent the registered investment advisor from enabling a client to act on inside information.
RIA Compliance Consultants, Inc. can help your firm understand its responsibility to prevent insider trading. We also provide services designed to ensure compliance with the SEC’s Code of Ethics and personal securities transactions policies and procedures. Give us a call to learn more.
Labels: Insider Trading, SEC
posted by bhill at 1:58 PM
Investment Advisers Should Review Insider Trading Policies & Procedures
Although the recent report concerning possible insider trading by a public pension plan administrator conducted by the Division of Enforcement of the U.S. Securities and Exchange Commission ("SEC") involves an essentially unregulated money manager which is not subject to the Investment Advisers Act of 1940, it still offers an excellent opportunity for each registered investment adviser to review its policies and procedures regarding trading activity based upon material, non-public ("insider") information.
The Retirement Systems of Alabama ("RSA") administers approximately 20 public pension funds for various state and local government employees in Alabama. It utilized an in-house investment staff to manage approximately $30 billion of assets under management, and during the period in question, RSA had no policies, procedures or training to ensure compliance with federal securities laws including prohibitions against trading based upon insider information.
According to the SEC's report, during June 2005 through August 2005, RSA acquired non-public information of a prospective acquisition of Liberty Corporation by Raycom Media, Inc. for a substantial premium over Liberty's current market price. RSA obtained this insider information in connection with the possibility of RSA arranging to serve as a source of funding to Raycom for the acquisition. After acquiring this insider information and before it was known to the public, RSA purchased shares of Liberty, which resulted in a profit of approximately $700,000 to pension funds administered by RSA. While the SEC investigated this matter, RSA determined the identity of these sellers of Liberty shares and offered these sellers rescission, which included lost interest.
The SEC noted that most of RSA's personnel and officials did not understand their duties and responsibilities under federal securities laws including the prohibition against trading based upon insider information and failed to consult with its outside legal counsel who had federal securities law expertise. The SEC concluded that RSA could have prevented this trading activity if it had adequate policies, procedures and training to assure compliance with federal securities laws and the prohibitions against insider trading.
The SEC's reminder to investment managers of public and private pension plans should not go unheeded by registered investment advisers. Under Section 204A of the Investment Advisers Act of 1940, a registered investment adviser "... shall establish, maintain and enforce written policies and procedures reasonably designed ... to prevent the misuse ... of material, nonpublic information by such investment adviser or any person associated with such investment adviser." Has your registered investment adviser established and implemented such written policies and procedures?
Here are some issues that should be considered by your registered investment adviser:
The Retirement Systems of Alabama ("RSA") administers approximately 20 public pension funds for various state and local government employees in Alabama. It utilized an in-house investment staff to manage approximately $30 billion of assets under management, and during the period in question, RSA had no policies, procedures or training to ensure compliance with federal securities laws including prohibitions against trading based upon insider information.
According to the SEC's report, during June 2005 through August 2005, RSA acquired non-public information of a prospective acquisition of Liberty Corporation by Raycom Media, Inc. for a substantial premium over Liberty's current market price. RSA obtained this insider information in connection with the possibility of RSA arranging to serve as a source of funding to Raycom for the acquisition. After acquiring this insider information and before it was known to the public, RSA purchased shares of Liberty, which resulted in a profit of approximately $700,000 to pension funds administered by RSA. While the SEC investigated this matter, RSA determined the identity of these sellers of Liberty shares and offered these sellers rescission, which included lost interest.
The SEC noted that most of RSA's personnel and officials did not understand their duties and responsibilities under federal securities laws including the prohibition against trading based upon insider information and failed to consult with its outside legal counsel who had federal securities law expertise. The SEC concluded that RSA could have prevented this trading activity if it had adequate policies, procedures and training to assure compliance with federal securities laws and the prohibitions against insider trading.
The SEC's reminder to investment managers of public and private pension plans should not go unheeded by registered investment advisers. Under Section 204A of the Investment Advisers Act of 1940, a registered investment adviser "... shall establish, maintain and enforce written policies and procedures reasonably designed ... to prevent the misuse ... of material, nonpublic information by such investment adviser or any person associated with such investment adviser." Has your registered investment adviser established and implemented such written policies and procedures?
Here are some issues that should be considered by your registered investment adviser:
- Has your registered investment adviser designated in writing a staff person, such as the chief compliance officer ("CCO"), to be responsible for establishing, implementing and enforcing written insider trading policies and procedures?
- Does your registered investment adviser's insider trading policy require a supervised person to report acquisition of insider information or suspected insider information to the CCO and likewise require the CCO to determine and communicate the appropriate course of action for the supervised person?
- Does your registered investment adviser's insider trading policy require the CCO to confidentially document such disclosure of the acquisition of insider information and the communicated course of action?
- To the extent that the supervised person needs to communicate such insider information to other supervised person, doe your registered investment adviser have procedures to limit such disclosures and document such disclosures.
- Has your registered investment adviser held training concerning its insider policy and procedures with its supervised persons? Can your supervised persons correctly identify what constitutes potentially insider information and how such situations should be handled?
- Does your registered investment adviser have any clients that are a publicly traded company, a board director of publicly traded company, or a high level executives of a publicly traded company with significant concentrated positions within the company? If so, are the personal securities transaction by your supervised persons within such companies subject to an exception report, restricted securities list, pre-clearance procedure, or black-out period? Likewise, does the investment committee of your registered investment adviser use similar supervisory tools with respect to making investment recommendations or decisions for client accounts or proprietary funds or accounts?
RIA Compliance Consultants can help your registered investment adviser develop written insider trading policies and procedures so as to minimize the risk of its supervised person's misusing material, non-public information. Please contact us at 877-345-4034 if you're interested in discussing such services.
Labels: Insider Trading, Pensions, SEC
posted by bhill at 3:57 PM
SEC Charges 14 individuals for Insider Trading Scheme.
In a March 1 press release, the SEC announced that it is charging "14 defendants in a brazen insider trading scheme that netted more than $15 million in illegal trading profits on thousands of trades, using information stolen from UBS Securities, LLC and Morgan Stanley & Co., Inc. The SEC complaint alleges that eight Wall Street professionals, including UBS research executive and a Morgan Stanley attorney, two broker-dealers and a day-trading firm participated in the scheme. The defendants also include three hedge funds, which were the biggest beneficiaries of the fraud." To read the full text of the press release click here.
This announcement is a reminder for all investment advisors to ensure the implementation and adequacy of policies and procedures prohibiting the misuse of material, nonpublic information. Policies and procedures must be designed to prevent insider trading (Section 204A of the Investment Advisers Act). It should also be noted that Section 204A applies not only to federally registered advisors, but to all state registered firms as well.
The SEC is basing the charges under the anti-fraud rules of the federal securities laws. It should be pointed out that all investment advisors are subject to the anti-fraud provisions, particularly Section 206 of the Advisers Act. Like other federal securities laws, the Advisers Act contains several broad antifraud provisions. Section 206 states:
It shall be unlawful for any investment adviser by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly -
1) to employ any device, scheme, or artifice to defraud any client or prospective client;
2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction.
4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.
Has your firm developed sufficient policies and procedures designed to comply with the anti-fraud provisions and prohibit insider trade? If not, you are subjecting the firm to significant risk and liability. Failure to properly supervise associated persons can bring severe punishment to the firm. In fact the SEC and state securities examiners have issued deficiencies to firms that have failed to establish policies and procedures, even when no violations have occurred.
This announcement is a reminder for all investment advisors to ensure the implementation and adequacy of policies and procedures prohibiting the misuse of material, nonpublic information. Policies and procedures must be designed to prevent insider trading (Section 204A of the Investment Advisers Act). It should also be noted that Section 204A applies not only to federally registered advisors, but to all state registered firms as well.
The SEC is basing the charges under the anti-fraud rules of the federal securities laws. It should be pointed out that all investment advisors are subject to the anti-fraud provisions, particularly Section 206 of the Advisers Act. Like other federal securities laws, the Advisers Act contains several broad antifraud provisions. Section 206 states:
It shall be unlawful for any investment adviser by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly -
1) to employ any device, scheme, or artifice to defraud any client or prospective client;
2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction.
4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.
Has your firm developed sufficient policies and procedures designed to comply with the anti-fraud provisions and prohibit insider trade? If not, you are subjecting the firm to significant risk and liability. Failure to properly supervise associated persons can bring severe punishment to the firm. In fact the SEC and state securities examiners have issued deficiencies to firms that have failed to establish policies and procedures, even when no violations have occurred.
Labels: Enforcement, Insider Trading
posted by bhill at 11:30 AM
