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.