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Use of Non-Public Information and Other Securities 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 FCMs and IBs may not trade based on an as yet unpublished research report Firewalls should be used.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:

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Use of Non-Public Information and Other Securities Law Issues

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  1. Use of Non-Public Information and Other Securities Law Issues

  2. Trading Ahead of Research Reports • FCMs and IBs may not trade based on an as yet unpublished research report • Firewalls should be used

  3. Case Study Trading Ahead of Research Reports

  4. 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

  5. Members may offset risk before a privately negotiated block transaction is reported under exchange rules

  6. Does not apply to transactions on electronic exchanges or ECNs with automatic execution

  7. 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

  8. Sections 9(a) and 9(b) of the Exchange Act prohibit manipulation

  9. Section 10(b) of the Exchange Act and SEC Rule 10b-5 prohibit fraud, including certain insider trading

  10. 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

  11. Targets of Investigations • Officers, directors, and employees • Lawyers, investment bankers, financial printers • Those who receive the tip

  12. Typical Procedures • Identify situations where employee may be a potential tip receiver or fiduciary • Review employee’s trading activity in these securities

  13. Identifying Potential Inside Traders • Ask about relationships to public companies on customer account forms

  14. 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

  15. Typical Procedures • Regularly review employees’ trading activity • Query unusual trading activity

  16. Typical Procedures • Investigate suspicious trading activity, and take disciplinary action when appropriate • Notify regulators of prohibited insider trading

  17. Controlling Person Liability • Knowingly or recklessly disregarded potential insider trading • Knowingly or recklessly failed to establish, maintain and enforce procedures

  18. Case Study Insider Trading

  19. Section 15(f) of the Exchange Act requires broker-dealers to have procedures to prevent employees from misusing material non-public information

  20. Typical Procedures Include • Restrictions on and review of firm trading • Restrictions on and review of employee trading • Training • Firewalls

  21. QUESTIONS?

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