A new report from the SEC uncovers different scenarios thatexposed risks to clients' confidential information and ways toprotect the data from dangers such as insider trading.

Compiled by the SEC's Office of Compliance Inspections andExaminations, the reporthighlights conflicts of interest scenarios and strengths andweaknesses identified in examinations into how broker-dealers keepmaterial, non-public information from being misused.

The OCIE report said the office had discovered that at somebroker-dealers, a senior executive might have access tomaterial, non-public information from one business unit whileoverseeing a different unit that could potentially profit frommisuse of that information, with few if any restrictions ormonitoring to prevent such misuse.

Some broker-dealers did not have risk controls to addresscertain business units that possess material nonpublic informationsuch as sales, trading or research personnel who receiveconfidential information for business purposes, institutional andretail customers or asset management affiliates with access tomaterial nonpublic information, according to thereport.

The OCIE also found a significant amount of informal,undocumented interaction occurred between groups that had material,non-public information and internal and external groups with salesand trading responsibilities that might profit from the misuse ofsuch information.

On the other end, the report also highlighted thosebroker-dealers that had effective practices in place to protectconfidential information from misuse.

For instance, some firms sometimes adopted processes thatdifferentiate between types of material, non-public informationbased on the nature of the information or where it originated.Others created tailored exception reports that take into accountthe different characteristics of the information.

Some broker-dealers expanded reviews for potential misuse ofconfidential information to include trading in credit defaultswaps, equity or total return swaps, loans, components of pooledsecurities such as unit investment trusts and exchange tradedfunds, warrants, and bond options, the report noted.

The OCIE also highlighted those broker-dealers that oftenconsidered electronic sources of confidential information andinstituted monitoring to identify which employees had accessed theinformation. Some firms often monitored access rights for key cardsand computer networks to confirm that only authorized personnel hadaccess to sensitive areas, the report said.