SEC Report Reveals Gaps in Broker-Dealers’ Use of Client Info
A new report from the SEC uncovers different scenarios that exposed risks to clients’ confidential information and ways to protect the data from dangers such as insider trading.
Compiled by the SEC’s Office of Compliance Inspections and Examinations, the report highlights conflicts of interest scenarios and strengths and weaknesses identified in examinations into how broker-dealers keep material, non-public information from being misused.
The OCIE report said the office had discovered that at some broker-dealers, a senior executive might have access to material, non-public information from one business unit while overseeing a different unit that could potentially profit from misuse of that information, with few if any restrictions or monitoring to prevent such misuse.
Some broker-dealers did not have risk controls to address certain business units that possess material nonpublic information such as sales, trading or research personnel who receive confidential information for business purposes, institutional and retail customers or asset management affiliates with access to material nonpublic information, according to the report.
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 sales and trading responsibilities that might profit from the misuse of such information.
On the other end, the report also highlighted those broker-dealers that had effective practices in place to protect confidential information from misuse.
For instance, some firms sometimes adopted processes that differentiate between types of material, non-public information based on the nature of the information or where it originated. Others created tailored exception reports that take into account the different characteristics of the information.
Some broker-dealers expanded reviews for potential misuse of confidential information to include trading in credit default swaps, equity or total return swaps, loans, components of pooled securities such as unit investment trusts and exchange traded funds, warrants, and bond options, the report noted.
The OCIE also highlighted those broker-dealers that often considered electronic sources of confidential information and instituted monitoring to identify which employees had accessed the information. Some firms often monitored access rights for key cards and computer networks to confirm that only authorized personnel had access to sensitive areas, the report said.