SEC Fines Broker-Dealer for Inadequate Information Barriers

The SEC on February 13, 2017, issued a cease and desist order (Order) and imposed a $100,000 civil penalty against broker-dealer Sidoti & Company, LLC (Broker-Dealer), to settle charges for “failure … to establish, maintain, and enforce written policies and procedures to prevent the misuse of material nonpublic information (‘MNPI’)” by the Broker-Dealer in connection with the trading of a hedge fund (Fund) managed by the Broker-Dealer’s affiliated investment adviser (Adviser). The Broker-Dealer, the Fund and the Adviser were all controlled, through a holding company, by the Broker-Dealer’s founder and CEO, who also headed the Broker-Dealer’s research and investment banking operations and directed trading for the Fund. In response to concerns raised in an SEC examination, the Broker-Dealer implemented written policies intended to prevent the misuse of MNPI by its associated persons in connection with the Fund’s operations. While the new policies attempted to address the CEO’s conflicting roles, the procedures did not ensure enforcement of the new information barriers, and therefore resulted in said Order. The Order is a reminder to registered broker-dealers – as well as registered investment advisers – to consider their business models and organizational structures when designing and implementing information barriers and other procedures to prevent misuse of MNPI, and to take into account activities and responsibilities with respect to affiliated entities, although, notably, the SEC did not charge affiliates – or individuals – in this administrative proceeding. Read More Here

Additional contributors to this post:

Elliott R. Curzon, elliott.curzon@dechert.com

David A. Vaughan, david.vaughan@dechert.com

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