There appears to be a shift in the U.S. Securities and Exchange Commission’s (SEC) enforcement strategy towards information barriers, following a recent complaint it filed. This stance comes as a signal to big corporates and law firms to take heed of the tighter enforcement landscape.
In a report filed by JD Supra on September 12, a large proprietary trading firm was charged by the SEC in a complaint before the Southern District of New York (SDNY). The SEC alleged that the defendants made ‘materially false and misleading statements and omissions’, specifically related to the information barriers the firm claimed to have implemented. The two businesses under the same firm, a customer-facing trade execution service and a proprietary trading business, were said to have access to a comprehensive database that contained all post-trade information generated.
This complaint signifies several vital points of interest to corporations and law firms alike. Information barriers, also known as ‘Chinese walls’, are internal procedures intended to prevent insider trading by ensuring no unauthorized transmission of insider information between different sections of a financial institution. Therefore, corporates must ensure that these barriers strictly do their intended job in preventing any potential unauthorized misuse of sensitive, nonpublic information.
Furthermore, any omissions or misleading statements in regard to such information barriers could potentially attract severe regulatory implications and consequently legal actions from the SEC. Therefore, legal teams in large corporates need to revisit the information barrier policies of their respective organizations. They should ensure that clear, stringent protocols are in place and are followed accordingly, as the SEC shows no tolerance for any loose practices.
Putting a strong focus on implementing an effective information barrier policy not only prevents insider trading but also increases trust among investors, ensuring the overall health of financial markets.
Overall, the aggressive shift in the SEC’s approach to information barriers enforcement is a clear signal that they mean business, and that companies need to reexamine their current internal controls and update them if required.