Published on Sep 14th, 2023 |

Misleading Disclosures Related to Information Barriers

SEC Releases

Brief Introduction

The SEC has filed charges in U.S. District Court against a Firm and their Parent Company for allegedly making materially false and misleading statements and omissions regarding information barriers to prevent the misuse of sensitive customer information.

The defendants have requested a trial by jury in response to the charges.

What Happened?

What Happened?

According to the SEC:

    • The Firm operated two businesses that reportedly had completely different operations that were “walled off”:
      • An order execution service for large institutional customers based typically on commissions.
      • proprietary trading business where the Firm bought and sold securities for its own business goals.
    • From January 2018 to April 2019, the Firm allegedly failed to secure a database of all post-trade information generated from customer orders routed to and executed by the Broker Dealer which included private customer information.
    • The database was accessible with widely known and shared login information amongst employees of both business operations and their affiliates.
  • The failure to safeguard created a substantial risk that proprietary traders could see executed orders for large institutional customers and use that information to trade ahead of potential subsequent orders.
  • From January 2018 to April 2019, the Firm:
    • Failed to establish, maintain, and enforce policies and procedures that could prevent the misuse of the information.
    • Misled customers about the existence and adequacy of barriers in place to prevent the abuse of information.
  • The disclosures to clients overstated the protections in place to protect institutional customers’ trade data and implied that only employees required to have access to that information would have it.

Vigilant's Conclusion

Vigilant’s Conclusion

Though Broker Dealers are required to comply with Section 15(g) of the Exchange Act, which is designed to protect against the misuse of material non-public information, this action can be a lesson to Investment Advisors and other Firms which either share Physical Office Space or Electronic Systems.

Vigilant offers a wide range of Compliance Solutions. It is vital that Firms assess their compliance policies and procedures, and having outsourced Compliance Professionals with an outside perspective can help find any potential weaknesses.

Please reach out to us today for any assistance you may need.

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