Use of Non-Public Information and Other Securities Law Issues

Trading Ahead of Research Reports

• FCMs and IBs may not trade based on an as yet unpublished research report

• Firewalls should be used

Case Study

Trading Ahead of Research Reports

Block Trading

• FCMs and IBs:– May not trade security futures based on

knowledge of an imminent block transaction in the underlying security

– May not trade the underlying security based on knowledge of an imminent block transaction in security futures

Members may offset risk before a privately negotiated block transaction is reported

under exchange rules

Does not apply to transactions on electronic exchanges or ECNs with

automatic execution

Other NFA Rules

• Applicable to Notice-Registered Broker-Dealers:– Compliance Rule 2-37(a): must comply

with Sections 9(a), 9(b), and 10(b) of the Exchange Act

– Compliance Rule 2-37(b): must have procedures for complying with securities laws

Sections 9(a) and 9(b) of the Exchange Act

prohibit manipulation

Section 10(b) of the Exchange Act and SEC Rule 10b-5 prohibit fraud, including certain insider trading

Prohibited Insider Trading

• Buying or selling a security

• In breach of a fiduciary duty or other relationship of trust and confidence

• While in possession of material, non-public information

Targets of Investigations

• Officers, directors, and employees

• Lawyers, investment bankers, financial printers

• Those who receive the tip

Typical Procedures

• Identify situations where employee may be a potential tip receiver or fiduciary

• Review employee’s trading activity in these securities

Identifying Potential Inside Traders

• Ask about relationships to public companies on customer account forms

Identifying Potential Inside Traders

• Require employees to notify registrant of relationships with public companies by employee and family members

• Maintain a list of these affiliations (including customer and familial) for each employee

Typical Procedures

• Regularly review employees’ trading activity

• Query unusual trading activity

Typical Procedures

• Investigate suspicious trading activity, and take disciplinary action when appropriate

• Notify regulators of prohibited insider trading

Controlling Person Liability

• Knowingly or recklessly disregarded potential insider trading

• Knowingly or recklessly failed to establish, maintain and enforce procedures

Case StudyInsider Trading

Section 15(f) of the Exchange Act requires broker-dealers

to have procedures to prevent employees from misusing

material non-public information

Typical Procedures Include

• Restrictions on and review of firm trading

• Restrictions on and review of employee trading

• Training

• Firewalls

QUESTIONS?