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Trading Ahead of Research Reports
• FCMs and IBs may not trade based on an as yet unpublished research report
• Firewalls should be used
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
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
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
• 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
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