More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
The SEC and FINRA have settled a case with Goldman Sachs related to the bank’s failure to supervise certain of its employees participating in the firm’s "trading huddles," and as a result, Goldman (GS) will pay $11 million fines to both the SEC and FINRA. Goldman consented to the fines without admitting or denying the findings.
In a statement, FINRA’s head of enforcement, Brad Bennett (below) said the fines were related to the weekly huddles, which the firm began in 2006 and ended in 2011 and which had previously been the subject of an investigation and action by Massachusetts securities regulators.
During those gatherings, FINRA said, Goldman analysts from its Americas equity research group met with traders from the firm’s securities division, and occasionally equity salespeople. The analysts would then disclose the securities on which they were considering making rating changes.
Under a Goldman program called the Asymmetric Service Initiative, some 180 “high-priority clients” selected by Goldman’s institutional sales group were informed of these possible changes in conference calls with the analysts. FINRA also charged Goldman with failing to monitor whether those clients then made trades based on the information they received in the conference calls, which included the analysts’ “most interesting and actionable ideas.” Goldman also failed to monitor for “possible trading in employee or proprietary trading, institutional customer, or market-making and client-facilitation accounts.”
Goldman thus failed to “identify and adequately investigate,” FINRA said, “increased trading in proprietary accounts in advance of the addition of securities to the firm's conviction list, certain transactions effected in an account in advance of changes in published research that warranted review based on their size or profitability and/or atypical trading for that account, and certain spikes in trading volume that immediately preceded the addition of stocks to the firm's conviction list.”
"Goldman's trading huddles created an environment of heightened risk in which material non-public information concerning analysts' published research could be disclosed to its clients,” said Bennett in the statement. Moreover, he said Goldman “did not have an adequate system in place to monitor client trading in advance of changes in its published research."
As an example of how the huddles worked, in its Letter of Acceptance, Waiver and Consent, FINRA said that in late 2008, on the day before the weekly trading huddle, “a research analyst received authorization to add Company A to the firm's conviction buy list. The next day, the analyst stated in a trading huddle that Company A ‘remains our analyst's favorite idea given a favorable strategic position for the evolving shift of certain CDS products from the OTC market to a cleared exchange.’ The firm published a report adding the stock to the firm's conviction buy list the day following the trading huddle.”