The types of issues identified in the report "may be helpful to firms as they review their conflict of interest risk management programs," di Florio said. "In particular, in any review of information barriers control programs, broker-dealers should be alert to changes in business practices and available compliance tools."
Conflicts of interest and other issues of concern raised by the report include:
- A significant amount of informal, undocumented interaction occurred between groups that have material nonpublic information and internal and external groups with sales and trading responsibilities that might profit from the misuse of such material nonpublic information
- At some broker-dealers, a senior executive might have access to material nonpublic information from one business unit while overseeing a different unit that could potentially profit from misuse of that information, with few if any restrictions or monitoring to prevent such misuse
- Some broker-dealers did not have risk controls to address certain business units that possess material nonpublic information such as sales, trading or research personnel who receive confidential information for business purposes; institutional and retail customers or asset management affiliates with access to material nonpublic information, or firm personnel who receive information through business activities outside of investment banking, such as participation in bankruptcy committees or through employees serving on the boards of directors of public companies.
The report also highlights effective practices that examiners observed at some broker-dealers, such as:
- Broker-dealers sometimes adopted processes that differentiate between types of material nonpublic information based on the nature of the information or where it originated. In some cases, broker-dealers create tailored "exception" reports that take into account the different characteristics of the information
- Some broker-dealers expanded reviews for potential misuse of confidential information to include trading in credit default swaps, equity or total return swaps, loans, components of pooled securities such as unit investment trusts and exchange traded funds, warrants, and bond options
- Broker-dealers often considered electronic sources of confidential information and instituted monitoring to identify which employees had accessed the information
- Broker-dealers often monitored access rights for key cards and computer networks to confirm that only authorized personnel had access to sensitive areas.
