By Chris Prentice
NEW YORK (Reuters) – The U.S. Securities and Exchange Commission is scrutinizing whether investment advisers and other firms have strong enough policies to ensure nonpublic information is not misused to gain an illegal edge in trading, a top official told Reuters.
The SEC is looking to crack down on ineffective policies and procedures as part of broader insider trading scrutiny, Gurbir Grewal, the SEC’s enforcement director, said in a recent interview.
“The frustration with insider trading is that sometimes the threat of jail and penalties don’t prevent it,” Grewal said. “So we have to emphasize the tools we have and the firms need to tighten up their policies to prevent abuse.”
The SEC’s efforts are aimed not just at insider trading in equity markets, but also potential use of complex financial tools including swaps or derivatives to benefit from non-public information or to mask misconduct, he said.
Grewal declined to say whether the agency has or would launch an enforcement sweep to target the issue.
Under Democratic leadership, the SEC has pursued theories of insider trading seen by many as novel.
The SEC this month scored a victory in a “shadow trading” case when a jury found that a former pharmaceutical company executive violated civil insider-trading law by betting on another company’s stock after learning of the acquisition of his own company, Medivation Inc.
That case has already prompted companies to begin checking their policies to meet a broader standard to guard against misuse of nonpublic information, said Perrie Weiner, a securities litigation lawyer with Baker & McKenzie, a law firm in Los Angeles.
“The SEC is going to be looking for policies that go beyond simply saying that you’re not allowed to trade on material nonpublic insider information. They’re going to be looking for policies that prohibit trading in any other company to which the information might apply.”
The efforts will apply not just to public companies but also to hedge funds and other firms that may gain access to nonpublic information through advisory work, Weiner said.
The regulator has also been targeting violations of basic rules and policies at financial firms. Earlier this year, Morgan Stanley and a former executive agreed to pay more than $249 million to settle an investigation into the bank’s failure to enforce policies concerning misuse of material nonpublic information.
(Reporting by Chris Prentice; Editing by Paul Simao)
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