The SEC Sanctions Broker For Failure To Maintain And Enforce Insider Trading Policies

Tuesday, October 4, 2011 - 01:00
Roger D. Blanc
Howard L. Kramer

Howard L. Kramer

Martin R. Miller

The SEC sanctioned Janney Montgomery Scott LLC ("Janney"), a registered broker-dealer and investment adviser, for violating section 15(g)1of the Securities Exchange Act of 1934 (the "Exchange Act") by failing to have and enforce policies and procedures to prevent the misuse of material, nonpublic information. Janney, without admitting or denying the findings, agreed to be censured and paid an $850,000 penalty to settle the administrative proceeding.2Janney also agreed to cease and desist from violations of Section 15(g) and to hire a compliance consultant.


According to the SEC, in certain instances Janney failed to

  • enforce its policies and procedures prohibiting noncompliance personnel from chaperoning meetings between investment banking and research staff;
  • adequately monitor trading in the securities of companies on the firm's watch list that its investment bankers were advising;
  • maintain an adequate email firewall between its investment banking and research staff;
  • enforce its policy that all Janney employees receive permission to maintain brokerage accounts at other firms;
  • obtain annual questionnaires from employees to identify those with brokerage accounts at other firms; and
  • review the brokerage account activity of employees with brokerage accounts at such other firms.


As described in the Order, as of October 2004, Janney had no policies and procedures in place for the Equity Capital Markets ("ECM") division separate from those applicable to Janney's other departments. The then-chief compliance officer asked compliance counsel who had been hired to draft Janney's retail policies and procedures to also draft an ECM manual that would separate and improve procedures for the ECM division. The ECM manual was completed in September 2005 and contained procedures that governed analyst-banker communications, the firewall policy and gatekeeper procedures, the watch list3procedure, the information barrier between the investment banking and the research departments, and the trading surveillance and review procedures.

In the Order, the SEC cited violations of various ECM manual sections, including those governing the information barriers between the investment banking and the research departments, the "chaperoning" of contacts between those departments, and the review of employee trading.

Violation Of Chaperone Requirements

The SEC cited instances where Janney did not follow the chaperone process set forth in the ECM manual (which required designated compliance or legal personnel to be present when investment banking department employees consult with the research department on the merits of a proposed transaction, a potential candidate for a transaction, or market trends or developments), including a May 2005 meeting held by the heads of Janney's research and investment banking departments to discuss business strategy where compliance counsel were absent despite their presence being required. The SEC also cited instances where the former head of the investment banking department and the head of the research department chaperoned meetings.

Failure To Monitor The Watch List

Although the responsibilities of the compliance chaperone included monitoring the watch list on which a company in a merger transaction appeared, the SEC cited an instance where the compliance chaperone for a chaperoned conversation between a Janney investment banker advising a company on a merger and a Janney analyst covering the company was not aware that the investment banking department was advising the same company in the pending merger and acquisition transaction and was not aware that the analyst specifically covered the company.

Violation Of The Information Wall Procedures

During the pendency of the deal, the Order indicated the same analyst was also having telephone conversations with senior employees of the two companies involved in the merger as part of his duties as an analyst. The analyst was not brought over the information wall between the investment banking and the research repartments and/or segregated at any point during the pendency of the deal.

Moreover, Janney implemented a new strategic marketing plan in which it used its research analysts to help solicit trading business by having the analysts attend meetings with customers. The Order indicates that the same analyst then recommended the stock of the company advised by Janney in the pending merger and acquisition to at least three clients. These clients bought the stock of the company after this meeting, and the following day the merger was announced, and the stock price of the company acquired and advised by Janney increased.

Breach Of The Email Firewall

The SEC indicates that at least in one instance, over a period of several years, Janney investment bankers were able to breach the firm firewall and directly email research department employees posing a risk that material nonpublic information could be exchanged or misused. Janney was aware of the breach at least by June of 2008, and the former compliance manager acknowledged that the firewall "wasn't as efficient" as Janney had thought and that he believed breaches were still occurring in 2009.

Failure To Adequately Monitor Personal Accounts

Janney was also cited by the SEC for failing to monitor trading in the securities of firms on the watch list. Janney's stated policy mandated that employees keep their trading accounts at Janney, making the monitoring of employees' activities easier. However, the Order states the former compliance manager admitted that granting permission to keep accounts away from Janney was "too frequent." Janney's Capital Markets Employee and Principal Compliance Manual ("CMEPC Manual"), a manual used within the ECM, required its employees to submit an "Annual Employee Questionnaire" and an "Employee and Employee-Related Account Initial and Annual Disclosure Form," which would disclose the existence of outside accounts of employees. In several instances, Janney failed to obtain or to timely obtain completed questionnaires and disclosure forms and, despite being aware of outside accounts held by employees, failed to request and review account information. As a result, certain employees' outside transactions were not reviewed.


The SEC viewed Janney's conduct to be a willful violation of Section 15(g) of the Exchange Act. This action underscores the position of the SEC and its staff that broker-dealers take seriously their responsibility to design and, just as importantly, enforce robust policies that prevent the misuse of nonpublic information. Penalties imposed on market participants that commit such violations are likely to be significant. In light of the SEC's actions, broker-dealers should review their compliance policies and procedures with respect to Section 15(g), and careful consideration must be given to determining whether policies and procedures in place are being adhered to in compliance with section 15(g). 1 Section 15(g) of the Exchange Act, formerly Section 15(f), requires registered brokers and dealers to "establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of such broker's or dealer's business, to prevent the misuse, in violation of the Exchange Act or the rules or regulations thereunder, of material, nonpublic information by such broker or dealer or any person associated with such broker or dealer."

2 In re Janney Montgomery Scott LLC, Exchange Act Release No. 64855, Administrative Proceeding File No. 3-14459 (July 11, 2011), available at "Order").Janney agreed to hire an independent compliance consultant to conduct a comprehensive review, make recommendations concerning Janney's policies, practices and procedures in relation to Section 15(g), prepare written reports and confirm whether revised Janney policies, practices and procedures and the auditing, implementation and enforcement of those revised policies, practices and procedures are reasonably adequate under Section 15(g).

3 As in most firms, the watch list was a nonpublished, nondistributed list of the companies that the investment banking department was actively advising and that was used to identify those securities where the potential for insider trading existed.

Roger D. Blanc is Of Counsel in Willkie's Asset Management Group in the New York office. Howard L. Kramer is a Partner in the Asset Management Group in Willkie's Washington office. Martin R. Miller is Of Counsel in the firm's Corporate and Financial Services Department in the New York office.