STAFF SUMMARY REPORT ON EXAMINATIONS OF

INFORMATION BARRIERS: 

BROKER-DEALER PRACTICES UNDER 

SECTION 15(g) OF THE SECURITIES EXCHANGE ACT OF 1934

By the staff of the Office of Compliance Inspections and Examinations

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

September 27, 2012

The SEC, as a matter of policy, disclaims any responsibility for any publication or statement 

by any of its employees. The views expressed herein are those of the staff of the Office of 

Compliance Inspections and Examinations and do not reflect the views of the Commission or 

of others at the SEC.
2

TABLE OF CONTENTS

I. EXECUTIVE SUMMARY 4

II. BACKGROUND 7

III. SOURCES OF MATERIAL NONPUBLIC INFORMATION 8

A. Corporate Clients 9

1. Mergers and Acquisitions 9

2. Capital Markets / Syndicate 10

3. Derivative Sales 11

4. Credit 11

B. Corporate Borrowers 12

C. Non-Corporate Issuer Clients 13

D. Investment Areas 14

E. Institutional Investor Customers 15

F. Insider Customers 16

G. Research 16

H. Secondary Sources of Material NonPublic Information 17

IV. CONTROL STRUCTURE 17

A. Public-Side vs. Private-Side Business Groups 17

B. Types of Material NonPublic Information Sources 19

1. Transaction Sourced Material NonPublic Information 19

a. Method of Notifying the Control Room 19

b. Materiality 20

c. Placement on a Monitoring List 21

2. Item-Specific Material NonPublic Information 22

3. Ongoing Sources of Confidential Information 22

C. Monitoring Lists 23

1. General Surveillance Lists 24

2. Hybrid Restricted and Surveillance Lists 24

3. Firmwide Restricted Lists 24

V. CONTROLS 25

A. Limiting Authorized Access 26

1. Deal Team Members 26

2. Sharing of Information 26

3. Dual Function Employees 27

4. Informal Discussions 27

B. Preventing Unauthorized Access 28

1. Physical Barriers 28

2. Technology Barriers 29
3

3. Printing and Production 29

4. Disposal of Confidential Documents 30

C. Controls over Information Given to Public-Side Employees 30

1. Information Provided by Internal Groups 30

2. Information Provided by External Groups 31

a. Information Received Pursuant to a Confidentiality Agreement 

-- Electronic Sources of Information 31

b. Information Received Pursuant to a Confidentiality Agreement 

– Oral or Written Sources of Information 32

c. Informal Discussions 33

3. Public-Private Transitions 33

D. Controls over Information Given to External Parties 34

1. Specific Transactions 34

2. General Discussions 35

3. Credit Extensions 36

E. Email Controls 37

F. Employee Trading Pre-clearances 37

G. Surveillance 38

1. Scope of Review 39

2. Pattern Surveillance 39

3. Compliance Access to Information 40

4. Resolution of Matters 41

5. Risk Arbitrage 42

VI. CONCLUSION 42

APPENDIX A -- DEFINED TERMS USED IN THIS REPORT 44

APPENDIX B – SUMMARY OF EFFECTIVE PRACTICES AND POTENTIAL CONCERNS 47
4

I. EXECUTIVE SUMMARY

Overview: The examination staff of the Securities and Exchange Commission (“SEC” or 

the “Commission”), FINRA, and the New York Stock Exchange’s (“NYSE”) Division of 

Market Regulation conducted examinations of the programs that exist at broker-dealers1

to protect against the misuse of material nonpublic information (“MNPI”). The purpose 

of the review was to assess broker-dealer compliance with regulatory requirements 

surrounding MNPI, primarily pursuant to Section 15(g) of the Securities Exchange Act of 

1934 (“Exchange Act”), 2 and to evaluate how broker-dealers consider and analyze new 

business practices, new technologies, and new controls that may impact their compliance 

efforts. This report contains numerous defined terms, which are set forth in Appendix A 

to this report.3 This report, which discusses the staff’s observations during these 

examinations, reflects the views of staff and does not represent findings or conclusions of 

the Commission. This document should not be considered legal advice.

Information Barriers: 

In many instances, broker-dealers may receive nonpublic information regarding their 

clients and market events as part of their business operations, including financial 

advisory,4 origination,5 and trading activities, often under circumstances in which a duty 

of trust and confidence may be owed to the client or an involved party.

6 When nonpublic 

 1 Examiners from the Commission (the “staff”) examined six of the largest broker-dealers. 

Examiners from the NYSE and from FINRA examined an additional thirteen broker-dealers, and 

their observations were incorporated into this report. The FINRA examinations included 

examination of three broker-dealers that were small in size when compared to the other brokerdealers being examined and had business activities focused on private investment in public equity 

(“PIPE”) transactions. 2 15 U.S.C. §78o(g). The Insider Trading and Securities Fraud Enforcement Act of 1988 

(“ITSFEA”) added Section 15(f) to the Exchange Act, which was later renumbered as Section 

15(g) by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank Act”). 3 These definitions are used only for purposes of this report and are not intended for any other 

context. Some of the definitions are based on existing statutes, laws, and cases as of the date of 

this report. Other definitions are derived from commonly used industry terms. 4 “Financial advisory” is an industry term that refers to advice to business organizations such as 

corporations, usually by members of an Investment Banking Department, including as to the 

structure of mergers and acquisitions. The term does not indicate any regulatory requirement or 

status. 5 “Origination” refers to the creation and issuance of a financial instrument that may represent either 

equity or debt of an issuer. 6 Exchange Act Rule 10b5-2 (17 C.F.R. §240.10b5-2) provides a nonexclusive definition of 

circumstances in which a person has a duty of trust or confidence for purposes of the 

“misappropriation” theory of insider trading under Exchange Act Section 10(b) and Rule 10b-5 

(the law of insider trading is otherwise defined by judicial opinions construing Rule 10b-5). In 

relevant part, Rule 10b5-2 states that a “duty of trust or confidence” exists in the following 

circumstances, among others: whenever a person agrees to maintain information in confidence; 

and whenever the person communicating the MNPI and the person to whom information is 

communicated have a history, pattern, or practice of sharing confidences, such that the recipient of 

the information knows or reasonably should know that the person communicating the MNPI 

expects that the recipient will maintain its confidentiality. 
5

information is material,7 Exchange Act Section 15(g) requires that registered brokerdealers establish, maintain, and enforce written policies and procedures reasonably 

designed, taking into consideration the nature of their business, to prevent its misuse in 

violation of the securities laws by the broker-dealer or its associated persons. Such 

misuse may occur through, among other activities, insider trading prohibited under 

Exchange Act Section 10(b) and Rule 10b-5;

8 through trading during a tender offer in 

violation of Exchange Act Rules 14e-3 and14e-5;9 or through issuance of a research 

report based on MNPI.10 Such policies and procedures created to prevent misuse of 

MNPI are commonly referred to as “information barriers.” 

Other federal securities laws may impact information barriers in place at broker-dealers. 

Section 204A of the Investment Advisers Act of 1940 (the “Advisers Act”) places similar 

obligations on registered investment advisers.11 Because broker-dealers may be dually 

registered as investment advisers or may be closely integrated with an affiliated 

investment adviser (as were most broker-dealers reviewed by the staff), broker-dealers 

may need to consider the specific challenges such circumstances present in designing 

their controls.

12 In addition to Exchange Act Section 15(g), broker-dealers may have

 7 The terms “material” and “nonpublic” are not defined in Exchange Act Section 15(g), which 

relies on existing definitions of the terms established in case law. Information is material if ”there 

is a substantial likelihood that a reasonable shareholder would consider it important” in making an 

investment decision or if the information “would have been viewed by the reasonable investor as 

having significantly altered the ‘total mix’ of information available.” TSC Industries, Inc. v. 

Northway, Inc., 426 U.S. 438, 449 (1976); see Basic Incorporated v. Levinson 485 U.S. 224, 238 

(1988) (materiality with respect to contingent or speculative events will depend on a balancing of 

both the indicated probability that the event will occur and the anticipated magnitude of the event 

in light of the totality of company activity); Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156, 

131 S.Ct. 1309 (2011) (Information that is not statistically significant may still be material if there 

is a substantial likelihood that reasonable investors would view the information as significantly

altering the total mix of information available); see also Rule 405 under the Securities Act of 

1933, 17 C.F.R. § 230.405; Exchange Act Rule 12b-2, 17 C.F.R. § 240.12b-2; Staff Accounting 

Bulletin No. 99 (August 12, 1999) (64 FR 45150) (discussing materiality for purposes of financial 

statements). 

Information is nonpublic if it has not been disseminated in a manner making it available to 

investors generally. See, e.g., SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 854 (2d Cir. 1968), 

cert. denied, 394 U.S. 976 (1969); In re Investors Management Co., 44 S.E.C. 633, 643 (1971). 

For purposes of insider trading law, insiders must wait a “reasonable” time after disclosure before 

trading. What constitutes a reasonable time depends on the circumstances of the dissemination. 

Faberge, Inc., 45 S.E.C. 249, 255 (1973), citing Texas Gulf Sulphur, 401 F.2d at 854. 8 15 U.S.C. §78j(b) and 17 C.F.R. §240.10b-5. 9 17 C.F.R. §240.14e-3 and 17 C.F.R. §240.14e-5.

10 SEC v. Citigroup Global Markets Inc., f/k/a/ Salomon Smith Barney Inc., Civil Action No. 03-CV2945 (WHP) (S.D.N.Y.), Litigation Release No. 18111 (April 28, 2003), settled action (brokerdealer, among other issues, did not maintain written policies and procedures reasonably designed 

to prevent the sharing and misuse of MNPI between an affiliated person who served as director of 

another company and a research analyst covering that company). 11 15 U.S.C. §80b-4a.

12 See, e.g., the settled injunctive action SEC v. Charles Schwab Investment Management et al., Civil 

Action No. CV-11-0136 EMC (N.D. Cal.), Litigation Release No. 21806 and Release No. 34-

63693 (January 11, 2011).
6

information barriers programs in order to rely on an exception or affirmative defense 

found elsewhere in the federal securities laws.13

The Report:

This report discusses the staff’s observations from its examinations regarding potential 

sources of MNPI and some of the controls registered broker-dealers have in place to 

fulfill their Exchange Act Section 15(g) obligations. The report also discusses instances 

in which a broker-dealer(s) did not appear to have reasonably designed controls. Finally, 

the staff’s review identified concerns that the staff will continue to monitor and that 

broker-dealers should periodically evaluate as to consistency with their obligations under 

Exchange Act Section 15(g). 

Specific concerns that we noted in the course of these examinations include: 

• A significant amount of interaction between groups that have MNPI and internal 

and external groups that have sales and trading responsibilities occurred on an 

informal (undocumented) basis. Broker-dealers instructed groups with MNPI to 

refrain from discussing MNPI (and sometimes any specific issuer) and instructed 

groups with sales and trading responsibility to identify themselves as groups that 

should not be provided with MNPI. However, the frequency of the discussions 

and the absence of documentation may make it difficult to trace any inadvertent 

(or even intentional) disclosures that may occur.

• At some broker-dealers, senior executives, referred to as “above-the-wall,” 

received MNPI with no related monitoring or restrictions. Many of these senior 

executives had managerial responsibilities for business units involved in sales and 

trading on behalf of the broker-dealer. The absence of any documentation that 

these executives were receiving MNPI, in view of the natural motivation to have 

business units within one’s areas of responsibility excel, as well as the apparent 

absence of related monitoring or other controls, raises serious concerns about the 

ability of broker-dealers to guard adequately against misuse of MNPI in firm and 

customer trading.

• Formal and documented discussions may occur between two internal business 

groups of a broker-dealer, in which MNPI is provided to sales, trading or research 

personnel for business purposes. Broker-dealers must make judgment calls 

between the need for information against the restrictions required, such as on the 

trading of securities or issuance of research reports in companies to which the 

MNPI related. In some cases, broker-dealers were not conducting any focused 

review of the trading that occurred after traders were provided with MNPI.

• The staff identified gaps in oversight coverage at most broker-dealers, although 

such gaps differed. Some broker-dealers did not review trading within accounts 

of institutional customers, asset management affiliates, or retail customers; or did 

not conduct any review when MNPI came through business activities outside of 

 13 See, e.g., Exchange Act Rule 14e-5(b)(8), 17 C.F.R. §240.14e-5(b)(8), and Exchange Act Rule 

10b5-1(c)(2), 17 C.F.R. §240.10b5-1(c)(2).
7

the Investment Banking Department (“Investment Banking”) – such as 

participation in bankruptcy committees, employees serving on the boards of 

directors of public companies, changes in research ratings, or insiders of 

companies placing unusual trades. 

These concerns by themselves may not necessarily suggest violations of Section 15(g), 

but broker-dealers may find it helpful to consider them in reviewing their policies and 

procedures. 

We also highlight practices we believe to be effective:

• Broker-dealers were developing processes that differentiated between types of 

MNPI based on the source (e.g., business unit) from which the information 

originated within the broker-dealer or the nature (e.g., transaction type) of the 

information. In some cases, broker-dealers were creating tailored exception 

reports that took into account the different characteristics of the information.

• Broker-dealers were expanding the scope of instruments that they reviewed for 

potential misuse of MNPI by traders, including: 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.

Considering these practices may assist broker-dealers in reviewing their own policies and 

procedures. However, a practice that is effective in one context may be less effective in 

another. The effective practices described in this report are not an exhaustive list, and 

they constitute neither a safe harbor nor a “checklist.” Other practices besides those 

highlighted here may be appropriate as alternatives or supplements to these practices. To 

comply with Section 15(g), a broker-dealer must not only establish but also must 

maintain and enforce written policies and procedures reasonably designed to prevent the 

misuse of MNPI. Whether the controls described in this report would be appropriate for 

a particular broker-dealer would depend on the broker-dealer’s size and business model. 

In addition, broker-dealers may identify and implement other controls that are reasonably 

designed to meet the goals of Section 15(g). 

II. BACKGROUND

In November 1988, ITSFEA was enacted, adopting Exchange Act Section 15(g). In 

March 1990, the Division of Market Regulation issued a report, “Broker-Dealer Policies 

and Procedures Designed to Segment the Flow and Prevent the Misuse of Material 

Nonpublic Information” (“1990 Report”).14 The 1990 Report provided an overview of 

then-current broker-dealer information barrier practices and identified common practices, 

including the maintenance of watch and restricted lists and the accompanying review of 

employee and proprietary trading, written procedures, and documentation of reviews.

 14 www.sec.gov/divisions/marketreg/brokerdealerpolicies.pdf. See, also, joint statement issued by 

the NASD and NYSE, available at NASD NTM 91-45; and Broker-Dealer Internal Control 

Procedures for High Yield Securities, a report by the Division of Market Regulation (1993), 

available at http://www.sec.gov/divisions/marketreg/15freport1093.pdf. 
8

Information barrier programs, as described in the 1990 Report and as currently observed 

by the staff, have certain common features: employee training in legal and firm 

requirements; review and restrictions on trading; physical barriers; formal over-the-wall15

procedures prior to sharing information with public-side employees; and surveillance. 

The basic practices and procedures described in the 1990 Report have provided a 

framework to which enhanced information barriers have been added as business models 

and business tools have changed. The 1990 Report described practices that raised

concerns, and the staff’s current examinations generally found that the concerns have 

since been addressed by the broker-dealers examined – creation of more formal training 

programs, greater documentation when employees are brought over-the-wall, and 

significantly increased broker-dealer compliance staff involvement in determining what 

matters are to be added to the watch list. 

Within the context of the current examinations, the staff observed that areas with ongoing 

access to MNPI are identified as “private-side,” and applicable physical barriers and 

trading restrictions are in place. Areas that have sales and trading responsibilities (“Sales 

and Trading”) are identified as “public-side,” and have restricted or monitored access to 

MNPI. Most broker-dealers centralize responsibility for managing the information 

barriers program into one group within the Compliance Department. The group is 

commonly referred to as the “Control Group” or the “Control Room,” and such terms are 

used interchangeably in this report.

This report does not restate the conclusions of the 1990 report, which remain generally 

appropriate. For example, this report does not go into detail about written procedures and 

employee training. Processes and controls that broker-dealers implement to meet their 

Section 15(g) obligations, which may include those described in this report, must be 

incorporated into written procedures. Employees generally should be appropriately 

trained on the requirements. To the extent the staff identified gaps in a broker-dealer’s 

written procedures and training, the staff raised the issue with the broker-dealer.

In order to comply with Section 15(g), broker-dealers should continually reassess both 

potential sources and uses of MNPI and whether reasonable controls are in place. 

Practices that are sufficient for a broker-dealer at one time may not adequately comply 

with its legal obligations at other times. Importantly, written and implemented controls 

that are deemed reasonable may likely vary among broker-dealers depending on factors 

such as size and business model.

III. SOURCES OF MATERIAL NONPUBLIC INFORMATION

In assessing their Section 15(g) programs, broker-dealers should be aware of information 

flows – the MNPI directly accessible by internal broker-dealer groups, how such 

information is used, and whether and which internal and external parties may have access

 15 The over-the-wall process is discussed in more detail below in V.C.1.
9

to the information.16 Some sources provide confidential information that at times is 

MNPI.

17 The staff’s review identified the activities discussed below as those that may 

result in broker-dealers coming into possession of MNPI.

A. Corporate Clients 

The staff has observed that the primary source of MNPI is information provided by 

clients of the broker-dealer that are companies with publicly traded securities.

18 These 

corporate clients provide MNPI to broker-dealers for general advice and for specific 

transactions. Some corporate clients have relationship bankers within Investment 

Banking to provide ongoing advice. The relationship bankers at larger broker-dealers 

tend to specialize by industry (e.g., health care or transportation) or region (e.g., Latin 

America).

1. Mergers and Acquisitions

The staff has observed that information concerning mergers and acquisitions (“M&A”), 

also referred to as strategic transactions, appears to have a high degree of materiality. 

Most Investment Banking Departments have M&A specialists who work with the 

relationship banker in structuring the transaction. The broker-dealer could be 

representing either a potential seller (e.g., a company selling itself or certain assets) or the 

potential purchaser (e.g., a company or institutional investor seeking to purchase a 

company or certain assets). The broker-dealer’s involvement could begin after two

companies have already reached a deal in principle or could begin when a company is 

looking to engage a broker-dealer to search for potential buyers or potential acquisition 

targets. In some cases, the broker-dealer is approached not with an offer of mandate but 

to compete with other broker-dealers to be engaged. 

The staff observed that internally, employees from other areas of the broker-dealer,

including Capital Markets groups (“Capital Markets,” see the description in the next 

section), the Credit Department (“Credit”), and Derivative Sales groups (“Derivative 

Sales,” frequently within Capital Markets) sometimes work on the transaction and 

therefore have access to the information. Capital Markets assists if the M&A transaction

includes a securities offering or restructuring. Credit must approve any financing 

commitments. Derivative Sales may provide a price quote on a derivative as part of the 

 16 The staff’s review was conducted prior to the enactment of the “Stop Trading on Congressional 

Knowledge Act of 2012,” commonly referred to as the STOCK Act, which was signed into law on 

April 4, 2012, and this report does not address the implications of such Act. In designing their 

information barriers, broker-dealers should consider whether information gathered as part of their 

government affairs or lobbying efforts may constitute MNPI. 17 “Confidential information,” as used in this report, refers to information received under a duty of 

trust or confidence. 18 The staff’s review observed that the majority of MNPI received by broker-dealers related to public 

corporations. Similar analysis would apply to other types of entities with outstanding securities 

concerning which the broker-dealer received MNPI. 
10

M&A transaction.

19 Other business units or groups within the broker-dealer may be 

consulted for information – the Research Department (“Research”) or Sales and Trading. 

Investment bankers may discuss transactions with clients that are external investment 

groups (e.g., advisors for private equity funds (“Private Equity”) and hedge funds).

20 

Staff observed that typically, a group within Investment Banking, sometimes called the 

Financial Sponsors Group, has ongoing discussions with institutional investors.21 Initial 

discussions may be oral, and later information may be provided through virtual data 

rooms, private websites on which the nonpublic documents are posted for review. 

2. Capital Markets / Syndicate

Many corporations raise capital for general corporate purposes or specific transactions 

through the issuance of equity and/or debt. Corporations also repurchase or restructure 

outstanding equity or debt, for example through a tender offer, stock buyback, or consent 

solicitation.22 Capital Markets facilitates such issuances, repurchases, or restructurings 

for corporate clients by assessing market interest in pending transactions, coordinating 

due diligence, and advising on the structure of the deal. The syndicate group 

(“Syndicate”) manages the issuance (e.g., building the book of purchasers and managing 

the settlement process). These functions are frequently either within Investment Banking

or within a unit that jointly reports into Investment Banking and Sales and Trading. 

Capital Markets and Syndicate sometimes serve as the conduit in communications 

between Investment Banking and external parties such as other broker-dealers or 

institutional investors and between Investment Banking and Sales and Trading. 

The Capital Markets and Syndicate functions are usually divided based on types of 

issuance – equity, high grade or investment grade debt, high yield debt, credit facilities 

and loans, and commercial paper, although in some cases the Capital Markets function is 

integrated for various debt instruments (bonds, credit facilities, and/or loans). The MNPI 

that may originate from these transactions include information about the company 

learned during the due diligence process, information regarding use of the proceeds, or 

information regarding the capital markets transaction itself. For example, the brokerdealer may learn the corporation will have reduced earnings through the due diligence 

 19 For example, if an acquisition is agreed to between a U.S. and non-U.S. entity with currency 

exchange risk, the broker-dealer or its affiliate may offer to enter into a foreign exchange swap to 

“lock in” the current exchange rate for the buyer’s acquisition price. Similarly, broker-dealers or 

their affiliates may sell over-the-counter interest rate derivatives to issuers in bond offerings to 

permit the issuer to hedge long-term interest rate exposure. 20 At the time of the staff’s review, the investment groups might include the broker-dealer’s internal 

principal investment areas and affiliated funds. 21 At the time of the staff’s review, Private Equity tended to be involved in M&A transactions, and 

hedge funds tended to be involved with capital markets offerings. 22 Issuer tender offers are subject to Exchange Act Rule 13e-4 (17 C.F.R. §240.13e-4), which 

requires a filing with the Commission, among other requirements. An issuer buyback is an open 

market repurchase of securities, usually under the safe harbor of Exchange Act Rule 10b-18 (17 

C.F.R. §240.10b-18). A consent solicitation is a vote by shareholders to waive a provision of the 

debt covenants, which may be held pursuant to the proxy rules. 
11

process. The broker-dealer may discover that the proceeds will be used to acquire certain 

assets. The information regarding the issuance may be material, depending on factors 

such as: size of the issuance compared to the overall capital structure of the company;

substantial revisions to the terms (e.g., interest rate) on which the corporation borrows;

changes to the corporate structure – such as a put option on change in control; or impact 

on concerns about the company (such as the company’s ability to borrow). 

In addition to Capital Markets and Syndicate, other areas may be involved with capital 

markets transactions. The Investment Banking relationship manager may have initiated 

the matter. An interest rate derivative may be offered to be used by the client to manage 

exposure resulting from the offering. Traders sometimes provide color on the market 

appetite for certain types of offerings. Issuer buybacks are generally forwarded to a 

trading desk for execution, which is sometimes a private-side group dedicated to 

processing transactions for corporate clients.

23 

3. Derivative Sales

Corporate clients may wish to enter into a derivative with the broker-dealer or its affiliate

in the context of an M&A deal or in the context of a securities offering. The M&A deal 

may be external to the broker-dealer and its affiliates (i.e., neither the broker-dealer nor 

its affiliates is acting as financial advisor to either the M&A buyer or the seller). Some 

broker-dealers represented that if they are not engaged to work on the original M&A 

deal, the M&A deal will have been already announced publicly prior to Derivative 

Sales’s involvement. 

Derivative Sales has ongoing discussions with corporate clients.24 For example, a

corporate client may want to enter into foreign exchange derivatives if it expects to have 

income or liabilities accrued outside the U.S. that must be converted into dollars. As a 

result, Derivative Sales may obtain MNPI, such as unannounced earnings, from corporate 

clients through its business interactions. 

4. Credit

Credit will have contacts with corporate clients in the context of review and approval of 

extensions of credit to finance an M&A or for ongoing operations.25 Credit must also 

review and approve the creditworthiness of corporations as counterparties in derivative

 23 The issuer must disclose purchases in its next Form 10-K or 10-Q, pursuant to Section 703 of 

Regulation S-K (17 C.F.R. §229.703). However, if the transaction is material, the issuer may need 

to disclose the transaction prior to execution. 24 The staff observed two unique derivative sales groups – one with corporate clients and one with 

institutional investor clients. Derivatives Sales as discussed in this report focuses on corporate 

clients. 25 Each of the registered broker-dealers reviewed by the staff had one integrated Credit Department 

that provided services to the broker-dealer as well as affiliates of the broker-dealer and was 

physically integrated within the broker-dealer’s location. Section 15(g) requires that brokerdealers’ information barriers be reasonably designed to prevent the misuse of MNPI by any person 

associated with such broker or dealer. 15 U.S.C. §78o(g).
12

transactions. Credit conducts initial due diligence and receives ongoing confidential 

information, which at times may be MNPI, from the corporations as required by the 

credit or derivatives agreement between the two parties. 

Credit may receive MNPI both through the periodic reports of the corporate client as well 

as activity under the credit extensions such as unanticipated material draws on credit 

facilities. Based on information received from corporate clients, Credit establishes an 

internal credit rating(s). As a result, Credit’s internal credit rating for a corporate client 

may at times be based on MNPI. 

B. Corporate Borrowers

As discussed above, Capital Markets will advise companies on raising capital, and during 

that process companies provide MNPI to Capital Markets. After the capital raising has 

been completed, the process to disclose information to existing holders of financial 

instruments differs based on product. Information on public securities must be 

disseminated to security holders and the public through public statements and filings. In 

contrast, information provided to lenders of credit may be nonpublic at the time of the 

lenders’ receipt. Both during the origination and during the term of credit facilities

(which include commitments to lend, lines of credit, term loans, revolving credit, among 

other financing vehicles, referred to collectively herein as a “loan”), the borrower 

typically is circulating confidential information, which at times may be MNPI, to the 

lenders privately through web sites hosted by external vendors (“Loan Sites”).26

One financial firm, which may be a broker-dealer or its affiliate, typically will act as 

administrative agent for the initial issuance of the loan. That administrative agent will 

have responsibility for, among other things, creating a Loan Site, granting and removing 

access to lenders and potential lenders, and maintaining records of current lenders. Other

broker-dealers or their affiliates may participate in the loan as syndicate members, 

purchasing interests in the loan and receiving the confidential information to review. 

After the initial issuance of the loan, loan interests are frequently traded among financial

institutions, including broker-dealers, and institutional investors. Once a loan interest is

purchased, the purchaser has the contractual right to review the confidential information 

contained on the Loan Site. Loan purchasers must decide whether to act as a private-side

or public-side group. When acting as a private-side group, the traders access the Loan 

Site, including any MNPI contained on the site but may not trade securities based on the 

MNPI. When acting as a public-side group, the traders choose not to access the 

confidential information contained on the Loan Site so that they may freely trade both 

loan interests and securities such as equities and bonds of the same companies. Publicside groups may go private on certain companies, with resulting trading restrictions only 

on that company. If the trading group holding the loan interests is designated as publicside, the lender must select another internal group to access the Loan Site on behalf of the 

 26 Typically, two Loan Sites are created – one for the origination process and one for the secondary 

trading market.
13

trading group (“Loan Site Monitors”).

27 The Loan Site Monitors will then receive the 

confidential information the borrower must provide to lenders. 

As a result, broker-dealers may have access to MNPI through the following contact 

points:28 

• as administrative agent (usually through the loan origination function, which is 

frequently within Investment Banking or Capital Markets), 

• as syndicate member (through the loan origination function or Loan Sales), 

• as holder of interests in the loan purchased during origination (through the loan

origination function, Credit, or a special purpose group), 

• as manager of the Loan Site (an administrative group), 

• as loan trader (trading group or principal investment area of the broker-dealer), 

• as Loan Site Monitors for public-side groups to monitor information coming 

through the Loan Site, and

• as a member of the bankruptcy committee if the loans default.

The MNPI provided to broker-dealers may include information about the borrower, as 

well as the borrower’s affiliates, parent, or guarantor, such as:

• enhancements to liquidity (or limitations on liquidity based on borrowing 

conducted under a line of credit),

• use of proceeds for non-routine transactions,

• information required to be provided pursuant to the loan agreement (e.g., material 

litigation), or

• failure to meet certain loan covenants.

C. Non-Corporate Issuer Clients

The staff’s review identified two categories of non-corporate securities that could result

in broker-dealers receiving MNPI when engaged to work on the origination: public 

finance securities and securitized products. Public finance securities are issued by 

governmental entities other than the federal government.

29 Securitized products are

created when an entity sells an asset or assets to a special purpose vehicle (“SPV”). The 

 27 No specific industry term exists for this group, which is frequently within Credit or an operations 

group (“Operations”). 28 The staff notes that in some cases, an affiliate of the broker-dealer may be the legal entity 

contractually specified to fulfill these roles. However, the broker-dealer may have possession of 

MNPI because its employees, registered personnel, or associated persons are engaged in the 

activities specified in this section. 

29 The term “public finance securities” is used in this report to be synonymous with municipal 

securities as defined in Exchange Act Section 3(a)(29). 15 U.S.C. §78c(a)(29). However, more 

broker-dealers are using the term “public finance securities” or “public sector” to reflect that such 

securities are frequently issued by governmental entities other than municipalities. 
14

SPV then issues securities, with the securityholders receiving payments generally 

dependent on the performance of the assets owned by the SPV.30 

Registered broker-dealers examined by the staff asserted that activities involved in the 

original issuance of such securities did not result in the broker-dealer receiving MNPI 

because any nonpublic information obtained is unrelated to any outstanding security or 

security-based swap. Specifically, the broker-dealers examined by the staff expressed the 

view that the information they obtained during due diligence is only relevant to that 

specific security, which does not yet have a market.31 The staff believes that brokerdealers should consider the extent to which any nonpublic information obtained may be 

MNPI, for example, if the information is material to an outstanding class of securities or 

is material to the new class of securities and is not fully disclosed prior to the 

commencement of public trading of such securities. 

Once the securities are issued, it is possible that the broker-dealer may receive MNPI on 

the outstanding securities based on its continuing role as financial advisor to the issuer. 

Examined broker-dealers thought this was less likely in the case of public finance issuers, 

given the issuers’ disclosures of information that may be made pursuant to a written 

agreement entered into as described by Exchange Act Rule 15c2-12. It is possible that 

the broker-dealer may get advanced word that the outstanding securities are about to 

default or re-fund. Broker-dealers also identified the following potential MNPI that may 

be received from public finance issuers: ratings changes, liquidity problems, substitution 

of property underlying the securities, modifications to the rights of security holders, 

regulatory investigations, and failure of the liquidity providers to perform. MNPI relating 

to securitized products may include information regarding defaults in the underlying 

assets or regarding the financial difficulties of any guarantor of the securitized product. 

D. Investment Areas

Different groups within or associated with a broker-dealer may monitor the financial 

condition of issuers. Principal investment or trading groups (collectively, “Proprietary 

Groups”) may invest or trade firm capital in public companies either in private 

 30 Securitized product is an industry term for products that are sometimes also referred to as assetbacked securities, structured finance securities, or structured finance products. This section covers 

securitized products in which the entity sponsoring the issuance purchased the underlying assets in 

the secondary market, usually for the purpose of creating a securitized product. The discussion in 

this section is not intended to cover instances in which a corporate issuer securitizes its assets, 

which may have been created or originated by the corporate issuer. The staff believes that such 

transactions are more likely to provide MNPI consistent with other corporate capital markets 

transactions described in III.A.2, and the broker-dealers examined by the staff generally 

established information barriers controls for securitized products originations initiated by public 

corporations similar to information barriers controls in place for other corporate originations. 31 Broker-dealers gave as examples: public finance securities based on the revenue stream of a 

specific project rather than the general creditworthiness of the municipality, or instances in which 

the value of securitized product is derived from the pool of assets solely underlying that specific 

issuance. 
15

transactions or in the open market.32 Other groups within the broker-dealer or associated 

with the broker-dealer may monitor issuers on behalf of customers – either brokerdealers’ institutional sales groups or internal or affiliated asset management groups

(“Asset Management”, and collectively with Proprietary Groups, “Investment Groups”). 

With respect to Asset Management, Private Equity tends to have more frequent contacts 

with their portfolio companies as well as with corporations seeking potential investments. 

As a holder of a substantial interest in a corporation, Investment Groups may receive 

confidential information, which at times may be MNPI, directly from the corporation. 

For example, the Investment Group may have an employee serving on the board of 

directors of the company or a shareholder committee. If a company has financial 

difficulty, a representative from the Investment Group may be invited to participate in 

bankruptcy or creditor committees of distressed companies (or even pre-bankruptcy 

committees).33 

Investment Groups may also obtain MNPI as part of the investment process. The 

information may be obtained by discussions between the employee and an insider of the 

company. For example, Investment Groups may be approached about investing in an 

offering that has not yet been publicly disclosed (e.g., a PIPE).34 

E. Institutional Investor Customers

Broker-dealers receive confidential information from institutional investors through 

taking orders for execution in the secondary markets and in processing and clearing such 

transactions as prime broker.35 The order information received from institutional 

investors may be material to the securities being purchased, and Section 15(g) requires 

broker-dealers to have policies and procedures reasonably designed to prevent misuse of 

 32 Section 619 of the Dodd Frank Act places limitations on the ability of banking entities and certain 

nonbanking financial companies to engage in proprietary trading or to acquire or retain any equity, 

partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund. 33 Such a committee may be a formal committee established by the bankruptcy court or an informal 

committee established by a group of creditors. See, e.g., In the Matter of Greenfield and Blue 

River Capital LLC, Release No. 34-52744 (November 7, 2005), and SEC v. Barclays Bank PLC 

and Steven J. Landzberg, Civil Action No. 07-CV-04427 (S.D.N.Y.) Litigation Release No. 20132 

(May 30, 2007), settled actions. 34 Section 15(g) cases have been brought against broker-dealers for failure to prevent the misuse of 

MNPI received by an employee as board member and officer of unrelated company (SEC v. 

Citigroup Global Markets Inc., f/k/a/ Salomon Smith Barney Inc., Civil Action No. 03-CV-2945 

(WHP) (S.D.N.Y.), Litigation Release No. 18111 (April 28, 2003), settled action; In the Matter of 

Gabelli & Company, Inc; and Gamco Investors, Inc, Release No. 34-35057 (December 8, 1994), 

settled action); and information regarding a proposed PIPE transaction (In the Matter of Friedman, 

Billings, Ramsey & Co., Inc., Release No. 34-55105 (December 20, 2006), settled action; SEC v. 

Friedman, Billings, Ramsey & Co., Inc. et al., Civil Action No. 06-CV-02160 (D.D.C.), Litigation 

Release No. 19950 (December 20, 2006), settled action). 35 Prime brokerage departments offer custody and clearing services to institutional clients, including 

securities lending. Prime brokerage departments may also obtain other nonpublic information 

relating to shareholder activities, for example, through processing tenders made in response to a 

tender offer.
16

MNPI, which may include customer order information.36 Customer order information is 

received by groups within Sales and Trading, usually located on open trading floors. 

After execution, information on the positions held by the institutional investor, including 

large short positions, as well as institutional investors’ trading strategy, may be material. 

Other areas within Sales and Trading may gain access to customer information –

personnel building trading models and stock loan desks. Broker-dealers also routed 

aggregate information on order flow to other areas of the broker-dealer and to external 

parties. Broker-dealers represented that this information, referred to as market color, is 

intended not to be based on a specific customer but overall market trends. However, the 

staff believes that market color should be evaluated for whether it represents MNPI, 

particularly when the information provided is based on or largely represents a specific 

customer’s order. 

F. Insider Customers

Certain customers of the broker-dealer are also insiders of a public corporation or other 

similar entities with access to MNPI. Generally, broker-dealers dealt with two categories 

of insiders. Corporate officers and directors may be customers of broker-dealers’

individual investor businesses. Large institutional investors may have acquired sufficient 

ownership of a corporation as to become an insider. Insider customers provide two types 

of MNPI. First, they have information gathered from their role as insider (e.g., the 

customer is a Chief Executive Officer about to retire). Second, insiders’ personal 

transactions in the stock of their company may be material. Information concerning the 

order, which may constitute MNPI, is forwarded to certain internal groups, sometimes in 

Operations, with responsibility for processing insider transactions. The staff believes that 

broker-dealers should consider which internal groups have access to MNPI and evaluate 

the controls (e.g., physical barriers and personal trading reviews) in place to prevent the 

misuse of such information. 

G. Research 

Information within Research, such as the initiation of research coverage or changes in 

price targets, may be MNPI.

37 Broker-dealers are starting to incorporate into their 

information barriers programs other publications and ratings systems that may be 

 36 The Commission has found violations of Section 15(g) by a broker-dealer that allowed traders 

without customer order execution responsibility to see customer order information on the 

customer facilitation traders’ computer screens and hear market makers discuss customer orders. 

See In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Release No. 34-63760 

(January 25, 2011), settled action. The Commission has also found violations of Section 15(g) 

based on a broker-dealer’s failure to have appropriate controls over the squawk boxes used to 

disseminate customer order information. See In the Matter of Merrill Lynch, Pierce, Fenner, & 

Smith Incorporated, Release No. 34-59555 (March 11, 2009), settled action. 37 See In the Matter of Goldman, Sachs & Co., Release No. 34-66791 (April 12, 2012); In the Matter 

of the Buckingham Research Group, Inc., Release No. 34-63323 (November 17, 2010); and In the 

Matter of Banc of America Securities LLC, Release No. 34-55466 (March 14, 2007); settled 

actions. See, generally FINRA Rule 5280 (regarding trading ahead of research reports).
17

material. For example, Research may maintain lists containing a subset of their buy and 

sell recommendations to highlight certain ratings for investors. The addition or deletion 

of names from the list may be material. Research may issue short term views on 

securities, with an analyst having recommendations for both a short term investment 

horizon and longer term investing. The short term rating may raise concerns if it, in 

effect, provides advanced notice of a change in a long term rating to a select group. 

H. Secondary Sources of Material NonPublic Information

MNPI provided to broker-dealers is frequently incorporated into secondary sources. For 

example, MNPI is reported into the Control Room and incorporated into a database there. 

The resulting database becomes a new potential source of MNPI. The Conflicts area of 

the broker-dealer (“Conflicts”) also receives MNPI on potential deals and creates its own 

database.38 Various support functions – such as information technology (“IT”), 

Operations, and risk monitoring groups such as Credit – have ongoing access to the 

MNPI initially sourced by one of the functions described above. In some cases, groups, 

using the MNPI, create a document or analysis that itself may be MNPI (for example, see 

the discussion above on internal credit ratings). 

IV. CONTROL STRUCTURE

The staff’s review observed broker-dealers generally categorized various groups, 

functions, activities, and information for control purposes. The category into which each 

is placed impacts the treatment. 

A. Public-Side vs. Private-Side Business Groups

Broker-dealers classify business groups as “public-side” or “private-side.” In order to 

manage the different types of MNPI within a broker-dealer, the controls typically 

consider factors beyond public or private classifications. For example, the staff observed 

that private-side and public-side groups frequently were segregated from other privateside and public-side groups. More broker-dealers are adopting this approach, with 

pockets created based on the type of MNPI to which each group has access. 

Private-side groups are areas that have routine or ongoing access to MNPI. As a result, 

broker-dealers generally physically segregate such groups. The groups typically are 

restricted from personal and firm trading in securities for which the group has MNPI, 

regardless of actual knowledge of the individual. In effect, once classified as privateside, the broker-dealer assumes that persons within these groups do have MNPI. Privateside groups typically include Investment Banking, Credit, Capital Markets, Syndicate

(and origination functions generally), certain Investment Groups, and support and control 

personnel supporting these areas. 

 38 All broker-dealers have a system to check individuals and the broker-dealer generally for conflicts 

between the project and other projects worked on by the broker-dealer or those employees (e.g., if 

the broker-dealer has an exclusive agreement with one client that would preclude working for a 

competitor).
18

Public-side groups are areas that do not have access to MNPI on a routine basis. If an 

employee within a public-side group does receive access, that employee is supposed to be 

identified to the Control Room as being over-the-wall in the corporation/security (see 

discussion at V.C.1 below). Public-side groups are allowed by the broker-dealer to trade 

in securities for which the broker-dealer has MNPI as long as that trader does not have 

access to the MNPI (or is not directed to trade by someone with access). Most Sales and 

Trading groups are public-side groups. Research may be considered a public-side group 

by some broker-dealers. Research itself may have MNPI such as ratings changes, and the 

physical barriers in place between private-side and public-side groups tend to exist 

between Research and Sales and Trading even if both are identified as public-side.

39 

Certain public-side groups are organized to allow them to be private on specific names. 

When the public-side group “goes private” on a name, the group has MNPI on that name 

(a company) and is restricted from trading in securities of that company. In order to 

accommodate the mixing of public and private, most broker-dealers either segregate the 

group from other public-side groups or apply the restriction to all Trading groups within 

the same physical location. 

A few broker-dealers use an “above-the-wall” classification for certain persons and 

groups. Under the classification, the person and/or group are neither public-side nor 

private-side. As an above-the-wall category, broker-dealers allow certain MNPI to be 

provided on a need to know limited basis without going through the over-the-wall 

process. Physical barriers, documentation, or other controls may be limited or nonexistent. The staff is concerned about the use of the above-the-wall category and believes

that broker-dealers should consider whether the category is appropriate and whether

additional controls should be in place. The staff observed the above-the-wall category 

used at some broker-dealers in three different situations – certain senior management to 

permit them to obtain MNPI for wall crossings, Research, and the syndicate group. The 

lack of documentation or other controls when MNPI is disclosed to above-the-wall 

executives may, in certain circumstances, result in activities in violation of the securities 

laws, such as Exchange Act Sections 10(b) and 15(g). For example, when the person 

receiving unreported, unmonitored MNPI has management responsibility over business 

units involved in sales or trading activity, staff believes that such circumstances could run 

the risk of facilitating rather than preventing the misuse of MNPI in firm trading. Staff

expects regulated entities to be especially mindful of this risk when assessing whether an 

executive needs to be “above-the-wall.” For those senior executives deemed to have an 

actual need to know MNPI without pre-approval, broker-dealers are strongly encouraged 

to consider the benefits, in terms of statutory compliance, of maintaining a MNPI 

disclosure reporting and monitoring requirement for above-the-wall executives and others 

in such a category.

 39 While Research may routinely have MNPI (e.g., changes to research ratings), broker-dealers may 

need to address the adequacy of controls over the group’s receipt of MNPI from external sources, 

which could impact the ability to issue research. SEC v. Citigroup Global Markets Inc., f/k/a/ 

Salomon Smith Barney Inc., Civil Action No. 03-CV-2945 (WHP) (S.D.N.Y.), Litigation Release 

No. 18111 (April 28, 2003), settled action. 
19

B. Types of Material NonPublic Information Sources

The sourcing of MNPI has one of three broad characteristics. The broker-dealer may 

work on a transaction and through the work receives MNPI concerning the transaction 

and other information gathered as part of the transaction. The broker-dealer may have 

ongoing contacts with an information source, through which MNPI is received on a oneoff basis (e.g., the corporate insider reveals that the corporation is having reduced 

earnings). The broker-dealer may have sources that provide on an ongoing basis 

confidential information, which at times may be MNPI. The type of information source 

has significance with respect to how broker-dealers are able to capture MNPI within their 

information barriers programs. 

1. Transaction Sourced Material NonPublic Information

Investment Banking, Capital Markets/origination, private-side Investment Groups, or 

Sales and Trading may receive transactional MNPI. Information regarding the 

transaction is forwarded to the Control Room for consideration of placement on 

monitoring lists (see IV.C. for a discussion of monitoring lists). While most transaction 

sourced information is sourced from private-side groups, public-side groups sometimes 

receive transactional MNPI (e.g., when the group purchases in a PIPE). 

 

a. Method of Notifying the Control Room 

A common practice in the past was reliance on the deal team phoning the Control Room 

to report the transaction. Because the deal team members can be busy developing the 

project, they may not put priority on providing notice. The staff’s review observed that

all broker-dealers had at least some instances in which the Control Room did not receive 

notice or received delayed notice and so did not have adequate controls in place to 

prevent misuse of such MNPI. The staff observed the following factors at some brokerdealers that may have contributed to the absence of timely notice: sole reliance by the 

Control Room on the Investment Banking team to determine whether and when a matter 

should be placed on a monitoring list; little written guidance as to when information 

should be reported to the Control Room and what matters would trigger the notice 

requirement; and absence of a process to test whether the appropriate information was in 

fact being placed on the lists as necessary.

Some broker-dealers had put controls in place to address absence or delays in notice:

• More broker-dealers are developing systems to notify automatically the Control 

Room based on information entered into computer systems used for deal 

management or for conflicts checks.

• Some Control Rooms review pipeline reports, commitment committee minutes, or 

news articles that reference the broker-dealer to identify items missed. However, 

the staff noted that such information may be received after significant work has 

been done on the transaction.
20

• Some broker-dealers conducted lookback reviews of trading activity that took into 

account possible delays, including a standard review of a few weeks prior to 

placement on the watch list or a special purpose review when a delay in 

placement was identified.

b. Materiality 

Information reported into the Control Room is assessed for materiality with respect to 

public companies (issuer, target, acquirer, competitor, or shareholders that are public 

companies) to determine whether that specific company should be placed on a monitoring

list to check for possible improper trading.

40 For example, the acquisition of a small 

company by a larger company may be material to the securities of the smaller company 

only or may be material to both companies’ securities. Broker-dealers stated that such 

materiality determinations permitted them to focus surveillance on significant 

transactions. Typically the Control Room, after discussions with deal team members, 

determines materiality.

The staff believes that registered broker-dealers have a responsibility to make reasonable 

judgments regarding the materiality of such information. If in fact the transaction is 

determined later to be material, broker-dealers should be prepared to justify their 

decisions not to monitor a transaction. 

The staff observed the following practices at some broker-dealers that may make it 

difficult for broker-dealers to monitor and evaluate whether their materiality 

determinations were reasonable:

• failure to memorialize transactions deemed immaterial, although all brokerdealers reviewed by staff had changed this practice during the course of the 

review,

• failure to document the basis of the determination of immateriality, 

• lack of any specific factors used to assess materiality, and

• failure to identify later receipt of MNPI (e.g., the transaction size is increased 

significantly).

One broker-dealer excluded all transactions within certain categories from monitoring 

lists, such as investment grade securities offerings and credit extensions. However, the 

staff observed that some such offerings and extensions were considered significant by 

contemporaneous public commenters. Most broker-dealers did assess materiality of 

investment grade securities offerings and credit extensions and included at least some of 

 40 In order to evaluate materiality, some broker-dealers use measures such as the relative size of a 

transaction compared to the size of the companies, with some assessment of likely impact on share 

price. The monitoring list referred to here is used for automated surveillance of public securities, 

and private companies are not generally included on such list. This discussion should not be 

interpreted to limit the scope of Section 15(g), which is not limited to misuse of MNPI related to 

public companies. 
21

these transactions on monitoring lists. To the extent that such transactions are material, 

failure to include such MNPI within the broker-dealer’s information barrier program may 

be a violation of Section 15(g). As such, the staff would strongly urge broker-dealers not 

to exclude categorically transactions.

As discussed above, transaction sourced information may provide MNPI both regarding 

the transaction and information received while working on the transaction (e.g., through 

the due diligence process). When broker-dealers exclude transactions from monitoring 

lists because they deem information about the transaction immaterial, the staff notes that 

the broker-dealer may later come into possession of MNPI through the due diligence 

process. The staff believes that broker-dealers need to have a process to identify such 

MNPI, and some broker-dealers did rely on the process described in IV.B.2 on itemspecific MNPI to identify which items should be placed on a monitoring list.

c. Placement on a Monitoring List 

The purpose of notification to the Control Room is to trigger placement on a monitoring 

list (discussed in more detail below). While all broker-dealers reviewed had policies to 

place material transactions on a monitoring list,41 broker-dealers could not give a bright 

line test as to when this would occur. Broker-dealers stated that corporations frequently 

discuss potential transactions, many of which never proceed beyond generalized 

discussions. Broker-dealers stated that they would make judgment calls as to when the 

transaction was of reasonable certainty prior to placing on a monitoring list. The staff’s 

review confirmed the variations that may occur between potential transactions. In some 

cases, the broker-dealer is approached because a corporation wants to discuss potential 

assets or companies to be purchased but has no specific candidates identified and no 

definitive intention to proceed with any acquisition. However, in some cases, the first 

contact conveys MNPI to the broker-dealer as in the case of a corporation that has 

already received an offer to be acquired, and the staff believes that even a tentative offer 

may constitute MNPI.

42 

The staff observed two practices that resulted in a delay in placement on the monitoring 

list. Some broker-dealers focused on whether they were formally mandated by a client to 

evaluate for placement on a monitoring list. However, the staff observed that mandate 

frequently occurred only shortly prior to announcement and/or after significant work by 

the broker-dealer had taken place. Some broker-dealers wait until the materiality 

assessment has been conducted. As a result, the processes delayed placement on a 

monitoring list even though the broker-dealers already had possession of MNPI.

 41 The staff observed that broker-dealers create monitoring list entries based on specific matters or 

transactions. For example, if a broker-dealer is engaged to work on an offering for a corporate 

client and is also engaged to work on an acquisition for the same client, two separate entries will 

be created. The staff believes that this practice may assist broker-dealers monitor for misuse of 

the information, as potential misuse (e.g., purchasing or selling the related security) will differ 

based on the matter involved. 42 See footnote 7. 
22

Broker-dealers are sometimes provided with MNPI while seeking a specific engagement, 

and in some cases another broker-dealer is selected to work on the transaction. As a 

result, the broker-dealer may have MNPI regarding the existence of the transaction, 

although it would be unaware of ongoing developments within the deal. Some brokerdealers continued to monitor trading in the company’s stock even if they were not hired if 

they had reasonable certainty that the transaction was progressing at another brokerdealer (see V.G. for a discussion of the scope of monitoring). Some broker-dealers 

immediately remove the item from any monitoring list and so may not have adequate 

controls in place for MNPI in their possession. 

The staff also noted another practice that may result in an absence of monitoring that it 

believes may be inconsistent with Section 15(g). Some broker-dealers removed items 

from any monitoring list upon public announcement or shortly thereafter. While the 

information regarding the transaction is now public, the broker-dealer continues to work 

on the transaction until closing and may receive additional MNPI regarding the 

transaction. For example, the broker-dealer may be aware of the progress towards getting 

shareholder approval or may be aware that one of the parties is considering terminating or 

renegotiating the transaction. 

2. Item-Specific Material NonPublic Information

Various public-side and private-side groups within the broker-dealer may have ongoing 

contacts with insiders outside the context of any transaction. The relationship between 

private-side and insiders may contemplate at times that MNPI will be provided (e.g., for 

financial advisory purposes). The relationship between public-side and insiders is 

generally intended to be based on public information only, but private information may 

be inadvertently disclosed. Broker-dealers generally provide written policies to 

employees as to their obligation to notify the Control Group. 

Two broker-dealers did not require MNPI within the possession of the Credit Department 

to be reported into the Control Room. The staff raised this as a concern with the brokerdealers, and the broker-dealers responded by implementing new procedures directing the 

Credit Department to report MNPI into the Control Room. 

3. Ongoing Sources of Confidential Information

Certain sources provide ongoing access to confidential information that at times may be 

MNPI. Sales and Trading, Investment Banking, Capital Markets, and Credit may access 

information given to lenders under a credit agreement or information obtained as a large 

investor in a corporation. Typically, the recipient must execute a confidentiality 

agreement prior to being granted access. Employees sometimes serve as directors of 

public companies, as members of bankruptcy committees, or as the broker-dealer’s 

contact when the broker-dealer owns a large percentage of the company. Employees also 

may serve on board of directors as the result of an outside business interest. 
23

Broker-dealers should take into account when a public-side group with investment or 

trading responsibilities has ongoing access to confidential information that may at times 

be MNPI.

43 The Gabelli action illustrates concerns with reliance on a public-side

employee to self-report when a specific instance of MNPI arises. The staff believes that 

similar concerns are presented when the public-side employee has ongoing access to 

confidential information, which at times is MNPI, through other sources (e.g., Loan 

Sites). 

The staff’s review observed that broker-dealers did differentiate between public-side and 

private-side business units with access. In most instances, broker-dealers immediately 

alerted the Control Group when a public-side area is receiving the confidential 

information for monitoring purposes. For private-side areas, the information was usually 

not forwarded to the Control Room unless the private-side employee believed that a 

specific item constituted MNPI (i.e., as discussed under the prior section). The staff 

identified instances in which public-side employees who served as directors of public 

corporations were not monitored, and the staff raised this concern with the brokerdealers. 

Information from Research generally is not reported into the Control Room until shortly 

prior to being publicly released. However, usually all information within a given 

category is reported in (e.g., all upgrades and downgrades), without a materiality 

determination for each specific item. Two other sources of confidential information (that 

are at times MNPI) are generally not reported into the Control Room: institutional 

customer information (e.g., orders) and corporate insider customers, although other 

controls are in place as discussed below. 

C. Monitoring Lists 

The 1990 Report focused on watch lists and restricted lists. Current information barriers 

are more complex. Matters reported into the Control Room receive different treatment 

based on the information source. All broker-dealers examined by the staff maintain a 

watch or grey list, as described in the 1990 report. Broker-dealers also maintain other 

lists, which were sometimes called private names lists, confidential lists, or control lists

or did not have any specific name at all. Because no industry standard term is in use, the 

staff will discuss the lists by their function. 

Information reported into the Control Room is generally entered into a database (“Control 

Database”), which then generates the lists discussed below. Each list is generated based 

on the coding or fields selected when the item is created or updated. In general, all items 

reported into the Control Room are entered into the Control Database. As discussed 

above, broker-dealers at one time did not record matters they deemed immaterial, but 

most have since altered their procedures. 

 43 See In the Matter of Gabelli & Company, Inc; and Gamco Investors, Inc, Release No. 34-35057 

(December 8, 1994), settled action.
24

1. General Surveillance Lists

The first type of list results in general surveillance of trading activity, as discussed below 

in V.G. Traditionally, the watch or grey list fulfilled this function. All large brokerdealers have a watch or grey list, which continues to capture instances in which a privateside group (and sometimes a public-side group) has possession of MNPI.44 Some brokerdealers maintain additional lists for certain events (e.g., Credit risk ratings or over-thewall),

45 and the resulting surveillance may be different, as discussed below in V.G. Most 

transaction sourced (IV.B.1) and item-specific MNPI (IV.B.2) will be placed on a general 

surveillance list, although some items may instead be placed on one of the other lists 

discussed below. 

2. Hybrid Restricted and Surveillance Lists

The second type of list acts as a restricted list for certain specific groups and a 

surveillance list for the rest of the broker-dealer. The most common example of this type 

of list is when public-side groups have access to ongoing sources of confidential 

information, which at times may be material, referred to as “going private on a name”. 

Broker-dealers may create lists that implement a complete restriction on trading by that 

group and other groups that share the same physical space. The list generally serves to 

monitor trading by other public-side groups that are physically segregated and employee 

trading generally. One broker-dealer maintained surveillance lists that restricted the 

specific group that had access to the MNPI but did not result in surveillance of the rest of 

the broker-dealer, and the staff raised this as a concern. 

3. Firmwide Restricted Lists

In some cases, broker-dealers may decide that certain sources of MNPI should be placed 

on a restricted list.46 This process is more common when the placement does not indicate 

that MNPI has been received but rather that it could be received. The types of MNPI 

sources placed on a restricted list varied considerably by broker-dealers but may include: 

corporations on which employees served as directors; for which Trading groups accessed 

private Loan Sites; or for which the broker-dealer was facilitating a transaction by an 

insider. 

Another example is the use of restricted lists after transactions have been announced. 

While the specific transaction has become public, the broker-dealer may continue to have 

two types of MNPI. First, some transactions are contingent upon certain conditions being 

 44 Examiners identified a small broker-dealer that did not have a watch list and relied solely on its 

restricted list. 45 Some broker-dealers maintain over-the-wall as a separate list, other broker-dealers annotate watch 

/grey list entries. 46 The restricted lists discussed in this section differ from restricted lists based on legal requirements. 

Legal restricted lists incorporate restrictions mandated by specific regulatory requirements, such as 

Exchange Act Rule 14e-5, 17 C.F.R. § 240.14e-5; Regulation M, 17 C.F.R. § 242.100-105; and 

Regulation S, 17 C.F.R. § 230.901-905. 
25

met. For example, the transaction may be completed only upon an affirmative 

shareholder vote, regulatory approval, or director approval. The broker-dealer may 

receive MNPI about the approval prior to public announcement.47 In addition, the 

broker-dealer may receive MNPI about financial conditions of the corporation. For 

example, in the context of an offering, the broker-dealer may receive nonpublic 

information, such as unannounced earnings information, in order to assist the issuer in 

updating its filed but not yet effective registration statement to reflect unannounced 

earnings information. 

Some broker-dealers have implemented trade-through policies that permit certain types 

of firm accounts to trade without restriction in restricted list securities and allow other 

types of firm accounts to trade below certain thresholds. The staff is concerned that 

restricted list surveillance only reviews whether the account is trading consistently with 

any applicable restrictions rather than a review to determine whether such trades may be 

based on MNPI. 

In order to implement the restriction, broker-dealers must disseminate information to the 

groups that are restricted. At one time, it was common to relay information to traders on 

restrictions through emails or a list posted on the intranet. The effectiveness of such 

notice is questionable for high volume traders who may not have time to consult a list 

(with several hundred names) prior to each trade. More broker-dealers are implementing 

other methods of notice that may be more effective, such as coding of order entry 

systems, pop-up notices in the trading systems, or hard blocks in trading systems that 

require a code from Compliance in order to complete the transaction. 

V. CONTROLS

After establishing the overall control structure, broker-dealers must implement controls 

reasonably designed to prevent inadvertent or deliberate accessing of MNPI by 

unauthorized persons and to identify instances in which it appears that an unauthorized 

person has accessed MNPI.48 The staff’s review identified the following controls 

implemented to address potential misuse of MNPI. 

 47 The potential for leakage of information may be greater at this point because public-side traders 

are more likely to be brought over-the-wall after public announcement of the transaction. 48 The report of the House Committee on Energy and Commerce on ITSFEA stated: “The 

requirements of these new statutory provisions reflect the Committee's belief that broker-dealers . . 

. must not only adopt and disseminate written policies and procedures to prevent the misuse of 

material, nonpublic information, but also must vigilantly review, update, and enforce them. . . . the 

Committee expects that institutions subject to the requirements of this provision will adopt 

policies and procedures appropriate to restrict communication of nonpublic information and to 

monitor its dissemination, such as restraining access to files likely to contain such information; 

providing continuing education programs concerning insider trading; restricting or monitoring 

trading in securities relating to which the firm's employees possess nonpublic information; and 

vigorously monitoring and reviewing trading for the account of the firm or of individuals.” H. 

Rep. No. 100-910 at 21-22 (1988).
26

A. Limiting Authorized Access

The staff believes that one important component of an information barriers program is 

restricting access to MNPI only to those persons that need to know the information. 

Examined broker-dealers placed limitations on access to nonpublic information generally 

regardless of whether the employee is public-side or private-side. Most broker-dealers 

have written policies that instruct personnel not to discuss confidential information with 

other public-side and private-side personnel unless they need to know the information.

 1. Deal Team Members

Initially, information on M&A and capital markets transactions is generally limited to 

deal team members, both to address concerns about conflicts and to limit dissemination 

of MNPI. Broker-dealers have processes to add employees to the deal team working on a 

transaction. Public-side employees must go through an over-the-wall process prior to 

being given access (see discussion at V.C.1 below). Some broker-dealers also use the 

over-the-wall process when a private-side employee outside of Investment Banking is to 

join the deal team, which may assist broker-dealers in monitoring the dissemination of 

information. Within Investment Banking, most broker-dealers rely on Conflicts to 

approve the addition of a private-side employee to the deal team. 

2. Sharing of Information

General information about transactions is circulated to the Control Room to incorporate 

into the Control Database. At most broker-dealers, only the Control Room has direct 

access to the Control Database. However, certain groups may have limited access to 

certain information within the database. For example, some broker-dealers provide 

supervisory analysts within Research only with the corporate names in order to compare 

to research reports being prepared for publication. Other broker-dealers send all draft 

research reports to the Control Room to perform the review. When broker-dealers did 

provide limited Control Database access to select Research employees, information 

barriers generally covered such employees similar to other private-side groups, such as 

physical separation from the rest of Research. 

Conflicts also receives information on corporate client transactions. Broker-dealers 

generally either integrated the group physically within Investment Banking or walled the 

group off into an area separate from all other groups. 

One broker-dealer provided deal information regularly to its unregulated parent. The 

information included both the deals worked on and ongoing information as to deal 

developments. The broker-dealer did not evaluate whether the parent had any controls 

over use of the information. Examiners raised this as a concern with the broker-dealer. 
27

Some broker-dealers have established cross-selling groups between Asset Management 

and Investment Banking.49 The access provided to the cross-selling groups varies among 

broker-dealers. In some cases, the cross-selling group is provided with access to 

information generally about transactions within Investment Banking. Other brokerdealers have Investment Banking personnel forward only certain transactions to the 

cross-selling group for consideration. The staff observed that some broker-dealers have 

detailed processes designed to limit when the Asset Management personnel may be given 

information on the potential client. The staff observed concerns with some brokerdealers’ practices – failure to document when the cross-selling group was given access to 

Investment Banking information or lack of adequate physical barriers surrounding the 

group. 

3. Dual Function Employees

Access to MNPI inconsistent with Section 15(g) may result when an employee has dual 

job responsibilities.50 For example, internal committees (e.g., commitment committees) 

review and approve Investment Banking transactions prior to public disclosure. Brokerdealers should be careful not to include as committee members employees who have 

trading responsibilities or otherwise have controls reasonably designed to prevent misuse 

of the information. The staff’s review identified different processes at broker-dealers to 

prevent misuse by public-side employees. Some broker-dealers only permit private-side

employees to serve on the approval committees. Other broker-dealers allow public-side

employees to serve on approval committees, but they must either leave the meeting prior 

to discussion of any MNPI or be logged over-the-wall. 

4. Informal Discussions

Private-side employees on occasion have general discussions with employees in other 

areas of the broker-dealer, which creates a potential for unauthorized disclosure of MNPI. 

Most of the interactions occur on an informal (undocumented) basis, with procedures 

specifying that all such discussions may not be related to any specific transaction. 

Broker-dealers state that Investment Banking employees may speak with employees in 

certain public-side areas of the broker-dealer to obtain background information on a 

client (Research, Investment Groups) or on market trading conditions (Sales and 

Trading). Sales and Trading employees sometimes speak to Research employees. 

Broker-dealers instructed the private-side personnel to refrain from discussing MNPI 

(and sometimes any specific issuer) and instructed the public-side personnel to identify 

themselves as such to any private-side personnel. The staff is concerned that the 

 49 The cross-selling efforts could include identifying employees of Investment Banking clients who 

will have funds to invest after completion of a deal and referring the client to Asset Management. 

Alternatively, Asset Management customers (e.g., CEOs of companies) could be referred to 

Investment Banking. 50 See SEC v. Friedman, Billings, Ramsey & Co., Inc; Civil Action No. 06-cv-02160 (D.D.C.), 

Litigation Release No. 19950 (December 20, 2006), settled action. See, also, SEC v. Charles 

Schwab Investment Management et al., Civil Action No. CV-11-0136 EMC (N.D. Cal.), Litigation 

Release No. 21806 (January 11, 2011), settled action. 
28

frequency of the discussions and the absence of documentation may make it difficult to 

monitor for any inadvertent (or even intentional) disclosures that may occur.

B. Preventing Unauthorized Access

As discussed in the 1990 Report, controls to prevent unauthorized access to MNPI have

been a long standing practice of broker-dealers. The initial focus was on physical 

barriers such as locked doors with key card access. Broker-dealers have incorporated 

other controls to prevent unauthorized access of MNPI. The movement to electronic 

copies required evaluation of access to network systems or potential leakage of 

information through electronic media (e.g., flash drives) or through emails. Brokerdealers remove authorized access when employees move from private-side to other areas 

of the broker-dealer or terminate their employment. Hardcopy documents are disposed of 

through secure methods to protect MNPI. 

1. Physical Barriers

The staff’s review noted that broker-dealers were moving more groups into separate 

physical spaces with key card access: Investment Banking, Capital Markets (including 

Derivative Sales), Syndicate, Credit, and Research. Some broker-dealers impose at least 

some physical separation between public-side groups that routinely receive MNPI and are 

brought over-the-wall and other Sales and Trading areas. As discussed above, brokerdealers are considering which groups need to be kept separate based on the information 

within the group. 

Some broker-dealers limit key card access to physical spaces by department, others 

restrict key card access further by floor. In other words, if Investment Banking is divided 

into multiple floors, some broker-dealers grant access to a specific floor only to 

employees permanently assigned to that floor. In addition to the employees working on 

each floor, access will also be given to certain control persons (e.g., Compliance) and 

senior managers. Some broker-dealers periodically review the access lists to confirm that 

each person should still have access. In addition, access may be limited to certain hours. 

Broker-dealers generally implemented a higher degree of physical separation for 

Investment Banking, Credit, Corporate Capital Markets and Syndicate, Private Equity, 

Research covering corporate issuers, Conflicts, and Control Room than for other privateside areas. These private-side areas frequently were on their own floor or (less 

frequently) were walled off with a separate entrance from other groups on the floor. The 

staff identified concerns at some broker-dealers where the origination functions for noncorporate issuers51 were located near trading floors. In contrast, some broker-dealers 

placed origination groups for non-corporate issuers within the physically segregated

Capital Markets floors. Physical barriers may also be in place for certain public-side

groups with access to confidential and sometimes material information: prime brokerage, 

stock lending, certain Investment Groups, and issuer buyback desks. 

 51 Origination for non-corporate issuers is discussed above at III.C.
29

The staff identified concerns with the adequacy of the physical barriers. Some privateside areas had glass walls, permitting visual access to information. Some broker-dealers

had private-side groups on the trading floor (e.g., Derivative Sales). The staff raised 

these concerns with the broker-dealer(s). 

Some broker-dealers did not have physical barriers surrounding certain groups that 

support private-side areas, such as IT, Operations, or the Loan Site Monitors.

52 The lack 

of physical barriers may result in unauthorized access through the IT systems to which 

the support personnel have access. For example, sensitive information may be viewable 

on computer screens, or the electronic systems may be accessible when employees step 

away from their desks. Broker-dealers may need to consider controls to prevent 

unauthorized access through these systems. 

The staff also observed that the Financial Sponsors Group within Investment Banking 

and Private Equity groups are sometimes integrated with other Investment Banking 

groups. The staff is concerned about potential conflicts between the interests of the 

Financial Sponsors Group and Private Equity compared to interests of the corporate 

clientele of other Investment Banking groups.

2. Technology Barriers

The staff observed that most information is stored electronically on network computer 

drives. Some broker-dealers have automated systems within Investment Banking to limit 

access to information by deal so that only approved deal members may access the 

information. Employees are able to log in only after Conflicts has approved them to 

work on the project. Other broker-dealers permit access to employees by department or 

group so that all of Investment Banking (or a unit within Investment Banking) may 

access the documents. The staff believes that broker-dealers should consider limiting 

access based on the need to know principle as well as to prevent conflicts between deal 

team members working for competing corporations. 

Some broker-dealers prevent access to Investment Banking computer systems in public 

areas of the broker-dealer (i.e., no remote log-ins). More broker-dealers disable the 

ability to download information to removable storage from computers. Requests to 

download the information must be approved by a supervisor and forwarded to the 

appropriate support group. Documents may not be downloaded or printed when 

accessing the network remotely.

3. Printing and Production

Most broker-dealers maintain reprographics and desktop publishing areas (collectively, 

“Printing and Production”). Broker-dealers stated that the overwhelming majority of 

users came from Investment Banking and Capital Markets. The reprographics areas are 

 52 See discussion in III.B. regarding the information handled by the Loan Site Monitors.
30

responsible for taking electronic files and (less frequently) hard copy documents and 

creating multiple copies. The desktop publishing areas create presentations or word 

documents. Most large broker-dealers have a centralized Printing and Production with a 

few smaller satellite locations. Broker-dealers generally created physical barriers around 

these groups. 

Personnel external to Printing and Production may need to enter through a single door, 

which provides access only to a limited visitors section. In some cases, broker-dealers 

created separate entrances for public-side vs. private-side areas. Work jobs for privateside employees might be identified as such by cover sheet. Some centers use different 

machines to copy private-side vs. public-side documents. Print jobs may be locked up 

between production and being picked up. Broker-dealers might check the identification 

card of persons picking up the job and confirm that the person is from the correct office. 

Other broker-dealers require that only the person or their specifically named designee can

pick up the print job. 

4. Disposal of Confidential Documents

Most private-side areas have document disposal policies to prevent MNPI being 

disseminated through discarded paper. Broker-dealers may have two sets of paper bins –

one for regular recycled trash and locked bins for MNPI. Broker-dealers had processes to 

move the locked bins from each floor to the disposal truck. The processes may include a 

security escort, movement from one locked bin to another locked bin for transport, and/ 

or a transport bin that incorporates a paper shredder. Some broker-dealers shred all paper 

that is removed from a private-side area, while other broker-dealers only shred those 

documents placed by the private-side personnel in the locked bins. The staff believes that 

the shredding of all paper from private-side may prevent inadvertent disclosures when 

MNPI accidentally gets mixed in with the normal recycle bins. Given the high 

percentage of MNPI within certain private-side groups, the staff believes that brokerdealers should consider expanding the scope of disposed documents shredded. 

C. Controls over Information Given to Public-Side Employees

As discussed above, public-side employees are not supposed to access routinely MNPI. 

Broker-dealers need to be able to monitor when public-side employees have or will have 

access to MNPI so that appropriate controls may be implemented.

1. Information Provided by Internal Groups

Public-side groups at times have a limited number of employees who receive access to 

MNPI related to a specific company through the over-the-wall process. The over-thewall process involves the private-side group with MNPI identifying to the Control Room 

the names of the public-side employees who will be given access to MNPI regarding a 

specific company. As a result, the over-the-wall employee is prohibited from both 

personal and firm trading in any security of that company. Some broker-dealers’ overthe-wall processes require pre-approval by Compliance, which may help to ensure that 
31

Compliance receives timely notice of over-the-wall crossings. For other broker-dealers, 

if Compliance is not required to pre-approve access to the information, it must be notified 

in a timely fashion. The over-the-wall employee generally is logged into the Control 

Database. The staff observed concerns at some broker-dealers that did not maintain 

complete listings of individuals who were deemed over-the-wall and may have had 

access to MNPI. 

Most broker-dealers will contact the supervisor of the employee to be crossed to obtain 

authorization. Some broker-dealers do not log the supervisor over-the-wall, and this may 

create an issue if the supervisor is provided with sufficient information to allow them to 

identify the MNPI. Some broker-dealers will bring an entire desk over-the-wall if a large 

number of employees have access to the MNPI. Some broker-dealers also maintain some 

level of physical separation between groups routinely over-the-wall and other public-side

personnel. 

Credit creates an internal credit rating, which may at times be based on MNPI. Some 

broker-dealers do not provide internal credit ratings outside of Credit and a small select 

group of private-side personnel. Some broker-dealers provide the credit rating to publicside personnel only if not based on MNPI. 

2. Information Provided by External Groups

Investment Groups may receive MNPI from external parties. The information may be 

provided as a solicitation to participate in a transaction (e.g., purchase in an offering) or 

may be accessed through the monitoring of current investments. 

a. Information Received Pursuant to a Confidentiality Agreement --

Electronic Sources of Information

Confidential information, which at times constitutes MNPI, frequently is circulated

through electronic websites requiring authorization to access. For example, corporate 

borrowers provide confidential information to lenders through Loan Sites. As discussed 

above, a public-side group will either forgo receipt of confidential information or will go 

private on the name.53 Most broker-dealers implemented controls to identify when a 

public-side group accessed confidential information without having gone through the 

formal process. The controls typically involved periodic review of reports from the 

website as to public-side employees’ access of information. Alternatively, broker-dealers 

may prevent public-side employees from directly accessing the website. Instead, another 

group will download and forward information consistent with the group’s authorized 

access. 

Some Loan Sites have implemented controls that permit broker-dealers selectively to 

block access by their employees to information contained on Loan Sites. For example, 

the broker-dealer may block all public-side employees from accessing private-side

 53 See discussion at IV.C.2 for the impact of going private on a name. 
32

webpages, as well as webpages that do not differentiate between public and private 

information. The broker-dealer selects a gatekeeper, such as someone within the Control 

Group. The gatekeeper has the ability to grant or deny access to employees to access 

private information. Broker-dealers then are able to confirm that public-side groups have 

been logged as private on the name prior to accessing the information. 

When the public-side group has decided not to receive confidential information on a 

company, the Loan Site Monitors will review the information being provided. At times, 

this information may be significant or may require that the lender take action. For 

example, a borrower may request that all lenders agree to waive a loan covenant, such as 

cash flow requirements or minimum equity levels. Some broker-dealers have the Loan 

Site Monitors forward the information to the Legal or Compliance Department for their 

determination as to whether the public-side group should be informed and made private 

on the name. Some broker-dealers have Loan Site Monitors vote consistently with the 

majority of external lenders or with other groups within the broker-dealer or its affiliates 

that are lenders (e.g., Asset Management). 

b. Information Received Pursuant to a Confidentiality Agreement – Oral or 

Written Sources of Information

Public-side groups may receive orally confidential information, which at times may be 

MNPI, typically for specific transactions rather than ongoing sharing of information. For 

example, public-side groups may be approached by external underwriters to invest in an 

unannounced offering. The information provided regarding the existence of the offering 

may be MNPI, and additional MNPI may be received during the investment process. 

Broker-dealers generally relied on identifying the provision of information based on the 

signing of a written confidentiality agreement. Broker-dealers stated that Legal would 

review any confidentiality agreements and would notify the Control Group if appropriate. 

The staff’s review noted that a written confidentiality agreement may only be required in 

certain circumstances. Some MNPI may be provided based on informal confidentiality 

agreements – oral discussions followed by emailed confirmation or emailed informal 

agreements to maintain confidentiality. No broker-dealer indicated that it had a control to 

identify emailed or oral confidentiality agreements entered into without notification to the 

Control Group. The staff is concerned that the lack of controls in these circumstances 

impacts the Control Group’s ability to monitor receipt of confidential information by the 

business unit. 

Some broker-dealers have instituted surveillance to monitor for possible disclosures to 

their public trading groups of external deals, including M&A and PIPEs. For example, 

upon announcement of a material M&A transaction for which the broker-dealer did not 

have a role, the broker-dealer may review the positions established by their trading 

groups. Broker-dealers may also review short positions created in advance of 

announcements of PIPEs. 
33

c. Informal Discussions

Public-side employees have ongoing discussions with persons in possession of 

confidential information and sometimes MNPI. For example, public-side traders have 

discussions with insiders of corporations or with consultants who may have confidential 

information, which at times is MNPI.

54 The only control identified to the staff was a 

written procedure directing employees to identify themselves as public-side to the insider 

and to self-report receipt of MNPI to the Control Room. No documentation was 

maintained of the contacts made, and no specific controls were in place. Broker-dealers 

stated that the contacts were too numerous to document. The staff is concerned about 

information barriers that consist solely of a written procedure directing employees not to 

engage in certain behaviors and to self-report when they come into possession of 

MNPI.55 

3. Public-Private Transitions

The staff’s review observed informal controls over the transition from public to private 

and vice versa. For example, private-side employees on occasion transfer to public-side

business units. At that point, the employee may still have MNPI. The staff inquired 

about controls over the transition process. Most broker-dealers did not have any formal 

processes and relied on employees self-reporting. The staff is concerned that no 

systematic reviews are conducted of employee transfers from private-side areas. One 

broker-dealer will review transfers for the purpose of eliminating physical key card and 

electronic systems access. However, the staff did not observe any formal broker-dealer

processes to monitor potential misuse of the MNPI in possession of the now-public-side

employee.

Most broker-dealers do not have a process for identifying when private corporations 

become public corporations through issuance of securities, which may result in an 

absence of monitoring inconsistent with Section 15(g). Public-side employees sometimes

are permitted by broker-dealers to access MNPI on private corporations,56 which were 

not included within automated surveillance. The staff’s review observed instances in 

which broker-dealers’ monitoring processes were incomplete because corporations 

continued to be categorized as private by the Control Group after the corporation had a

securities distribution. The gap in coverage remained for extended periods of time, and 

the staff raised this as an issue with the relevant broker-dealers. 

 54 The Commission has brought Section 15(g) actions based on the failure to have procedures 

reasonably designed to prevent misuse of MNPI obtained through interactions with company 

insiders (In the Matter of Guy P. Wyser-Pratte, Release No. 34-44283 (May 9, 2001)); and 

received from consultants relating to an announcement regarding 30 year U.S. Treasury bonds (In 

the Matter of Goldman, Sachs & Co., Release No. 34-48436 (September 4, 2003)), settled actions. 55 See e.g., In the Matter of Gabelli & Company, Inc. and Gamco Investors, Inc., Release No. 34-

35057 (December 8, 1994), settled action. 56 In the instances reviewed by the staff, a private corporation was typically owned by a limited 

number (e.g., one or two) private equity funds, and securities interests were not traded on even a 

limited basis. 
34

The staff believes that broker-dealers also need controls for instances in which an 

employee or group had MNPI and related restrictions (e.g., over-the-wall or private on a 

name) and now wants removal of the restrictions. Some broker-dealers establish a set 

period – two reporting periods (i.e., the company has filed two Forms 10Q/10K) between 

the time the group accessed the MNPI and when they may begin trading. Other brokerdealers have no such periods and analyze the information accessed to determine when 

stale. While the reliance on two reporting periods does provide an opportunity for the 

corporation to make public disclosure and a bright line test for broker-dealers to follow, 

the staff believes that broker-dealers should have some type of control procedures to 

protect specific nonpublic information with continued materiality. 

D. Controls over Information Given to External Parties

Various groups within the broker-dealer may have discussions with external institutional 

investors, both on an informal basis and with respect to unannounced transactions. 

Institutional investors are generally considered by the industry to be either public or 

private. Private institutional investors, which include Private Equity, trade mainly in the 

primary market (e.g., Rule 144A purchases). Public institutional investors, which include

many hedge funds, trade in the primary and secondary trading market. Some institutional 

investors have both private and public investment areas. The staff’s review observed that 

confidential information, at times MNPI, may be provided to institutional investors. The 

most common instances are when institutional investors are approached to participate in 

M&A transactions, capital markets transactions, and loans. 

1. Specific Transactions

Broker-dealers represented that private institutional investors were more likely to be 

contacted on M&A transactions, and public institutional investors were more likely to be 

contacted on capital markets transactions.57 The staff’s review noted that broker-dealers 

are developing control procedures over providing information in both contexts. Some 

broker-dealers might pre-qualify institutional investors, including determining the 

appropriate contact person or procedure established by that institutional investor. For 

example, some investors prefer that all contacts be initiated with the investor’s Legal or 

Compliance staff. Other investors select a specific person within their organization who 

is authorized to access MNPI. The broker-dealer’s M&A control procedures may require

an internal conflicts check prior to discussions with an institutional investor. Controls 

around capital markets transactions may include provision of limited information with the 

contact made only shortly prior to public disclosure. The control procedures typically 

specify the information that may be provided based on the type of confidentiality 

 57 With respect to M&A transactions, institutional investors are invited to participate in purchasing 

assets or an interest in a company. The transaction typically is not announced until agreement is 

reached. With respect to capital markets transactions, the investor is queried as to market interest 

(aka sounding the market) in purchasing in an offering. The offering may or may not be publicly 

disclosed prior to completion of the deal (depending on whether it is a public offering or private 

placement). 
35

agreement obtained: oral with an email confirmation by the broker-dealer, oral with an 

affirmative email reply from the investor, or a written agreement. Most broker-dealers 

reviewed by the staff maintain a log of contacts made with investors. The contact is 

recorded even if the investor declines to participate and does not receive MNPI. 

While some broker-dealers require at least an oral confidentiality agreement followed by 

an email confirmation of the agreement prior to providing the name of the corporation

that is the subject of the transaction, some broker-dealers provided information based 

solely on oral confidentiality agreements. Documentation that information was provided 

may be limited, potentially impacting the broker-dealers’ ability to monitor for misuse of 

MNPI. 

Information regarding a transaction may be circulated to investors through an electronic 

website, referred to as a virtual data room. Broker-dealers stated that virtual data rooms 

were used more frequently in M&A transactions rather than offerings. Broker-dealers 

also indicated that the virtual data rooms were more likely to come into play later in the 

transaction when the potential buy-side participants had gone through initial rounds of 

discussions. Access to virtual data rooms is based on specific users, so that each 

individual within an institutional investor will have a unique log-on. Broker-dealers 

stated that either the sell-side participant or its financial advisor could control access to 

the data room. The broker-dealers stated that no formal process was used to remove 

access from buy-side participants that had exited the negotiations. Broker-dealers 

believed that if the investor continued to access the data room after exiting negotiations, 

the broker-dealer or the sell-side participant would notice the activity. While audit trails 

were maintained of the accessing of information, broker-dealers were divided as to 

whether the documents would be maintained after the transaction had closed. The staff is 

concerned about the informal nature of controls surrounding virtual data rooms, including 

the lack of documentation, written procedures, and absence of an audit trail. 

2. General Discussions

Institutional investors frequently request wide-ranging discussions with private-side

employees, such as investment bankers. Some broker-dealers have instituted controls 

surrounding the discussions. The controls include requiring that questions be submitted 

in advance, pre-qualifying the institutional investor, requiring that senior bankers 

participate in the discussion, and maintaining a log of meetings held. Implementing such 

requirements or prohibiting them from occurring are relevant controls to prevent misuse 

of MNPI. 

Public-side employees provide information to institutional investors referred to as market 

color. The information is developed from customer confidential information. Some 

broker-dealers create detailed matrices for the public-side as to how the public-side

anonymizes the information. For example, the information may need to be based on a 

minimum number of customers, and no single customer may represent more than a 

certain percentage of the color. The broker-dealer allows customers to specify that their 
36

trading information may not be used in developing market color. Providing clear 

guidelines to employees may prevent inadvertent disclosure of customer trading orders. 

3. Credit Extensions

During the loan origination process, institutional investors are given access to Loan Sites 

in evaluating whether to lend. In the secondary market, the administrative agent58 for the 

borrower grants and removes access to Loan Sites to institutional investors and other 

lenders. The administrator of the loan controls the granting and removing of site access 

based on purchases and sales of the loan. 

During the initial sale of loan interests, some broker-dealers create lists of potential 

lenders to grant access to the Loan Site based on credible investors. Institutional 

investors are given access to the borrower’s confidential information in order to evaluate 

loans for purchase. If such institution is routinely accessing the information without 

purchasing loans, this may indicate that the institution does not have a legitimate need to 

know the information. Some broker-dealers indicated informally that they might 

eliminate access to potential investors with a history of accessing sites without 

participating in the issuance. In some cases, a supervisor must specifically approve the 

list of potential investors. Other broker-dealers could not articulate when they would or 

would not grant access to the Loan Site to potential investors. The staff observed that the 

controls in this area remain informal and without any specific standards and believes that 

broker-dealers should consider where additional controls may be needed. 

Broker-dealers or their affiliates may have control over the addition and removal of third 

party investors from the ongoing Loan Site. The staff’s review noted that broker-dealers 

are creating better controls to limit access to actual lenders. Some broker-dealers have 

processes to grant access to Loan Sites only upon purchase of a loan interest and to 

remove access upon sale of a loan interest. The process may include reviewing trading 

reports to identify lenders that no longer hold interests and comparing against access to 

the Loan Sites. Some broker-dealers have processes to identify institutional investors’ 

designated contact for the Loan Sites and the same contact is used for all access to the 

Loan Site (or to authorize others within the institutional investor to access the Loan Site). 

Some broker-dealers only grant access to Loan Sites to user email addresses that include 

the institution’s name (e.g., user@institution.com) and not to user email addresses that 

use generic third party services.59

 58 At most of the broker-dealers examined by the staff, a group within the Investment Banking 

Department performed the functions of administrative agent during the loan origination, while a 

group within the Investment Banking Department or Operations performed the functions during 

secondary market trading. 

59 The use of generic email addresses creates significant risk that there will be a failure to identify 

when an individual contact person has left the financial institution or may otherwise create 

concerns regarding the use of false identities.
37

E. Email Controls

The use of emails to transmit MNPI between persons working on a transaction is 

common. Within a specific department, information is shared between employees 

through a network drive. However, when employees across departments work on a 

transaction, the information is usually emailed to the employee. In addition, emails may 

be sent between broker-dealer employees and external clients. The staff’s review 

observed instances in which emails were sent to the wrong party so that unauthorized 

public-side employees and external parties received MNPI. Broker-dealers were 

implementing controls to minimize misdirected emails. Some broker-dealers require 

private-side employees affirmatively to identify emails as appropriate to be sent outside 

of the department or outside of the broker-dealer. Some broker-dealers turned off the 

autocomplete function of email systems to require employees to type in the full email 

address. Some broker-dealers created pop-ups to identify to the employee that the email 

was being sent externally.

Broker-dealers generally review emails for information barriers concerns (e.g., 

inappropriate disclosures of MNPI). Broker-dealers represented that email review 

systems do not have keyword sets to take into account information barriers issues. As a 

result, broker-dealers must develop other techniques. At the most basic level, most 

broker-dealers conduct random samplings of emails to identify potential concerns. Some 

broker-dealers have targeted reviews for when an “internal use only” document is sent 

outside the broker-dealer or for large attachments sent to generic internet email domains. 

Some broker-dealers will conduct ad hoc email reviews when surveillance identifies 

concerns in trading or based on announced deals. 

The staff did observe specific gaps in the email review process, and the gaps were 

discussed with the broker-dealers. Some broker-dealers did not review emails of 

personnel within control functions with access to MNPI, including Compliance and IT. 

Some broker-dealers only required reviews of the names of the sender and recipient

without any assessment of the content of the email. One broker-dealer did not review any 

internal emails so that no controls existed over emails between private-side and publicside groups.

60 Some broker-dealers did not monitor internal communications through 

chat rooms. 

F. Employee Trading Pre-clearances

Most broker-dealers require pre-clearance of employee trading throughout the brokerdealer, and pre-trade clearance processes differ for public and private-side employees. At 

some broker-dealers, public-side employees only pre-clear through their supervisor, 

although employees in Research (which may or may not be classified as public) may also 

pre-clear through Compliance. Other broker-dealers require public-side employees to 

pre-clear with Compliance, which will review against the watch list, although the trade 

 60 The 1990 Report noted the need for substantial control, preferably by Compliance, of 

interdepartmental communications. 
38

will not necessarily be denied.61 At some broker-dealers, all personal trade requests of 

private-side employees are denied if the matter is on the watch list. Other broker-dealers 

make a case-by-case analysis based on the employee’s job function. Broker-dealers were 

moving to require pre-clearance of personal trades by contingent workers (e.g., persons 

performing work on behalf of and as directed by the broker-dealer but employed by third 

parties) and control/support functions if the worker/employee has access to MNPI. 

Broker-dealers are taking into account whether the employee was over-the-wall in 

approving or denying the request. Certain pre-clearances may be done to take into 

account specific information held by the employee. For example, employees in areas that 

process trades for corporate insiders may have scrutiny of their personal trades against 

pending and recent orders. 

Broker-dealers generally exempt employee managed accounts from the pre-clearance 

process. Some broker-dealers select certain permitted managed products, none of which 

were individually managed accounts, and employees were only allowed to choose from 

the broker-dealer specified list. The staff had concerns about practices at broker-dealers 

that permit employees to use any external manager and do not conduct any scrutiny as to 

the ability of the employee to influence trading in the account (e.g., individually managed 

accounts or managers with any connections, familial, business, or otherwise, with the 

employee that might allow the employee to influence the trading in the account). 

Most broker-dealers compare executions of employee trades against pre-clearances 

obtained. Broker-dealers were less effective in tracking and/or responding to multiple 

failures to pre-clear. One broker-dealer responded to multiple failures to pre-clear with a 

“letter of education,” and the employee failed to pre-clear subsequent to receiving the 

letter. In response to the staff’s concerns, the broker-dealer revised its procedures to 

place restrictions on employees who failed to pre-clear multiple times. In responding to 

failures to pre-clear, some broker-dealers did not have any specific remedy and only 

reversed if the trade would not have been approved. As a result, the employees did not 

have a significant deterrent from trading without clearance. Some broker-dealers have 

policies to reverse trades made without pre-trade authorizations even if the trade would 

have been approved, which may be an effective deterrent and cause employees to preclear. 

G. Surveillance

The placement of a matter on a monitoring list triggers surveillance.62 The ability to 

surveil adequately may be circumscribed based on excessive volume as well as limited 

 61 Broker-dealers should be alert to the possibility that the denial of the trade of a public-side

employee based on a watch list entry may in effect tip off the employee that the broker-dealer has 

possession of MNPI regarding the security. In designing its controls around employee preclearance, broker-dealers should evaluate the use of controls, such as heightened surveillance or 

over-the-wall processes, to prevent misuse of the information when the denial may result in the 

employee identifying the MNPI. 62 Some broker-dealers integrate information barriers surveillance in the Control Group; other 

broker-dealers place the surveillance responsibility within the Surveillance group. Both groups 

are usually within Compliance.
39

information access (e.g., the reviewer may not know that a significant milestone had 

occurred, such as a definitive agreement). The staff observed that while some brokerdealers continued to rely on manually intensive reviews, improvements, as described 

below, have been made and continue to be made in review scope and review process.

1. Scope of Review

Historically, surveillance focused on employee and firm accounts. Surveillance scope 

has expanded to capture trading in other types of accounts that may indicate misuse of 

MNPI. Broker-dealers may review activity of institutional customers, Asset Management 

affiliates, and retail customers. Broker-dealers are reviewing the trading done by 

contingent workers to whom the broker-dealer has given access to MNPI.63 

Broker-dealers were expanding the scope of their review to take into account all products 

that could be used to profit from MNPI. For example, broker-dealers may review 

transactions in related derivatives – credit default swaps, single stock futures, equity or 

total return swaps, warrants, and bond options. Broker-dealers also may review interests 

in companies held through loans or as components of pooled securities such as unit 

investment trusts and exchange traded funds. When such instruments may not be easily 

captured by automated surveillance reports, some broker-dealers respond by reviewing 

reports of all such instruments traded. Other broker-dealers conducted targeted reviews 

by searching the trade blotters when a deal is announced. The staff notes that the lack of 

automation and standardization has hindered broker-dealers from reviewing derivative 

products in the same manner as other securities. The staff is encouraged that some 

broker-dealers are continuing to enhance their review as technology becomes available. 

The staff believes that broker-dealers should consider all instruments that may be used to 

profit from the MNPI. For example, some broker-dealers issue structured products for 

which it or an affiliate is the issuing entity. If the structured product references specific 

securities and the broker-dealer has MNPI regarding the reference security, the brokerdealer may need to have controls to prevent the issuance of the structured product from 

being based on MNPI.

Broker-dealers may conduct lookbacks to determine if there are unusual trading patterns 

preceding a significant event or receipt of MNPI. In some cases, broker-dealers consider 

transactions for which the broker-dealers did not have any involvement when conducting 

lookback reviews. For example, the broker-dealer may follow up if one of its employees 

made a trade prior to the announcement of a major merger for which other broker-dealers 

served as financial advisors.

2. Pattern Surveillance

Broker-dealers are enhancing the types of reviews being conducted to allow identification 

of behavior patterns. When an employee trades in a security on the monitoring list, the 

 63 Some broker-dealers hire personnel as an outside contractor or consultant to fill some support 

positions such as IT and Printing and Production. The staff observed that these persons could be 

referred to as consultants, contractors, or vendors. 
40

report might identify all trades by the employee in the security during the prior few 

months. Surveillance of firm trading accounts might identify the pattern of trading by the 

accounts during a time frame, noting when the account has built a position over time. 

Other pattern analysis might create exceptions based on accounts that trade in multiple 

securities on the monitoring lists, accounts that have not historically traded in the 

security, accounts that are newly open, or positions in monitoring list securities that 

constitute a substantial percentage of the account. With respect to firm accounts, most 

broker-dealers establish size cut-offs based on dollar value or percentage change in 

position so that only significant exceptions are reviewed.64 While the staff agrees that 

excluding de minimis trading may help broker-dealers focus on significant concerns, the 

staff is concerned that the cut-offs were very high ($5 million at one broker-dealer) or did

not take into account positions that are built over several days. 

Broker-dealers are also generating reports to take into account specific fact patterns. For 

example, reports may compare broker-dealer trading for transactions in which a trading 

employee is over-the-wall, identifying exceptions when the over-the-wall employee 

trades, other employees on the desk trade, or nearby desks trade. Reports may be 

generated based on instances in which a public-side area has become private on a specific 

name – which would include instances in which the desk has obtained borrower 

confidential information, has been invited to participate in a PIPE or other unannounced 

offering, or has received information through a bankruptcy committee. A report may 

review for concerns of cross-tipping – trading desks that are private on different names 

tip each other. 

Restricted list placement typically also results in a lookback review. The lookback

review provides heightened scrutiny of transactions prior to public announcement. At 

some broker-dealers, the lookback review is the only scrutiny of trading that occurred 

prior to publication of research reports. Other broker-dealers will place the subject of a 

research report on the general surveillance list a day or two prior to publication. 

Certain types of MNPI are not generally placed on monitoring lists, including large

customer orders, institutional investor information, and ongoing contacts with insider 

clients. Broker-dealers rely on surveillance reports to identify problematic behavior. 

Frontrunning reports review for trades prior to a large customer order. Shadowing 

reviews look for patterns of trading that appear to take advantage of customers’ 

investment strategies. Registered representatives with insider customers may be subject 

to special scrutiny of their personal and customers’ trades in those companies.

3. Compliance Access to Information 

In order to perform their responsibilities, surveillance personnel need to have sufficient 

information in order to evaluate effectively trading activity. The staff noted that 

surveillance personnel are being provided greater access to developments that occur 

 64 The staff observed that surveillances for broker-dealer positions are starting to take into account 

profit potential rather than size. The profit potential may be based on actual market movements or 

may be based on theoretical movements of price up and down.
41

within deals. At some broker-dealers, Compliance personnel have direct access to 

Investment Banking deal management systems. At other broker-dealers, the Control 

Database would contain detailed status updates, with Control Group personnel 

periodically speaking with the deal team in order to maintain awareness of current 

developments.

The staff’s review did identify instances in which limited information was available to 

Compliance, which could impact the ability to monitor for misuse of MNPI. Compliance 

may be unaware of all deal team members. While Compliance may monitor 

developments in the deal, it generally does not obtain information regarding events that 

occurred prior to the first contact into the Control Room.65 Some broker-dealers do not 

have mechanisms to identify transactions that are removed from all monitoring lists

because they were terminated when they subsequently are reactivated.66 

4. Resolution of Matters

The staff reviewed the adequacy of how broker-dealers were researching and resolving 

surveillance items. At some broker-dealers, the staff was unable to determine that the 

broker-dealer was appropriately resolving matters because documentation was limited to 

a simple notation that the trade was reviewed. If the analyst researched the item, no 

documentation was maintained of the research or that the research was conducted. As a 

result, the staff was unable to conclude that the broker-dealer had an effective 

surveillance process. In contrast, some broker-dealers are enhancing the documentation 

maintained, with a brief description of the reason for resolving the exception (e.g., 

consistent with historical trading patterns). 

The staff also observed that two broker-dealers resolved exceptions based solely on the 

assertions of the person being reviewed, without any independent confirmation. The staff 

believes that broker-dealers need to consider when the subject of surveillance has a 

motive to dissemble and therefore independent information should be obtained. The staff 

also is concerned when resolution is based on assumptions without verification – for 

example that trading by a customer-facing trading desk is for customer facilitation even 

though the desk is able to create and hold positions. 

The staff has significant concerns about limited monitoring that may not be reasonably 

designed to identify misuse of MNPI. Most broker-dealers’ analysis does not take into 

account when the broker-dealer first had possession of MNPI or other developments in 

the deal. An analysis is sometimes based on the historical trading patterns of an account, 

 65 For example, the first entry in the Control Database may indicate that Investment Banking has 

been working on the transaction for a while. No documentation indicates that Compliance 

determines the date on which the project began. This information might be needed to determine 

whether trading in a company began before or after the broker-dealer first became aware of the 

transaction. 66 For example, the Control Room may receive notice that the buyer and seller could not reach 

agreement and that all negotiations have stopped. The matter is then removed from the monitoring 

list. Shortly prior to announcement, the Control Room may learn that the negotiations were

renewed and that it did not receive timely notification. 
42

but the analysis does not necessarily consider whether an account began trading prior to 

or after the broker-dealer first began working on a transaction, or consider the possibility 

that a leak may have occurred as of a certain date. Instead, the compliance analyst might 

close out an exception based on the account having traded in the security before, even if 

the trading started after the broker-dealer first received MNPI. The staff also did not 

observe much in-depth analysis of trading – whether an account traded in multiple 

securities that may indicate a specific source of information, a position built over time in 

a security, or trading correlated with deal developments. Instead, most broker-dealers’ 

review tend to look for a “quick hit” type of trading, where an account purchases a large 

position in a single day in a transaction that is about to announce. 

5. Risk Arbitrage

The 1990 Report discussed in-depth the concerns surrounding the risk arbitrage desk.67 

Because the risk arbitrage desk is building positions in announced M&A deals, it may be 

more difficult to distinguish between positions built on public information (including 

circulated rumors or speculation) or built on inside information. The staff noted that at 

the time of their review, broker-dealers had recently eliminated restrictions on risk 

arbitrage trading (which required pre-clearance or restricted their trading). The staff is 

concerned that no targeted or focused review of the desks’ trading activity was 

implemented at these broker-dealers. The concern may be reduced in part because most 

broker-dealers subsequently eliminated desks that focused on a risk arbitrage strategy. 

The staff believes that broker-dealers should consider controls to the extent that certain 

trading desks may engage in risk arbitrage. 

VI. CONCLUSION

The staff’s review observed that broker-dealers were enhancing their controls in response 

to developments in business activities, technologies, and business structures. The staff’s 

review also identified gaps in controls, which were raised with the broker-dealers. 

Finally, the staff identified certain areas in which practices were more informal, and the 

staff plans to continue to review such areas in future examinations. 

The examination staff members who participated in these exams are:

Headquarters-DC: Christine Sibille, Juanita Hamlett, Roberta Boyd, Jane Cash, Michelle 

B. Davis, Everardo DeArmas, Wanda Hunter, Judy Lee, Danielle Perfetuo, Lisa 

Wardlaw.

 67 Traditionally, risk arbitrage was considered the simultaneous purchase of stock in a company 

being acquired and the sale of stock of the acquirer. Modern risk arbitrage focuses on capturing 

the spreads between the market value of an announced takeover target and the eventual price at 

which the acquirer will buy the target's shares.
43

New York Regional Office: John M. Nee, Stephanie Morena, Theresa D. Gleason,

Hermann Vargas, Claudia Arroyo
44

APPENDIX A -- DEFINED TERMS USED IN THIS REPORT68

1990 Report Report issued by the Division of Market Regulation, “BrokerDealer Policies and Procedures Designed to Segment the Flow and 

Prevent the Misuse of Material Nonpublic Information” (March 

1990)

http://www.sec.gov/divisions/marketreg/brokerdealerpolicies.pdf

Asset Management Area(s) with responsibility to manage assets and funds on behalf of 

individual and institutional customers, frequently on a pooled basis

Capital Markets Area(s) that work on capital raising efforts for issuers, whether 

through equity, debt, securitizations, or other instruments

Confidential 

 information Information received under a duty of trust or confidence

Conflicts Area(s) within a broker-dealer with responsibility to monitor for a 

broker-dealer’s conflicts of interests, such as those between clients 

of the broker-dealer and the interests of the broker-dealer in 

transactions on which the broker-dealer is engaged 

Control Group or 

 Control Room Area(s) with responsibility to manage the information barriers

program

Control Database Database maintained by the Control Room that identifies the 

MNPI being monitored by Compliance

Credit Area(s) with responsibility to monitor the financial standing of 

entities to which the broker-dealer has extended credit 

Derivative Sales Collectively, area(s) that have a corporate client base with a focus 

on facilitating transactions in swaps and other over-the-counter 

derivatives 

Dodd Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act

Exchange Act Securities Exchange Act of 1934 

Financial Advisory Industry term referring to advice given to business organizations,

such as corporations, usually by employees in a broker-dealer’s

Investment Banking Department

 68 These definitions are used only for purposes of this report and are not intended for any other 

context. Some of the definitions are based on existing statutes, laws, and cases as of the date of 

this report. Other definitions are derived from commonly used industry terms. 
45

Information Barriers Controls, procedures, and processes required to be established 

under Exchange Act Section 15(g)

Investment Banking Area(s) that provide financial advisory services to corporate clients 

relating to, among other things, M&A, restructurings, and strategic 

alternatives

Investment Groups Collectively, Proprietary Groups and Asset Management

IT Information technology, area(s) within the broker-dealer

responsible for computer systems, software, and networks

ITSFEA Insider Trading and Securities Fraud Enforcement Act of 1988

Loan Sites Electronic systems offered by vendors used to provide information 

from borrowers to lenders, frequently through websites, as required 

under credit agreements

Loan Site Monitors Area(s) selected to review information on Loan Sites on behalf of 

the broker-dealer’s trading group

M&A Mergers and acquisitions 

MNPI Material NonPublic Information 

Operations Area(s) within the broker-dealer with processing and other 

physical functional responsibilities (e.g., confirmations, payments, 

and settlements) related to broker-dealers’ financial services

Origination Creation and issuance of a financial instrument that may represent 

either equity or debt of an issuer 

PIPE Private investment in public equities

Printing and 

 Production Area(s) within the broker-dealer with responsibility to create 

presentation materials, photocopy materials, or provide other 

publishing support

Private-Side Areas Areas with ongoing access to MNPI

Private Equity Area(s) with responsibility to invest funds (sometimes on behalf of 

external clients and sometimes on behalf of the broker-dealer or its 

parent or affiliate) typically in private companies or in public 

companies that are brought private
46

Proprietary Groups Principal investment or trading area(s) that trade on behalf of the 

broker-dealer using firm capital not for the purpose of facilitating 

customer order flow 

Public-Side Areas Areas generally without access to MNPI, typically with sales, 

trading, or investment responsibilities 

Research Area(s) within the broker-dealer that analyze companies, 

securities, and markets and provide related written analysis and

investment recommendations to customers 

Sales and Trading Area(s) within the broker-dealer that engage in trading or sales 

activity with respect to equities or fixed income securities

Syndicate Area(s) within the broker-dealer with responsibility to manage 

offerings of securities
47

APPENDIX B – SUMMARY OF EFFECTIVE PRACTICES AND POTENTIAL CONCERNS

Below is a summary of the staff’s observations of effective practices and potential 

concerns discussed in more detail in the report. Exchange Act Section 15(g) requires a 

broker-dealer to establish, maintain, and enforce written policies and procedures 

reasonably designed, taking into consideration the nature of a broker-dealer’s business, to 

prevent the misuse of material nonpublic information. As such, the list below is not 

intended to be prescriptive. Different practices may be necessary or appropriate 

depending on the facts and circumstances. The effective practices described below are 

not an exhaustive list, and they constitute neither a safe harbor nor a “checklist”. Other 

practices besides those highlighted here may be appropriate as alternatives or 

supplements to these practices.

EFFECTIVE PRACTICES - OBSERVATIONS AND CONSIDERATIONS. The staff observed the 

following practices used by broker-dealers to comply with Exchange Act Section 15(g). 

Identification of Companies/Securities for which Monitoring Should Occur

 Independent control functions, such as the Control Room, did not rely solely on 

notice from the business unit but had other controls and information sources 

available to identify when the broker-dealer may come into possession of material 

non-public information or MNPI, including:

o automatic notices from computer systems responsible for managing 

investment banking deals or for conflicts checks,

o reviews of pipeline reports or commitment committee minutes,

o reviews of confidentiality agreements,

o reviews of access reports for electronic information services, and

o blocked access to electronic information services to public-side employees

until authorization is given and the item is coded for monitoring.

 The Control Room had responsibility for determining the materiality of nonpublic 

information, after discussions with the relevant business unit. The Control Room 

maintained a list of items not placed on a monitoring list based on a determination 

that such information was not material. 

 The assessment of whether the broker-dealer had possession of MNPI was not 

limited to transactions on which the broker-dealer was engaged but also included 

instances when employees had knowledge of transactions for which another 

broker-dealer had been engaged. Broker-dealers also assessed when they came 

into possession of non-transactional MNPI, such as unannounced earnings. 

Sharing of Information

 Broker-dealers had formal over-the-wall processes that were used prior to sharing 

MNPI with public-side employees.

o Compliance pre-approved the sharing of information.
48

o Compliance logged the names of public-side employees given the 

information.

o Compliance logged an entire desk as over-the-wall if a large number of 

employees within the desk have the information.

o Some level of physical separation existed between groups that routinely 

received MNPI and other Sales and Trading employees.

o Over-the-wall processes were used for sharing information between two 

private-side groups to monitor the flow of information. 

 Broker-dealers had controls over other sources of potential MNPI and generally 

limited access based on a need to know. For example, the following information 

sources had restrictions on access: 

o databases containing internal credit ratings,

o committees that approved engagements on nonpublic transactions, and

o databases containing information received from borrowers.

 Broker-dealers had formal written processes and documentation surrounding the 

sharing of MNPI between two private-side groups and between private-side 

groups and internal public-side groups or external parties. 

 Broker-dealers had physical barriers to prevent unauthorized access to MNPI. 

o Physical barriers were used to separate two functions that had different 

types of MNPI (e.g., Investment Banking and Research) or two publicside functions when one of the public-side functions routinely had MNPI 

(and related trading restrictions).

o Access to segregated spaces was limited by key card access, and such 

access was periodically reviewed to remove unauthorized personnel.

o Physical barriers took into account support functions such as Printing and 

Production, Operations, and Information Technology.

o Access to confidential paper documents was limited through controlled 

disposal techniques. 

 Broker-dealers had technology barriers to prevent unauthorized access to 

information.

o Private-side employees were blocked from remotely logging-in to their 

computers from public-side physical space.

o The ability to download electronic files to removable storage was blocked. 

o Controls were in place to minimize misdirected emails, such as pop-up 

messages for external emails and eliminating autocomplete addressing 

functions. 

o Access to electronic documents on network drives was limited, in some 

cases to the specific employees with a need to know (e.g., members of a 

deal team). Access rights were periodically reviewed. 
49

Surveillance and Monitoring

 Broker-dealers had expanded the scope of their surveillance of trading as well as 

enhanced the process for identifying anomalous trading. 

o The type of transactions and instruments being reviewed included: credit 

default swaps, single stock futures, equity or total return swaps, warrants, 

and bond options. 

o Lookback reviews were conducted upon the announcement of information 

or in instances in which the broker-dealer failed to begin monitoring upon 

receipt of MNPI. 

o Pattern-based surveillance assessed historical patterns or accumulations of 

positions over time. Surveillance evaluated trading based on potential 

scenarios that could take advantage of the MNPI and based on trading 

patterns and trends.

o Surveillance was triggered not only by transactions on which the brokerdealer was involved but also by non-transactional MNPI within the 

broker-dealer’s possession and by transactions on which the broker-dealer 

did not have involvement to take into account information provided by 

external sources to their employees. 

o Surveillance personnel were being provided greater access to relevant 

information such as developments that occur within deals. 

o The documentation maintained provided descriptions of the reasons for 

resolving the exceptions. 

 Broker-dealers reviewed emails for information barriers concerns, including 

targeted reviews when an “internal use only” document was sent outside the 

broker-dealer or for large attachments sent to generic internet email domains. 

Some broker-dealers conducted ad hoc email reviews when surveillance identified 

concerns in trading or when deals were announced. 

 Controls around employee trading captured trading by contingent workers (e.g., 

persons performing work on behalf of and as directed by the broker-dealer but 

employed by third parties) and control/support functions if the worker/employee 

had access to MNPI. 

POTENTIAL CONCERNS. The staff observed the following concerns at some brokerdealers that may raise questions about the broker-dealers’ compliance with Section 15(g). 

Identification of Companies/Securities for which Monitoring Should Occur

 The independent control function at some broker-dealers did not actively identify 

when the broker-dealer came into possession of MNPI. Instead, the group was 

dependent on the business unit notifying them of possession of MNPI. 

Procedures for the business units may be generic across the broker-dealer, so that 

employees within specific business functions had little guidance as to the types of 

information that should be reported. The independent control function did not test 
50

whether it was being notified of information as required under the broker-dealer’s 

procedures. 

 The coding and removal of coding for monitoring within the Control Database 

was not timed based on the broker-dealer’s possession of MNPI. 

o Placement on a monitoring list did not occur until formal mandate had 

been received or a materiality assessment had been conducted.

o Some broker-dealers removed items from all monitoring lists upon public 

announcement or shortly thereafter. While the information regarding the 

existence of the transactions was public, the broker-dealer continued to 

work on the transactions until closing and received additional MNPI 

regarding the transactions. 

o Some broker-dealers removed items based on a specified period of time 

elapsing without any assessment as to whether the information continued 

to be MNPI.

o Some broker-dealers lacked processes to identify events that could impact 

monitoring, such as a private company having a securities distribution or 

significant changes to the status of the transaction (e.g., a change in timing 

or a formerly inactive deal being re-activated). 

 Certain practices raised concerns about the ability of the broker-dealer to monitor 

and evaluate whether its materiality determinations were reasonable, including a 

lack of documentation, a lack of factors to assess materiality, and a lack of a 

process to identify later receipt of MNPI (e.g., through the due diligence process 

or based on an altered transaction structure). 

 Some broker-dealers excluded certain information types or departments 

categorically from monitoring without any assessment of whether specific 

information was material. Exclusions observed related to: 

o debt transactions for corporations rated as investment grade,

o information within the Credit Department obtained as a result of their 

monitoring or contacts with insiders of corporations, and

o information obtained by public-side employees who served as directors of 

public corporations. 

Sharing of Information

 Broker-dealers provided MNPI to certain public-side employees and senior 

supervisors or external parties without any documentation or other controls. As 

such, the ability to identify potential misuse of such information was curtailed. 

o Some broker-dealers created categories of employees who had supervisory 

responsibility over trading groups and who were authorized to receive 

MNPI without any restrictions or monitoring. At some broker-dealers, 

this was referred to as “above-the-wall.” In the staff’s view, this practice 

limits the ability of the Control Group to investigate effectively suspicious 
51

firm or other trading and significantly impedes the broker-dealer’s ability 

to prevent the misuse of MNPI.

o Supervisors who approved bringing employees over-the-wall were not 

themselves logged over-the-wall at some broker-dealers, even though they 

were aware of the company involved and potentially the nature of the

transaction.

o Private-side employees were permitted to have informal discussions with 

public-side areas of the broker-dealer, and the frequency of the discussions 

and the absence of documentation limited the ability to monitor for 

potential disclosures of MNPI.

o Information regarding unannounced transactions was shared with external 

parties without any documented confidentiality agreement. 

o Controls surrounding virtual data rooms were informal, including the lack 

of documentation, written procedures, and absence of audit trails. 

 Broker-dealers did not take into account conflicting interests between two groups 

of private-side personnel and so permitted information to be freely shared without 

any documentation or other controls. 

o The Financial Sponsors Groups within Investment Banking Departments 

have institutional investor clients, while other Investment Banking groups 

have corporate clients. 

o Broker-dealers had cross-selling groups that were organizationally within 

the asset management function but were provided with Investment 

Banking information regarding unannounced transactions. 

 One broker-dealer provided deal information regularly to its unregulated parent. 

The information included both the deals worked on and ongoing information as to 

deal developments. The broker-dealer did not evaluate whether the parent had 

any controls over use of the information. 

 The physical barriers at some broker-dealers did not prevent the possible access of 

MNPI. Some private-side areas had glass walls or only had walls of half-height, 

permitting visual access to information. 

 Some groups with access to MNPI were not physically segregated. The groups 

included sales functions with corporate clientele, origination functions for noncorporate issuers, as well as certain groups that support private-side areas, such as 

Information Technology and Operations. 

Surveillance and Monitoring

 Surveillance and monitoring focused solely on a broker-dealer’s formal processes

rather than potential misuse of MNPI. For example, restricted list surveillance 

only assessed whether accounts were trading consistently with any applicable 

restrictions rather than reviewing to determine whether such trades were based on 
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MNPI. 

 Surveillance did not have sufficient information to resolve adequately exceptions.

o Surveillance was unaware of employees who transferred from the privateside to the public-side and continued to have knowledge of MNPI.

o Some broker-dealers only monitored trading in entities with public 

securities and failed to identify when a formerly private corporation 

created a public securities market. 

o Compliance was unaware of all employees working on a transaction or did 

not obtain information regarding events that occurred prior to the first 

contact into the Control Room. 

o Compliance relied solely on the assertions of the person being reviewed 

without any independent confirmation. 

o Surveillance reports only identified large positions built on a single day 

and did not take into account positions that were built over several days. 

 Monitoring functions excluded relevant groups.

o Email monitoring excluded groups with access to MNPI, including 

Compliance and Information Technology. Other broker-dealers failed to 

review internal emails for information barriers purposes. 

o Employee trade surveillance excluded managed accounts without any 

consideration that the manager could have personal connections with an 

employee.

o Some broker-dealers did not review activities of asset management 

affiliates, institutional customers, or customer facilitation trading groups. 

 Broker-dealers did not adequately track ongoing or recurring concerns.

o Documentation of surveillance was limited to a simple notation that the 

trade was reviewed. No documentation was maintained of any analysis or 

research conducted to resolve the item. 

o Broker-dealers did not enforce their policies and procedures when 

employees failed to pre-clear personal trades.