Use of Non-Public Information and Other Securities Law Issues

Trading Ahead of Research Reports FCMs and IBs may not trade based on an as yet unpublished research report Firewalls should be used

Case Study Trading Ahead of Research Reports

Block Trading FCMs and IBs: –May not trade security futures based on knowledge of an imminent block transaction in the underlying security –May not trade the underlying security based on knowledge of an imminent block transaction in security futures

Members may offset risk before a privately negotiated block transaction is reported under exchange rules

Does not apply to transactions on electronic exchanges or ECNs with automatic execution

Other NFA Rules Applicable to Notice-Registered Broker-Dealers: –Compliance Rule 2-37(a): must comply with Sections 9(a), 9(b), and 10(b) of the Exchange Act –Compliance Rule 2-37(b): must have procedures for complying with securities laws

Sections 9(a) and 9(b) of the Exchange Act prohibit manipulation

Section 10(b) of the Exchange Act and SEC Rule 10b-5 prohibit fraud, including certain insider trading

Prohibited Insider Trading Buying or selling a security In breach of a fiduciary duty or other relationship of trust and confidence While in possession of material, non-public information

Targets of Investigations Officers, directors, and employees Lawyers, investment bankers, financial printers Those who receive the tip

Typical Procedures Identify situations where employee may be a potential tip receiver or fiduciary Review employee’s trading activity in these securities

Identifying Potential Inside Traders Ask about relationships to public companies on customer account forms

Identifying Potential Inside Traders Require employees to notify registrant of relationships with public companies by employee and family members Maintain a list of these affiliations (including customer and familial) for each employee

Typical Procedures Regularly review employees’ trading activity Query unusual trading activity

Typical Procedures Investigate suspicious trading activity, and take disciplinary action when appropriate Notify regulators of prohibited insider trading

Controlling Person Liability Knowingly or recklessly disregarded potential insider trading Knowingly or recklessly failed to establish, maintain and enforce procedures

Case Study Insider Trading

Section 15(f) of the Exchange Act requires broker-dealers to have procedures to prevent employees from misusing material non-public information

Typical Procedures Include Restrictions on and review of firm trading Restrictions on and review of employee trading Training Firewalls

QUESTIONS?