Sending out emails containing material information could cost you $900,000

In North America, the way that material non-public information is handled by trading companies and research analysts within private equity and institutional sales and trading firms is a very serious matter. It is relatively common practice to serve information to interested potential clients and existing customers with regard to news relating to companies whose stock […]

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In North America, the way that material non-public information is handled by trading companies and research analysts within private equity and institutional sales and trading firms is a very serious matter.

It is relatively common practice to serve information to interested potential clients and existing customers with regard to news relating to companies whose stock in which they may have an interest in investing, and ‘flash’ emails is one method often used to maximize reach.

One particular company, Stephens Inc, of Little Rock, Arkansas, has been issued a fine of $900,000 by the Financial Industry Regulatory Authority (FINRA) for what the authority considers to be an oversight which created the risk that these flash emails could potentially include materiall non-public information that may be misused by sales and trading personnel.

As an additional aspect, Stephens Inc will cease the distribution of flash emails, and was ordered by FINRA to implement a plan to conduct a comprehensive review of its policies, procedures and training in the research area.

This is particularly interesting as many retail FX companies have considered that operating a research and analytics team which analyzes the market and in some cases actually distribute data to clients.

With regard to currencies, there is very little risk indeed because the internal affairs or performance of companies which are the subject of investment and could influence prices is not relevent.

With stocks, equities and indices, however, which are continually being added to many FX trading companies’ range of products, this would be a different matter and this action by FINRA sets a precedent.

In this particular case, Stephens’ company-wide flash email program was designed as an expeditious way for research analysts to share publicly available news and insights regarding covered companies with its sales and trading personnel for discussion with firm customers interested in those companies.

FINRA conducted an inspection of Stephens Inc’s operations and found instances of the company’s personnel forwarding flash emails marked “internal use only” to customers, or cutting and pasting the text of an internal-use email into a separate communication sent to a customer.

In at least one instance, FINRA also found that content from an unapproved, draft research report was cut and pasted into a flash email. Although these practices were contrary to firm policy, FINRA found that the firm lacked effective monitoring or supervisory systems to detect or prevent them.

Making a public statement this week on the matter, Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said

“The supervision of internal communications by research analysts to the sales force requires extreme vigilance given the possibility of revealing material nonpublic information in advance of published research. Today’s action reminds those firms that permit such communications of the need to supervise and monitor them, and to ensure that their controls protect against trading based on the information.”

Should this now become a point of focus for the regulators, ‘call to action’ emails could well become a thing of the past.

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