Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, November 17, 2010

Two New York Firms Settle SEC Charges Involving Failure to Protect Non-Public Information

The SEC settled charges that two affiliated New York-based firms and their former chief compliance officer failed to have adequate policies and procedures to prevent misuse of nonpublic information.  One of the firms - investment adviser Buckingham Capital Management Inc. (BCM) - also was charged with supplementing and altering its records prior to turning them over to SEC examination staff.

In administrative proceedings against BCM and its broker-dealer parent company, The Buckingham Research Group Inc. (BRG), the SEC found that the firms failed to establish, maintain, and enforce written policies and procedures reasonably designed to prevent misuse of material, nonpublic information, including forthcoming BRG research reports. The former chief compliance officer for both firms, Lloyd Karp, was charged with aiding and abetting and causing the failures.

BRG provides equity research to hedge funds, broker-dealers, and other institutional customers and is known for its research in the retail, apparel, and footwear industry, which is the primary focus of BCM's investments. The firms share common office space and management, and BCM's trading accounts for approximately 25 percent of BRG's commission revenue.

In its order instituting administrative proceedings, the SEC found that when BCM began preparing for an SEC examination in 2006, the firm discovered that it was missing pre-approval forms for more than 100 employee trades. Instead of producing the incomplete employee trading records to the SEC exam staff, BCM created new forms to replace the missing ones. BCM then produced the existing records along with the newly-created forms to the SEC examination staff without telling the staff what it had done. BCM also replaced incomplete compliance logs with newly-created completed logs and turned the completed logs over to SEC staff without disclosing what had been done. These compliance documents were particularly important because they were intended to address deficiencies identified in an earlier SEC exam of the firm.

The Commission found that whenever there was a material research event, BRG's written policy required research analysts to complete a certification form attesting that they had maintained confidentiality of the material research information. However, in practice, BRG required an analyst to complete a certification form only where a BCM portfolio had traded in the same direction as the research. Moreover, in some instances, analyst certifications were lacking, incomplete, or dated long after the research event had occurred.

The Commission also found that, until May 2009, BCM's written policy required that people with access to material, nonpublic information report "all business, financial or personal relationships that may result in access to material, non-public information." However, BCM required employees to report only relationships that actually did result in access to material, nonpublic information. BCM also failed to conduct the required annual review of its policies and procedures for 2005.

Without admitting or denying the SEC's findings, BRG agreed to pay a $50,000 penalty, BCM agreed to pay a $75,000 penalty, and Karp agreed to pay a $35,000 penalty. They also consented to an order that censures all of the respondents and requires that both firms engage an independent consultant to review and make recommendations regarding their compliance policies and procedures.

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