Recommended Procedures for Compliance

Recommended Procedures for Compliance

Achieve Public Dissemination
If a member or candidate determines that information is material, the member or candidate should make reasonable efforts to achieve public dissemination of the information. These efforts usually entail encouraging the issuing company to make the information public. If public dissemination is not possible, the member or candidate
must communicate the information only to the designated supervisory and compliance personnel within the member’s or candidate’s firm and must not take investment action or alter current investment recommendations on the basis of the information.
Moreover, members and candidates must not knowingly engage in any conduct that may induce company insiders to privately disclose material nonpublic information.
Adopt Compliance Procedures
Members and candidates should encourage their firms to adopt compliance procedures to prevent the misuse of material nonpublic information. Particularly important is improving compliance in such areas as the review of employee and proprietary trading, the review of investment recommendations, documentation of firm procedures,
and the supervision of interdepartmental communications in multiservice firms.
Compliance procedures should suit the particular characteristics of a firm, including its size and the nature of its business.
Members and candidates are encouraged to inform their supervisor and compliance personnel of suspected inappropriate use of material nonpublic information as the basis for security trading activities or recommendations being made within their firm.
Adopt Disclosure Procedures
Members and candidates should encourage their firms to develop and follow disclosure policies designed to ensure that information is disseminated to the marketplace in an equitable manner. For example, analysts from small firms should receive the same information and attention from a company as analysts from large firms receive.
Similarly, companies should not provide certain information to buy- side analysts but not to sell- side analysts, or vice versa. Furthermore, a company should not discriminate among analysts in the provision of information or “blackball” particular analysts who have given negative reports on the company in the past.
Within investment and research firms, members and candidates should encourage the development of and compliance with procedures for distributing new and updated investment opinions to clients. Recommendations of this nature may represent material market- moving information that needs to be communicated to all clients fairly.
Issue Press Releases
Companies should consider issuing press releases prior to analyst meetings and conference calls and scripting those meetings and calls to decrease the chance that
further information will be disclosed. If material nonpublic information is disclosed for the first time in an analyst meeting or call, the company should promptly issue a press release or otherwise make the information publicly available.
Firewall Elements
An information barrier commonly referred to as a “firewall” is the most widely used approach for preventing the communication of material nonpublic information within firms. It restricts the flow of confidential information to those who need to know the information to perform their jobs effectively. The minimum elements of such a system
include, but are not limited to, the following:
■ substantial control of relevant interdepartmental communications, preferably through a clearance area within the firm in either the compliance or legal department;
■ review of employee trading through the maintenance of “watch,” “restricted,” and “rumor” lists;
■ documentation of the procedures designed to limit the flow of information between departments and of the actions taken to enforce those procedures; and
■ heightened review or restriction of proprietary trading while a firm is in possession of material nonpublic information.
Appropriate Interdepartmental Communications
Although documentation requirements must, for practical reasons, take into account the differences between the activities of small firms and those of large, multiservice firms, firms of all sizes and types benefit improving the documentation of their internal enforcement of firewall procedures. Therefore, even at small firms, procedures
concerning interdepartmental communication, the review of trading activity, and the investigation of possible violations should be compiled and formalized.
Physical Separation of Departments
As a practical matter, to the greatest extent possible, firms should consider the physical separation of departments and files to prevent the communication of sensitive information that should not be shared. For example, the investment banking and corporate finance areas of a brokerage firm should be separated from the sales and
research departments, and a bank’s commercial lending department should be segregated from its trust and research departments.

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