March 28, 1990
TO: SEC RULES MEMBERS NO. 25-90
BROKER/DEALER ADVISORY COMMITTEE NO. 13-90
BROKER-DEALER ASSOCIATE MEMBERS
RE: SEC STUDY ON BROKER-DEALER CHINESE WALL PROCEDURES
________________________________________________________
The SEC's Division of Market Regulation recently issued the
attached report on "Chinese Wall" procedures used by broker-
dealers to prevent the misuse of material, nonpublic
information.
The study was done pursuant to the Commission's rulemaking
authority granted under the Insider Trading and Securities
Fraud Enforcement Act of 1988, which requires broker-dealers to
maintain procedures designed to prevent the misuse of such
nonpublic information. The Division found that improvements
had been made by broker-dealers in comparison to an earlier
review of Chinese Wall procedures. However, the Division found
that there were certain areas that still needed improvement
such as reviewing employee and proprietary trading,
memorialization and documentation of firm procedures and
supervision of interdepartmental communication. The Division
determined that the necessary improvements should be
effectuated by self-regulatory programs, supplemented by SEC
oversight, rather than by SEC rulemaking.
In its report, the Division identified the following
practices as necessary elements of an adequate Chinese Wall:
a. substantial control (preferably by the compliance
department) of relevant interdepartmental communications;
b. the review of employee trading through the effective
maintenance of some combination of watch, restricted, and rumor
lists;
c. dramatic improvement in the memorialization of Chinese
Wall procedures; and
d. the heightened review or restriction of proprietary
trading while the firm is in possession of material, nonpublic
information.
Amy B. Rosenblum
Assistant General Counsel
Attachment