July 9, 1991
TO: BROKER/DEALER ADVISORY COMMITTEE NO. 23-91
BROKER/DEALER ASSOCIATE MEMBERS NO. 3-91
COMPLIANCE COMMITTEE NO. 5-91
RE: NASD/NYSE JOINT MEMO ON CHINESE WALL POLICIES AND PROCEDURES
__________________________________________________________
As we previously informed you, the SEC's Division of Market
Regulation issued a report on "Chinese Wall" procedures used by
broker/dealers to prevent the misuse of material, nonpublic
information. (See Memorandum to Broker/Dealer Advisory Committee
No. 13-90 and Broker-Dealer Associate Members, dated March 28,
1990.) The staff's review of broker-dealer policies and
procedures was done pursuant to the Commission's rulemaking
authority granted under the Insider Trading and Securities Fraud
Enforcement Act of 1988. The staff found that improvements had
been made by broker-dealers in comparison to an earlier review of
Chinese Wall procedures, but that there were still certain areas
that needed improvement. The staff determined that the necessary
improvements should be effectuated by self-regulatory programs,
supplemented by SEC oversight, rather than SEC rulemaking.
In response, the NASD, the NYSE and a committee of the
Securities Industry Association, prepared the attached memorandum
setting forth their conclusions as to the scope and definition of
the minimum elements of adequate Chinese Wall procedures, which
have been reviewed by the SEC staff.
The attached memorandum identifies the following items as
minimum elements of adequate Chinese Wall procedures and
describes the necessary documentation that should be maintained
with respect to those items:
1. A firm's Chinese Wall procedures must be formalized,
organized and incorporated within a firm's procedural/policy
manual.
2. Firms that conduct investment banking, research or
arbitrage activities must maintain some form of watch and
restricted lists and conduct reviews of employees and proprietary
trading in securities appearing on those lists.
3. Adequate Chinese Walls must include policies and
procedures reasonably designed to limit or contain the necessary
flow of material, non-public information to employees who have a
"need to know."
4. Firms must implement procedures to ensure that
employees have an understanding of federal and state laws, self-
regulatory organization requirements, and the firm's own policies
and procedures relating to the use of material, non-public
information.
Amy B.R. Lancellotta
Assistant General Counsel
Attachment