Broker-Dealer and Investment Adviser Violations, Compliance, and Supervision Daniel A. Nathan and Kelly A. Howes

• Pages: 157-166

157

CHAPTER 9

Broker-Dealer and Investment

Adviser Violations, Compliance,

and Supervision

Daniel A. Nathan and Kelly A. Howes

Although individuals who allegedly engaged in insider trading are principal

targets for enforcement actions, regulators recognize that broker-dealers

and investment advisers play an important role in facilitating or prevent-

ing such misconduct. Most insider trading involves transactions in pub-

licly traded securities, and the transactions associated with violations are

almost always conducted through a broker-dealer. Investment advisers

and their associated persons may be in unique positions to obtain material

non-public information in the course of their investment research or as a

result of relationships with management and other employees of issuers.

Although broker-dealers are not expected to be a guarantor against the

occurrence of insider trading, they are in a unique position to identify

the occurrence of possible misconduct. Where a customer places a trade

through a direct contact with his or her broker, the customer might convey

material non-public information to the broker, or the broker might learn

information suggesting that the customer was in possession of material

non-public information or was trading in breach of a duty. In addition,

through their surveillance systems, broker-dealers might be able to detect

unusual patterns of trading.

Given their roles in securities transactions and their ability to moni-

tor for unusual trading, broker-dealers and investment advisers should

be aware of the possibility that regulators—particularly the Securities and

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