U.S. securities regulators settled charges against Goldman, Sachs & Co. Thursday concerning allegations that the firm failed to supervise its equity analysts to prevent them from disclosing important changes in their ratings to its traders and top clients.
The firm agreed to pay US$22 million in settling the charges with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority (US$11 million to each regulator). It also agreed to be censured, to be subject to a cease-and-desist order, and to review and revise its written policies and procedures to correct the deficiencies identified by the SEC. The firm settled the case without admitting or denying the allegations.
The regulators said today that Goldman, Sachs lacked adequate policies and procedures to address the risk that during weekly ‘huddles’ — in which its equity research analysts met to provide their best trading ideas to the firm’s traders and later passed them on to a select group of top clients — the analysts could share material, nonpublic information about upcoming research changes.
According to the SEC’s order, the huddles created a serious risk that Goldman’s analysts could share material, nonpublic information about upcoming changes to their published research with clients and the firm’s traders. The SEC found these risks were increased by the fact that many of the clients and traders engaged in frequent, high-volume trading.
Despite those risks, the SEC found that Goldman failed to establish adequate policies, or to adequately enforce its existing policies, to prevent the misuse of material, nonpublic information about upcoming changes to its research. And, it says that Goldman’s surveillance of trading ahead of research changes — both in connection with huddles and otherwise — was deficient.
“Higher-risk trading and business strategies require higher-order controls,” said Robert Khuzami, director of the SEC’s division of enforcement. “Despite being on notice from the SEC about the importance of such controls, Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients.”
“Goldman’s trading huddles created an environment of heightened risk in which material non-public information concerning analysts’ published research could be disclosed to its clients. In addition, the firm did not have an adequate system in place to monitor client trading in advance of changes in its published research,” said Brad Bennett, FINRA eExecutive vice president and chief of enforcement.