SEC Sanctions Broker For No Procedures and then Inadequate Procedures

The Commission has brought an increasing number of enforcement actions focused on either a failure to comply with firm procedures or for inadequate procedures. In many instances the actions arise from inspections by OCIE. The SEC’s latest case in this area focus on both aspects of the compliance question – first there were no procedures; then, when installed, they were inadequate. In the Matter of Sidoti & Company, LLC, Adm. Proc. File No. 3-17843 (February 13, 2017).

Sidoti was established in 1999 as an independent research firm, focused on small and microcap public companies. Over the years the firm expanded its operations. For example, in 2004 Sidoti expanded its business by offering brokerage and investment banking services. The sales and trading operations distributed the firm’s research product and proprietary investment recommendations. Its services included block trades, Rule 144 transactions and facilitating Rule 10b-5-1 plans.

In 2014 the firm again sought to expand. Sidoti decided to raise capital through an IPO. The firm also established a hedge Fund, an Adviser and a holding company structure chaired by its founder and CEO. Trading in the Fund began in early November 2014. The Adviser continued its services until October 2015. Ultimately the firm decided not to conduct the offering.

For an eight month period beginning on November 3, 2014 Sidoti did not have any written policies and procedures regarding the misuse of material non-public information in connection with the Adviser and trading in the Fund. Dur ing the same period the CEO controlled Sidoti’s investment banking and research departments and maintained trading authority in the Fund. The firm’s written policies and procedures precluded the misuse of material non-public information by the investment banking and research departments. Those policies did not restrict the CEO from misusing material non-public information obtained from those departments when making decisions for the Fund. For example, although Sidoti maintained a Restricted List of securities that the firm and its employees could not trade, between November 3, 12014 and May 5, 2015 the Fund traded in shares on that list 126 times.

Subsequently, the firm amended is written policies and procedures to prevent the misuse of material non-public information in response to concerns raised by the staff. Although the amended procedures created some information barriers to address the roles of the CEO, they lacked an enforcement mechanism. The Order alleges violations of Exchange Act Section 15(g).

In considering the firm’s offer of settlement, the Commission considered the fact that the firm cooperated and took remedial steps which included discontinuing its advisory operations and the retention of compliance consultants.

To resolve the proceeding Respondent consented to the entry of a cease and desist order, a censure and agreed to pay a penalty of $100,000.