Goldman Sachs has agreed to pay a $22 million fine and accept other penalties to resolve charges from the U.S. Securities and Exchange Commission that the firm lacked adequate policies and procedures to address the risk that during weekly meetings, known as “huddles,” its analysts could share important non-public information about upcoming research changes.
According to the SEC, huddles were a practice where Goldman’s stock research analysts met to provide their best trading ideas and views on the markets to firm traders and later passed them on to a select group of top clients. These meetings, according to the regulator, took place weekly from 2006 to 2011 and were sometimes attended by sales personnel.
Further, in 2007, Goldman began a program known as the Asymmetric Service Initiative (ASI) in which analysts shared information and trading ideas from the huddles with select clients.
According to the SEC’s order, the programs created a serious risk that Goldman’s analysts could share material, and nonpublic, information about upcoming changes to their published research with ASI 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, according to the regulator, Goldman failed to establish adequate policies or adequately enforce and maintain its existing policies to prevent the misuse of material, nonpublic information about upcoming changes to its research. Goldman’s surveillance of trading ahead of research changes — both in connection with huddles and otherwise — was deficient, according to the SEC.
“Higher-risk trading and business strategies require higher-order controls,” said Robert S. Khuzami, director of the Commission’s Division of Enforcement, in a statement. “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 agreed to settle the charges and will pay a $22 million penalty. Goldman 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 Financial Industry Regulatory Authority (FINRA) also announced today a settlement with Goldman for supervisory and other failures related to the huddles.
“Firms must understand that they cannot develop new programs and services without evaluating their policies and procedures,” said Antonia Chion, associate director in the SEC’s Division of Enforcement, in a statement.
The order issued today finds that Goldman willfully violated Section 15(g), formerly Section 15(f), of the Securities Exchange Act of 1934. The regulator censured the firm and has ordered it to cease and desist from committing or causing any violations and any future violations of this section.
Under the terms of the settlement, Goldman will pay a $22 million penalty— $11 million of which will be paid to FINRA in a related proceeding.
Further, Goldman has agreed to complete a comprehensive review of the policies, procedures, and practices relating to the SEC’s findings in this order so as to improve its policies and procedures related to this issue.
"We are pleased to have resolved this matter,” a Goldman spokesman told Securities Technology Monitor.
This is not the first time Goldman has had to pay SEC fines for this kind of issue.
In 2003, Goldman paid a $5 million penalty, and more than $4.3 million in disgorgement and interest, to settle SEC charges that, among other violations, it violated Section 15(f) of the Exchange Act by failing to establish, maintain, and enforce policies and procedures for preventing the misuse of material, nonpublic information obtained from outside consultants about U.S. Treasury 30-year bonds.
The 2003 SEC order found that although Goldman had policies and procedures regarding the use of confidential information, its policies and procedures should have identified specifically the potential for receiving material, nonpublic information from outside consultants. Goldman settled the Commission’s 2003 proceeding without admitting or denying the findings.
Tommy Fernandez writes for Money Management Executive.
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