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← Series 79: Section 4
Series 79 practice questionhardSEC Enforcement Actions

An investment bank fails to maintain adequate information barriers and a proprietary trader profits from MNPI that leaked from the M&A advisory department. The SEC investigates and determines the firm lacked reasonable supervisory procedures. What is the most likely enforcement outcome for the firm?

  1. AThe firm faces potential liability under Section 15(f) of the Exchange Act for failure to maintain required policies and procedures, along with disgorgement and penalties✓ Correct answer
  2. BThe SEC will only issue a private warning letter with no public consequences
  3. CThe firm is automatically exempt from liability because only the individual trader can be held responsible
  4. DThe SEC must first obtain approval from Congress before pursuing action against a major investment bank
Explanation

Why A — The firm faces potential liability under Section 15(f) of the Exchange Act for failure to maintain required policies and procedures, along with disgorgement and penalties

Section 15(f) of the Securities Exchange Act of 1934 requires broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information. A firm that fails to maintain adequate information barriers faces direct liability for supervisory failures, separate from any individual liability of the trader. Penalties can include substantial fines, disgorgement of trading profits, and mandated remedial measures to strengthen compliance programs.

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