The SEC announced that it settled administrative proceedings with Deutsche Bank Securities regarding the firm’s failure to establish and enforce policies and procedures designed to prevent the misuse of material nonpublic information generated by its equity research analysts. The firm was also sanctioned for violating the analyst certification requirement of Regulation AC and for failing to maintain and to furnish to the SEC internal chat communications as required by the federal securities laws (In the Matter of Deutsche Bank Securities Inc., Release No. 34-79083, October 12, 2016).
Research information safeguards inadequate. The equity research department of Deutsche Bank Securities, Inc. (DBSI), a broker-dealer and investment adviser subsidiary of global banking giant Deutsche Bank AG, provides its customers with investment recommendations and analysis on public company stocks through public research reports. DBSI encourages its analysts to communicate frequently with its customers and its sales and trading personnel to answer questions about the companies and the industries the analysts cover, including engaging in morning calls, squawks, idea dinners, and non-deal road shows. However, according to the SEC, DBSI failed to establish, maintain, and enforce policies and procedures reasonably designed to prevent the firm from disclosing material nonpublic information regarding their views and analyses on the companies they researched.
Noting that "information generated by research analysts such as ratings, views, estimates, and trading recommendations can move markets," Associate Enforcement Director Antonia Chion emphasized the importance of having polices in place that prevent the misuse of yet-to-be published information. While DBSI did have polices in place requiring analysts to safeguard their research and that their research should not be shared with customers prior to publication, these policies failed to prevent the disclosure of potentially market-sensitive information to be included in forthcoming research reports, the SEC alleged.
Regulation AC violation. The SEC also alleged that DBSI violated the analyst certification requirement of Rule 501 of Regulation AC, which requires analysts recommendations to customers be consistent with their personally held views. A DBSI analyst privately told members of DBSI’s sales and trading staff that he wanted to, but did not, downgrade his analysis on Big Lots, Inc., yet certified that his BUY rating in a research report was consistent with his personal view about the company, according to the SEC.
Chat communications not preserved. In addition, the SEC alleged that while it was investigating DBSI’s policies and procedures, the firm discovered a problem with its internal "DB Chat" messaging system resulting in a "substantial amount" of the communications not being preserved in an accessible place as required by Rule 17a-4. The SEC also alleged that DBSI failed to promptly furnish copies of all DB Chat communications that had been requested by the staff in the course of its investigation.
Settlement. To settle the SEC’s charges, DBSI agreed to pay a $9.5 million civil penalty and to cease and desist from further violations. It also agreed to be censured. The SEC’s order noted that it considered remedial actions undertaken by DBSI in determining to accept the firm’s offer of settlement. DBSI did not admit or deny the SEC’s findings.
The release is No. 34-79803.
Companies: Deutsche Bank Securities Inc.
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