The Commonwealth of Massachusetts addressed this issue in a 2011 Consent Order with the Goldman Sachs Group Inc. (“Goldman”) where Goldman agreed to pay a $10 million and halt a practice referred to as “huddles” between traders and research analysts and the alleged practice of providing certain Goldman clients with special access to the firm’s stock analysts and information and short-term tips that other clients didn’t receive.
In April of this year, the SEC and FINRA followed the lead of Massachusetts and entered into a SEC Consent Order and Acceptance Waiver and Consent (AWC) with Goldman, respectively. Goldman agreed to pay a $22 million penalty. FINRA asserted that Goldman’s practices violated NASD Rules 3010 and 2110 and FINRA Rule 2010. Goldman also failed to establish and maintain policies and procedures reasonably designed to prevent trading ahead of research reports, in violation of FINRA Rules 5280 and 2010.
A few years earlier, FINRA attempted to establish a bright-line rule on this issue. In FINRA Regulatory Notice 08-55 (Oct. 2008), FINRA addressed the issue of selective dissemination of research reports stating that
A firm may not, however, differentiate the timing of the availability of research to any customer within the class of customers eligible to receive a particular research report or product. FINRA understands, however, that customers may actually receive at different times research reports originally made available at the same time because of the mode of delivery elected by the customer eligible to receive such research services (e.g. in paper form versus electronic). However, member firms may not “game” the mode of delivery in order to preference certain customers over others in the timing of receipt of reports.
Accordingly, FINRA proposed Rule 2711(g) which provided:
(g) Distribution of Member Research Reports
A member must establish,maintain and enforce policies and procedures reasonably designed to ensure that a research report is not distributed selectively to internal trading personnel or a particular customer or class of customers in advance of other customers that are entitled to receive the research report.
Emphasis added. However, this provision was never adopted.
