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FINRA & SEC Fined Goldman, Sachs $22 Million for Inadequate Policies & Procedures in Research “Huddles”

The Financial Industry Regulatory Authority (“FINRA”) in conjunction with the Securities and Exchange Commission (“SEC”) fined Goldman, Sachs & Co. $22 million for failure to establish adequate policies to prevent the misuse of material, nonpublic information about upcoming changes to its research.

According to the investigation, in 2006 Goldman implemented a formalized business process known as “Trading Huddles.” These were internal weekly meetings attended by equity research analysts, traders, and on occasion, may have included clients, to discuss their top short-term trading ideas. In addition to Trading Huddles, in January 2007, Goldman established a program known as the Asymmetric Service Initiative (ASI) in which analysts shared information and trading ideas from the huddles with Goldman’s high priority clients. ASI clients were typically large hedge funds and other institutional investors. These programs created significant risks that material nonpublic information could be disclosed to ASI clients, prior to its release to the general public. Goldman’s failure to properly supervise these programs gave ASI clients an unfair advantage of trading in advance of research ratings and other changes.

The SEC found that the Trading Huddles and the ASI programs were created to improve the performance of the firm’s traders and generating increased commission revenues from ASI clients. Furthermore, FINRA alleged that Goldman made clear to analysts the importance of the programs to their performance evaluations which would impact their compensation.

The SEC stated, “[f]irms must understand that they cannot develop new programs and services without evaluating their policies and procedures,” and that “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.” Both the Trading Huddles and the ASI programs were discontinued in 2011.

The SEC and FINRA sanctions come 10 months after Massachusetts regulators fined Goldman for the same practice.