According to FINRA, Public Ventures, LLC, doing business as MDB Capital, was censured and fined $50,000 for failing to establish adequate supervisory systems to address conflicts of interest and prevent misuse of material nonpublic information (MNPI).
The Addison, Texas firm's written supervisory procedures required trade blotter reviews but did not describe how reviews should be conducted or specifically address trading in start-up companies' stock. In practice, the firm's surveillance of such trading relied on reviews that did not clearly identify trades subject to certain conflicts of interest. Other supervisory reviews were conducted on an ad hoc basis without written criteria or documentation.
More concerning, the firm's supervisory system did not reasonably address the potential for misuse of MNPI when firm representatives served on the boards of start-up companies. Board members of companies often have access to material nonpublic information about earnings, business developments, and other matters that could affect stock prices.
The firm had a general "Need to Know" policy and required annual attestations, but these measures were insufficient. The attestation did not ask representatives whether they possessed or had possessed MNPI. The policy and procedures did not address situations where representatives served on company boards or establish reasonable procedures to prevent MNPI from being shared with colleagues and customers.
Instead of proactive controls, the firm relied on start-up companies and representatives to independently identify and notify the firm when they came into possession of MNPI—an approach that provides inadequate protection against insider trading.
For investors, insider trading undermines market fairness. When company insiders or those with access to inside information trade ahead of public announcements, other investors are disadvantaged.