Officials say top U.S. market watchdog is investigating insider trading protections

Keris Prentiss reports.

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission is scrutinizing whether investment advisers and other firms have strong enough policies in place to ensure that nonpublic information is not misused to gain an illegal advantage in trading, a senior official told Reuters.

In a recent interview, Gurbir Grewal, the SEC's Enforcement Director of Arbitration, said the SEC is looking to crack down on ineffective policies and procedures as part of a broader insider trading investigation.

"The frustrating thing about insider trading," says Grewal, "is that sometimes the power of imprisonment and punishment does not deter insider trading." That's why we need to emphasize the tools we have, and companies need to tighten their policies to prevent abuse.

He said the SEC's work not only focuses on insider trading in the stock market, but also on the possible use of complex financial instruments, including swaps or derivatives, to benefit from nonpublic information or to cover up inappropriate behavior.

Grewal declined to say whether the agency has launched or will launch an enforcement campaign against the issue.

Under the leadership of the Democratic Party, the U.S. Securities and Exchange Commission (SEC) has implemented what many consider to be a novel theory of insider trading.

The U.S. Securities and Exchange Commission prevailed in a "shadow trading" case this month when a jury found that a former pharmaceutical company executive violated civil insider-trading laws by betting on another company's stock after learning that his company, Medivation Inc. had been acquired.

Perrie Weiner, a securities litigation attorney at Baker & McKenzie in Los Angeles, said the case has prompted the company to begin examining its own policies to meet broader standards for the misuse of nonpublic information.

The U.S. Securities and Exchange Commission (SEC) is looking for policies that go beyond simply "disallowing trading on material nonpublic insider information. They are looking for policies that prohibit trading in any other company to which the information may apply".

These efforts apply not only to publicly traded companies, but also to hedge funds and other firms that may have access to nonpublic information through consulting efforts, Weiner said.

The watchdog has also been cracking down on financial firms' violations of basic rules and policies. Earlier this year, Morgan Stanley and a former Koon agreed to pay more than $249 million to settle an investigation into the bank's failure to enforce its policy on the misuse of material non-public information.

(Reporting by Chris Prentice; Editing by Paul Simao)