In investment banking, a trading watch list is maintained by the compliance group to comply with legal and regulatory requirements, mitigate conflicts of interest, prevent insider trading, and support information barriers.
A watch list facilitates compliant securities trading surveillance and research monitoring activities to safeguard against improper use or disclosure of material nonpublic information by a bank or its employees.
When Securities are Added to a Trading Watch List
The following three examples illustrate situations where a security may be added to a bank’s watch list.
The investment bank has been invited to make a pitch to a client concerning a prospective material transaction (where the client appears to be reasonably committed to proceeding with the transaction within the near term) that would involve a publicly-traded securities issuer.
The bank has signed or is negotiating definitive terms of an engagement letter with a securities issuer or an interested third party in respect of a proposed material transaction.
The bank has been invited to lead or co-lead, manage, or participate as an underwriter in connection with any distribution.
Preventing Insider Trading
When it has been determined that any of the above situations apply, compliance must be promptly informed to add the corporate issuer to the watch list. Investment bankers have the continuing responsibility for updating compliance of the status of each transaction so the appropriate monitoring of the bank’s trading and equity research activities can be achieved. It is also important to include the names of any potential target companies or a buy-side mandate and any potential acquirers or financial sponsors of a sell-side mandate, if applicable, as well.
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