# How Do Regulators Define "Reasonably Designed" Policies for Information Barriers? ▴ Question

**Published:** 2025-08-06
**Categories:** Question

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## Concept

The regulatory mandate for “reasonably designed” policies governing information barriers is a direct acknowledgment of an unchangeable reality in financial markets. Firms, by their nature, are exposed to a constant influx of sensitive data. The core of the mandate, particularly under Section 15(g) of the Securities Exchange Act, is the requirement for registered broker-dealers to construct and enforce written [policies and procedures](https://prime.greeks.live/area/policies-and-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that are tailored to the specific nature of their business. This framework is built to prevent the misuse of [material non-public information](https://prime.greeks.live/area/material-non-public-information/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (MNPI) by the firm or its associates.

The term “[reasonably designed](https://prime.greeks.live/question/what-are-the-primary-architectural-components-of-a-trading-system-designed-for-leakage-mitigation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)” is a deliberate choice of language, indicating that a one-size-fits-all solution is inadequate. The effectiveness of an [information barrier system](https://prime.greeks.live/question/what-are-the-key-components-of-an-effective-information-barrier-policy/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is measured by its practical ability to manage and contain information flow within a firm’s unique operational structure.

At its heart, an [information barrier](https://prime.greeks.live/area/information-barrier/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a system of internal controls. This system is engineered to segregate departments that regularly receive MNPI, such as [investment banking](https://prime.greeks.live/area/investment-banking/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) or capital markets divisions, from those that engage in trading or sales activities. The objective is to ensure that trading decisions are made using only publicly available information, preserving market integrity and protecting the firm from accusations of insider trading.

These barriers are not merely suggestions; they are a fundamental component of a firm’s compliance architecture, designed to manage the inherent conflicts of interest that arise in multi-service financial institutions. The system must be robust enough to prevent one unit from knowing about customer orders held by a different unit, a principle that allows for the “No-Knowledge” exception under rules like [FINRA Rule 5320](https://prime.greeks.live/area/finra-rule-5320/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

> A firm’s information barrier is its primary defense mechanism against the illegal use of material non-public information.

The definition of what is “reasonable” is dynamic and context-dependent, shifting with the size of the firm, the complexity of its business lines, and the nature of the information it handles. A small advisory boutique will have vastly different requirements than a global bulge-bracket bank with interconnected investment banking, research, and trading desks. Regulators expect firms to conduct a thorough self-assessment to identify potential sources and uses of [MNPI](https://prime.greeks.live/area/mnpi/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) within their operations and to implement controls that directly address those identified risks.

This process is continuous, requiring firms to reassess their policies as their business evolves or as new risks emerge. The expectation is proactive adaptation, a state of constant vigilance to ensure the system remains effective.

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## Strategy

Developing a strategic framework for [information barriers](https://prime.greeks.live/area/information-barriers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) requires a firm to move beyond a simple check-the-box mentality. The foundation of a “reasonably designed” system is a comprehensive risk assessment that maps the specific informational risks inherent in the firm’s business model. This involves identifying every point where MNPI is received, generated, or stored, and analyzing how it could potentially be misused.

For instance, a firm with a large M&A advisory practice and an active trading desk must architect a more complex and rigid system than a firm that only engages in retail brokerage. The strategy must be tailored, reflecting a deep understanding of the firm’s unique operational landscape.

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## Designing the Control Environment

The control environment for an effective information barrier is multi-layered, integrating physical, technological, and procedural elements. Each layer works in concert with the others to create a resilient structure that mitigates the risk of information leakage. A purely procedural system without technological enforcement is likely to be deemed insufficient, just as a technologically advanced system without clear procedures and personnel training would be.

- **Physical Barriers** ▴ This is the most straightforward component, involving the physical separation of departments. This can mean placing teams on different floors, in separate buildings, or using secure, key-card-access areas. However, even seemingly minor details, like the use of glass walls that allow for visual access to sensitive information, can be a point of regulatory concern. The goal is to prevent inadvertent communication and casual observation that could lead to the transmission of MNPI.

- **Technological Barriers** ▴ In the modern financial firm, technology is the backbone of any information barrier. This includes automated systems that restrict access to electronic files and deal-related data to only approved personnel. Other critical controls include prohibiting remote log-ins for certain sensitive systems, disabling the ability to download information to removable storage devices, and maintaining detailed audit trails of who accesses information and when. These systems provide a hard, enforceable line that is difficult to circumvent.

- **Procedural Barriers** ▴ These are the written policies and procedures that govern the conduct of employees. This includes protocols for how and when information can be shared between departments, requirements for “wall-crossing” (bringing an individual from a public-side department over to the private side for a specific project), and the maintenance of watch and restricted lists. Clear, unambiguous written guidance is essential, as is a defined process for reporting information to the [Control Room](https://prime.greeks.live/area/control-room/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

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## What Are the Core Components of a Surveillance Program?

A surveillance program is the verification mechanism that ensures the information barrier is functioning as designed. It involves the ongoing monitoring of trading activity, employee communications, and information access logs to detect potential breaches. An effective surveillance program provides Compliance and Control Room personnel with significant access to information, allowing them to connect dots that might otherwise be missed.

Some firms provide compliance staff with direct access to investment banking deal management systems, while others rely on detailed status updates. The key is that the surveillance function has the tools and the authority to investigate suspicious activity and escalate issues as needed.

> The strategy behind a “reasonably designed” barrier is one of proactive risk mitigation tailored to the firm’s specific activities.

The table below outlines a comparison of strategic approaches for different types of firms, illustrating the tailored nature of the “reasonably designed” standard.

### Table 1 ▴ Comparative Information Barrier Strategies

| Firm Type | Primary MNPI Risk | Key Strategic Components | Surveillance Focus |
| --- | --- | --- | --- |
| Global Investment Bank | M&A advisory, capital raising, proprietary trading | Strict physical separation, deal-specific access controls, automated watch/restricted list monitoring, mandatory training for all employees. | Cross-referencing trading activity against deal timelines, e-communication reviews for keywords, monitoring wall-crossing procedures. |
| Research-Focused Broker-Dealer | Pre-publication research reports | Firewall between research and sales/trading, chaperoned communications, pre-publication review by compliance. | Monitoring trading in covered securities ahead of report publication, tracking dissemination of research. |
| Credit-Focused Institution | Confidential borrower information from loan agreements | Segregation of credit and trading departments, systems to automatically notify the Control Room of new credit agreements. | Reviewing trading in the securities of corporate borrowers, ensuring credit information is not used for trading decisions. |

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## Execution

The execution of a “reasonably designed” information barrier system translates strategic principles into concrete, auditable actions. This operational phase is where the system’s integrity is truly tested. It requires a meticulous focus on process, technology, and personnel, ensuring that every component is not only well-designed but also rigorously enforced. A critical element of execution is the firm’s ability to document its compliance, demonstrating to regulators that its policies are consistently applied and tested.

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## Implementing Access and Communication Controls

Effective execution begins with granular control over information access. This involves more than just standard IT permissions. For private-side deal teams, firms should implement systems that create secure virtual work environments.

Access to these environments should be governed by a “need-to-know” principle, with access rights granted on a deal-by-deal basis and logged in a centralized system. The use of virtual data rooms for sharing information with external parties must also be tightly controlled, with unique log-ins and comprehensive audit trails that are retained even after a transaction closes.

Communication protocols must be equally stringent. This includes:

- **Chaperoning** ▴ All communications between research personnel and other employees, particularly those in sales and trading, should be chaperoned by a member of the compliance or legal department. This ensures that conversations do not stray into prohibited territory.

- **Electronic Surveillance** ▴ Firms must implement robust surveillance of electronic communications, including emails and instant messages. These systems should be configured to flag keywords and phrases associated with MNPI or specific deals on the firm’s [watch list](https://prime.greeks.live/area/watch-list/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

- **[Wall-Crossing Procedures](https://prime.greeks.live/area/wall-crossing-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** ▴ The process for bringing an employee “over the wall” must be formally documented and approved by the Control Room. This includes documenting the reason for the wall-crossing, the information to be shared, and the time the employee is expected to return to the public side.

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## Training and Certification as a Core Function

A firm’s policies are only as effective as the employees who are expected to follow them. Therefore, a comprehensive training program is a non-negotiable component of execution. This training should be tailored to the specific roles and responsibilities of employees. For example, investment bankers require different training than equity traders.

The program should cover the definition of MNPI, the firm’s specific policies and procedures, and the consequences of violations. Training should be conducted upon hiring and on at least an annual basis thereafter, with employees required to certify in writing that they have received, understood, and will abide by the firm’s policies.

> Execution transforms written policies into a living, breathing system of controls that adapts to the firm’s daily operations.

The following table provides a detailed breakdown of execution protocols for a hypothetical M&A deal, illustrating the practical application of information barrier policies.

### Table 2 ▴ M&A Deal Information Barrier Protocol

| Protocol Stage | Action Item | Technological Control | Procedural Control | Responsible Party |
| --- | --- | --- | --- | --- |
| Deal Initiation | Project “Phoenix” is created. | Secure virtual deal room established with access limited to named team members. | Deal added to the firm’s watch list. Control Room notified. | Investment Banking Team Lead |
| Due Diligence | Need for industry expert from research. | N/A | Formal wall-crossing request submitted to Control Room, detailing justification and scope of information to be shared. | Investment Banking Team |
| Expert Consultation | Research analyst is brought “over the wall.” | Analyst’s access to public-side research systems is temporarily suspended. | Analyst signs a statement acknowledging receipt of MNPI and restrictions on trading and communication. | Control Room |
| Pre-Announcement | Deal is nearing public announcement. | Automated trading surveillance system flags all employee trades in the target company’s stock for review. | Target company is moved from the watch list to the restricted list, prohibiting all employee trading. | Compliance / Control Room |
| Post-Announcement | Deal is public. | Virtual deal room is archived. | Company remains on the restricted list until the “information staleness” period has passed. Wall-crossed analyst is debriefed. | Control Room / IT |

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## References

- Financial Industry Regulatory Authority. “Regulatory Notice 11-24 ▴ Manning ‘No-Knowledge’ Exception.” May 2011.

- Proskauer Rose LLP. “Broker-Dealer Concepts ▴ Information Barriers at Broker-Dealers.” Insights, 2012.

- U.S. Securities and Exchange Commission, Office of Compliance Inspections and Examinations. “Staff Summary Report on Examinations of Information Barriers in the Broker-Dealer Industry.” September 2012.

- Citigroup Global Markets Inc. “FINRA Rule 5320.” September 2024.

- Financial Industry Regulatory Authority. “FINRA Rule 2111 (Suitability) FAQ.”

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## Reflection

The regulatory framework for information barriers provides a blueprint, yet the ultimate responsibility for constructing a resilient and effective system rests within the firm. The concept of “reasonably designed” is a perpetual challenge, compelling a continuous cycle of assessment, adaptation, and reinforcement. As market structures evolve and new forms of communication proliferate, the architecture of these barriers must also advance. Consider your own operational framework.

Is it a static defense, or is it a dynamic system capable of anticipating and neutralizing new informational risks before they materialize? The strength of a firm’s information barriers is a direct reflection of its commitment to market integrity and its capacity to manage the complex conflicts of a modern financial institution.

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## Glossary

<a href="https://prime.greeks.live/area/material-non-public-information/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Material Non-Public Information

Meaning ▴ Material Non-Public Information refers to data that is not broadly disseminated and, if publicly known, would predictably influence the market price of a security or derivative instrument. </a><a href="https://prime.greeks.live/area/policies-and-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Policies and Procedures

Meaning ▴ Policies and Procedures represent the codified framework of an institution's operational directives and the sequential steps for their execution, designed to ensure consistent, predictable behavior within complex digital asset trading systems and to govern all aspects of risk exposure and operational integrity. </a><a href="https://prime.greeks.live/question/what-are-the-key-components-of-an-effective-information-barrier-policy/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Information Barrier System

An effective information barrier is a dynamic system of technological, physical, and procedural controls that manages information flow to neutralize conflicts of interest. </a><a href="https://prime.greeks.live/question/what-are-the-primary-architectural-components-of-a-trading-system-designed-for-leakage-mitigation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Reasonably Designed

A leakage-mitigation trading system is an architecture of control, designed to execute large orders with a minimal information signature. </a><a href="https://prime.greeks.live/area/information-barrier/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Information Barrier

Meaning ▴ An Information Barrier constitutes a structural and procedural control mechanism designed to prevent the unauthorized or inappropriate flow of confidential information between distinct functional areas or individuals within an institution, particularly crucial in contexts where such data access could lead to conflicts of interest, market manipulation, or unfair advantage in trading activities. </a><a href="https://prime.greeks.live/area/investment-banking/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Investment Banking

Meaning ▴ Investment Banking represents a specialized segment of the financial services industry, primarily focused on providing capital raising and strategic advisory services to corporations, governments, and institutional clients. </a><a href="https://prime.greeks.live/area/finra-rule-5320/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Finra Rule 5320

Meaning ▴ FINRA Rule 5320, titled "Prohibition Against Trading Ahead of Customer Orders," mandates that a broker-dealer or its associated persons must not execute a proprietary trade in a security at a price that would satisfy a customer order they hold, unless the customer order is first executed. </a><a href="https://prime.greeks.live/area/mnpi/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Mnpi

Meaning ▴ Material Non-Public Information, or MNPI, constitutes data that has not been broadly disseminated to the market and, if publicly known, would predictably exert a significant influence on the valuation of a financial instrument. </a><a href="https://prime.greeks.live/area/information-barriers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Information Barriers

Meaning ▴ Information Barriers define a control mechanism engineered to prevent the unauthorized or inappropriate flow of sensitive data between distinct operational units or individuals within an institutional framework. </a><a href="https://prime.greeks.live/area/control-room/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Control Room

Meaning ▴ The Control Room represents the centralized, interactive operational nexus for managing and overseeing high-frequency trading activities and risk parameters within institutional digital asset derivatives. </a><a href="https://prime.greeks.live/area/watch-list/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Watch List

Meaning ▴ A Watch List is a systematically configured data set comprising financial instruments, counterparties, or market events designated for continuous algorithmic monitoring within a trading or risk management system. </a><a href="https://prime.greeks.live/area/wall-crossing-procedures/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Wall-Crossing Procedures

Meaning ▴ Wall-Crossing Procedures delineate a structured, auditable process for managing the flow of Material Non-Public Information (MNPI) within an institution, particularly when specific individuals or teams gain access to confidential data that could influence the trading of certain securities or digital assets. </a>

**Tags:** [Policies and Procedures](https://options.greeks.live/area/policies-and-procedures/), [Compliance Surveillance](https://options.greeks.live/area/compliance-surveillance/), [Section 15(G) Exchange Act](https://options.greeks.live/area/section-15g-exchange-act/), [MNPI](https://options.greeks.live/area/mnpi/), [FINRA Rule 5320](https://options.greeks.live/area/finra-rule-5320/), [Information Barrier](https://options.greeks.live/area/information-barrier/)	

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### [How Should a Best Execution Committee Adapt Its Review Process for Illiquid Assets?](https://options.greeks.live/question/how-should-a-best-execution-committee-adapt-its-review-process-for-illiquid-assets/)
![Abstract forms representing a Principal-to-Principal negotiation within an RFQ protocol. The precision of high-fidelity execution is evident in the seamless interaction of components, symbolizing liquidity aggregation and market microstructure optimization for digital asset derivatives. This visualizes a private quotation system, underpinning block trade execution with systemic resiliency for institutional-grade infrastructure.](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-execution-engine.jpg)

A Best Execution Committee adapts for illiquid assets by shifting from price validation to a process-driven review of the entire trade lifecycle.

- 
### [What Are the Primary Regulatory Differences between MiFID II and FINRA Best Execution?](https://options.greeks.live/question/what-are-the-primary-regulatory-differences-between-mifid-ii-and-finra-best-execution/)
![Two intertwined, reflective, metallic structures with translucent teal elements at their core, converging on a central nexus against a dark background. This represents a sophisticated RFQ protocol facilitating price discovery within digital asset derivatives markets, denoting high-fidelity execution and institutional-grade systems optimizing capital efficiency via latent liquidity and smart order routing across dark pools.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-system-architecture.jpg)

MiFID II and FINRA best execution rules differ in their core architecture prescriptive data disclosure versus principles-based procedural diligence.

- 
### [How Did MiFID II’s Tick Size Regime Impact HFT Scalping Strategies?](https://options.greeks.live/question/how-did-mifid-iis-tick-size-regime-impact-hft-scalping-strategies/)
![A polished Prime RFQ surface frames a glowing blue sphere, symbolizing a deep liquidity pool. Its precision fins suggest algorithmic price discovery and high-fidelity execution within an RFQ protocol. This system optimizes institutional digital asset derivatives trading, ensuring capital efficiency and minimizing slippage.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-intelligence.jpg)

MiFID II's tick regime recalibrated HFT scalping from latency arbitrage to a competition based on predictive queue management intelligence.

- 
### [What Are the Regulatory Implications of Information Leakage in the Context of Institutional Block Trading?](https://options.greeks.live/question/what-are-the-regulatory-implications-of-information-leakage-in-the-context-of-institutional-block-trading/)
![Three parallel diagonal bars, two light beige, one dark blue, intersect a central sphere on a dark base. This visualizes an institutional RFQ protocol for digital asset derivatives, facilitating high-fidelity execution of multi-leg spreads by aggregating latent liquidity and optimizing price discovery within a Prime RFQ for capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocols-best-execution-multi-leg-spreads-latent-liquidity-aggregation.jpg)

The regulatory implications of information leakage in block trading center on preventing fraud and market manipulation through strict enforcement of confidentiality duties.

- 
### [What Are the Best Practices for Selecting Counterparties to Minimize Information Leakage?](https://options.greeks.live/question/what-are-the-best-practices-for-selecting-counterparties-to-minimize-information-leakage/)
![A cutaway view reveals an advanced RFQ protocol engine for institutional digital asset derivatives. Intricate coiled components represent algorithmic liquidity provision and portfolio margin calculations. Translucent sections expose the quantitative analytics core enabling high-fidelity execution and low-latency order routing for Bitcoin options.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocol-engine-digital-asset-derivatives-core-internal-mechanism-visualized.jpg)

A robust counterparty selection process is a data-driven security protocol designed to protect trading intent and preserve execution alpha.

- 
### [How Do Varying Jurisdictional Classifications Affect Crypto Options Product Development?](https://options.greeks.live/question/how-do-varying-jurisdictional-classifications-affect-crypto-options-product-development/)
![A precisely engineered system features layered grey and beige plates, representing distinct liquidity pools or market segments, connected by a central dark blue RFQ protocol hub. Transparent teal bars, symbolizing multi-leg options spreads or algorithmic trading pathways, intersect through this core, facilitating price discovery and high-fidelity execution of digital asset derivatives via an institutional-grade Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-facilitating-high-fidelity-multi-leg-options-spread-execution-best-price-discovery-and-latent-liquidity-access-for-prime-brokerage.jpg)

Jurisdictional classifications define the operational physics for crypto options, dictating product architecture and market access.

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---

**Original URL:** https://options.greeks.live/question/how-do-regulators-define-reasonably-designed-policies-for-information-barriers/
