Chris Prentice

WASHINGTON, (Reuters) – The U.S. Securities and Exchange Commission is investigating whether financial professionals may have violated the rules by tipping off Hedge funds before large shares sales. This practice is known as block trades.

The Wall Street Journal published the first report on Monday. According to the newspaper, the SEC was conducting an investigation Morgan Stanley (NYSE:) Goldman Sachs and the U.S. Department of Justice.

The parties all declined to comment.

Blocks of shares are often bought and sold by broker-dealers for clients, or in a hedge strategy. These blocks can be large enough to affect the share price.

As institutional investors balance their portfolios, block trading is more common during volatility.

It could prove extremely useful to have information on these share sales in advance. The source stated that improperly sharing information, or nonpublic, could violate U.S. laws. If they do not have the right processes in place for preventing misuse of information, firms could face scrutiny.

According to the WSJ, several banks and hedge funds have been subpoenaed by the SEC, requesting trading records as well information on investors’ communications with bankers.

The report stated that investigators will investigate whether or not bankers incorrectly alerted clients favored before public disclosure of trades. They also want to know if this information was beneficial to the funds which, in some cases, act as liquidity providers for Wall Street firms.