It’s the cardinal rule for investment professionals! Do not use, share, disseminate or trade on the basis of material, non-public information. Even so, various authorities like SEC, SEBI etc. regularly charges brokers, advisors with illegal insider trading.
Of course, potential sanctions are not always limited to the individual “bad actors” in insider trading cases. Firms don’t have mechanisms in place to prevent, detect and correct such violations. It can find themselves facing regulatory risk too.
Firms and Compliance Staff May Be Liable
When insider trading occurs, it’s not just those directly involved in trading on material, non-public information that are at risk. The compliance personnel and their firms can be charged too.
Mitigating Insider Trading Risks
Individual analysts, brokers and other firm insiders are not the only ones at risk when an insider trading scheme is uncovered. CCOs and firms without reasonable compliance measures in place to identify and stop insider trading activities may face sanctions and penalties of their own as well.
Most financial services firms include clear, unambiguous prohibitions against insider trading in their codes of ethics. It’ll also include personal trading, and other compliance policies. While simply having policy language prohibiting illegal insider trading probably won’t shield a firm from liability, requiring employees to complete annual certifications may help strengthen a firm’s position.
Certifications should, themselves, be unambiguous and straightforward, and they should be collected and maintained for everyone in the firm. Using a regulatory compliance platform like VComply to automate this process is important. It will send periodic reminders and help a firm manage a process that can otherwise become unwieldy. Firms should also leverage technology to identify any “exceptions” reported on such certifications, so the CCO can take follow-up actions as needed.
Use Complete and High-Quality Data Feeds
Firms should also use a compliance technology solution to facilitate the pre-clearance process and personal trade monitoring. It should aggregate employee and firm trade information through direct broker feeds. While doing so is not a guarantee that insider trading will be detected. Yet, it can help firms identify potentially problematic activity so it can be investigated further.
Data-driven solutions should provide a mechanism that helps firms do more than simply review individual trade data. The data and capabilities of a firm’s compliance system allow it to oversee transactions, codes of conduct and police all related activities. The patterns and potential issues are more readily apparent and can be addressed appropriately. Of course, it is also critical that any such solution ensures the quality of the underlying data. Thus, firms and compliance officers can rely on the information provided.
Semantic data integrity, which allows for advanced forensic analytics, dynamic risk surveillance and demonstrates the firm’s commitment to compliance, is no longer an option for financial services firms that want to ensure compliance. To learn more about data quality, download our free white paper “Data Quality – Overcoming the Biggest Hurdle for Compliance and Risk Management.”
Evaluate Compliance Controls and Adjust as Needed
As with any type of compliance violation, firms can only do so much to mitigate their risk. If someone associated with the firm is intent on circumventing the rules, they may well find a way to do so – in spite of whatever measures the compliance department puts in place.
Firms should, at least annually, review their compliance procedures and controls around insider trading to ensure processes and mitigation efforts are reasonable and functioning as intended. Making needed adjustments can help limit the firm’s exposure in the event someone associated with the firm is found to have engaged in illegal insider trading.Add to favorites