Cases of insider trading and securities compliance failures have made headlines in recent years. And for a good reason. Financial markets rely heavily on high liquidity, making it easy to trade securities without affecting price. However, when markets are manipulated, liquidity is affected, transaction costs can increase, and investor returns are reduced.
The adverse effects of insider trading are still further-reaching, disrupting investor confidence. With direct and indirect public investor ownership of stock market capitalisation sitting at around 14% globally, as per OECD, negative impacts on investor confidence can stunt the market and overall economic growth.
Therefore, preserving safe, adequately regulated environments where investors can confidently trade securities is imperative to maintaining trust and ensuring healthy financial markets. And while the actions of individuals often can’t be anticipated, organisations can reduce insider trading risk with proper securities compliance and internal processes. This obligation is so significant that the US SEC (Securities and Exchange Commission) recently fined 16 Wall Street firms a total of USD$1.1 billion for recordkeeping failures.
“Finance, ultimately, depends on trust. By failing to honour their recordkeeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust,” explains Gensler.
Recent high-profile compliance risk failures have made headlines, with businesses paying record fines, board chairs and CEOs forced to resign, and reputations damaged, resulting in reduced trust from customers and the community.
Insider trading is where an individual publicly trades stock and securities while using material non-public information (MNPI) to gain an unfair advantage over the rest of the market.
MNPI is confidential information about an organisation and its dealings that may include information such as initial public offerings (IPOs), mergers and acquisitions, executive and board member changes, and stock buyback schemes. In short, the data is considered “material” if it can influence an investor’s decision to buy, sell, or hold the company’s securities.
Cases of insider trading have often been seen where a person privy to MNPI within their organisation has either made a trade or passed information to a friend to a relative to make a trade, which financially benefits these parties.
At certain times, directors, executives, and employees may be aware of MNPI. A blackout period prevents these people from buying or selling securities in the company for a certain time, mitigating the risk of unfair gains from trades while possessing MNPI. Blackout periods are commonly observed before the release of publicly-traded company earnings reports. Conversely, the time outside the blackout period is known as a trading window.
Loo Siew Yee, Assistant Managing Director of Policy, Payments and Financial Crime at the Monetary Authority of Singapore (MAS), commented, “As the chief financial officer of a listed company, Mr Tan owed a duty to the company and its shareholders not to divulge price-sensitive information that has not been disclosed to the market at large. His act of conveying such information to his friends to benefit them and himself undermines public confidence in the transparency and integrity of our capital market.”
The penalties for insider trading apply not only to where financial gains have been made, but also where losses have been avoided. For example, Raymond Yap, Deputy Chairman of the now-delisted Patimas Computers in Malaysia, disposed of shares while possessing MNPI to prevent financial losses. Yap was ordered to pay an amount three times the losses avoided by him as a result of the insider trading activity.
ASIC Deputy Chair Sarah Court remarked about the case, “Mr Story was a true insider, an individual with sensitive company information that he knew would affect the share price. He sold his shares with inside information, giving him an unfair advantage. This criminal conduct threatens the integrity of Australia’s financial markets.”
At a bare minimum, every listed entity should have a securities trading policy in place to regulate trading by key management personnel, directors, executives, and anyone privy to MNPI.
Irregularities in the trading patterns of employees can sometimes be an early indicator of insider trading activity. Such trades may be incongruent with established trading patterns due to MNPI being acted upon. While this does not confirm that insider trading is happening, it may suggest further investigation is needed.
It is essential that anyone impacted by trading blackout periods understands their purpose and knows when your organisation is in a blackout period or a trading window. Ensure communication with the relevant employees, or as a blanket internal announcement, when these periods arise.
A list of people who have access to MNPI is called an “insider list”. These lists can include employees and anyone outside the organisation who has access to insider information, such as contractors, advisors, accountants, and other resources who may come in contact with MNPI during business dealings.
Your records should maintain accurate information about these people’s contact details, why they are on the insider list, and dated additions and changes to the list. It is also crucial to record when people are removed from the list to understand when they stopped being in possession of MNPI. Insider lists are vital when responding to requests for information from regulatory bodies during market surveillance activities.
As part of the employee trading policy, a pre-clearance process enables employees to request permission to make a securities transaction. This process helps the firm’s chief compliance officer, chief financial officer, or other senior officers to properly evaluate whether the transaction should be approved or denied.
Regulatory Technology (RegTech) solutions, such as MCO’s Personal Trade Manager (PTM), can be implemented to automate this process based on your firm’s policies. Compliance resources can save significant time while ensuring full audit trails of all requests, approvals, and denials by using a compliance management software solution instead of manual processes.
As we have seen from the recent examples of insider trading in APAC, executives and directors have incurred huge penalties for their unethical behaviours. As the EY Global Integrity Report reveals, an astonishing 42% of surveyed board members agree that unethical behaviour in senior or high performers is tolerated in their organisation (up from 34% in 2020). Driving a culture of ethics and integrity from the top down must now be an imperative directive to reduce organisational risk and see the right behaviours practised throughout an organisation.
By actively communicating policies (and their reasons), providing clear reporting channels, and fostering open discussion where questions and concerns can be raised in a supportive environment, a better mindset can be cultivated. As a result, employees can gain a deeper understanding of the ethical standards expected of them and even alert compliance teams to insider trading and other risks before they develop into larger problems.
Access your Ultimate Guide to Conflicts of Interest for more detailed information about reducing insider trading risk and minimising ethical conflicts.
A proper onboarding attestation process will also ask staff to attest to their willingness to comply with all relevant policies in the firm, including personal trade policies. These attestations confirm that employees have received, read, and understood policy information and training and can comply with policy requirements.
Annual re-attestation or certification of employees’ trading accounts (and potentially those of their close personal relationships) should also be undertaken to identify any changes and confirm the details they have provided are true, accurate and complete.
The MyComplianceOffice (MCO) Attestations Manager is part of the Know Your Employee (KYE) compliance suite, which is an integrated solution to manage attestations and certifications, personal trades, outside business activities, gifts & hospitality, access to MNPI and other areas of employee compliance.
Insider lists and tracking of employees with MNPI can become complex and labour-intensive to manage through spreadsheets and disconnected systems. Regulatory bodies across the globe have highlighted the importance of proper record-keeping the internal processes to ensure securities compliance. Additionally (and as we unpacked in our recent article, Your SEC Examination Priorities Guide + the APAC Impact in 2023), for every registered firm with the SEC, it’s not a matter of if you’ll be examined but when.
MCO’s KYE compliance suite enables firms to quickly manage insider trading lists and capture MNPI information. The award-winning RegTech solution streamlines the receipt of MNPI and associates who and when access to the insider information has been gained or relinquished. Additionally, electronic tracking and maintenance of MNPI allows firms to quickly produce the necessary reporting when examined by regulatory bodies. Read more about MCO’s MNPI and Insider List Management capabilities.
Conflicts of interest have been a recurring theme for many regulators globally. MCO’s integrated compliance management suite enables firms to identify conflicts of interest more efficiently across their organisation.
From an employee perspective, MCO allows all staff to access our platform and manage various activities, including:
With MCO’s Personal Trade Manager, firms can:
For more information about how MCO can help your firm stay out of the headlines (for the wrong reasons), monitor and manage conflicts of interest, and reduce insider trading risk, schedule your no-obligation meeting with MCO APAC Director, Kelly-Ann McHugh, or request your demo now.
Access your Ultimate Guide to Conflicts of Interest or your Know Your Employee Brochure for more information.