During 2020, many factors have shaped the regulations and enforcement actions to maintain market integrity and place the interests of clients ahead of firms and individuals. In addition to the challenges faced by compliance and risk departments, the number of people trading worldwide has risen, pressuring regulators and compliance departments to quickly act to monitor conflicts of interest and prevent individuals from taking market advantage.
The Rise in Global Trades
Uncertainty and volatile stock markets created more opportunities for insider trading and market abuse, driving regulators attention towards possible market offences due to an increase in the number of stocks trading worldwide.
The UK's biggest trading platforms noticed a huge spike in users as trading boomed around the world during the coronavirus pandemic. The UK trading platform grew its client base by 34% by onboarding 96,900 people in the last six months.
The rise in trades and opportunism resulted in more enforcement. Complex rules and regulations were introduced, as well as an increase in the number of investigations and regulatory alerts. In early April, the US SEC reported that firms were lacking oversight of supervised persons’ investment and trading activities. While in the UK the FCA warned companies to further protect inside information.
The Market Abuse Regulation
Insider lists continue to be key for regulators and their market abuse investigations. To avoid scrutiny under Market Abuse Regulations, firms are required to keep records, such as lists of insiders and have in place compliance and risk management controls to detect conflicts of interest, including:
- restraining access to files likely to contain material non-public information;
- providing continuing education programs concerning insider trading regulations;
- restricting or monitoring trading in securities about which firm employees possess material non-public information; and
- diligently monitoring trading for firm or individual accounts.
Records, such as insider lists should be kept for five years and must include:
- the list of all persons receiving inside information;
- date/time of planned information sharing, such as market soundings;
- the list of any investors who might refuse MNPI sharing and/or soundings;
- the facts relevant to the assessment if/when inside information ceases to be such;
- the discloser's written procedures related to MNPI sharing such as market soundings.
Companies struggle to monitor employee activities due to a lack of modern controls and systems. In many cases, employees’ personal trades can create conflicts of interest and the mitigation of these risks can be difficult without the help of technology. Hence, failing to adhere to the rules and regulations around the Market Abuse Regulation can lead firms and individuals to reputational damage and criminal sanctions.
At the beginning of the pandemic, a case was brought to the attention of the media, highlighting that four US senators were under investigation over claims they used insider knowledge about the impending coronavirus crisis to sell shares before prices plummeted. This is an example of usage of material non-public information to trade in their favour.
In a recent case, an international bank became the focus of an investigation relating to the disclosure of insider information and its obligation to establish an insider list in connection with the disclosure of suspected money laundering within the company.
In Ireland, the Stockbroker Davy was fined 4,130,000 euros for regulatory breaches for regulatory breaches arising from personal account dealing.
Monitoring and Enforcement Efforts
Regulators are encouraging firms to adopt a risk-based approach and follow guidance on insider lists management and protection of material non-public information (MNPI).
ESMA recently published some guidance for firms around Insider Lists in its MAR review report that covers many aspects of the regulation and recommendations. The report was based on a 2019 consultation and emphasizes the need for companies to have a robust system and controls to manage insider lists as part of their regular processes.
The FCA have been warning that investigations around Market Abuse are being undertaken and recently published its Market Watch report that covers how the inappropriate handling of information requirements can compromise market abuse investigations.
The US SEC also warned firms about the importance of disclosure controls during the COVID-19 pandemic and stated that regulators would be on alert for signs of insider trading and other misconduct that might harm investors.
How can companies mitigate the risk?
Financial Services firms must demonstrate good conduct, integrity, and not have a conflict of interest with their clients.
MyComplianceOffice can assist you in automating and managing Conflicts of Interest, including Employee Conflict, Client, Third Party and Deal/Transaction Conflicts. Implementing our single integrated yet modular solution helps companies around the world to successfully identify and manage workplace conflicts. Contact us today or click here to learn more about our solutions.