Failing to adequately manage Material Non-Public Information (MNPI) remains a high-risk area for compliance, as evidenced by recent actions in the United States, the United Kingdom and across the globe for issues including insufficient insider trading compliance policies, market abuse and failure to effectively manage insider information.
Just take a look back at the last few years. The enforcement keeps coming and the penalties are significant.
The days of writing off regulatory fines as a cost of doing business are long over. Keeping a handle on employee access to MNPI and proactively identifying areas of potential risk and concern is critical to protect the firm’s brand and reputation—and the bottom line. Below are some examples of recent fines for trading violations and misuse of insider information in financial services firms across the globe.
- In December of 2023, the SEC announced a settlement with a registered investment adviser for failure to maintain and enforce written policies and procedures to prevent the misuse of MNPI and failure to implement written policies and procedures to prevent sending misleading communications to current and prospective investors.
- In August of 2023, the SEC charged a broker-dealer with insider trading for the second time, resulting in penalties of $1,173,926 for the individual and $490,353 for the related firms.
- In July of 2023, a London-based investment banking firm was fined £2,837,600 by the FCA for failure to have effective systems and controls in place to properly assess, monitor and manage the risk of financial crime such as fraudulent trading. The firm was also fined for failing to follow up on red flags that indicated fraudulent trading.
- In February of 2023, the AMF fined a real estate investment trust that was an acquisition target of a leading insurance and financial services provider €350,000 for failure to maintain and update insider lists. The action also fined a holding company €400,000. Penalties for 10 individuals that profited from insider dealing in the case exceeded €2.4 million.
- In late 2022, BaFin fined a financial services firm €190,000 for failure to prevent insider dealing in their German mergers and acquisitions group. The individuals involved had already received suspended jail sentences.
- In December of 2022, the FCA fined a global brokerage firm £4,775,200 for failure to ensure that appropriate systems and controls were in place to effectively detect market abuse.
- In November of 2022, the SEC obtained a final judgement against an index fund manager for insider trading, resulting in a penalty of $246,000, In a parallel action, the U.S. Attorney's Office for the Eastern District of New York entered a forfeiture order for $912,082.
- In August of 2022, the FCA fined the international broker-dealer arm of a large global financial institution £12,553,800 for failure to properly identify significant gaps in its arrangements, systems, and procedures for monitoring for the risk of potential insider trading and market manipulation.
2022 was a record year for SEC enforcement, with over 700 actions and obtained judgments and orders totaling $6.4 billion. Read about it here.
What Is Material Nonpublic Information?
Material Non-Public Information or MNPI is defined as information that is not generally disseminated to the public or available to investors, which a reasonable investor would likely consider important in making an investment decision such as to buy, sell, or hold securities. It can include strategic plans, significant capital investment plans, negotiations concerning acquisitions or dispositions, new or canceled contracts, financial results and more. This information is considered non-public if it has yet to be distributed to the public via a press release, company announcement, etc.
Example of Material Nonpublic Information
Here’s an example of how MNPI could be used for insider dealing and undue gain. A CEO resigned from their position in March, and the company made an announcement on the same day, thereby making the information public. However, a month prior, during a company meeting with key stakeholders, the management discussed the CEO’s impending resignation. These key stakeholders knew that the CEO would resign a month before the public did. If any of these stakeholders traded, sold, or bought shares using this information as a market advantage, such an act would constitute illegal trading.
What is Insider Trading?
As defined by the SEC, "insider trading" generally refers to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material non-public information about the security.
An Example of Insider Trading
Here’s an example of activity that would be considered insider trading. A high-level employee receives information that their company will either merge with another firm or be sold. Understanding the market impact of this information, which has not yet been shared with the public, he consequently buys or sells the company’s shares in his father’s account in order to gain a profit.
Implications for Firms
The SEC has served notice that firms must continue to make monitoring for insider trading a priority. With many employees working remotely, “a greater number of people may have access to material nonpublic information than in less challenging times.”
In the Risk Alert Observations from Examinations of Investment Advisers Managing Private Funds the Office of Compliance Inspections and Examinations (OCIE) of the SEC noted policies and procedures relating to MNPI as a general deficiency commonly seen during examinations of registered investment advisers that manage private equity funds or hedge funds.
OCIE staff found deficiencies under Section 204A of the Advisers Act in the establishment and enforcement of MNPI policies and procedures including failing to address the risk of the exchange of MNPI when employees interact with outside entities, the risk of employees obtaining MNPI though access to office space and systems, or employees who periodically had access to MNPI about issuers of public security.
FCA activity including this Decision Notice also reflect regulator focus on market abuse and the management of MNPI. To be in compliance with Market Abuse Regulation (MAR), firms must have controls in place to manage conduct risk and reduce the risk of market abuse.
“To achieve effective compliance, firms need to understand the Personal Account Dealing risks posed by their business models, design clear policies and processes around those risks and develop a culture where adherence to their rules is the norm. When breaches of PAD policies do occur, firms need to investigate them and, where appropriate, take disciplinary action.
Failing to adequately assess the conduct risks that PAD may pose, or to have adequate systems and controls in place or to train staff to observe appropriate standards of market conduct may leave a firm or its staff exposed to raised risks of regulatory action.”
Is your firm protected?
Insider dealing is a perennial concern for regulators worldwide. Agencies like the SEC, the FCA, BaFin and the AMF are using the latest technology to detect insider trading, misuse of insider information and market abuse. Regulators increasingly expect as well that firms will have the latest technology in place in order to demonstrate that they are taking a comprehensive and proactive approach to managing access to MNPI and employee personal account dealing compliance.
MyComplianceOffice can help your firm manage regulatory guidelines around the sharing of MNPI among corporate insiders in advance of trading and investment deals. Our software can help you identify and mitigate potential conflicts of interest from the activities of employees, third parties and the company and automate your MNPI and Insider Trading policies & procedures and embed them within your business.
Our Insider List Management solution enables users to create insider lists, complete with individuals and roles/rights assignments, timeframes when individuals can access inside information as well as a cross-referenceable hierarchical database of securities listings and company information on tens of thousands of entities. The automated solution supports standardized data management formats for sharing insider lists in accordance with regulatory guidelines.
We can help! MCO's Personal Trade Manager and Insider and MNPI solutions enable firms to reduce the risk of employee personal account dealing and manage insider information across the organization. Contact us today to chat with our global team of experts and see the solutions in action!
Let us know if you’d like to learn more.
Check out our selection of content below that explains what an insider list is, what are your obligations to protect and manage MNPI and when to provide information to the public under current regulations, such as market abuse regulation.
- SEC Enforcement and Priorities Set Compliance Expectations for 2024
- Market Abuse Regulations - A Look Back and Ahead - On-Demand Webinar
- Insider List and MNPI Management under MAR
- Insider Trading and Safeguarding MNPI - On-Demand Webinar
- SEC Finds Deficiencies in Disclosing Conflicts of Interest and MNPI