Track Insiders in Compliance with Market Abuse Regulations

    

Technology makes keeping material non-public information (MNPI) in compliance with securities laws and regulations a lot easier. As a longstanding priority to prevent insiders from wielding unfair market advantage, regulators on both sides of the Atlantic have explicit guidelines surrounding the sharing of MNPI among corporate insiders in advance of trading and investment deals.[1] 

When individuals in companies act illicitly on inside information instead of upholding the highest levels of fiduciary care for the client their actions will be aggressively pursued by regulators. 

Yesterday, the former chief information officer (CIO) of Equifax, who was next in line to be global CIO of a business unit, was given jail time for insider trading. The CIO used confidential information to trade in advance of the company’s September 2017 announcement about a massive data breach that exposed the social security numbers and other personal information of nearly 150 million U.S. customers. Just one month before, the SEC announced that its Market Abuse Unit’s Analysis and Detection Center used sophisticated data analysis tools to detect suspicious patterns and reveal a wide-reaching insider trading ring involving numerous individuals conducting illegal trades in advance of dozens of pending mergers and acquisitions.[2] 

In the United States, Section 204A of the Investment Advisers Act of 1940 requires advisers to establish policies and procedures to prevent the misuse of MNPI while SEC Rule 10b5-1 addresses the selective or unfair disclosure of MNPI.[3]  Similarly in the European markets, the Market Abuse Regime (MAR) prohibits company directors, officers and employees from trading or investing on inside information (MNPI).[4]  

Of course, sharing MNPI and insider trading are not always illegal. For instance, regulators permit registrants to buy or sell shares in their own companies if they disclose such transactions with regulatory agencies using such disclosures as SEC Forms 3, 4 and 5 within the designated timeframes. Information sharing is also permissible when investment and deal teams selectively share such information as earnings reports or information regarding a pending business deal or restructuring. 

Unlike the pejorative use of the word “insiders” in the U.S., in European markets, the term “insiders” refers to individuals permitted to share information related to securities or capital markets transactions.  Such permissible and managed information sharing to authorized persons is known as “wall-crossing”.  As well, in Europe, so-called “market soundings” are an example of intentional information sharing among designated parties prior to the announcement of a transaction in order to gauge the interest of potential investors in the transaction and the conditions related to it, such as its potential size or pricing. 

Under regulations such as MAR Article 11, givers and receivers of MNPI are held to regulatory guidelines, such as the requirements on disclosers and recipients when a potential investor is wall-crossed, i.e., MNPI is shared. Companies must electronically maintain and keep certain records, such as lists of insiders for five years, and be prepared to supply such lists to regulators upon request.    

The information to be stored and accessible includes: [5]

  • 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.

As it stands, many deal teams, investment and compliance professionals use Excel spreadsheets to manually track insider lists. These manual methods are unstructured, inefficient and error-prone. 

New tech tools enable users to easily create insider lists, complete with individual’s personal details, justification for access, attestations, time frames when individuals have had access to inside information as well as a cross-referenceable hierarchical database of securities listings and company information on tens of thousands of entities.

The solutions enable compliance professionals to create and access insider lists in a matter of minutes.  Such lists include people conferred with access based on discrete events, such as a deal, corporate event and/or publication of financial statements or profit warnings. It also includes people who, by the nature of their roles, present permanent potential conflicts when exposed to MNPI. This would include deal or investment team members, senior executives and compliance professionals.

Importantly, unlike manual methods, automated insider lists support standardized data management formats for sharing lists in accordance with regulatory guidelines. For instance, MAR requires registrants to keep and maintain insider lists in a “precise format, including the use of standard templates,” including personal data to facilitate the tracking of insiders such as their date of birth, address and national identification number.[6] 

Additionally, the technology enables compliance teams to cross-reference trading and deal flow activities with persons who have access to information over a specified period. The tools integrate with other solutions throughout the deal lifecycle such as SalesForce.com, to document and deliver insider lists, information access requirements and activity, attestations as well as document management.

Regulators are combating conflicts of interest and market abuse as a top priority in their effort to maintain safe and orderly markets. Financial services firms such as investment advisors have a fiduciary duty to not breach their client’s trust by putting their interests ahead of their clients’. Market participants must do their part to uphold the law by knowing and documenting who has access to sensitive regulated data, including MNPI. Technology makes it easier than ever to track and report such information, enhancing a firm’s internal and external compliance and audit functions.

MCO works with firms around the globe to help protect material non-public information (MNPI) and maintain compliance. To see how we can do this for you, contact us.

[1] http://www.finra.org/industry/2018-regulatory-and-examination-priorities-letter

[2] https://www.sec.gov/news/press-release/2017-143

[3] https://www.sec.gov/news/extra/seldsfct.htm

[4] https://www.fca.org.uk/markets/market-abuse/regulation

[5] https://www.fca.org.uk/markets/market-abuse/regulation

[6] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R0347&from=EN