February 21, 2023
The preservation of healthy financial markets relies on having safe, properly regulated environments where investors can confidently trade securities. Unfortunately, high-profile insider trading cases have grabbed the spotlight in recent years.
Financial firms have an obligation to consumers, and the broader financial market, to actively monitor and take action against insider trading. Complexities can arise, however, when firms have valid personal trading policies that individuals may take advantage of through use of Material Non-Public Information (MNPI) and unethical behaviour.
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.
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.
Conflicts of interest arise in personal trading (also known as personal account dealing) when securities transactions are made for an individual’s direct or indirect benefit by leveraging an unfair advantage. Personal trading consequently becomes insider trading when an individual takes advantage of MNPI to anticipate changes that help them profit (or, in some cases, avoid losses) from stock and securities trading activity.
Those engaging in insider trading may underestimate (or perhaps disregard) the severe consequences of their actions, with the wider-reaching effects on economic markets even more sizable. Financial markets rely heavily on liquidity which makes it easy to trade securities without affecting price. Unfortunately, when markets are manipulated, liquidity is impacted, and investor returns are compromised.
Additionally, consumer confidence in financial markets can be severely damaged. As insider trading activity is uncovered, consumers can perceive markets to be “rigged” and their investment opportunities to be diminished.
The OECD reports that direct and indirect public investor ownership of the global stock market capitalisation sits at around 14%. So when investor confidence is hurt, overall economic growth can also take a massive hit.
While not all personal trades are likely to result in cases of insider trading, proactive monitoring and management of personal trading activity are critical. See the following steps that every compliance department can take to reduce risk.
By implementing these steps, you can minimise conflicts of interest and maintain trust within your organisation, its clients and stakeholders.
Regulatory Technology (RegTech) solutions, such as MCO’s Personal Trade Manager (PTM), can also be implemented to automate these processes in line with 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 outdated manual processes.
All communications between sell-side brokers and buy-side participants must be recorded, logged, and readily available to ensure dealings are handled ethically. Proper record-keeping of voice and eCommunications are a vital part of understanding if MNPI has been used inappropriately within securities transactions to identify issues and enable further actions to be taken.
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 insider lists to identify 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.
Insider lists and tracking of employees with MNPI can become complex and labour-intensive to manage through spreadsheets and disconnected systems. So when further investigation is needed or when regulatory bodies request information, systems that automate the capture, maintenance, and reporting of your data offer considerable benefits to compliance teams.
When implementing or reviewing the appropriate compliance management solution for managing insider lists and MNPI, ensure that it will:
Conflicts of interest have attracted increased focus for many regulators around the globe in recent years. And simply having systems in place to monitor potential issues is no longer enough. Your technology must be adequate and capable of proactively flagging suspicious activity to compliance teams and quickly producing reporting and documentation to confirm or disprove assumptions of wrongdoing.
MCO’s integrated compliance management suite enables firms to identify conflicts of interest more efficiently across their organisation. MCO provides a consolidated platform for compliance teams to manage areas of potential conflict, including:
For more information about how MCO’s innovative compliance management platform can help your firm effectively manage conflicts of interest, schedule your no-obligation meeting with MCO APAC Director, Kelly-Ann McHugh, or request your demo now.
Uncover the strategies you need to reduce risk and strengthen your overall compliance management process.
Access your Ultimate Guide to Conflicts of Interest or your Know Your Employee Brochure for more information.
