Financial firms should see enforcement actions as learning opportunities. The Securities and Exchange Commission (SEC) and other regulatory bodies enforce fines and penalties to not only penalize noncompliant firms, but to also send a clear message to other firms and deter future violations. As a result? They expect firms within the industry to pay attention and adapt their compliance programs accordingly.
With that in mind, we’re continuing our blog series, “what went wrong” in which we’ll cover headline enforcement actions and what your firm can do to avoid similar violations.
In our previous blog posts, we talked about a $305,000 Pay-to-Play violation, a $1 billion recordkeeping violation, and before that, we talked about a $13.1 million Regulation Best Interest (BI) violation. Today, we’re focusing on an enforcement action regarding the SEC’s insider trading regulations and what firms can learn from this case of noncompliance.
The case: A violation of the SEC’s insider trading rule
On Mar. 30, 2023, the SEC filed insider trading charges against a former Canadian asset management firm trader and a former US broker-dealer partner. The SEC alleges that the pair used material, nonpublic information (MNPI) to gain illicit profits of over $3.4 million ahead of at least seven merger announcements involving Special Purpose Acquisition Companies (SPACs).
The SEC’s own Investor.gov defines insider trading as “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.”
Recently, the SEC updated Rule 10b5-1 with new amendments including additional disclosures, cooling off periods and additional restrictions.
In this case, the SEC alleges:
- The firm trader tipped off a friend and trading client, the broker-dealer partner, via encrypted messaging about upcoming mergers.
- The broker-dealer partner then purchased the securities using his personal brokerage accounts, profiting after the securities increased in price following public announcements.
- The broker-dealer partner led and managed an events-driven group at his broker-dealer, which evaluated corporate mergers and acquisitions. His responsibilities included managing client relationships, business development and sales trading.
- The information provided to him concerning SPAC mergers was confidential, and the person who shared it with him had an explicit duty not to do so.
- To avoid detection, the information was sent to the broker-dealer partner through Telegram, an encrypted messaging application that could not be monitored by Polar or Elevation.
The SEC investigation is ongoing.
What can firms do to avoid violating the insider trading rule?
Here are some steps your firm can take to avoid making costly mistakes as it relates to MNPI and insider trading:
- Create policies and procedures to monitor and detect suspicious trading activity, such as large or unusual trades, particularly by employees who have access to MNPI.
- Implement strong controls around communication channels, including encrypted messaging applications, and ensure that employees are aware of the risks associated with using these channels for sensitive business communications.
- Provide specific and up-to-date education to employees on insider trading regulations, including the importance of maintaining confidentiality and the various types of MNPI they are responsible for protecting.
- Conduct regular audits and risk assessments to identify potential vulnerabilities in your firm’s insider trading prevention program and take corrective action immediately.
- Foster a culture of compliance and encourage employees to report any concerns about potential violations
Now is the time to assess your firm’s compliance program to ensure it is fully equipped to prevent an insider trading compliance violation – and automation might be the way to do it!
ComplySci offers a regulatory compliance solution to help your firm mitigate the risk of insider trading violations by monitoring your employees’ trade activity. Through intelligent alerts and dashboard access, the platform provides a full view of account-level detail to proactively identify potential misuse of MNPI. Not only that, but ComplySci allows firms to integrate direct broker feeds for easy access to all trade information and to reveal trends through trade activity and reconciliation reports.
By leveraging a ComplySci solution, your firm can stay ahead of potential violations and ensure it is compliant with regulatory requirements. Schedule a demo today!