Financial firms should see enforcement actions as learning opportunities. The Securities and Exchange Commission (SEC) and other regulatory bodies enforce steep fines and penalties to send a clear message 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 recent enforcement actions and what your firm can do to avoid the same mistakes.
In our previous enforcement action blog post, we talked about a multi-million dollar SEC insider trading rule violation. Today, we’re focusing on a case in which a chief compliance officer (CCO) and a registered representative for a broker-dealer allegedly committed an SEC insider trading violation and what investment firms can learn from this case of alleged noncompliance.
The case: A violation of the SEC’s insider trading rule
On Jun. 29, 2023, the SEC filed insider trading charges against a chief compliance officer and a registered representative. According to the SEC, their trading was based on material non-public information (MNPI) that the chief compliance officer obtained from his girlfriend’s laptop while she was working at a prominent investment bank from home during the COVID-19 pandemic. The SEC alleges that the pair used the MNPI to purchase call options on several issuers ahead of the announcement of the deals and tipped the information to friends so they could trade as well.
According to the SEC’s own Investor.gov, insider trading is the “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, non-public information about the security.” In other words, if an adviser is privy to information that the general public isn’t and then buys or sells stock accordingly, that’s insider trading.
In light of recent developments in technology, the SEC updated Rule 10b5-1, which aims to further close loopholes that could be exploited. The new amendments to Rule 10b5-1 include additional disclosures, cooling off periods and additional restrictions.
In this case, according to the SEC:
- The CCO accessed MNPI on possible upcoming mergers and acquisitions of public companies from his girlfriend’s laptop.
- The information he obtained concerning mergers and acquisitions was confidential, and he should not have had access to it.
- The scheme allegedly generated illicit profits of roughly $800,000 between the representative and the CCO.
- Additionally, the representative recommended trades to his brokerage customers based on the MNPI, resulting in millions of dollars in profits for them and hundreds of thousands of dollars in commissions for himself.
The SEC has charged the CCO and representative with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief, disgorgement with prejudgment interest, civil penalties and bars on them serving as officers or directors of public companies. In a parallel action, the two also face criminal charges from the U.S. Attorney’s Office for the Southern District of New York.
The SEC investigation is ongoing.
What can your investment firm do to avoid violating the insider trading rule?
The SEC’s strict enforcement of its insider trading rule highlights just how important it is for investment firms like yours to do their part in ensuring the security of their clients’ MNPI and integrity of the financial industry. Here are some steps your investment firm can take:
- Create policies and procedures to monitor and detect suspicious trading activity, especially the activity of employees who have access to MNPI.
- Your compliance team should work closely with your firm’s IT team to implement robust access controls and data security measures. This includes implementing strong authentication mechanisms, encryption protocols and monitoring systems to detect any unauthorized access or suspicious activities.
- Implement strong controls around communication channels and ensure that employees are aware of the risks associated with using these channels for sensitive business communications.
- Regularly assess the controls your firm has in place and identify potential vulnerabilities in its insider trading prevention program. If your compliance team spots any vulnerabilities, take corrective action immediately.
- Provide specific, up-to-date and regular training to all employees on insider trading regulations, including the importance of maintaining confidentiality and the various types of MNPI they are responsible for protecting.
- Encourage employees to report any concerns about potential violations.
Now is the time to assess how your firm is preventing insider trading compliance violations – and automation might be the way to do that!
ComplySci’s Control Room offers a regulatory compliance solution to help investment firms like yours avoid insider trading violations by monitoring your employees’ trade activity. Through intelligent alerts and dashboard access, the platform provides a comprehensive view of your firm’s activity to help you proactively identify potential misuse of MNPI.
By leveraging a ComplySci solution, your firm can stay ahead of potential violations and ensure it is compliant with regulatory requirements.
Is your firm doing all it can to avoid a compliance violation? Let’s find out. Schedule a demo today