Insider Trading: Without Effective Employee Compliance Monitoring, Where Does the Buck Stop?
Failure to comply with market-abuse regulations can lead to severe punishments for both firms and individuals. Without a robust compliance framework, employers and employees can find themselves unprotected and exposed facing hefty fines and jail time. Terry Dawson, StarCompliance’s Managing Director for Product, explores why and how firms can protect themselves and employees from non-compliance through more rigorous monitoring.
Type ‘market abuse’ into your search engine, and straightaway you’ll see news coverage of insider trading and the subsequent crackdown by regulators on the parties involved. However, a closer look at the punishments and penalties levied on firms and individuals respectively reveals they can be vastly different.
Usually, the biggest cases are against corporations rather than individuals, and many result in settlements rather than a full trial and a guilty plea. Why? Corporations often want to quickly tidy up after incidents of market misconduct, draw a line under them, and move on. However, being found guilty of market abuse can be life-changing for an individual, who may potentially be incarcerated or end up with huge debts to pay off. But how does the regulator determine whether to sanction an individual or the organization?
Protecting The Firm and Employees With The Right Policies and Procedures
When it comes to insider trading, there can also be some discrepancy over who should be held to account. This is because the legislation puts the onus on the organization rather than the individual for ensuring the necessary steps are taken to prevent market abuse.
Punitive actions by regulatory authorities are often determined by how robust a corporation’s policies and procedures are. Has it educated its employees and reinforced what they need to report? Does it have monitoring tools in place to detect the offense? For example, if a particular individual is told not to do something multiple times but chooses to ignore it, then the corporation is more likely to be let off, with the punishment much more likely to be levied on the individual.
Conversely, in cases where a corporation’s processes and procedures are just not good enough, it is more likely to incur penalties than the individual. That’s why it’s incredibly important for businesses to implement effective procedures that monitor employee trading activity, which can then be investigated when complaints are raised.
Should Monitoring For Insider Trading Be Extended Beyond Financial Services Firms?
In recent years, firms have also gotten better at annual ethics statements and have become much more proactive in their approach to providing employees with the right training. This is especially true for financial services firms, which are highly regulated and must monitor employee activity, carry out trade surveillance, and report suspicious activity. This is primarily because the people inside these organizations have access to large amounts of material, nonpublic information.
While financial services firms typically have more legislation to comply with given the intense regulatory oversight, greater emphasis needs to be placed on the monitoring for insider trading among issuers of securities, law firms, and advisers.
So, it’s only right and proper that they should be held to that standard, and they should have to adhere to those reporting, recording, and notification requirements. Nonetheless, there are other firms that have access to lots of material nonpublic information – such as law firms, accountants, consultants, systems integrators, and auditors – that aren’t held to the same standard. The question is: should they?
Case For:
- Lawyers and accountants can sometimes be more careless with their clients’ information given the lack of regulatory oversight
- Cybersecurity threats to law firms and accountancy firms have risen because they’re often regarded as an easier target than their clients for information relating to their client’s affairs
- There is less education on insider trading for employees at law firms, particularly surrounding confidentiality obligations and the dangers of market abuse
Case Against:
- It’s less likely for insider dealing to occur within a law firm given the difference in experience, knowledge, and means to engage in those activities compared to financial services
- There is effective legislation around client confidentiality, and law firms are rewarded for putting their client’s interests first
Verdict:
Without more monitoring of employee activities within these firms, it can be difficult to know where insider trading has occurred. Legislators and regulators have told issuers, law firms, and advisors that they must have ‘sufficient’ measures in place to prevent market abuse. But if regulators do decide to increase their scrutiny, firms will need to have in place the right policies and procedures to prevent non-compliance.
Star’s easy-to-use insider trading solution gives businesses in financial services and beyond the certainty of being able to monitor and detect insider trading. This not only delivers confidence for the compliance function but also for employees and the business as a whole, before regulators, clients, and investors.
Best Practices Guide: Detecting Insider Trading
