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The Role of Technology Departments in Insider Trading Prevention

Insider trading concerns among regulators are on the rise. Businesses should leverage advanced technology solutions to protect themselves.

Corporate assets such as laptops and mobile devices can be used to facilitate insider trading but monitoring technology can also be leveraged to flag it and prevent it.

In September 2021, a former senior fund manager who admitted to major insider trading was ordered by a court in Frankfurt to repay his former employer, Union Investment, Germany's third-largest asset manager, an amount of €45million. It was a case that shook the investment world. The repayment sum was almost six times the €8m in profits that the convicted insider trader made. The case and sentence follow a few years after the German government and lawmakers increased the ability of courts to seize the gains and assets of white-collar criminals. Insider trading can be punishable by up to five years in jail in Germany. [1]

According to a New York Times report and based on research findings by New York and McGill Universities, up to a quarter of all mergers and acquisitions of public organizations in the U.S. appear to be “the targets of undetected insider trading by investors with prior knowledge”.[2]

Globally, there is a unified trend with regulators tightening the rules and restrictions on insider trading. In August 2021, the U.S. Securities and Exchange Commission (SEC) charged a senior executive not for trading in the securities of his employer, but in those of a company that was a peer or was economically linked, and whose share price was materially affected by news of M&A activity in the industry sector. [3] The independent financial regulator of the Dubai International Financial Centre (DIFC), the Dubai Financial Services Authority (DFSA), is enhancing its regulatory framework. A ban on insider trading at companies listed in the UAE capital markets was introduced last summer to comply with regulations laid down by the Emirates Securities and Commodities Authority (SCA). [4]

With increasing regulatory pressure on what was once considered an acceptable aspect of market intelligence, business leaders should understand the role of their technology departments in preventing and, if necessary, uncovering insider trading and conflicts of interest. Executives should ensure that insider trading is clearly defined within the organisation, and that every team understands the concepts of insider trading and how they relate to the organisation in terms of compliance. Employees should be provided regular compliance training on which they can be examined on. Furthermore, employees should be educated against getting involved in conversations at trade events, while travelling or even on social occasions, in which they might learn or reveal information that could potentially affect the share price of the organisation or one with a direct link to it.

Business leaders should also ensure that they have oversight of employees' corporate devices, which might be used for insider trading or for communicating information that might throw up a conflict of interest against the organisation. Advanced monitoring solutions leveraging AI and machine learning techniques should provide managers with insight on what information their teams are sending out of the organisation and to whom. Internet Protocol (IP) addresses might reveal that a staff member is buying or selling stock for which they have inside or privileged information. In November 2021, the SEC charged Puneet Dikshit, a partner at a global management consulting firm, with illegally trading in advance of a corporate acquisition by one of the firm's clients in September. In addition to internet history evidence, the SEC found that the partner purchased and liquidated stock options using an IP address associated with the global management consulting firm. [5]

As the pandemic struck, the SEC issued a statement expressing concerns that, “in these dynamic circumstances, corporate insiders are regularly learning new material non-public information that may hold an even greater value than under normal circumstances”.[6] The move to remote working and working from home (WFH), and the use of personal devices makes combating insider trading or conflicts of interest even more challenging and so managers need to ensure that they have technology, policies, and procedures in place to manage and mitigate these complex issues. With organisations listed on public exchanges, employees need to be careful and take extra precautions about discussing even basic facts about sales or strategies in person, by email, and through text messaging platforms during closed periods – the time between when financial results are being finalised and their publication.

As is the case with desktop and laptop computers, managers need to ensure that staff are not using their own personal mobile phones to exchange confidential information – and that they are aware of the risks of even a casual, informal exchange of messages to a friend that might be regarded as revealing market sensitive information. 

The C-suite needs to include handling Insider trading concerns in its whistleblowing policies. Employees need to be aware that they can report any suspicious activity in this area in a safe and confidential way and they should be reassured that the information will be acted upon. 

According to Fortune Business Insights, the global online trading platform market is projected to grow from $8.59billion in 2021 to $12.16 billion in 2028, at a CAGR of 5.1% during forecast period. [7] Organisations need to ensure that employees are not accessing these platforms from their corporate devices and using them in a way that could contradict insider trading regulations. 

As awareness of insider trading in all its forms and concerns about conflicts of interests in the corporate world grow and regulations increase in response, businesses need to implement – and regularly review – their policies and procedures. They also need to ensure that their technological capabilities and protocols for monitoring insider trading and conflicts of interest are effective and regularly updated.

[1] Financial Times: "German court orders Insider trader to repay almost 6 times his profits" (30 September 2021). Link: www.ft.com/content/dbd5ada5-b1f2-497c-81cb-d304b8ab5eb3

[2] Harvard Business Review: "Insider Trading Is More Commonplace Than You Might Think". Link: hbr.org/2014/06/insider-trading-is-more-commonplace-than-you-might-think

[3] US Securities and Exchange Commission: "SEC Charges Biopharmaceutical Company Employee with Insider Trading" (17 August 2021). Link: "www.sec.gov/news/press-release/2021-155"

[4] Emirates News Agency: "Insider Trading in UAE capital markets banned effective Tuesday, June 16" (16 June 2020). Link: "www.wam.ae/en/details/1395302848960"

[5] Bloomberg: "Mckinsey Partner's Insider Trading Strategy was Bad" (10 November 2021). Link: "www.bloomberg.com/opinion/articles/2021-11-10/mckinsey-partner-s-insider-trading-strategy-was-bad"

[6] US Securities and Exchange Commission (SEC): "Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC's Division of Enforcement, Regarding Market Integrity" (23 March 2020). Link: "www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity"

[7] Fortune Business Insights: "Online Trading Platform Market Size, Share & COVID-19 Impact Analysis, By Component (Solution and Services), By End-Users (Banking and Financial Institutions, Brokers and Others), and Regional Forecast, 2021-2028". Link: "www.fortunebusinessinsights.com/online-trading-platform-market-104934"

© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.

Tags

article, f-risk, data & technology, dubai, saudi arabia

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