Will Haggerty is Director of Product Management at StarCompliance. He has 10 years of experience in the financial services industry ranging from investment analysis and technical advisory to risk management and sales. Here he shares his thoughts on how the discovery of insider trading has evolved beyond rule-based compliance.
FINRA I recently discovered that a Goldman Sachs Research Analyst He was violating the insider trading regulations by trading material non-public information. He is also accused of lying to FINRA investigators about undisclosed brokerage accounts and trading history of securities of companies covered by his business unit. FINRA banned him from trading securities, and the conviction seriously scarred Goldman Sachs’ reputation.
Of course, the Securities and Exchange Commission requires financial institutions to prevent insider trading Like that – but it doesn’t outline specific guidelines for doing so. As a result, compliance teams have typically relied on employee disclosure in a rules-based approach. the problem? Employees are less likely to report their nefarious activity.
The fall of rule-based compliance
While some critics are quick to blame Goldman Sachs for allowing the illegal trade to occur under the company’s watchful eyes, the truth is that there is no way the company could have known about this activity. Like most other financial criminals, the individual involved wisely chose to place trades in an account that the bank was not aware of and therefore not included in his account. Personnel control measures. Insider trading is seen as uncommon not because it does not happen but because its discovery and conviction still largely depends on the self-reported offenders.
Banks rely on disclosure for rule-based compliance, which means that they require employees to disclose their accounts and trades and then forward that information to data collected using compliance technology. Some brokers will disclose new accounts to a business owner if the account holder indicates that they are in the securities industry. However, an employee can open a new online brokerage account without indicating his status as a financial professional and effectively circumvent these enforcement measures in one fell swoop.
Basically, the trading takes place based on inside information – but its policing will still be insufficient if it relies primarily on employee disclosure. Encrypted communication applications make it difficult to trace the communications involved in insider trading, and almost anyone can open an account and start trading quickly from their phone. The connectivity and ease of opening accounts for trading is worrisome, and companies must move beyond a rules-based compliance approach to identify high-risk situations, investigate them efficiently, and take action ahead of regulators.
Intersection of employee behavior with market movements
Some rule-based compliance measures are necessary to prevent insider trading, but it is important to remember that it is only a first step. For example, a convicted Goldman Sachs analyst was making an MNPI swap Produced by fellow analyst. While the culprit was an analyst, it could just as easily have been someone in the IT field with access to internal emails. Information barriers that control the flow of multinational information and keep it out of the wrong hands are a vital first line of defense against insider trading. Compliance teams should monitor and investigate the flow of information daily, if possible – and at least weekly. Monitoring is most effective when evidence emerges as quickly as possible rather than 30, 45, or even 90 days outside of illegal activity.
Next, compliance teams must identify what “suspicious” activity means to their organizations and monitor those activities. Was there a price change before or shortly after the trade that worked in the employee’s favour? People often think of insider trading as a way to make money, but it can also be a way to avoid a big loss. Turnover is another major consideration, and employees may use the MNPI to create a position ahead of a significant amount of public interest in the company.
Monitoring the flow of information and detecting any suspicious activity is a necessary procedure. However, they can alone cloud the true signals for insider trading because they lack the context of the broader market. To bypass rule-based compliance, companies must create insider trading detection methods Whether employees disclose themselves or not.
Compliance teams need a way to match employee behavior with market movements to reveal meaningful insights beyond employee disclosure. They can start with a tool that allows collecting and arranging all the behavioral data of employees, such as trading in new places and seeing big gains or avoiding losses. Then, they must analyze this data against the broader market context to detect potential patterns and trends. Essentially, the company’s ability to demonstrate examples of insider trading by regulators will come down to compliance teams’ capabilities to collect and analyze behavioral data at scale.