Prediction Market Compliance Risks for Investment Advisers

Prediction markets can create material compliance risks for investment advisers when firms or employees trade event contracts using nonpublic, confidential, client-related, or otherwise restricted information obtained through the adviser’s work. Advisers should evaluate whether their existing conflicts–of-interest, insider trading, personal trading, and market manipulation controls clearly apply to prediction-market activity.

Prediction markets, also called event-contract markets, allow participants to trade contracts tied to the outcome of future events, such as elections, economic releases, regulatory decisions, corporate developments, and sporting events. As interest in these markets grows, they may create new opportunities to trade on research, data, and analysis that advisers obtain or develop while serving clients.

For investment advisers, the underlying risks are familiar. The application may not be. Existing policies and surveillance frameworks may not explicitly address event contracts, particularly where trading occurs outside traditional securities accounts or where the connection between an event contract and a portfolio company, issuer, or client matter is less obvious.

Controlling the Use of Firm and Client Information

Prediction-market trading can create conflicts when a firm or employee uses research, analysis, data, or other information developed or acquired for clients for personal gain or proprietary profits.

Advisers should assess whether their policies clearly address the use of firm, client-related, and other restricted information in event-contract trading, including:

• Whether research obtained through client work may be used in personal or proprietary trading
• Whether employee trading in event contracts requires preclearance, reporting, or both
• Whether conflicts are identified, mitigated, and disclosed where appropriate
• Whether controls distinguish between publicly available information and confidential, client-related, or otherwise restricted information

The appropriate approach will vary based on the adviser’s business model, the nature of its research and information, its client base, and its oversight resources.

Insider Trading and Misuse of Confidential Information

Prediction markets may provide another avenue for the potential misuse of material nonpublic information (MNPI) or other confidential business information. In 2026, the Commodity Futures Trading Commission (CFTC) issued an enforcement advisory addressing prediction markets following enforcement matters involving misuse of nonpublic information and fraud in event contracts. The Department of Justice has also brought charges involving the alleged use of confidential corporate information to trade on a prediction-market platform. CFTC advisory, DOJ case announcement.

Advisers whose employees participate in prediction markets should consider whether their insider trading policies and training appropriately address:

• Event contracts and prediction-market platforms
• MNPI and other confidential information that could affect an event outcome
• The use of expert network, due diligence, portfolio company, and issuer-related information
• Escalation and reporting requirements when potentially sensitive information is identified

Personal Trading and Surveillance Challenges

Prediction markets can present new considerations for established personal trading programs. Employees may not understand when personal trading requirements apply beyond securities transactions, and firms may have limited visibility into activity occurring through platforms that are not incorporated into current reporting or surveillance processes.

Advisers should determine whether their personal trading program addresses event contracts, including whether employees must disclose accounts, report transactions, obtain preclearance, or certify compliance. Firms should also consider whether surveillance procedures can identify links between event-contract activity and covered securities, issuers, clients, portfolio companies, or confidential firm information.

Ability to Influence an Outcome

Unlike many traditional securities transactions, event contracts may be tied to outcomes that a firm or employee could influence or appear able to influence. For example, an employee may have access to information, commercial relationships, or decision-making authority that could affect a corporate, regulatory, or operational event.

Even where no improper conduct occurs, trading in contracts tied to outcomes that employees can influence may create reputational and conflicts–of-interest concerns. Advisers should evaluate whether existing policies prohibit or restrict trading in these circumstances.

Market Manipulation and Cross-Market Risks

Prediction-market activity may also create market-manipulation concerns. Event-contract prices often function as visible probability estimates that may influence news coverage, social media discussion, research commentary, and investor perceptions.

Trading activity intended to affect perceptions of an event, issuer, or related security could present risks beyond the event contract itself. Advisers should consider whether their market-manipulation policies, communications controls, and surveillance protocols address these cross-market risks.