On August 17, 2021, the U.S. Securities and Exchange Commission (SEC) charged a former employee of Medivation, a biopharmaceutical company, alleging that the individual was privy to confidential information that Medivation would be acquired by Pfizer and misappropriated that information to engage in insider trading. Notably, the SEC does not allege that the individual traded in securities issued by either of the companies involved in the acquisition. Rather, the SEC ‘s complaint alleges that he profited from the purchase of options on the stock of a third company, Incyte Corporation, on the basis that Incyte Corporation was identified by Medivation ‘s investment bankers as a comparable company to Medivation and that news of the acquisition of Medivation would likely cause the price of Incyte Corporation ‘s stock to increase.
Compliance Implications
Insider trading is classically thought of as trading in a security of an issuer on the basis of material nonpublic information (MNPI) that directly pertains to that issuer. This could include, among other things, nonpublic information about the issuer ‘s business operations, trading in the issuer ‘s securities by another market participant, or the contents of a sell-side research report or mainstream news report that has yet to be published. In this instance, however, the SEC ‘s complaint does not allege that the defendant was in possession of any confidential information pertaining to Incyte Corporation, the issuer whose securities he traded. Rather, the defendant is alleged to have engaged in so-called “shadow trading” – i.e., using confidential information about one issuer (Medivation) to trade the securities of another issuer (Incyte Corporation) on the basis that the market price of the two securities is likely to react similarly when the information becomes public. Accordingly, this has profound implications for compliance personnel at most investment advisers whose compliance testing and surveillance programs historically have not focused on this type of activity.
What can advisers do?
Ideally, firms will already have a process in place to surveil for client and employee personal trading in a security ahead of an aberrational price movement and not only scanning against news or events. For ACA ‘s Market Abuse Surveillance and Employee Compliance clients, there are algorithms and rules to support against the risks identified. The Buyside Front Running algorithm of the Market Abuse Surveillance solution scans for positions opened or increased after an abnormally advantageous price move of the underlying security. The solution leverages historical data and statistical parameters to support in calibrating the “norm”. For clients leveraging the Employee Compliance module, ACA offers a trade rule focused on Employee Trading in Front of Anomalous Price Movement.
In light of this case, firms should consider expanding their investigation process to assess whether the firm and/or relevant employees possess confidential information about another comparable issuer that could be material. Enhancements to the investigation process could include, for example:
- Checking the firm ‘s restricted list to see if the firm is in possession of MNPI about a comparable issuer.
- Reviewing whether the firm has any non-disclosure or confidentiality agreements in place with respect to a comparable issuer.
- Reviewing whether investment personnel met directly with a comparable issuer or met with a research consultant to discuss a comparable issuer.
- Reviewing firm trading in comparable issuers.
Additionally, firms involved in private markets transactions that intentionally receive confidential information about securities issuers may consider taking additional steps to prevent shadow trading. For example, these firms may consider proactively restricting any public issuers identified as market comps when evaluating a potential transaction.
For more information
ACA believes this action by the SEC warrants a possible enhancement to our market abuse system and we are considering how best to automate some functionality in ComplianceAlpha®. Please contact us here to set up a meeting to learn more about our products and how ACA can assist your firm.
ACA has& recently& welcomed several& new members to our investment adviser practice, all of whom& bring& years of experience and& skills to& the& team. These additions help& us& accommodate& the& developing& regulatory landscape and meet our client ‘s specific needs.& Some of our new hires& include& in alphabetical order:& &
Brian Applegate&
Brian Applegate joined ACA in June 2021& as a& Senior Principal Consultant with ACA ‘s Investment Adviser Consulting Group.& Before ACA, Brian was Chief Compliance Officer and AML Compliance Officer for& HighMark& Capital Management, a registered investment adviser with $18.2 billion in AUM/AUA delivering customized investment solutions across various asset classes for institutional investors.& & Prior to& HighMark, Brian worked as a Securities Compliance Examiner with the SEC. There, he performed examinations of registered investment advisors, investment companies, and broker-dealers.& Brian has also been Chief Compliance Officer and AML Compliance Officer for ING Direct Investing/Sharebuilder& Advisors and prior to that, was the Chief Compliance Officer for an institutional, self-clearing broker-dealer subsidiary of JP Morgan Chase.& &
Brian earned his Bachelor of Arts degree in English from the University of Washington and his MBA from Western Governors University. He is also a Certified AML Specialist (CAMS), a Certified Regulatory and Compliance Professional (CRCP), and an Investment Adviser Certified Compliance Professional (IACCP).&
Monika Gupta& &
Monika Gupta rejoined ACA in July 2021 after& being& a member of its early growth stage team in the& mid-2000s. Monika previously served as general counsel and chief compliance officer of a SEC-registered investment adviser managing $2 billion in assets on behalf of hedge funds and private equity funds across a variety of investment strategies, including equities, real estate, and multi-strategy, in emerging markets. Monika started her career in the investment management group of Ropes & Gray LLP in Boston, where her practice focused on the structuring and formation of hedge funds, and advising those funds and their sponsors on federal and state securities& laws and regulatory compliance matters on an ongoing basis.&
While in law school, Monika served as a legal intern in the Washington, D.C. office of U.S. Senator Hillary Rodham Clinton during 9/11. She assisted& former& Sen. Clinton and her chief legal counsel with various projects in the immediate aftermath, such as providing support to first responders, helping arrange the transport of special demolition equipment to New York City,& and drafting proposed amendments to the draft USA PATRIOT Act. Monika earned her J.D. from Cornell Law School, where she was a member of the& Cornell Law Review, and her B.S. in Finance from the University of Connecticut.&
John& Holzwarth&
John& Holzwarth& joined ACA in June 2021& as& a Senior Principal Consultant with ACA ‘s Regulatory Compliance practice. He& brings& over a decade of broad experience in finance and consulting with SEC and FINRA registrants to ACA.& & Prior to ACA, John served as Vice President of Regulatory Consulting at Kroll, where he focused on implementing best-in-class compliance programs, conducting mock regulatory examinations, and assisting with SEC registrations for private funds.& &
Before Kroll, John served as Chief Compliance Officer and Director of Perkins Fund Marketing, a leading introducing broker-dealer in the alternative investment market, where he oversaw the firm ‘s private placement and marketing business for emerging private funds. John is a Chartered Alternative Investment Analyst (CAIA) and holds a Master ‘s in Law from Fordham Law School with a focus in securities regulation and compliance. Additionally, he holds the FINRA Series 7, 24, 31, 50, 51, and 63 licenses. John completed his undergraduate education with distinction at the University of Maine, earning degrees in Economics and Spanish Literature.&
Jennifer Rodriguez& &
Jennifer Rodriguez joined ACA in August 2021& as a Consultant with ACA ‘s Investment Adviser division.& In her career, Jennifer has managed compliance programs for mutual funds, exchange-traded funds, and separately managed accounts; managed due diligence with turn-key platforms, registered investment advisers, and broker-dealers; reviewed proprietary software related to adviser education; and managed the implementation of a hedge fund.& Before ACA,& Jennifer worked with Toews Corporation where she was their Chief Compliance Officer and General Counsel.& Prior to that, she served as an associate with the law firm Pappas & Richardson, where she conducted research on securities and other matters, managed the litigation calendar and client relationships, represented clients in court, and drafted motions and pleadings. She has spoken on securities-related matters at events held by the NJ and& Philadelphia Bar Associations.&
Jennifer earned her Bachelor of Arts degree in Economics from the University of Houston and her law degree from the Temple University Beasley School of Law. She is a Certified Anti-Money Laundering Specialist (CAMS), holds the Series 65 license, and is licensed to practice law in New York, New Jersey, and Pennsylvania.
Glenn& Skreppen&
Glenn& Skreppen& is a Principal Consultant for the Investment Adviser division and& has worked in the securities industry for over twenty-four years.& Glenn& has extensive& experiences& in broker-dealer, investment advisor, and securities issuer regulatory compliance.& & &
Prior to ACA,& Glenn& served as the Director of the Bureau of Securities Compliance and Examinations for the Pennsylvania Department of Banking and Securities. In his official capacity,& he& managed enforcement, securities investigations, broker-dealer& examinations,& and investment advisor examinations.& He& has presented as an industry expert at conferences held by the SEC, FINRA, NASAA, and the Pennsylvania Department of Banking and Securities, where& he& has spoken on securities topics including regulatory examinations, securities investigations, private& placements,& and anti-money laundering.& Glenn& also& served on the NASAA Enforcement Training Project Group, where he helped plan enforcement training conferences for NASAA members.& & & &
Glenn& holds the designations of Certified Fraud Examiner (CFE) and Certified Anti-Money Laundering Specialist (CAMS).& He received a& Bachelor of Science& in Accounting from Indiana State University in 1991, and& an& MBA& with a& finance& concentration in 1994 from the Joseph M. Katz Graduate School of Business at the University of Pittsburgh.&
Charles “Chas” Spiros&
Charles “Chas” Spiros joined ACA in July 2021& as a& Principal Consultant with ACA ‘s Regulatory Compliance Group.& Chas brings his diverse experience to ACA from working in regulatory enforcement at FINRA and in-house with registered investment advisers focusing on private markets and outsourced chief investment officer (OCIO) services.&
Before ACA, Chas held positions with the Strategic Investment Group, Greenwich Advisor Compliance Services, The Carlyle Group, and FINRA. In these roles, he focused on registered investment adviser and private equity compliance program management, consulting, registration, and ongoing compliance services, and (at FINRA) market manipulation.&
Chas earned his Bachelor of Science degree in Finance from the University of Maryland and his MBA in Organizational Leadership from Virginia Tech.&
Louis Sweeney&
Louis Sweeney is a Principal Consultant within ACA ‘s Regulatory Compliance practice and member of the private markets practice group.& Louis has a decade of regulatory and compliance experience acquired from a combination of working in-house, in a compliance consulting capacity and for a financial regulatory organization.& &
Prior to ACA, Louis served as a Senior Vice President of Regulatory Consulting at Kroll, where he successfully implemented and maintained comprehensive regulatory and operational compliance programs, conducted mock regulatory examinations, and prepared FINRA and SEC registrations for a wide variety of clients, including various types of alternative investment fund managers.& Before Kroll, Louis served as a Sales Practice Examiner for the Financial Industry Regulatory Authority (FINRA).& &
Louis’ breadth of knowledge across the alternatives space brings a nuanced understanding of operational diligence and regulatory analysis that will further support ACA ‘s investment adviser& compliance consulting practice in developing best-practice compliance programs for its clients.& Additionally,& Louis completed his undergraduate education at Saint Joseph ‘s University, earning a degree in finance.&
Meet& more of our recent new hires& here.&
About ACA Group &
ACA Group (ACA) is the leading governance, risk, and compliance (GRC) advisor in financial services. We empower our clients to reimagine GRC and protect and grow their business. Our innovative approach integrates consulting, managed services, and& our ComplianceAlpha® technology platform with the specialized expertise of former regulators and practitioners and our deep understanding of the global regulatory landscape. &
Our global team of regulatory compliance professionals includes former SEC, FINRA, FCA, CFTC, NFA, and state regulators, as well as former senior managers from prominent financial institutions and advisory firms. We work with compliance and legal professionals to review and develop compliance programs based on best practices, current regulatory requirements, and robust oversight processes. &
Learn more about& our compliance consulting services or contact our team here to learn more.&
For SEC registered investment advisers, the end of the year brings many opportunities and unique challenges. It ‘s a time to& catch-up,& reflect, evaluate, and& plan. This& blog is the second in our& 2021 CCO year-end roadmap series.& Have a question or topic you’d like to see covered?& Contact us& here.& &
As we look toward a new year,& it is& important to start developing a testing plan that fits& the specific needs of& your& firm. Given the unpredictability of 2020 and 2021,& deciding& your compliance testing schedule& for& 2022 requires exceptional& preparedness.& &
After the events in 2020,& it was predicted that firms may fall behind in testing. However, according to the& 2021& Investment Management Compliance Testing Survey& (“IMCT Survey”),& the& majority of& respondents did not decrease their compliance testing in any area. We observed a continued increase in testing for& Covid-19 related Business Continuity Planning (BCP),& cybersecurity,& electronic& communication surveillance,& advertising and marketing,& personal trading/code of ethics,& and more.
What was most interesting is that& there was a significant increase in& firms indicating& they had& increased& their& Environmental, Social, and Governance (ESG)& testing.& In 2020, 24% of respondents noted they had increased testing in ESG compared to 2019;& however& in 2021, 47% of respondents noted that they had increased testing& in& ESG based on the testing done in 2020.&
The& annual testing mandate& prescribed by U.S. Securities and Exchange Commission’s (SEC) Rule 206(4)-7 (the “Compliance Program Rule”) requires advisers to review the adequacy of the compliance policies and the effectiveness of their implementation on a yearly basis. However, while this& is& an annual mandate, firms of differing sizes may approach testing in a manner that best suits their firm, as the Compliance Rule does not dictate the specific methods needed to satisfy its requirements.& &
For instance, larger organizations tend to prefer the continuous testing approach. Given that these firms operate& under& strict management, continuous testing& satisfies the Compliance Program Rule, but also allows for focused, periodic reviews that help ensure that programs follow all regulations and are flexible as new regulations arise throughout the year.& &
Work Smarter, Not Harder& &
A periodic testing approach can minimize the number of resources used across the organization to achieve the requirements& put in place by the SEC.& Consistent with the SEC ‘s expectations, a holistic annual review should touch all aspects of an adviser ‘s business. Consequently, stakeholders and process owners operating in these critical areas will need to devote time and resources to address several inquiries made by the firm ‘s compliance group.& Considering& this need for firm-wide participation, a full-scale, project-based approach implicating all business units at once can create disruptions sufficient to frustrate the purpose and timeline of the review. Alternatively, choosing a few key focus areas to test each quarter avoids placing too heavy a burden on the& organization as a whole, which& can result in a more efficient exercise.&
Focused& and Effective Evaluations&
A& periodic testing approach& tends to drive a tighter focus and more potent analysis of each area of the organization.& An annual project-based approach could dilute the amount of attention given to each area of focus, which could potentially lead& to erroneous conclusions drawn from a mile-wide, inch-deep evaluation.& Breaking down the scope and areas of testing into each quarter could potentially prevent any mishaps that happen during the broader annual testing. This increased level of attention could lead to a more successful outcome.& &
The IMCT Survey shows that& personal trading was by far the most common material violation at 36% while the second most common violation was advertising at 21%. Periodic testing& can& focus in on these specific issues and help prevent& any material or glaring violations& before submitting the annual testing results to the SEC.& &
Move with Agility&
A large organization testing frequently throughout the year, or on a quarterly basis, allows more flexibility as SEC focus areas shift. Considering that the SEC frequently communicates new& areas of focus& via enforcement actions, risk alerts, investment management guidance, and no action letters, firms must be nimble enough to adjust their compliance program and testing as needed to meet any changes that may come up unexpectedly. A firm pursuing periodic& testing is privy to& SEC& priorities& as they develop& which& and& allows& the& firms& to accommodate& to& the current regulatory landscape.& &
According to the& 2021& Investment& Management& Compliance& Testing& Survey there has been& significant& changes& in& what firms consider& to be& area of focus for the SEC and& compliance& “hot topics”& trends& between 2020 and 2021, some& even& doubling in& popularity. Some of these& hot topics& for firms& include& advertising& and marketing& at& 58%& for 2021, up from the& 25%& in 2020; ESG and sustainability at& 45%& in 2021, jumping from only& 14%& in 2020;& and& a dramatic change in BCP focus at& 17%& in 2021, down from& 64%& in 2020.& Considering these drastic changes& in trends& have occurred within a year, periodic testing could help your firm move nimbly as& any& unforeseen events happen or as regulatory focuses& shift.& &
Planning and executing on a continuous testing mandate to satisfy the Compliance Program Rule is a complex and resource-intensive exercise involving multiple business units and& stakeholders. Difficulties and delays may cause firms to adjust their focus as more urgent needs come up, however, failing to meet testing mandates can subject a firm to regulatory exposure and invite scrutiny from regulators.& &
How ACA Can Help&
ACA& can& serve as a strategic partner to help firms solve their resource challenges. We& haves& significant experience in helping larger managers to supplement their internal testing efforts and meet annual deadlines. Learn more about how we can assist by contacting us& here.&
Looking to& learn how& your compliance testing& stacks up& with your peers?& Gain peer insights and benchmark your compliance program with& ACA ‘s Compliance Leaders Network (C-LEAD). C-LEAD is a new membership-based group of compliance thought leaders, backed by ACA ‘s dedicated research and analytics team and staff of experienced consultants. C-LEAD members gain access to exclusive research, benchmarking, and events designed to help CCOs and senior compliance leaders make informed, data-driven decisions on top functional challenges. Sign-up here for more information. &