Review and Enhance Your Holistic Surveillance Program: A Year-End Checklist

Author

Michael Lehman, Blake Hausladen and Marc Salter

Publish Date

Type

Article

Topics

  • Regulatory Technology
  • Trade Surveillance
  • eComms Surveillance
  • Personal Account Dealing

The recent SEC “shadow trading” case, as well as the insider trading case brought by BaFin (subscription needed) against a bank employee, both signal a large-scale regulatory crackdown related to insider trading. These are a sampling of cases involving the identification of trading patterns in personal accounts that are linked back to the usage of material non-public information (MNPI) gained from employment.

Although it is impossible for compliance departments to monitor employee accounts that are not linked to their system (unregistered accounts), firms need to be aware that regulators can detect misconduct involving these accounts using sophisticated technology. So, what can firms do to capture these risks?

Best practices for capturing surveillance risks related to public and private company investing

Your surveillance program should be designed to respond to evolving risks and scale alongside dynamic market conditions that may lead to firm trading behavior that falls outside of the historical norm. Conduct regular and thorough reviews of your program to identify any gaps as well as enhancements that need to be made. Below are some recommendations from our surveillance team considering the implications of the “shadow trading” case and others like it.

Best practices:

  • Expand your firm’s control room monitoring capabilities to track and log all events and meetings with all public and private companies.
  • Enhance your firm’s investigation process to assess whether your firm and/or relevant employees possess confidential information about another comparable issuer that could be material. These enhancements could include:
    • 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
    • Scanning communications through extended policy guidelines
    • Adopt and enforce a mindset of compliance/surveillance across your firm and ensure your surveillance teams are well trained on the systems they use. The more your firm can institutionalize surveillance and educate employees how to spot misconduct, the better you can avoid fines and deter bad behavior.
    • For firms involved in private markets transactions that intentionally receive confidential information about securities issuers: 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.

Updated surveillance program checklist

As you approach year-end and budget season, it’s a good time to review your surveillance program and determine what enhancements may be needed. To help your firm do this, we’ve updated our surveillance program gap analysis checklist to include expanded reviews of public and private events, eComms surveillance, and more. Download the checklist here:

Download Checklist

How We Help

ACA’s integrated surveillance solutions are designed to help your firm manage its firm-wide conduct and regulatory risks in a way that meets expectations and industry best practices. Our offerings include consulting, managed services, and technology to provide a holistic solution for developing and executing a comprehensive and truly risk-based surveillance program.

For questions or to discuss how ACA can help your firm strengthen its surveillance program, increase efficiencies through technology, and ensure your regulatory obligations are met, reach out to your ACA consultant or contact us.