One of the biggest risks affecting investment advisers is the potential that material non-public information (“MNPI”) may be misused, leading to a charge of insider trading. Advisers should implement controls to mitigate these risks.
Steven Stone of Morgan, Lewis & Bockius, LLP, Salvatore Cincinelli of the FBI and David Chaves of Tone at the Top Advisers, addressed the risks of insider trading at the recent Ascendant Compliance Solutions Strategies Spring 2019 Conference held in Miami Beach. During the session, the panel discussed the legal backdrop of the insider trading laws and process of conducting investigations, all of which inform the process of mitigating the risks.
Chaves and Cincinelli noted that insider trading investigations can go on for years, but improvements to data analytics and knowledge of the process significantly improve the chances that someone trading on inside information will be caught. Federal investigators have also built closer relationships with regulators and routinely embed agents with the SEC and other regulators.
The panel offered the following tips for investment advisers to guard against insider trading risks:
- Ensure that you have good policies and procedures in place
- Conduct training with respect to identifying and handling potential MNPI
- Consider developing information barriers to limit the possession of MNPI within the firm
- Review trading activity and identify profitable trades, in both client and personal accounts
- Identify any trends in trading activity against subsequent news releases or other suspicious patterns
- Review policies with respect to the use of expert networks, using only networks with strong compliance controls
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