Compliance chiefs eye insider trading risks in the new WFH era

Hedge fund firms want their employees to know they are still being monitored even if they are working from their living room couch.

Back in March, the U.S. Securities and Exchange Commission issued a warning of the higher risk of insider trading and said it would devote substantial resources to enforcement during this crisis. Stephanie Avakian and Steven Peikin, the co-directors of the SEC Division of Enforcement at the time stressed the importance of maintaining market integrity in these “dynamic circumstances” created by COVID-19.

“When the SEC put out their advisory on insider trading, the next day me and the CCO were reaching out to employees and using it as a talking point to show the regulators are focusing on this and it’s something we take very seriously,” said the COO of a New York-based multi-strategy hedge fund who declined to be named.

He now has been regularly reaching out to different employees of the firm to see if they have had any issues generally, but also brings up topical issues, like insider trading, as a segue into the firm’s policies and procedures.

With market volatility combined with the general health and economic crises, there is a higher risk of bad behavior on the part of hedge fund employees working from home with less direct oversight coupled with access to confidential information, according to experts.

And this is why hedge fund firms have implemented training around insider trading and increased communications with employees.

The GC/CCO of a U.S.-based systematic manager said, “The SEC’s advisory was a great way to make the issue topical and do a round of training on insider trading risks and our own policies and procedures.”

Peter Greene, the vice chair of Lowenstein Sandler’s Investment Management group, said training is a cornerstone of monitoring information sharing and trying to educate employees about where the lines of insider trading lie.

“Most CCOs took that as a chance to speak with their teams and remind them of their obligations under the law and the firm’s insider trading policies and procedures,” Greene said.

Regulators too are watching how firms monitor for and try to prevent insider trading and market manipulation.

The CFTC also said it has a similarly aggressive view of potential insider trading and market manipulation, with director of enforcement James McDonald warning that the agency “will aggressively pursue misconduct in our markets tied to the impact of the coronavirus pandemic.”

Federal prosecutors will also be looking into cases of potential insider trading or market manipulation as there is a greater potential for violations.

As FBI special agent Tracie Razzagone explained, “When you have more people out of the office environment, it lends itself to a little more ‘fast and loose’ behavior because there is the perception that you are not being watched and monitored when you’re not in the office environment.”

Additionally, Razzagone said that many people have lost their jobs and some people are desperate for money, making others more inclined to try to “help” them by sharing inside information.

As no firm wants the reputational harm of an insider trading investigation of one of its employees, Greene said in addition to training, firms should also review their cybersecurity policies and procedures and provide adequate resources for IT staff to avoid inadvertent employee exposure or hacking of market sensitive information.

However, Razzagone noted that firms have generally done a good job in the past of training employees on insider trading and monitoring activity for red flags. “I think the best advice is to keep your foot on the gas the way you always have and just don’t ignore what you’ve done in the past,” Razzagone concluded.

Jennifer Banzaca

Jennifer Banzaca has been a reporter and editor covering the hedge fund industry for 14 years, most recently focusing on legal and compliance issues.

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