How To Manage Employee Personal Trading Compliance

BY: ComplyLog|September 28, 2021|Employee Trade Monitoring

To strengthen the control over personal transactions and prevent insider trading, the European Securities and Market Authority (ESMA) has mandated the use of insider lists. Listed companies are required to keep insider lists of employees with access to inside knowledge of an event or trade because: 

“[Insider lists] contribute to make informed decisions in relation to personal account dealing trades, to investigate alerts following an employee trading warning, to check possible wall crossing and/or inappropriate disclosure)”

However, there are more aspects of employee personal trading compliance to consider. In October 2019, the Financial Conduct Authority (FCA) in the UK laid out its concerns over employee personal trading, or personal account dealing (PAD). The authority said 

“firms need to understand the PAD risks posed by their business models, design clear policies and processes around those risks and develop a culture where adherence to their rules is the norm. When breaches of PAD policies do occur, firms need to investigate them and, where appropriate, take disciplinary action.”

But what is considered employee personal trading and how can you stay on the right side of compliance? Keep reading to find out. 


What is Considered Employee Personal Trading?

Of course, people who trade securities for a living are also likely to take a recreational interest in doing so. These could be investment bankers, personal trading managers, portfolio managers and so on. However, due to the nature of their job, their personal trading behaviour must be closely monitored to ensure that there is no risk of unlawful actions such as insider dealing. 

Employee personal trading is any investment transaction performed by:

  • a relevant person connected with an investment business, from the board of directors down to contractors, where the transaction is either outside of the scope of their regular work or where it is carried out for the benefit of themselves
  • their family
  • their friends
  • close contacts
  • anyone else connected to the relevant person, in cases where there is a possibility that the outcome of the transaction could benefit the relevant person.

The Risks of Employee Personal Trading

The risks of employee personal training are both reputational and compliance-based. These include:

  • the risk of a conflict of interest with the clients of the relevant person’s employer. If the relevant person holds stock in a rival of a client, that could lead to issues further down the line, for example. 
  • the risk of committing market manipulation, in contravention with regulations. This includes possessing and acting on inside information. An example of this would be front-running a client’s order. If the broker knows that their client is set to buy a large amount of stock in a certain company, they could buy shares for their personal portfolio, knowing that, when they put their client’s deal through, it will drive up the price and they can sell their personal stock. 
  • the risk that they will fail to fulfil their regulatory requirement to report suspicious orders or transactions if it could negatively affect their personal portfolio. 

How To Stay on the Right Side of Compliance

It is important for investment businesses to stay on the right side of compliance and ensure their employees trade in an appropriate, transparent and law-abiding manner. There are a number of steps you should take in order to achieve this:

1. Understand the Laws and Regulations

Here are some of the main laws and regulations relating to employee personal trading in various jurisdictions:

Regulation Rules
Markets in Financial Instruments Directive II (MiFID II) MiFID II in the EU and the UK states that “an investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and tied agents with its obligations under this Directive as well as appropriate rules governing personal transactions by such persons.”

MiFID II prohibits personal trading in cases where this contravenes the Market Abuse Regulation. This could be the misuse or unlawful disclosure of confidential information or a transaction that conflicts or could conflict with the company’s obligations. 

Companies should:

  • ensure these relevant persons are aware of their obligations
  • be informed about personal trading either by disclosure from the relevant person or through procedures put in place that allow it to identify such transactions
  • keep a record of the transaction and a note relating to permission or prohibition communicated relating to it.
Market Abuse Regulation (MAR) MAR in the EU and UK prohibits the disclosure or misuse of inside information. This is defined as: 

“information of a precise nature which has not been made public, relates directly or indirectly relates to one or more issuers or financial instruments and, if it were made public, would be likely to have a significant effect on the prices of those financial instruments, or on the price of related derivative financial instruments.” 

MAR also states that: “persons professionally arranging or executing transactions should be required to establish and to maintain effective arrangements, systems and procedures in place to detect and report suspicious transactions.”

There are large potential fines for making public information that is classed as inside, as such information leaking can lead to manipulation of the market. 

Investment Advisers Act The Investment Advisers Act in the US states that advisory personnel, or ‘access persons’ with access to nonpublic information, must disclose their personal securities transactions to their employer. Registered advisers must also create a code of ethics to include the correct procedure around personal transactions. 


2. Create a Code of Ethics or Personal Trading Policy

Codes of ethics or personal trading policies are great resources that can help an investment company avoid many of the risks involved with employee personal trading. If you want to maintain the highest ethical standards and remain compliant, this is essential. Here are some recommendations for what to include to prevent a violation: 

  • requirement for pre-clearance for employee trades. This would be written permission to carry out the transaction. 
  • policy on personal trading of the company’s own securities. This may include a prohibition on short selling, short-term trading and additional restrictions.
  • Prohibit employee trades on securities the firm is analysing or recommending to clients by maintaining a list.
  • Adding issuers about whom the firm has inside knowledge to a restricted list that prohibits employees’ personal trades in those instruments. Using TradeLog, an online compliance tool, you can set parameters for allowing or restricting employee trades, meaning you can add any trade in a particular issuer if you feel that the inside knowledge your firm has as part of its duties would create a compliance issue if an employee were to use it to inform a purchase or sale of securities. 
  • Blackout periods around the time when making or recommending client trades, prohibiting personal trades in the same securities.
  • Ensure a procedure where new securities analyses are assigned to employees with no potential conflicts of interest.
  • requirement to provide the chief compliance officer or another officer with trade confirmations statements relating to personal transactions.

3. Explore Compliance Solutions

Being able to verify the integrity of your employees’ personal transactions helps you to avoid conflicts of interest and regulatory issues. However, attempting to ensure compliance manually is a painstaking and labour-intensive process that can also be open to mistakes and oversights. This is where a compliance solution can help you meet your reporting requirements. 

A tool like TradeLog can automate the process, saving time and effort required to monitor your employees’ holdings and transactions. 

It works in concert with the rules of your organisation, which you can input to ensure the platform is tailored exactly to your needs. Employees only need to open TradeLog and apply for pre-clearance for instruments they intend to purchase. The platform can then carry out the surveillance procedures to ensure staff are meeting their obligations and alert you to potential violations of your policies. 

You can set TradeLog up with pre-determined parameters so it can approve or decline applications from employees without you needing to spend time combing through the details. 

FAQs

How do investment banks monitor their employees’ personal trading accounts?

Employees should disclose their personal trading activity to their employer to ensure compliance with the law. This could be through passing on account statements or it could be through a compliance system that the employee updates when they make a trade. 

What is unauthorised trading?

Unauthorised trading includes trades that a broker makes for a client without their permission. 

Conclusion


Employee personal trading compliance is an absolute necessity, with so many regulations relating to it. In the EU, you could contravene MiFID II as well as 
MAR by failing to properly monitor your workers’ personal transactions. With high penalties for insider trading and the disclosure and misuse of inside information, for example, you cannot afford to allow this to occur. 

If you want to maintain your compliance without having to spend time and effort chasing your employees, try TradeLog. Request a demo today to find out how it can help your organisation. 

 

References and Further Reading

 

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