The United States government is taking another pass at defining what exactly constitutes insider trading – and nearing resolution on one aspect of this challenge at the highest of legal authorities, the Supreme Court. What began in 2014 with the highly publicized Chiasson-Newman decision in the federal appeals court in Manhattan should soon come to an end in November with a decision on Salman v. United States, 15-628 by the Supreme Court. The question at hand: if prosecutors cannot prove that the recipient of a tip knew their tipper was an insider and that said tipper was receiving a “personal benefit” as a result of their leak, can they prosecute the recipient of the information for insider trading?
The impact of this decision will likely not result in any radical change in the way CCOs protect their firms from the potential reputational and financial damage caused by the leak of Material Non-Public Information by their employees. However, the spotlight placed on this issue reminds us once again of the rapidly changing regulatory landscape for both companies and prosecutors.
What will this ruling mean – in either outcome – for compliance officers?
Either ruling reinforces the growing importance of the CCO and compliance departments – positions that we have seen elevated to the board level in recent years. Compliance professionals have been forced to move beyond ‘check the box’ mentality to being responsible for building a culture of compliance within an organization. From the 2008 financial crisis to the recent headlines about Wells Fargo – cultivating a corporate culture, where a clear code of conduct is understood and actually practiced at all levels is key in mitigating people-based risk, such as insider trading. Regardless of the outcome of the Supreme Court’s deliberations, expect more calls for more rigorous and formal examinations of compliance culture across organizations, along the lines of FINRA’s recent decision to “formalize [its] assessment of firm culture to better understand how culture affects a firm’s compliance and risk management practices.”
Better data becomes critical
The Supreme Court debate will largely surround defining insider trading – but even with a more precise definition, the volume of data flowing through organization and the growing interdependencies that exist between employees within and outside the boundaries of their organizations make it increasingly difficult for compliance professionals to derive insights out of the noise. Harnessing better data and tools is becoming a critical requirement for compliance officers seeking to manage risks proactively. By having the tools to normalize and integrate third party data with their own, and with advanced analytics that allow them to identify questionable activities before they lead to actual misconduct, compliance officers can operate from a place of informed knowledge.
Match the regulators’ capabilities
It should surprise no one to hear that the number of enforcement actions brought by regulators on insider trading and other compliance areas has risen dramatically over the past few years. Regulators are ramping up the use of automated technology and data centric solutions to conduct investigations and audits. The SEC alone uses over twenty different technology and data solutions to aid in their examinations and investigations. In turn, we believe that regulators will increasingly expect the organizations they monitor to demonstrate that they are exerting the right standards of care and sophistication as well. It is imperative that companies invest in sophisticated data-centric compliance solutions that can arm CCOs with a fully integrated platform to not only streamline compliance workflows, but to truly derive actionable insights on what’s happening under their watch.
While we believe that the Supreme Court’s decision in November will provide some clarity on what constitutes insider trading, our mission at ComplySci remains the same – to continually provide the best data-centric insight, tools and technology that chief compliance officers and their compliance staff need to proactively safeguard their firms against employee behaviors that put their organizations at risk.