How Brokerage Firms Can Use RRA to Reduce Liability for Insider Trading
If you keep an eye on the financial news, you might notice a trend. It seems that more and more company executives are getting caught engaging in insider trading. It is not that brokers are acting more unethically now than they did in the past, but more so that big data is making it much easier for the SEC to find insider trading potential. The SEC uses data mining to comb through thousands of employment and stock trading records to find connections between individuals they would never have found in the past. But when those insider traders are caught, it’s not just them paying the piper. As the firm who hired them, you will find yourself having to pay, too—and it won’t be small change.
If the SEC is using technology to catch insider trading, it only makes sense that brokerage firms leverage new technology to prevent insider trading. Using Remote Risk Assessment (RRA) as part of compliance questionnaires can help weed out higher risk individuals whose unethical actions could have very serious implications for the firm who hires them. Technology like RRA can help protect against the fines, stock losses, and even bankruptcy that can befall a company whose employees go astray. It can also act as due diligence evidence if the worst happens down the road.
The Risks of Insider Trading to Brokerage Firms
Consider the case of Matthew G. Teeple, a former senior analyst at Artis Capital Management, who used inside information to broker about $30 million in illicit deals. Teeple used his position as an analyst to get others to purchase stocks using his insider information. He pled guilty in May and was sentenced to five years in prison.
But the problems from Teeple’s insider trading weren’t over for Artis. During the SEC investigation, it was determined that the company knew or should have known that Teeple was using insider information and failed to have policies in place to prevent this. In the end, the firm was fined $9 million for its part in failing to prevent Teeple’s scheme.
Failing to prevent insider trading is just as bad as insider trading itself, per the SEC. That’s why it is so crucial to have procedures in place to weed out people like Teeple, who don’t act ethically appropriate. Insider trading creates an uneven playing field that undermines the credibility of the entire equity system and can cost your firm extraordinary amounts of money in penalties.
Moreover, on top of the risk of fines, it’s important to consider the damage that an insider trading accusation can cause to your company, even if it has not yet been substantiated. Recently, Hexagon AB has been in the news as its CEO is investigated for insider trading activities. Though the company denied the charge and is standing behind their CEO, it appears the public is not. The company’s share price dropped by 11 percent once the investigation hit the media, and it continues to tumble.
It is crucial to ensure that your firm has a well-known zero tolerance policy on insider trading. Even a rumor of insider trading can be enough to seriously damage a company, and if that rumor becomes fact, a company may never recover.
Leveraging RRA to Prevent Insider Trading
Having no policy or weak policies to prevent insider trading is not going to protect your firm from backlash in the event of an unethical employee. The best way firms can protect themselves is by showing they made every single effort to monitor for and prevent these activities. This is where RRA can be used both to vet employees before they are hired, and as a means of maintaining compliance.
RRA is a biometric technology risk-assessment decision-support tool. Delivered by automated telephone interview, it uses closed-ended questions and “yes” or “no” answers to assess the risk of an individual. An RRA interview results in a risk level being ascribed to the interviewee. A higher risk level indicates that someone should be more closely scrutinized.
RRA can be leveraged to prevent insider trading during pre-employment and annual compliance vetting and screening. The individual being screened could call into an automated interview and would then give a “yes” or “no” answer to a series of direct questions. The result is a risk rating that gives a valuable data point to the company.
Clearspeed is currently offering this technology to brokerage firms as a means of staying in compliance. By using this technology, firms can show the SEC that they are making a concentrated effort to monitor for and prevent insider trading, by conducting technology-based risk assessments, while also ensuring their employees behave ethically. For more information on using RRA technology at your brokerage firm, contact AC Global today.
Image Source: Unsplash user Ruth D