Computer Forensics Help Fall Accused Insider Trader
Mark S. Enslin
A former Bristol-Myers finance executive pleaded guilty earlier this week to an insider trading charge, admitting to buying stock options in a biotech company that Bristol-Myers was preparing to buy. As part of the plea, the executive agreed to forfeit $311,361 in allegedly illegal profits, and he now faces a maximum of 20 years in prison and $5 million fine when he is sentenced later this year.
This relatively innocuous insider trading case is interesting for at least two reasons. First, it’s a good reminder that insider trading remains a high priority for the SEC and other regulators. In fact, over the past three years, the SEC has filed more insider trading cases than in any three-year period in the agency’s history. Many of these actions involved registered representatives, hedge fund managers, corporate insiders, and other financial professionals who conspired in various forms to trade on non-public information.
The second interesting aspect of this case is what investigators revealed was one of their key pieces of evidence: they were able to trace the fact that the executive had run a series of Internet searches on insider trading detection just prior to some of his trades, including a review of an article entitled “Ways to Avoid Insider Trading.” Technology continues to evolve at an astounding pace, and the effects of that evolution on the securities industry will continue to be significant. When the SEC is able to utilize such technology on the back end to apprehend those who violate the securities laws, it’s only a matter of time before the SEC and other regulators will expect those in supervisory positions to utilize that same technology on the front end to attempt to stop the violations before they occur. Supervision of Internet usage, so called “social media” websites, and other electronic media remains a “hot button” issue and will only continue to grow in importance.
Suitability Headlines Regulatory Focus
Christopher A. Grgurich
Two weeks ago I attended the Securities Industry and Financial Market Association (SIFMA) regional legal and compliance meeting held in St. Louis, Missouri. Three weeks earlier I attended the annual FINRA conference held in Washington, DC. Speakers at both conferences emphasized a number of changes that have and would continue to be made at the regulatory level including spending a fair amount of time discussing fallout from the new suitability rule implemented last fall and the fact that only 38% of Dodd-Frank has been implemented to date, leaving a number of questions unanswered chief among them for broker dealers being the potential end of mandatory arbitration and whether a potential fiduciary standard may be looming for broker-dealers.
While discussion over a fiduciary duty standard for broker-dealers and mandatory arbitration have seemingly stalled for the time being, with regard to suitability, industry panelists and regulators alike agreed that implementation of the new rules has not come without unique challenges and hundreds of questions being lodged by member firms. One question relayed to the audience had to do with oversight over a portfolio containing both security and non-security components and whether and/or how far a suitability analysis would be applied to the non-security. Generally, everyone on the panel thought that the security component would be subject to the suitability analysis where as the non-security piece of the portfolio would be analyzed under an outside business activity standard. In terms of exams, FINRA regulators said that their focus for the next year is on complex products and those selling them. The regulators are focusing on whether the registered representative understands the products being sold, how the firm is making sure the registered representative understands the products, and what training the firms have in place. Regulators are concerned that uneducated registered representatives may not appropriately evaluate whether a particular investment is suitable for the client if the broker does not know how the product works. And the related concern is that a customer may not be able to make an informed investment decision to purchase the product based on erroneous or materially incomplete information.
Another point worth mentioning and one that is playing itself out right now is the Staff’s increased effort to examine branch offices other than the home office—the thought being that most conduct questionable in the regulators’ eyes is likely taking place at an office other than the one in which a firm’s compliance function resides.
A final point worth noting is that views concerning FINRA’s more risk-based approach to conducting examinations were generally positive. In other words, by identifying a firm’s lines of business ahead of time, and exam more tailored to the firm’s business can be structured thereby eliminating or at least reducing inapplicable questions or requests for materials—issues which have frequently arisen in past years.