The UK Financial Conduct Authority published the results of its review of asset management firms and how they control risks associated with the impermissible trading of equities based on confidential inside information, as well as improper disclosure and market manipulation. Although FCA concluded that all firms had established “some practices and procedures to control the risk of market abuse,” the measures were comprehensive in only “a small number of firms.” Accordingly, wrote FCA, “firms need to pay more attention to the possibility of receiving inside information through all aspects of the investment process and take steps to manage this risk.” Firms should also enhance their post-trade surveillance, warned FCA. As part of its publication, FCA provided specific examples of good and bad practices various asset managers have taken to control the risks associated with insider trading.
Compliance Weeds: In connection with its review of asset management firms’ practices related to controlling the risk of unauthorized and prohibited trading on inside information and manipulation, FCA listed six steps firms should take to minimize abuse: (1) minimizing the possibility that inside information might be received but not identified as such; (2) restricting access to inside information and preventing its improper disclosure; (3) utilizing pre-trade controls to help prevent insider trading and potentially manipulative trading; (4) utilizing effective post-trade surveillance; (5) maintaining and enforcing personal account policies that reduce the risk of improper trading (e.g., pre-trade checks against restricted lists and minimum holding periods); and (6) requiring ongoing training of employees. The FCA publication provides many specific examples of how firms have endeavored to implement these steps with a characterization of their efforts as effective or not. Comparison of firms’ own practices against the FCA’s analysis might prove helpful to firms seeking to enhance their own procedures.