Market misconduct in Regulators sights
As Australia’s regulators increasingly clampg down on incidents of alleged market abuse, companies should be increasing their monitoring of trading activity by company officers and employees, according to Deloitte Forensic Partner, Chris Cass.
We are seeing evidence of the increasing regulatory activity across the media of alleged insider trading, front running of client orders or simply failure to continuously disclose price sensitive events. Recent cited examples are to be found in the oil and gas, mining, media and financial services sectors.
I believe that the increased activity can in part be attributed to a number of regulatory initiatives that have taken shape in the past three months. For example, later this year Australian Securities and Investment Commission will take over full responsibility of monitoring of market conduct and integrity from the Australian Securities Exchange.
In particular, ASIC released a public consultation document, “Consultation Paper 128 Handling Confidential Information” on 21 December 2009. This consultation paper outlines ASIC’s proposals for best practice relating to the handling of confidential information, primarily in the context of capital raisings and mergers and acquisitions for companies and their advisors. ASIC states they have “observed abnormal stock market trading immediately prior to the announcement of a reasonably high number of capital raisings and merger and acquisition transactions.”
The consultation paper and increased activity shows ASIC is focused on upholding market integrity and will seek out those who are involved in market abuse activities such as, but not limited to, trading on the knowledge of price-sensitive confidential information. Penalties are also under review.
The ASX will still continue its role of monitoring continuous disclosure and upholding its listing rules. The ASX is also addressing the topic of market integrity and transparency by issuing its own proposed rules concerning the requirement for its listed participants to maintain policies concerning the trading of company securities during ‘blackout periods’.
Efficient monitoring techniques explored through data analytics
As a result of the increased focus, companies should be reviewing and reinforcing their share trading and handling of price-sensitive confidential information policies and control infrastructure to ensure full compliance. Typically, corporate policies on personal share trading tend to be quite mature, but based on our market research to date we note that very few listed corporates have ever stress-tested their policies to determine their relevance, compliance or effectiveness.
This unconscious gap represents a potentially serious reputational risk to a listed corporate, given the increased regulatory focus.
From our experience, the first time a policy is tested is following an incident - a policy violation coming through an enforcement action from the regulators - with the media not too far behind. In the event of an issue, proposed planning and testing may be superseded by a reactive response to both regulator and media enquiries.
Deloitte Forensic’s Market Conduct Advisory Services helps clients proactively assess weaknesses in their control systems and provide recommendations to assist in the deterrence of market misconduct and mishandling of price-sensitive information. This is achieved through adopting a range of new and innovative approaches, including data analytics, diagnostic tools and mapping of operational control infrastructures.
Deloitte Share Trading Analytics is an advisory solution utilising a data driven approach to help identify unusual and unauthorised behaviour by employees and officers against a wide number of internal and external variables over an extended period of time.
This innovative solution helps companies and their compliance professionals assess their policies, monitor activities and reveal issues worthy of further investigation through:
- accessing company share and personnel records
- applying advanced data mining techniques to identify potential abuses of company policy and regulatory obligations
- offering rigorous, objective and independent analysis of trading activities.
Companies can also access:
- a diagnostic tool with dashboard reporting highlighting adherence to best practices around handling price sensitive information
- investigations into leakage of price sensitive confidential information
- deep dive reviews into front running of client orders.
For more information about market misconduct investigations, please contact Chris Cass