Corporate governance and regulatory tech to reduce insider trading risk

Whether intended or not, employees have more opportunities than public companies fully understand to engage in trading activity that puts their employer at risk — be it in terms of reputation, credibility, trust, or market perception. Digital Asset recently hosted a webinar featuring a number of experts with a focus on mitigating the risks that can lead to trading violations. They discussed challenges stemming from manual record keeping, misunderstood and difficult-to-follow policies, differing blackout periods, and more. You can watch the recording here.

Editor’s note: The following experts were featured in the webinar 

Amanda Mark, Managing Director, Regulatory Consulting, MIntegrity

Charly Duffy,  Director, Corporate Services, Coghlan Duffy & Co. 

David Beros, Chief Product Officer, Digital X 

Lomi Hou, AP Business Development, Digital Asset

Below are some key challenges discussed, as well as things to consider in avoiding them. 

 

What are the main areas enterprises can affect today to mitigate risk?

Broadly speaking, record and calendar keeping, strong policies and procedures, data governance and strict access to information, education of employee stockholders and approvers, rules enforcement, and thorough documentation are key.

 

Team-wide education is paramount 

Who is restricted from trading, and when? It’s important to clearly explain both the policies and the lifecycle of company shares. Employees need to understand the reasons behind policies, so it’s important to clearly articulate insider trading and market manipulation. They also need to understand material non-public information (MNPI) and price-sensitive information. For example, when or if private information leaks out through social media or to close friends and relatives, this information cannot be used to make trading decisions. On an individual level, employees and approvers should know where their shares are in the life-cycle. Management should integrate those policies into corporate documentation and procedures, and train staff on these policies regularly.

 

Record and calendar keeping 

Ensure trading employees and approvers are aware of blackout periods. Staff should be empowered and aware of non-financial risks and continuous disclosure and reporting obligations. If management takes steps to ingrain this in company culture, then there is a much higher likelihood of cautiousness and compliance.

 

Enforce the rules

Data governance is key. Charly Duffy of Coghlan Duffy & Co. spoke to the benefits of disseminating information only to select parties who need to know, which makes the approval process easier — in essence, approvers will know who is aware of what MNPI, and they can match approval information with a particular trade. Seeking approval should therefore be on a case-by-case, manual basis. As an example, there is a benefit to executives sharing pending deal information to energize an organization, but they must be aware of the risks of sharing too broadly, as it could lead to too many people having access to MNPI.

 

Policies and continuous disclosure obligations

Building an immutable digital audit trail, including the need to review and approve, will help with verification. Concise record keeping for internal and regulatory needs can simplify implementation. 

Once policies are written, they need to be integrated into procedures. Enterprises should consider including offer documentation, delegation of authority, timing conditions, expiry dates for option exercising, statement issues, and so on.

Amanda Mark, Managing Director, Regulatory Consulting, MIntegrity, explained that companies need to manage both financial and non-financial risks by reporting when appropriate and being careful to demonstrate that the right rules and regulations were followed. Controlling the flow of data and reacting when necessary is essential. The right technology that facilitates policy alignment and process automation can help ensure your staff is trading on material non-public information and staying within regulatory guidelines. 

Management should look for ways to minimize manual processes. Automation helps save time, eases record keeping, and allows for quick reaction if a regulatory request or similar event arises. Having a handle on records makes it easier to be aware of blackout periods and provides a clearer way to track which part of an individual life cycle a holder’s shares are in. Understanding all of this  information makes reconciling, approvals, and enforcement easier. 

As Lomi Hou from Digital Asset’s APAC Business Development team discussed, regulatory risk mitigation should be considered from day one — from the design and development stage. Organizations should look at end-to-end journeys, and fully digitize processes and synchronize workflows wherever possible. This  minimizes reconciliation efforts, as it helps to translate policy into workflows, including anti-fraud and know-your-customer (KYC) considerations to enhance operational, legal, liquidity, and market risk mitigation. Daml and smart contract technology are incredibly useful here, by allowing developers to focus on business logic, and also by providing for the privacy, scalability, and ease of connection that is critical in large public organizations with disparate systems. 

 

Drawbridge for digital governance 

These challenges outlined above can be addressed using new technologies such as Drawbridge, a RegTech solution built with Daml that helps companies safeguard against corporate governance disasters involving securities trading policies. Learn how our partner Digital X’s Drawbridge solution mitigates this risk and promotes trust by managing the end-to-end lifecycle, from issuance, to management, to compliance approval, to trade for employee and director shares.

Watch the webinar replay here.