SEC Continues to Focus on Trade Surveillance

November 10, 2016

In 2014, the U.S. Securities and Exchange Commission (SEC) announced a sustained commitment to revolutionize its National Examination Program and Enforcement Division through the extensive use of technology to detect and combat wrongdoing, including insider trading and market manipulation. Over the past several months, we have observed the SEC staff’s technology commitment in action through various public statements and the announcement of a number of enforcement actions (both settled and ongoing) against registered investment advisers. To highlight:

  • In his "Inside the National Exam Program in 2016" keynote address at a compliance conference on October 17, OCIE Director Marc Wyatt noted, “We have developed an impressive arsenal of data within the SEC, and various groups with OCIE have been continually building the technological capabilities to utilize that data for both industry surveillance and examination work."
    See https://www.sec.gov/news/speech/inside-the-national-exam-program-in-2016.html.
  • In an SEC enforcement proceeding announced in October against a hedge fund manager and its senior research analyst, the SEC alleged that the manager did not adequately enforce its policies relating to insider trading and did not have systems in place to ensure that the firm was not trading on material nonpublic information. Among other things, the SEC alleged that the manager failed to track or monitor employee interactions with industry sources, including employees of public companies. Sanjay Wadha, Senior Associate Director of the SEC’s New York Regional Office, stated, “Hedge fund advisory firms and supervisors must take all reasonable measures necessary to prevent insider trading…” The SEC’s order noted that employee self-evaluation of insider information is not sufficient: “[I]f the nature of a particular broker-dealer’s or investment adviser’s business exposes employees to persons in possession of material nonpublic information on a regular basis, a general policy that those employees self-evaluate information they receive is insufficient to comply with Section 15(g) of the Exchange Act and Section 204A of the Advisers Act.”
    See https://www.sec.gov/news/pressrelease/2016-214.html.
  • Recently, SEC Chair Mary Jo White commented, “Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our market.”
    See https://www.sec.gov/news/pressrelease/2016-212.html.
  • And finally, in announcing its enforcement results for fiscal year 2016, the SEC noted that a number of insider trading cases “…involved complex insider trading rings which were cracked by Enforcement’s innovative use of data and analytics to spot suspicious trading.” 
    See https://www.sec.gov/news/pressrelease/2016-212.html.

We believe the SEC will continue to make substantial investments in its data analytics and surveillance tools. As a result, the old way of conducting compliance surveillance and testing through manual processes and sampling techniques will need to evolve and change with the times.

How ACA Can Help
ACA offers Decryptex®, our proprietary algorithmic-based data analytics software that provides firms with surveillance tools to facilitate more rigorous and robust oversight over their investing activities. Decryptex's algorithms test an adviser’s trading and investment positions for, among other things, issues related to the misuse of material non-public information, market manipulation, fairness in dealing, abusive personal trading, inappropriate allocations, and violate short selling. Decryptex provides firms with the tools necessary to satisfy ever-increasing regulatory demands and ensure the implementation of reasonably designed and effectively implemented compliance oversight procedures.

Attend our Upcoming Webcast on November 30
Join ACA's Ted Eichenlaub and Michael Lehman on November 30 at 11 a.m. EST for a webcast that will discuss the regulatory focus on trade surveillance and provide a demonstration of ACA's Decryptex. Click the button below to register.

For More Information
If you have any questions about the SEC's focus on trade surveillance or ACA's Decryptex, please contact Michael Lehman or your ACA consultant.