www.pwc.in Tackling the unknown Insider trading compliance
Background The term insider trading has gained prominence due to some recent events around the world as well as in India. Although this concept has attracted attention of late, it has existed since the early days of markets. Regulators across the globe have become more vigilant and are making continuous efforts to devise innovative ways to monitor insider trading activities. In India, the Securities and Exchange Board of India (SEBI), through its revised guidelines on insider trading regulations, has defined clear expectations and requirements to combat this challenge. Statements by judicial systems on multiple occasions clearly indicate that despite stricter rules and regulations, adherence to the requirement of the insider trading regulation remains a matter of utmost importance for regulators, corporates and investors. In this context, an entity s governance risk management and compliance mechanism and stakeholders have a huge role to play in ensuring compliance with these norms, in action and spirit. Recent cases suggest that despite stringent regulations/guidance from the regulators, the overall objective and essence of the law are yet to be achieved, and a lot remains to be done in this area. While presently, the larger responsibility of compliance is with the organisations to whom the regulations are applicable, we can expect a future where the regulator, equipped with centralised data and advanced analytics and tools (e.g. data analytics, digital platforms, artificial intelligence), is able to identify and investigate potential insider trading activities. Insider trading Insider trading is an event when a person buys or sells a security when in possession of unpublished price-sensitive information, thus breaching the duty of trust or confidence that the person owes to the issuer of that security or the shareholders of that issuer, or to the source of the unpublished information. It includes complex activities whereby information is acquired and passed through various channels and modes, having far-reaching implications both monitory and otherwise. Insider trading environment Threats Administrative hurdles to obtain details of board members, directors and their family members Lack of mechanism to identify high-risk communication Gap in control environment and monitoring mechanism Consequences Civic and criminal proceedings Penalty and imprisonment Loss of reputation and goodwill Barred from securities market Lack of learning and development programmes Insufficient surveillance around trading and disclosure Inadequate technological support Loss of confidence among international community Modes of exchanging information Experts Research networks Relatives and family Professional consultants Idea dinners Information on bank loans Affiliates Insiders Immediate relatives, Auditors Vendors Officers and employees, Board or management Promoters Directors Bankers Holding company Associates Subsidiaries
Suggested framework To prevent insider trading and ensure compliance with regulatory requirements, organisations need to develop a robust insider trading management framework. While insider trading frameworks are evolving, a structured approach such as the one depicted below provides a solid foundation for insider trading governance, aids in reducing legal and reputation risk, enhances the control environment and transparency in reporting, and establishes a risk-sensitive culture for insider trading compliance. Tone at the top Protecting the organisation Goals, policy and code of conduct Restriction, requirements, responsibilities Control environment: Development and implementation Checks and balances Information technology as key driver Reduced manual interventions Trainings, creating awareness, surveillance and continuous monitoring Continuous checking and updates
Framework enablers 1 Governance Tone at the top and conduct risk Effectiveness of policy, procedures, their implementation and monitoring Evaluation hierarchy and levels to gain personal benefit 2 Social media Social media policy and its effectiveness Adherence to regulator guidelines on social media Inventory of information circulation 3 KMP s accountability Adherence to disclosure requirements by KMPs and monitoring Inventory of KMP information and management of data in group environment 4 Disclosures Preliminary disclosure by employee Continual disclosure by promoters, directors, employees Compliance by consultant and person associated with company 5 Group companies Review mechanism by group company office Certification and board disclosure process Consolidate monitoring and tracking 6 Technology Identification of data points Linkages of data points to policy Single view of trades
At PwC, we believe in building solutions to address client needs. Our structured approach to monitor and manage risk from illegal insider trading focuses on key elements such as strong governance at the top through detailed trainings and a mechanism for continuous surveillance at the bottom. The suggested framework and solutions outlined below tackle insider trading from a strategic as well as a tactical and operational perspective. Diagnostic review of existing framework Regulatory reviews: Assisting entities in conducting a diagnostic review of existing status of insider trading governance. Special review/investigation for the board or committees or assistance to internal audit/compliance team in reviewing insider trading control effectiveness. Build on insider trading monitoring framework Policy development and strengthening: Assistance in the development/ strengthening of code of conduct. Assistance in compliance with requirements of the regulations and defining the monitoring mechanism. Assistance to board and senior management in monitoring insider trading compliance within the entity/across the group. Benchmarking/implementation leading practices. Training and awareness programme Assistance in creating awareness: Spreading awareness, conducting training, creating a framework for periodic learning, publishing regular updates and alerts for adherence to insider trading norms. Technological enablement Technological support: Assistance in creating a technological platform or support with technological aid.
About PwC At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 158 countries with more than 2,36,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India s service offerings, visit www.pwc.com/in PwC refers to the PwC International network and/or one or more of its member firms, each of which is a separate, independent and distinct legal entity. Please see www.pwc.com/structure for further details. 2018 PwC. All rights reserved Our Leaders Vivek Iyer Partner Risk Assurance Services vivek.iyer@pwc.com +91 9167745318 Dnyanesh Pandit Director Risk Assurance Services dnyanesh.pandit@pwc.com +91 9819446928 Gaurav Mehta Manager Risk Assurance Services mehta.gaurav@pwc.com +91 9820082799 pwc.in Data Classification: DC0 This document does not constitute professional advice. The information in this document has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take. 2018 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity. HS/February2018-12036