October 26, 2020

Volume X, Number 300


October 26, 2020

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October 23, 2020

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FCA: Working from Home Heightens Insider Trading Risks

In an October 12 speech, the Director of Market Oversight for the Financial Conduct Authority (FCA) emphasized the need to adapt insider trading controls to account for changes in working conditions due to COVID-19 restrictions.

The Director’s speech started by discussing that global economic conditions have heightened the need for companies to raise capital, and that the UK has seen a significant portion of this activity, with the FCA citing the fact that “the UK saw a greater volume of follow-on equity issuance than the next 7 major European bourses combined.” At the same time, working conditions of financial professionals has changed dramatically since March 2020 with many now working from home in response to the COVID-19 pandemic. While this situation presents novel issues for firms and professionals, the FCA emphasized the need for firms to adapt and implement effective insider trading controls. The Director emphasized, “[a]t a time where capital raising activity is vital to fuel much needed economic activity, we must be crystal clear that behaviours that risk disrupting that activity will not be tolerated.”

In addition to capital raising, the rise in mergers and acquisitions has presented new challenges. The FCA warned that firms must ensure they have appropriate controls in place to protect against inappropriate activity with respect to mergers and acquisitions. As companies struggle to remain in business, and M&A transactions increase, an increased volume of inside information will be generated. Firms must “ensure that they are alert to this, and identify when during a transaction, controls become necessary.”

The current working conditions present challenges not only to a firm’s control landscape, but also what information may be considered inside information. The FCA highlighted concerns that home work arrangements could present difficulties in ensuring insiders are appropriately keeping information from partners or flatmates that now share workspaces. While these concerns have always existed, the extent of the current at-home worksite may increase those risks: “It is absolutely the case that this risk has always existed, but when the separation between work and home life is perhaps harder for some people to navigate, it may be all the more important and acute.” This line may be harder to draw in a COVID-19 world.

Further, what constitutes inside information may change “radically” during the pandemic. “[K]nowledge that an entire businesses’ operation would have to shut, or indeed could open again; knowledge of whether a company had utilized the furlough scheme or any of the pandemic lending schemes; information about the pace of cashflow burn – all issues that might either not have come up in the past, or not have been material, but which are now” could now, according to the FCA, be considered inside information.

In the speech, the FCA also addressed concerns related to an increase in the volume of trading surveillance alerts due to the increased volume and volatility in the market, specifically noting:

Firms should continue to escalate and report instances of potentially suspicious activity by considering whether the bar of ‘reasonable of suspicion’ has been met. While we understand that the exceptional market conditions may have an impact on what is judged to constitute unusual, or anomalous, the process should be the same. Firms should assess the evidence, apply context and make informed decisions. In other words, we do not expect firms to submit poor quality STORs, simply because they have had more alerts. I am happy to say that whilst we saw a reduction in the number of STORs in the early months of the crisis, we did not observe a reduction in the quality of STORs or observe a significant number of ‘missing STORs’ compared to our own surveillance of the market. In recent months, we have also observed the pattern of STOR submission returning to more normalised levels and typologies.

If a firm has a significant backlog of alerts because of the increased market activity and volatility, the FCA would like firms to advise the STOR Supervision team of the issue, its scale and anticipated timescales for clearance. If a firm must submit a STOR outside the normal timeframe, the FCA asks firms to advise them of this, and the reason for the delay.

In conclusion, companies and firms must remain vigilant regarding new challenges and issues the new remote work environment raises, including controls and processes regarding insider trading.

© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume X, Number 290



About this Author

Nicholas Wendland Attorney Chicago

Nicholas A.J. Wendland represents and advises financial institutions in navigating securities, commodities and exchange regulations. Drawing on his extensive experience at FINRA and the New York Stock Exchange (NYSE), as well as in private practice, Nicholas assists his clients in understanding and complying with securities and commodities laws, as well as regulations and rules set by self-regulatory organizations. Nicholas’ in-depth understanding of complex financial products, global regulations, and the business and operation requirements of his...

Sophie H. Gotlieb Litigation Attorney Faegre Drinker Law Firm

Sophie Gotlieb assists clients with various aspects of legal proceedings and trial preparation, including legal research and the drafting of motions and other legal memoranda.

Sophie served as a judicial extern for the Honorable Donovan W. Frank, U.S. District Court for the District of Minnesota, and as a 711 law clerk for the Cook County (IL) State Attorney’s office (Felony Trial Division). She has provided assistance on discovery requests and compilation, case management and case dispositions.

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Richard Tall guides financial services companies on regulatory, financing and transactional matters, including counseling on financial technology and digital currency issues. Richard also provides business-oriented advice to companies, limited partnerships and investment firms on corporate and M&A matters. He has particular expertise in the renewable energy and travel sectors.

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