Trading Desk Practices

Trading desks, or where the sale or purchase of stocks and securities occur, should be tightly monitored by the corporation in which it is located in order to avoid a costly and time-consuming investigation or litigation by the federal government for questionable trade practices. Businesses should invest in regular internal investigation or auditing to prevent illegal trading, risking their reputation, livelihood and business. The markets have become increasingly regulated, and it is incumbent upon corporations and hedge fund managers to be aware of any changes that affect how, where and why one can trade securities.

Audits should cover a wide range of topics with securities corporations, including operations, IT security, and even third-party providers and contractors. Further, the audit plan and internal investigation policies should be constantly updated to keep up with changing regulations and technologies. They should also be done regularly – at the very least semi-annually in order to assess and monitor risk factors and risky trading.

Most companies have a statutory and regulatory obligation to investigate. There is a defensive aspect to internal investigations, in which the SEC allows the use of a ‘voluntary disclosure program,’ to conduct internal investigations and prepare reports to be disclosed to the SEC. By disclosing any irregular trading practices to the SEC, the company very often enjoys amnesty or forgiveness from questionable trades, depending on the facts and circumstances.

If a company has reason to believe that it is under investigation by the SEC or the Department of Justice based on its trading practices, an internal investigation can be an efficient way to determine whether there is any wrongdoing, and to remediate the situation as soon as possible. Further, this will show investigators that the company culture takes illegal trading seriously, which will likely cause investigators to be more willing to negotiate and work with the company in finding a resolution to the case. Further, the company will be able to determine what the actual wrongdoing is, and allow it to gather evidence and facts in conjunction with or prior to federal investigators. An attorney who is adept with securities and regulatory law will be able to assist the company in conducting an appropriate and thorough internal investigation, as well as provide good defensive legal advice, should the need arise.

Some risks to internal investigation are that first, it is possible that the company proves the SEC’s case for itself, by providing a map or paper trail of any wrong doing, particularly if the company has waived any sort of privilege or immunity. Additionally, an investigation can be costly, if hiring a third-party to lead the investigation, as well as interrupt the daily work operations of the company in order to pursue leads. Finally, an internal investigation has no legal authority against its employees – therefore, the company cannot subpoena employees or compel them to answer questions in its own internal investigation. Therefore, a cost-benefit analysis must be carefully scrutinized in conducting an internal audit of a company’s practices and procedures.

At the conclusion of the investigation, there should be a detailed discussion between counsel and the company to determine whether to publish the information gleaned in a written report, and further, whether that written report is required by law to be disclosed. If it is not required by law, then there must be an additional conversation as to whether or not the report would be beneficial if released to the SEC or other investigatory agents. Once published, the company could lose autonomy in dealing with the employee or parties who engaged in illegal trade practices. However, it might receive some amnesty or better treatment from law enforcement agencies who perceive their disclosure as a willingness to cooperate. Either way, competent legal counsel should always be sought in the event you become aware of a federal investigation concerning yourself or your company.

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