Saturday, August 04, 2012

Japanese Financial Services Agency Orders Internal Control Remediation after Findings of Insider Trading at Global Investment Firm


As part of an increasingly global crackdown on insider trading, the Japanese Securities and Exchange Surveillance Commission recommended administrative action against a global investment bank based on findings that the firm failed to take measures to prevent illegal insider trading with regard to the management of confidential corporate information related to public offerings of new shares. Under such circumstance, employees at the firm solicited customers to trade in securities and conduct other trading by providing confidential corporate information. The Commission also found that the firm’s governance system was inadequate given that its management team did not exercise effective control of the system for managing confidential corporate information. The recommendation was made to the Financial Services Agency, which then ordered the firm to implement measures to improve its internal controls in order to prevent a recurrence of this conduct and periodically report to the FSA on the effectiveness of these remedial efforts. Nomura Securities Co. Ltd, August 3, 2012.

The Commission found that a member of the institutional equity sales department who was in charge of sales to hedge funds made aggressive attempts to contact an internal analyst and obtain any information related to public offerings of new shares. The internal analyst carelessly replied to sales personnel with regard to the status of internal control in the trading compliance department concerning stock issues scheduled to be publicly offered. Within the institutional equity sales department, confidential corporate information related to public offerings was shared on the assumption that it would not be inappropriate for the department's employees to mention the names of shares to be issued in relation to such information obtained as long as it is treated as "a rumor" or something similar in their conversation.

According to the Commission, a manager of the institutional equity sales department made sure that the top priority of the sales operation was to generate profit throughout the department. As a result, a lack of compliance awareness arose, leading to inadequate management of confidential corporate information related to public offerings of new shares. Based on the careless notion that there was no problem even if they could guess the specific names of the companies concerned through their conversation as long as they did not directly ask for those names, said the Commission, a member of the department routinely made active efforts to obtain confidential corporate information related to public offerings and information from which the names of the relevant stock issues may be guessed from another department holding such information and used the information obtained in order to promote sales.

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