The Securities and Exchange Commission (SEC) is encouraging firms to review controls designed to prevent and detect unauthorised trading in brokerage and advisory accounts.
The SEC warned firms to be aware of high volumes of trade cancellations or corrections, changes in trading patterns, manual trade adjustments and unexplained profits for particular traders or clients, advising such activity may warrant additional scrutiny.
Highlighting the danger of rogue trades and trades that exceed firm limits on position exposures, risk tolerances and losses, a risk alert issued by the agency’s Office of Compliance Inspections and Examinations (OCIE), recommended firms identify any potential weaknesses that could enable unauthorised trading. Once identified, the SEC said firms should review control functions to develop enhanced controls and processes to address any new weaknesses.
“Unauthorised trading is not a new problem, and the risks it poses should be a perennial concern to financial firms as well as to regulators,” said Carlo di Florio, director of OCIE.
The OCIE said controls should address potential unauthorised trading for the firm’s own account or for a customer or client account, position mismarking, exceeding trading limits, personal trading activities of associated persons, and creation and maintenance of inaccurate or altered records.
In its latest risk alert, the OCIE advocated requiring traders to take vacations without remote access to trading accounts and using the trader’s vacation to audit the trader’s portfolio for signs of unusual activity.