Can the SEC and FSA really stop insider trading?

It’s funny and amazing how many ways we communicate these days as, being in the USofA, I’m in a meeting where we are all twittering, emailing, text messaging, Skyping … you name it.

This makes it interesting from a regulatory and communications perspective with banks, as tracking who’s saying what to whom through what medium is becoming far harder to monitor, maintain and manage, especially as new forms of communication appear every day.

By way of example, I’m staying in a hotel this week where there is no television and no Skype available.

There’s Wi-Fi on tap for free throughout the hotel, but they’ve blocked the Skype streaming capability to ensure you use the hotel phone, especially as cellphone coverage is also limited.

As a result, I’m enjoying TV on my iPad, watching non-stop episodes of favourite TV shows on YouTube and Netflix, and making calls and messaging through Viber rather than Skype.

This makes me realise that just as kids began using text messaging to avoid POS – Parent Over Shoulder – the world’s communication systems are gradually eroding, evolving, adapting and changing to accommodate our new digital lifestyles.

Does this matter?

Of course it does as the regulators think banks should know everything their employees tweet and update.

From status updates on Facebook, QQ or other, a bank is meant to track their people’s every screen wipe, button push and keyboard touch.

For example, in January 2010, FINRA (the Financial Industry Regulatory Authority) in the USA issued specific guidance about social media, stating that:

“Every firm that intends to communicate, or permit its associated persons to communicate, through social media sites must first ensure that it can retain records of those communications as required by Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 and NASD Rule 3110 … firms must supervise these interactive electronic communications under NASD Rule 3010 in a manner reasonably designed to ensure that they do not violate the content requirements of FINRA’s communications rules.”

The latest version of these rules come into effect in December 2011, and effectively say that records must be kept for six years with a recording of the name of the agent(s), if any, responsible for an account.

This sort of directive is actually baloney in an environment where I can easily find any mobile = method to avoid the capture of my thoughts.

A few years ago, it was simpler to regulate – you just tracked emails – but today it’s virtually impossible, as demonstrated by the use of Blackberry Messenger (BBM) in the London riots last week:

“BBM allows users to send one-to-many messages to their network of contacts, who are connected by ‘BBM PINs’. For many teens armed with a BlackBerry, BBM has replaced text messaging because it is free, instant and more part of a much larger community than regular SMS. And unlike Twitter or Facebook, many BBM messages are untraceable by the authorities.”

This led to the UK Prime Minister, David Cameron, calling for the shutdown and reporting of social media usage of this nature, and pressure on Blackberry to support such process.  Even MI5- the domestic verson of James Bond's outfit, MI6, also known as Spooks - have been asked to jump into the fray and help out by decoding BBM messages*.

The reaction was overwhelmingly that this was an attack on free speech, and that David Cameron's call to act against social media was not right.  Perhaps it was articulated best by online community Zero Paid with the line: “You know your internet censorship plans are too strict when China praises you for it.”

It was also just as Facebook and Apple launched equivalents to BBM with Facebook Messenger and Apple’s iMessage.

In other words, communication is out of control and if the UK authorities have no chance of managing online communications, how the financial authorities expect to manage such dialogue is beyond me.

Hence, insider trading – something that’s been in the news a lot lately thank to the McKinsey case – is not only likely to continue, but to grow in nature and substance.

This is particularly true as apps, the mobile internet, devices and the ability to communicate becomes cheaper, more ubiquitous and less easy to trace and track.

Result: the easier communication becomes, the more likely that this complex mesh of discussions will elude both the financial and political powers that be.

 

* I don't think James Bond can help as he's sponsored by Sony Ericsson who don't even have a messenger service yet