Wells Fargo is applying internal rules aimed at preventing insider trading to a larger slice of its workforce, citing regulatory scrutiny and the challenges in tracking which workers may come into contact with potentially market-moving information.
In recent weeks, the $1.95 trillion-asset bank has notified certain commercial banking employees who were not previously subject to the policy that they will be in the future. The policy requires covered employees to disclose to Wells Fargo any trading accounts that are in their own names, as well as any trading accounts maintained by their spouses, domestic partners and dependent children.
Employees and family members who are subject to the policy are required to get pre-clearance before trading stocks, bonds and options, as well as asset-backed securities. They are also typically required to hold their positions for 30 days after completing an approved trade.
Policies designed to sniff out insider trading are common at big companies, including banks. One particular concern for banks is that their employees will misuse nonpublic information that has been provided by publicly traded corporate clients.
But one current Wells employee, who spoke on condition of anonymity, argued that the San Francisco company is overreaching by expanding its anti-insider trading rules to cover workers like himself. This employee said that he does not interact with Wells Fargo’s customers or have access to customer data.
Under the anti-insider trading rules, “I have to report what my spouse does, too,” the employee lamented, noting that the two of them have until now kept their personal finances separate.
In response to the argument that Wells Fargo is overreaching, a source familiar with the bank’s position said that managing a large anti-insider trading program on a person-by-person basis would be ineffective.
This source noted that employees can come into contact with information as a result of the location of their workspace, meetings they attend and systems to which they have access. Consequently, the bank’s policy applies to more workers than just client-facing bankers, this source said.
Wells Fargo’s policy previously applied to about 35,000 employees, or roughly 13% of the company’s total workforce, a company spokesperson confirmed.
An additional 3,400 workers in the company’s Treasury Management and Payment Solutions group will be subject to the anti-insider trading policy, the spokesperson added. Treasury Management and Payment Solutions was moved into Wells Fargo’s commercial banking unit
In light of that organizational change, Wells Fargo revisited the question of which workers should be subject to the anti-insider trading rules.
Wells Fargo spokesperson Hannah Sloane said the company’s program to combat insider trading meets regulatory expectations and is consistent with policies at peer institutions.
“As a trusted adviser to our clients, we place great importance on ensuring we have appropriate risk management policies in place and, periodically, we will review these policies and procedures to ensure they remain up to date,” Sloane said.
Wells Fargo recently explained the decision to expand the reach of the restrictions in a document marked confidential that was sent to newly covered employees. The document, which was reviewed by American Banker, states that there is increased regulatory scrutiny of risk management in connection with the handling of material nonpublic information.
“Regulatory and enforcement actions related to insider trading continue to increase,” the document states, “and financial institutions are expected to implement controls more broadly to address these risks.”
The internal Wells document also cites reputational risk, which could include the risk that the bank will lose customer relationships if it fails to safeguard corporate customers’ confidential information.
The document states that it is “very challenging to maintain an inventory of every employee who may come into contact” with material nonpublic information.
“For this reason, Wells Fargo must take a practical approach,” the document states. “Maintaining a consistent and practical approach is more defensible to regulators and other oversight functions.”
In 2014, the Securities and Exchange Commission charged two former Wells Fargo employees — one a health care industry research analyst and the other a trader of health care stocks — in an administrative case that alleged insider trading. One of the men paid $75,000 to settle the charges, while the other eventually won the case’s dismissal.
Since CEO Charlie Scharf joined Wells Fargo last October, he has repeatedly said that resolving lingering regulatory issues is his top priority. After a string of scandals, Wells has been operating under a 2018 asset cap established by the Federal Reserve Board, which requires the firm to improve its governance and risk management processes.
“We still have much to do to build the right risk and control foundation, which is what our regulators expect,” Scharf said Tuesday during a quarterly earnings call. “And nothing can or will stand in the way of those activities.”
Given the volatility in markets today, it is reasonable for financial institutions to monitor the trading activities of employees more closely, said Jacob Frenkel, a former SEC enforcement lawyer.
Frenkel, who is now the chair of the government investigations and securities enforcement group at Dickinson Wright in Washington, was speaking generally, not about Wells Fargo in particular. “Pre-clearance of trades is a very prudent tool for minimizing risk to an institution,” he said.
Eric Beste, a former federal prosecutor who won insider trading convictions, agreed that the risks of employees misusing nonpublic information may be higher than usual today, given the pandemic-induced market volatility. He, too, was speaking in general terms.
“Anytime you have fast-moving events that could impact the securities markets, there’s a risk that people will take advantage of it, to the detriment of the general public,” said Beste, who is currently a partner at Barnes & Thornburg in San Diego.
