The prediction market platforms, Kalshi and Polymarkets have exploded this year. In some cases, for bad reasons: Federal prosecutors are exploring whether prediction market bets trip insider trading laws.
The markets are not supposed to be taking predictions on the movements of securities. That would make them a derivative of a security and subject to the Securities and Exchange Commission’s regulatory framework. Therefore, they don’t have to be monitored under a registered investment adviser’s supervision. The prediction market account shouldn’t meet the standard that requires reporting under 204A-1.
There is sill the possibility of trading in a prediction market on Material Non-Public Information in a way that doesn’t involve a security. An employee could bet on some corporate event they learn about through the investment adviser that would move the stock. Look at Kalshi in the Apple App store. It’s listed as a “finance” app.
For instance, Kalshi currently has a bet on when SpaceX will officially announce and IPO, before June 1 (currently 0.23) and before July 1 (currently 0.76). There are people at investment banks, affiliated with a registered investment adviser or broker-dealer who know that answer.
There are a lot of company performance bets that you can make on the prediction markets. If you have MNPI on that performance you could make some cash. This might even be a more direct way to make money on MNPI than stock trades. One bet on Kalshi is the number of Uber trips in Q1. That may or may not move the stock price. Other factors could come along.
But… Is that trade on Uber trips using MNPI securities fraud? Or wire fraud? Maybe its outside the scope of SEC jurisdiction and securities laws.
What to do?
Monitor? I’m not aware of any feeds to be able to track activity. I suppose you could ask for some form of account statements. The platforms are not really set up for compliance.
Block access?
Its fairly easy to set up a URL block on your firm’s network. That sends a sign. Of course, that doesn’t stop them from making the “predictions” on personal devices.
Ban your employees from using prediction markets?
Possible. The US Senate just did that.
Certifications?
For sure. Maybe not as part of your 204A Code of Ethics, but a separate policy.
Sources:
- Prediction Markets and Your Compliance Program – Conflicts of Interest and Reputational Risks by Lisa H. Bebchick, Amy Jane Longo, Sean Seelinger, Kathryn Daniels of Ropes & Gray
- Exclusive: Federal prosecutors are exploring whether prediction market bets trip insider trading laws
- Senate bans senators from prediction market trading by Jordain Carney