National Bank to crack down on conflict-of-interest trading

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National Bank of Canada is barring its financial markets employees from trading stocks for their own personal accounts, scrapping an often-lucrative perk for high-powered Bay Street traders.

The policy, set to take effect in March of 2016, is aimed at removing any risks of conflict of interest in trading for both client and personal accounts, the bank told employees in an internal memo.

It has caused consternation among some staff. Such trading, benefiting from a wealth of real-time market intelligence and expertise, can make up a large chunk of income for some, sources say.

The new rules will cover front-line employees such as investment bankers, traders and analysts, but will also extend to back office and support staff.

"The changes … will help us reduce the potential for actual or perceived conflicts of interest, regulatory risks and support our focus on the business of our clients and the bank," wrote Ricardo Pascoe, executive vice-president, financial markets with National Bank Financial Inc. in the memo sent to staff on Sept. 17

It has long been common on Bay Street for financial-services employees to be able to trade for their personal account. Most capital-markets arms of the big banks allow traders to buy and sell stocks – even while on the job – as long as they do not put their own interests ahead of clients, or use information gleaned from a client to execute a favourable trade for themselves.

The employees benefit by having access not to inside information that is illegal to trade on, but to deep market intelligence, real-time data and momentum within shops where some of the country's top traders work. During bull markets, some employees have made more money in personal-account trading than in salary and bonuses.

Under National's new rules, employees would still be able to trade "managed products," such as mutual funds and exchange-traded funds (ETFs), but are forbidden from trading individual stocks. For employees that already own a stock portfolio, they have two choices – liquidate, or hand over management to a portfolio manager who will then have sole responsibility for buying and selling individual stocks.

The move appears to be a first for a Canadian bank. Under the current regulatory regime, banks must monitor the activity of employees such as traders to make sure they are not putting their own interests ahead of those of their clients, but there is nothing expressly prohibiting them from buying and selling shares for themselves.

Canadian Imperial Bank of Commerce, for instance, requires sales and trading staff to get approval before conducting personal trading. Monitoring is in place to ensure rules are complied with, CIBC spokesman Tom Wallis said.

Royal Bank of Canada also allows such trading under some stipulations.

"This is a cultural change and cultural change doesn't necessarily come easy," said Brian Davis, co-chief executive officer of National Bank Financial Inc., in an interview.

"We've encountered some level of disappointment, frustration, resistance. I don't think it's widespread, but I do think that there are employees who are disappointed with the direction we're taking."

Mr. Davis added that management will listen to any employee concerns about the new policy and "may entertain other variations" of the rules, but he doesn't expect to backtrack on the decision.

Even if the decision irks employees, or causes traders to jump to other shops that allow them to trade stock for their own accounts, it could also potentially give the bank an edge vis-à-vis competitors. National will be in a unique position to tell its clients that its employees operate in a truly conflict-free zone – something other banks are unable to guarantee their clients.

However, one Bay Street human-resources professional said it may "make it less of an attractive place to work for the market-savvy sales people and traders." That is, at least until other financial institutions follow suit.