Prediction market contracts initially gained popularity as a way for people to engage in sports betting, but have evolved to mimic financial derivative products with little institutional oversight.
As more platforms become available and contracts rise in popularity, in-house compliance teams should take notice of the potential risks associated with employee engagement with prediction market contracts. As offerings continue to outpace regulation, firms need to define and implement a proactive strategy to manage risk by adapting policies to align with available tools, their people, and regulatory feedback.
Predominantly led by Kalshi and Polymarket, prediction market contracts now span election outcomes, military operations, and even corporate performance metrics that resemble capital market derivatives.
Legacy retail brokerage platforms now include prediction market contracts tied indirectly to companies’ financial performance. What once required a traditional derivative on an underlying security can now be accessed through prediction markets, disrupting the retail investing model and raising questions about how firms monitor employee investment activity.
Recommendations for compliance teams
Section 15(g) of the Securities Exchange Act of 1934 and Rule 17j-1 of the Investment Company Act of 1940 were implemented to ensure that personal securities trading by firm employees with access to material non-public information (“MNPI”) is conducted free of any actual or potential conflict of interest. The U.S. Securities and Exchange Commission (“SEC”) expects and requires registered firms to actively take steps designed to prevent employees from engaging in conflicted transactions.
While the Financial Industry Regulatory Authority (“FINRA”) has not explicitly announced an intent to monitor prediction markets, the 2026 FINRA Annual Regulatory Oversight Report included a focus on manipulative trading, citing several existing FINRA rules that prohibit certain organizations from engaging in impermissible trading practices. Among other things, FINRA communicated:
“Under FINRA Rule 3110 (Supervision), firms are required to include in their supervisory procedures a process to review securities transactions that is reasonably designed to identify trades that may violate the provisions of the Exchange Act, the rules thereunder, or FINRA rules prohibiting insider trading and manipulative and deceptive devices that are effected for accounts of the firm and its associated persons.”
Given the scope of SEC Rule 17j-1 and FINRA Rule 3110, new rule adoption may not be necessary, but firms should start determining how to handle surveillance of employees’ engagement in prediction markets. Initial steps to consider would include:
- Connect relevant stakeholders in compliance, legal, and the business to determine the firm’s position and evaluate feasibility, risk appetite, and broader strategy goals.
- Review existing policies and procedures to evaluate which can be adjusted and which may need to be created. Simply reminding employees they are not allowed to act on MNPI is likely not a strong enough defense for future regulatory scrutiny.
- Research available technology solutions for surveillance efforts. Compliance vendors now offer off-the-shelf tools to monitor contracts similarly to automated broker feeds.
- Set clear expectations for employees. Ideally, firm communications should be direct and include explicit acknowledgment of what is and is not allowed – doing so can make it easier for employees to stay compliant. Although some platforms require users to provide employment information before accessing certain contracts, it does not mitigate a firm’s requirements to monitor employee activity.
- Maintain an open dialogue with regulators to determine potential future regulatory expectations. When possible, solicit feedback and ask questions about the firm’s proposed efforts to monitor employee behavior.
Regulators are taking notice of prediction markets
Many firms have established extensive compliance programs to monitor employee trading: requiring employees to pre-clear trades and not act while in possession of MNPI, and setting up real-time broker feeds for trading surveillance. Prediction market contracts create a new avenue for trading activity to occur outside existing compliance controls.
The SEC continues to investigate market manipulation, insider trading, front running, and spoofing. As recently as May 6, the SEC announced charges against 21 individuals for insider trading while in possession of MNPI relating to corporate transactions. With respect to prediction markets, the Commodity Futures Trading Commission (“CFTC”) recently issued a $35,000 fine to former Congressman George Santos for betting on his own attendance at the State of the Union address on Kalshi.
Based on enforcement activity like this, there is regulatory appetite to ensure market integrity and prevent investor harm, and there is potential for enforcement action against those leveraging prediction market contracts in lieu of legacy derivative products to avoid detection.
Regulatory priorities are not anti-market
Regulation of prediction markets has largely been under the jurisdiction of the CFTC, and on June 10, 2026, the CFTC announced a Notice of Proposed Rulemaking regarding event contracts. Specifically, the Commission is considering restricting registered entities from offering certain contracts related to illegal actions (e.g., terrorism); however, there are limitations to this notice:
- It starts a 90-day review period
- The notice did not suggest any new proposed regulation on derivative or option-like contracts
At present, the SEC appears more focused on expanding access to prediction market contracts than adding regulation. The Commission is currently evaluating the creation of Exchange-Traded Funds (“ETFs”) tied to prediction market contracts. Although the SEC has paused Roundhill Investments’ launch of an ETF based on Kalshi’s contracts (among others), the suspensions are expected to be temporary.
Despite the mixed signals, there are plenty of reasons for firms to address the risk posed by employees using prediction markets unchecked. Regulatory hindsight standard-setting has a longstanding precedent. There is little reason to believe the prediction markets will be different.
Alma Angotti is a recognized expert in financial crime compliance and economic sanctions with more than 30 years of experience in both regulatory enforcement and global consulting. Alma has held senior enforcement roles at the U.S. Securities and Exchange Commission (SEC), the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), and the Financial Industry Regulatory Authority (FINRA).
Michael Herde is a global compliance and risk management executive with 35 years of experience, including as chief compliance officer. Michael’s expertise includes wealth management, asset management, fiduciary, and investment and consumer banking for both public and private companies.
Tyler Paretchan is a managing director in the Financial Services practice at FTI Consulting and has almost ten years of direct client experience serving financial institutions and law firms. His experience includes matters under review by the SEC, FINRA, CFPB, Federal Reserve, and others.
