It is important to advise and regularly train employees regarding what constitutes insider trading, and how best to prevent it.
As a policy, no person should be permitted to trade, either personally or on behalf of others, or cause another person to trade, while in possession of material, non-public information (MNPI) (in the US) or inside information (in the UK) that is subject to a duty of confidence, or communicate such MNPI/inside information to others in violation of the law. This prohibition on insider trading should apply without regard to whether the MNPI/inside information is obtained from activities within or outside an employee’s duties at the firm.
Employees should also be required to maintain all confidential information about the firm in strict confidence and agree that such information may be divulged only within the firm and to those who have a need for it in connection with the performance of services for the firm—for example, outside counsel.
Written insider trading policies may also address firewalls, blackout periods, preclearance of securities transactions, transaction restrictions for covered persons, and short-term trading by covered persons.
In the UK, the FCA expects that appropriate policies and procedures for regulated firms include steps designed to counter the risk of insider dealing occurring through the firm. Policies and procedures should be aligned and make reference to the firm’s insider dealing risk assessment.
UK-regulated firms should ensure that their policies and procedures cover both:
- identifying and taking steps to counter the risk of financial crime before any trade is executed; and
- mitigating future risks posed by clients or employees who have already been identified as having traded suspiciously.
The FCA also expects that regulated firms should assess and regularly review the risk that they may be used to facilitate insider dealing through a risk assessment. A number of factors should be incorporated into this assessment, including client types, products, instruments, and services provided by the firm. Firms’ assessments should also consider the risk that employees may pose. This could include:
- undertaking enhanced order and transaction monitoring on clients and/or employees,
- setting client-specific pre-trade limits, and
- ultimately declining business or terminating client or employee relationships if appropriate.1
1 See Financial Conduct Authority, Financial Crime Guide: A firm’s guide to countering financial crime risks (FCG), § 8.2.2 (Release 36, Feb. 2019).