Firms can mitigate insider trading-related risks by prescribing whether and when employees may transact securities.
Preclearance policies prohibit employees and agents from engaging in any transaction involving the firm’s or other securities without first obtaining preclearance of the transaction from the firm’s chief compliance officer, chief financial officer, or some senior officer with similar responsibilities. Companies should appear on the restricted list at any time the firm has received or expects to receive material, non-public information (MNPI)/inside information regarding the company. The placement of a company on the restricted list should restrict all trading in the designated company’s securities by the firm and its employees unless an exception is granted by a firm’s chief compliance officer or by some other individual with similar authority and responsibility within an organization. A company placed on the restricted list ordinarily should not be removed from the restricted list unless and until the relevant transaction or other MNPI/inside information has been announced, has otherwise become a matter of public record, or is no longer material.
A firm’s personal account dealing policy may require employees to request consent prior to acquiring or disposing of listed securities.
Firms, particularly issuers, may also establish policies that designate periods during which trading in specified securities is permitted (windows) and periods in which it is not (blackouts).
In the UK, issuers of securities and persons acting on their behalf must abide by specific rules regarding maintaining insider lists in prescribed forms.1 For more on that, see here.
Why would we expect to receive MNPI/inside information? This most commonly happens when an entity engages in discussions with a third party regarding a possible transaction. However, it could also occur if the entity obtains, even unintentionally, information that would result in insider trading if the company traded while in possession of the information. Under US law, it is only insider trading if a trade occurs. However, under the EU’s Market Abuse Regulation, insider dealing can occur even if no trade is executed, for example where a person in possession of inside information cancels or amends an order to which the information relates where the order was placed before the person concerned possessed the inside information.
1 Regulation 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) (MAR), art. 18.