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 (“PAD”) policy may require employees to request consent prior to acquiring or disposing of listed securities. In the UK, the FCA has asked firms to consider the following matters when designing their PAD policies:
- where PAD creates conflict of interest or market abuse risk within its business model and how such risks can be adequately mitigated;
- what effective monitoring and control of PAD it could do;
- how it ensures that employees are aware of their obligations;
- the appropriate degree to which a firm should rely on employees acting with integrity and following internal procedures, and what level of post-trade monitoring of PAD activity is necessary to ensure employees comply with policies; and
- whether senior managers are leading by example when engaging in PAD and act as advocates of strict compliance with the firm’s PAD rules1.
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.2 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 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 See Market Watch 62 for more information: https://www.fca.org.uk/publication/newsletters/market-watch-62.pdf
2 Regulation 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) (MAR), as retained in the UK by the Market Abuse (Amendment) (EU Exit) Regulations 2019/310, art. 18.