Preventing Insider Trading: Best Practices for a Compliant and Ethical Workplace

Insider trading is a grave offense that erodes the fundamental pillar of a transparent and equitable capital market, that is trust. Despite its seriousness, instances of insider trading violations and the unauthorized leakage of Unpublished Price Sensitive Information (UPSI) are becoming more prevalent. It is concerning that such activities persist, considering the severe consequences that can follow, including substantial monetary penalties and long-lasting damage to one’s reputation.

In recent years, the Securities and Exchange Board of India (SEBI) has implemented significant regulatory changes to strengthen compliance measures to prevent insider trading and promote transparency in the stock markets. While these amendments have made market manipulations more detectable and fostered a fair playing field, it is crucial for companies to take proactive measures to prevent instances of insider trading even before they come to the attention of SEBI. In this blog, we will delve into the essential elements of an effective insider trading prevention strategy that companies can adopt to ensure better compliance.

Defining is The First Step 

Defining what constitutes insider trading may appear obvious but it is a crucial step often overlooked. Without a clear understanding of this key factor, how can an organization effectively achieve its goal of preventing insider trading? For instance, they may not know — who qualifies as an insider? Or what constitutes UPSI?  

Start by brushing up on the basics and, most importantly, add plenty of examples. Such as – “What is Insider Trading? Insider trading is a term used to describe the buying or selling of securities by someone with access to confidential information about the company or its stock.”  Insider trading can take multiple forms, such as:

1. Company executives, directors, and employees who traded corporate stock after learning about non-publicly disclosed information
2. Friends, family, or business associates tipped off to such information from company employees of any level
3. Employees in brokerage, banks, legal offices, or printing companies who traded based on information they obtained through providing services to a customer

Invest in Developing Policies 

At a bare minimum, every listed organization, regardless of its market presence, should have a well-defined stock trading policy and a Code of Conduct. These policies should regulate trading activities conducted by key management personnel, directors, executives, and individuals with access to UPSI. Such a policy is a critical safeguard to prevent insider trading. It ensures transparency and fairness in the organization’s trading practices. It helps establish clear guidelines, restrictions, and reporting mechanisms for those who hold privileged information. When looking for investors and or merging with another company, due diligence teams of the partner company often look for such policies and their proper implementation to better rate and or negotiate the business deal.

Maintain an Insider List

An “insider list” refers to a roster of individuals who have access to UPSI. These lists encompass employees and external parties who come into contact with insider information, such as contractors, advisors, accountants, and other resources involved in business dealings. 

Maintaining accurate records within the organization is crucial, including the contact details of individuals on the insider list, the reasons for their inclusion, and the dates of any additions or changes. Equally important is documenting when individuals are removed from the list to determine when they are no longer in possession of UPSI. Insider lists play a vital role in fulfilling information requests from regulatory bodies during market surveillance activities.

Mandatory Pre-trade Clearance Process

Companies incorporate information regarding employee trading limitations in their employee trading policies. These limitations aim not to prohibit employee trades but to mitigate conflicts of interest and minimize the potential for insider trading. Within the employee trading policy, there is typically a pre-trade clearance procedure that necessitates employees seek permission before engaging in securities transactions. This procedure enables the company’s compliance officer to assess whether the proposed transaction should be authorized or rejected, thereby effectively mitigating the risk of insider trading.

Employee Attestation 

When new employees start at a company, they may be asked to disclose any securities of the company they currently possess. This procedure allows compliance teams to assess potential conflicts of interest, especially those that may arise from the employee’s access to UPSI related to their role, which could influence their trading behavior for those securities.

Furthermore, a comprehensive onboarding attestation process mandates that employees affirm their commitment to abide by all pertinent company policies, including personal trade policies. These affirmations serve as confirmation that employees have received, reviewed, and comprehended policy information demonstrating their ability to adhere to policy requirements.

Share Knowledge 

The onus is ultimately on the company to ensure that its employees are well-informed about the definition and potential consequences of insider trading since, if an employee is found guilty of insider trading, the company may be held accountable for any damages incurred.

To promote knowledge and awareness for compliance, every employee must have a clear understanding of the company’s policy on insider trading, as well as the relevant regulations governing this area. The company should conduct regular training sessions to educate employees about insider trading policies, emphasizing the severe penalties associated with violations of the law and of course the long-term reputation damage for both parties, specifically the difficulty in getting hired again for the guilty employee.

Additionally, companies should consider implementing a confidential “whistleblower hotline” to provide employees with the means to anonymously report any suspicions of insider trading. This encourages a culture of accountability and transparency, as employees can actively contribute to maintaining the organization’s integrity by reporting any potential violations.

Final Thoughts 

To ensure compliance with laws against insider trading, companies must establish comprehensive policies that effectively inform and guide employees. The path to that begins by penning down key concepts of Insider Trading, UPSI, Blackout Periods, Trading Windows and other information. The next step is to disseminate this information methodically and periodically through knowledge sharing via workshops, training, etc. 

And finally, they should also go the extra mile by periodically evaluating and updating their insider trading policies to ensure ongoing effectiveness. As laws and regulations evolve, businesses must adapt their policies to reflect changes and maintain a proactive approach to preventing this menace.

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