With the latest string of insider trading prosecutions, the government has demonstrated its commitment to aggressive “pushing the envelope” criminal prosecutions. Compliance officers need to put this issue on their radar screens and add it to the mix of risk areas.
The SEC and Justice Department are on a “moral crusade” -- the leadership of the enforcement division is now a former federal prosecutor. The SEC is now using som of the same tools that were being used in the criminal enforcement area, including non-prosecution agreements for cooperation, the payment of bounty to informants, and greater cooperation between the SEC and criminal authorities. This gives each a whole new tool bag, including wiretaps, which can be very effective in successfully prosecuting cases. The Justice Department has been very aggressive, and all signs point to a continuation of this enforcement policy.
There are various forms of insider trading. The classic case occurs when an insider with fiduciary duties to shareholders is in possession of material non-public information and trades on that information. Then, you've got the tipper/tipee scenario, where the insider passes that information to someone who's one level removed, who then trades. Finally, the misappropriation theory is a less well-understood species of insider trading. It holds that an individual may be guilty of insider trading if they violate a promise or duty not to trade on inside information, which they owed to the source of the information.
Insider Trading Compliance Tools
Companies need to address the risk of insider trading in a coordinated fashion, much like an FCPA compliance plan. Misconduct by an employee in paying foreign bribes is comparable to employees trading on material, nonpublic information.
1. Tone at the Top: Like any attempt to minimize risk, the program starts with the tone at the top. Senior management has to set an example and specific restrictions have to be followed with respect to the handling of confidential information. Most companies get into problems through unauthorized leaks of information that people should not know. Companies continually leak critical information by failing to understand the sensitivity of the information. Leaks can exist for any number of reasons; they can exist because people don't know that the information they have is confidential. They don't think they're a big shot, that it's just their little, insignificant project: it can't possibly be a problem.
Executives have to mandate confidentiality, realizing that information is the lifeblood of the company, and keep everything confidential. Start with the board. The confidentiality policies need to be very broad, and apply not just to material, non-public information, but also include board discussions. There are a lot of questions about how enforceable these policies are, but the true value is that they give you a baseline from which you can function; they give you a tool to train people with; they give you an opportunity to sit down and talk about confidentiality.
2. Restricting Access to Sensitive Information: Access to sensitive information has to be restricted. A company has to resist the desire of employees to communicate among offices and departments. If you have a project that could affect the trading of the company’s stock, access has to be carefully guarded.
3. Trading Windows: Many companies rely on what are called “10b5-1 trading plans,” which are specifically detailed plans that limit liability because trades have been pre-planned well in advance of any news or event. Trading can only occur in predetermined trading windows. 10b5-1 plans are generally effective in reducing the risk of insider trading.
4. Regular Training: Training is very important and it must be continually conducted on a periodic basis. Senior executives need to be reminded of the insider trading compliance policies. New employees need to be exposed to insider trading prohibitions. Employees need to certify that they have not, and will not, engage in such trading.
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