Just to make every compliance officer’s job a little bit more difficult, companies need to adopt and implement an insider trading compliance policy. The Justice Department and the SEC have made headlines through its high-profile insider trading criminal prosecutions.
Underneath the radar screen, the Justice Department has been pursuing a large criminal investigation focusing on “expert networks,” in which consultants have been used, along with traders to pass along non-public material information. The Justice Department has taken guilty pleas and secured the cooperation from a number of defendants. The investigation is spreading and more subjects have been targeted. It will continue for years with more guilty pleas, more targets, and ultimately lead to further convictions of traders.
Public companies have to address the risks. There are obvious risks in every public company and financial incentives to engage in insider trading. As a starting point, I wanted to suggest some basic elements of an insider trading compliance program.
1. A Written Stand-Alone Compliance Policy – Every company can demonstrate its commitment to compliance by adopting a stand-alone written policy which is reviewed and approved by the Board of Directors. It is a basic must-have and should be done as soon as practicable.
2. Designation of a Compliance Officer – The compliance policy should identify a chief compliance officer for insider trading. In most cases, the existing chief compliance officer should add this matter to his or her portfolio. In some cases, depending on the organization, the general counsel can be designated, but it is always preferable to rely on the chief compliance officer. The chief compliance officer should be responsible for pre-clearing all transactions involving the company’s stocks by Insider Trading designated individuals; assisting in the preparation and filing Section 16 reports with the SEC; overseeing the implementation of the insider trading compliance policy; training of relevant officers and employees; supervising the announcement and operation of any authorized trading windows by company officers and employees.
3. Statement of Prohibition – The compliance policy must include an affirmative statement of prohibition against insider trading – no director, officer, employee, subcontractor, independent contractor, agent, consultant, or other person acting on behalf of the company, and any family member of these individuals shall engage in any transaction, in whole or in part, to buy or sell the company’s securities. The prohibition statement should include specific discussions of the types of sales or purchases involving “securities,” including short sales, options, hedge transactions, margin accounts and pledges. A separate prohibition needs to be included which prohibits tipping to other of nonpublic material information.
4. Pre-Clearance Requirement – The chief compliance officer, in consultation with senior management and approved by the Board, should designate directors, officers, employees and family members as designated individuals who may not trade in the company’s securities without complying with a pre-clearance review. The designated individuals, most of whom are within the company, should be identified based on access to non-public material information (e.g. upcoming financial reports and disclosures, potential company acquisitions).
5. Establishment of Trading Windows – A company needs to establish trading windows during which designated individuals may trade in company stock. These windows should be administered by the compliance officer and timed to avoid obvious risk periods (e.g. quarterly financial reports).
6. Training and Certifications – The company should conduct annual trading on the insider trading prohibition and require annual certifications of training attendance and familiarity with the compliance policy.