Harry S. Truman once said, “It is selﬁshness and greed, individual or national, that causes most of our troubles.” Ultimately, insatiable greed that has permeated the minds of successful people is what has cost them their reputations that were built with considerable effort. Despite history telling us that one cannot game the system and escape punishment, corporate icons have fallen victim to this greed and have lost their reputations.
Recent news on Insider Trading involving employees of the 2 biggest IT giants in India has caused corporate leaders to ponder about how one can prevent such instances from occurring within their organizations.
Businesses in good standing, whether private or public, are now more concerned about reputational risk than the associated ﬁnancial risk.
Regulators have also long been vigilant about corporate fraud. Market participants generally consider insider trading to be detrimental because it gives an unfair advantage to those with information that is not readily available to everyone.
To prevent insider trading, SEBI is increasingly enforcing stringent regulations and rules. An amendment recently passed in April 2019 focuses on UPSI (Unpublished Price Sensitive Information), as well as digitization and automation.
Given the guidelines, the onus of its execution lies with the senior management and compliance teams to ensure that these rules and regulations are followed in letter and spirit.
Despite this, insider trading scandals continue unabated and still make news headlines. Such actions not only malign the involved person(s) but also tarnish the organization’s public reputation. How does one prevent insider trading?
Here are ﬁve best practices that I believe can be adapted to prevent insider trading:
Educate your employees on insider trading
People ﬁnd it easier than they think to commit insider trading. An effective training program that emphasizes the gravity of insider trading penalties - for both insiders and businesses should be your foremost priority. These should cover the full extent of potential insider trading incidents and enhance employee awareness on Insider Trading periodically.
Insider trading can take many forms, from an unintentional conversation with a friend or family member to intentionally trading on securities during blackout periods, highlighting
that not all insider trading can be prevented, but ﬁrms will be able to protect themselves with these measures in place.
Limit trading during certain periods
When earnings reports come out, restricting employee trading on company-owned securities is a popular strategy for reducing the risk of violating insider trading laws.
There may be privileged material information contained in earnings reports that can be traded on while they are being compiled. You should therefore classify all corporate information as either for public or private consumption. Employees should only be able to access private information "on a need-to-know basis".
By eliminating the ability to trade on insider information, prevents the insiders from making any proﬁt from the information. This tactic can be further enhanced by keeping a list of securities that employees cannot trade at any time. Taking this approach, the compliance/legal department must approve employees who trade in company-backed securities.
It will take you some investigating to determine which of these restrictions and approval processes are the most effective for keeping your employees as well as regulators happy.
Be diligent with self-certiﬁcation
To ensure compliance, you may want to mandate that your employees submit statements from the brokerage ﬁrms they use personally instead of just relying on your employees to submit clearance requests.
By requiring employees to certify that their submissions of trades are accurate, it can act as an effective restraint against insider trading on securities owned by the corporation.
Companies that discourage insider trading as a result of implementing checks on insider trades are less likely to face the unpleasant situations of investigations.
Investigate insider trading as soon as possible
In the case of an employee being accused of insider trading, you need to act quickly to assess the validity of the allegations. Investigating the case will require determining whether this was an isolated incident and whether other employees displayed similar trading patterns. Furthermore, you might need to watch out for irregular trading patterns, sudden wealth growth, and changes in lifestyle that are not proportional to the income disclosed by employees and close family members.
Nevertheless, if insider trading has been committed, it should be followed up with due diligence. In order to make sure that insider trading did occur, you need to look at whether the information used for determining the trade is publicly available.
It will be crucial for the company to know what information its employee used to make the trade that is under suspicion. A detailed review of the documents surrounding the covered security will be required.
Good Practise #5: Prohibit insider trading by using technology
The most straightforward solution involves hiring additional staff to monitor, record, and clear trade requests, but that isn't always the case. There are best-in-class workﬂow softwares available to simplify the automation of SEBI regulations on Prohibition of Insider Trading.
These help in improving efﬁciency & having better controls in the monitoring of insider trading regulations. Some of the beneﬁts include:
● Having a centralized data storage of the investments & holdings of employees, immediate dependents & persons with material ﬁnancial relationships as deﬁned under the regulation making it easier for faster retrieval of past information.
● Automated requests for approval/rejection of trade requests helps save on time and provides for greater visibility.
● Conﬁgurable holding/contra restrictions provide for better control.
● Setting up UPSI, blackout period/no-trading windows can be better managed within a deﬁned system.
● Maintaining an automated restricted securities list based on preset rules helps in auto-rejecting any trading requests.
● Electronic submissions of periodical disclosures make it hassle-free for all stakeholders and ﬁnally,
● Systematic workﬂow for all trading approvals, automated reminder emails, notiﬁcation alerts & audit trails will keep your entire process well deﬁned and in auto-mode.
In conclusion, good governance and being compliant with the regulations provides conﬁdence to the regulator, market participants, and to shareholders of your Corporation. You should therefore consider and act on these 5 best practices to help you with your policies in preventing insider trading.
1. Educate your employees on insider trading
2. Limit trading during certain periods
3. Be diligent with self-certiﬁcation
4. Investigate insider trading as soon as possible
5. Prohibit insider trading by using technology
The author, Debashis Roy, is Director, Infomatics Services Pvt. Ltd. The views expressed are personal
First Published: IST