Insider trading and conflicts of interest

The Coronavirus is,of  course, creating considerable volatility in the stock market. With such volatility comes opportunity for investors to make profits, either honestly or otherwise. Are companies prepared for what might be an increase in insider trading risk?

In many companies the principal “owner” of insider trading compliance is the corporate secretary or other member of the law department – not the compliance & ethics officer. That is generally fine, as the subject is of a fairly technical nature.

But in my view the CECO should still have  a “line of sight” into insider trading compliance too. This is particularly so given that insider trading laws are – at least in part – conflict-of-interest based, and COIs are within the “heartland” of a CECO’s duties.

The basics

The core of an insider trading compliance program is the policy, which every public company (and some private companies) should have. A typical policy should cover the following

– Explanation of insider trading, including definitions of key terms such as “material” information, non-public information, purchase and sale.

– Procedures to prevent insider trading, including preapprovals and black-out periods.

– Policy and procedures on “tipping.”

– Any additional transactions that are prohibited by the policy, such as trading in options in the company stock or buying on margin,

– Rule 10b5-1 trading plans.

– Penalties and enforcement.

The basics also include:

– Insider trading training and periodic communications.

– Certificates of compliance.

– Avenues for seeking guidance and reporting concerns.

The role of the CECO

Most of these items are, as noted above this is fairly technical. But an insider trading program can also have a broader cultural dimension.

For instance, as noted in an earlier post: insider trading should be seen as a form of private corruption, rather than as a more technical and indeed victimless form of wrongdoing,  which it is sometimes seen as. This can give enforcement and compliance efforts  a degree of moral force that they might otherwise lack.

Can the corporate secretary make the case about insider trading being a form of private sector corruption? Sure – but in all likelihood the CECO can do it better because she will be able to place insider trading within the larger conflict of interest framework. This could make both areas stronger.

Again, I’m not trying to take work from the corporate secretary. But having the insider trading program learning from the CECO could help companies strengthen their compliance in a time of heightened risk.

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You might be interested in this piece about abuses in the gifts and entertainment area  being viewed as “soft-core corruption.”

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