Instruments for overseeing insider. Management is required to take measures, to ensure that insiders or insider trading activities are monitored. Strong oversight is required, to be created within the organization at all levels, especially where confidential information flows. According to Section 14 of the MAR, there is a prohibition of insider dealing and attempts to engage in insider dealing by carrying out or arranging a transaction in financial instruments. It is also prohibited to disclose or recommend to another person, to engage in insider dealing, or induce them to do so. Finally, it is prohibited to unlawfully disclose inside information.
Instruments For Overseeing Insider
The oversight mechanism must be transparent and should aim to avoid the market abuse risks through the implementation of such systems, and processes that prevent, and detect insider dealing, market manipulation, or attempted insider dealing.
Management as part of the oversight mechanism should periodically conduct a risk assessment to understand how effective are the controls applied to prevent insider trading and risks. The risk assessment is also a helpful tool in prioritizing the market participant’s work program and making improvements to the surveillance system.
Certain factors are considered as per MAR to determine whether or not inside information has been made public, such as whether the information has been disclosed to a prescribed market or a prescribed auction platform through a regulatory information service or RIS or otherwise following the rules of that market. The information must be contained in records which should be accessed only by the authorized company personnel.
Insider trading can be overseen by adopting practices that prevent the risks of insider trading activities, from being performed by the employees or other management personnel. Insider trading undermines the confidence of potential investors in the securities markets, therefore, nearly every jurisdiction has enacted legislation prohibiting insider trading, and encourages overseeing the activities of the employees, and management. Below are some of the steps that management may take, and implement to prevent insider trading activities, which may lead to losses for the potential investors of the securities market.
Conduct Due Diligence And Monitoring
Investigate the background of the potential and existing employees, vendors, and suppliers, before establishing relationships, including identification of risks of non-financial misconduct.
Management needs to regularly monitor the behavior of the employees, towards the information that they have. Discussions with employees may identify the risk of unauthorized disclosure, by the employees, where management shall be required to take immediate measures, to prevent the risk of financial loss, that may be caused due to leakage of confidential information.
Taking Extra Care
Management needs to ensure that employees take extra care, when they are outside the office, especially while attending social events and dealing with close contacts outside the office. Employees should be sure to remove themselves from any conversations that may lead to a discussion about sensitive topics or conversations. Employees should be provided with training, and awareness to abstain from leaking or talking about confidential information.
Defining Sensitive Information
Management should ensure that both employees and suppliers know what they are legitimately allowed to discuss, and share with others to prevent any risk of insider trading.
Policy To Never Disclose Information To Outsiders
Management should ensure that a policy is developed and implemented to prevent the undue, and unnecessary sharing of details about the takeovers, mergers, earnings, profit warnings, or security-related confidential information, to outsiders. Prior permission from the senior management must be taken by the employee, who has to share the information with outside parties.
Final Thoughts
The version of insider trading that makes headlines is the illegal trading done by someone who has material and nonpublic information. The SEC aggressively pursues such insider trading cases to ensure that the capital market is a level playing field with no one having an unfair advantage. Otherwise, rampant insider trading can undermine public trust in the market and impede its operation. The SEC’s success in prosecuting high-profile individuals such as Martha Stewart and former McKinsey global head Rajat Gupta demonstrates that no one is above the law if they engage in such illegal activity.
