Combating the Unfair Advantage: Insider Trading Management


Let's face it; we'd all love to be a little ahead of the market, to know when to buy or sell a volatile stock at just the right time. When that sort of move is based on intuition, a hunch, an educated guess or just plain dumb luck, we might call it business instinct. But when such trades are made with insider knowledge, facts that are not publicly available, then it is considered insider trading, and that's illegal.

While the criminal consequences of insider trading may focus on the individual who made the trade, the wider repercussions can have a negative effect on the company as a whole. Instances of insider trading erode a company's reputation, eventually causing investors to rethink their commitments to the company and look to move their money elsewhere.

In the past, insider trading has been a tough crime to prosecute, as tracking down the evidence to prove illegal knowledge was both time-consuming and costly. But as trading has become increasingly digital, insider trading management software has made it far simpler to safeguard your organization against insider trading. In this post, we'll explain some of the details of insider trading, and look at some of the regulations in place to combat it. Then, we'll explain how a high-quality insider trading management system can help your company avoid the damages associated with the shady trades that can attract so much attention.

What Is Insider Trading?

According to the most recent SEC definition, insider trading is 'buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include 'tipping' such information, securities trading by the person 'tipped,' and securities trading by those who misappropriate such information.'

In a similar vein, the Market Abuse Regulations, which pertain to trades within the UK and the EU, define insider trading this way: 'MAR prohibits engaging in (or attempting to engage in) insider dealing, which is using inside information to acquire or dispose of financial instruments to which that information relates. . . Inside information is information of a precise nature, which has not been made public; relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments; and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of a related derivative.'

In the EU approach, those who possess inside information are prohibited from trading in related securities as well. Traders cannot disclose information to third parties except in the course of normal business, employment or professional duties.

Who Are the Insiders?

In most instances, there are two varieties of insider: a company insider and a temporary insider.

Company insiders are those who have professional access to material information about a company. Material information is defined as any information that might impact investors' decisions or impact the valuation of the company's stocks. Company insiders might include: corporate executives, general managers, public relations officers, members of research and development teams, brokers, bankers and corporate lawyers. Any one of these individuals may be in the position to obtain privileged information concerning the company's financial well-being, future moves or mergers, or upcoming product releases. Thus, it is incumbent upon the company to keep a list of these individuals and to notify them of their responsibilities and liabilities. For more on these insider lists, see below.

Temporary insiders are individuals who do not receive privileged information in their professional capacity, but nonetheless are in possession of material information. For example, perhaps an executive tells her husband about an upcoming merger in her company. He is now in possession of material information that is not available to the general public. Were he to trade securities in his wife's company based on that information, he would be in violation of the law. Temporary insiders might include friends, family or business associates of company employees, but there need not be a direct tie to the company to the designation to remain in effect. Anyone who has privileged material information, regardless of how they obtained it, is considered a temporary insider and is barred from trading on their knowledge.

What Are the Consequences of Insider Trading?

Insider trading is usually detected through the use of market surveillance systems. The SEC monitors trades for the appearance of abnormal trading patterns, which serve as a red flag for insider trading activity. If convicted, individuals can be charged with up to $5 million in fines and up to 20 years in jail. In addition, the company the insider works for may suffer severe blows to its public reputation.

How Can Insider Trade Management Systems Help?

Insider trade management systems (ITMS) are software tools that help corporations monitor and prevent insider trading among their employees, board members and professional contacts.

These systems work in many ways at once. Some of the many services they provide include:

Communication and documentation

Information is the first line of defense. A quality ITMS can help you create and maintain a list of individuals who, due to their position or professional contacts, are now considered company or temporary insiders. This list allows you to notify them of their responsibilities and any restrictions on trading that may pertain to them.

Creation of a preclearance system for legal trades

Employees and executives who trade in company stocks are not necessarily breaking any law; illegal insider trading only happens when these trades are motivated by material non-public information. Using an ITMS can assure a process by which each trade is prescreened for any suspicious activity.

Easy Production of Reports and Monitoring

Filings such as the Market Abuse Regulations report are easy to assemble as well as to disseminate.

Provides tracking for close periods, projects, permanent sections and associated

Keep all relevant dates and details organized, accessible and secure.

Insider trading management allows organizations to safeguard themselves against the threat of insider trading, preventing loss of investor confidence and costly reputational repercussions. For more information about how you can take control of your internal security, contact a Blueprint representative and ask about insider trading management software options.