There is always a pursuing effort by firms and regulators for the prevention of insider trading. Insider trading is an illegal activity that can pose a huge danger to the firm involved in it. It is also prevented to ensure the quality and integrity of the market.
No firm tries to promote insider trading of any form. Firms are seen bringing out new rules and policies for the prevention of insider trading. Not all kinds of internal trading can be labeled as insider trading. There is a violation of certain dimensions that makes it insider trading.
What Is Insider Trading in Firms?
Insider trading in firms refers to when a company employee gives out non-public and material information to their friends, family, or relatives. The other way that insider trading occurs is when non-employees of a company (government regulators, law firms, brokerages, or accounting firms) gain non-pubic information from their clients and use it in a wrong way.
If the company employee makes a purchase or sells in the market with some special knowledge, it is not considered insider trading. But the Securities and Exchange Commission(SEC) should be aware of this transaction.
How to Protect Your Firm From Risks Associated with Insider Trading?
Firms keep coming up with rules and regulations that would prevent their company employees from participating in any kind of insider trading. If any employee is caught up in insider trading, it tarnishes the reputation of the firm too. There are some policies that are used by the firm in order to prohibit insider trading.
1. Blackout Periods
A blackout period in a financial market is one where the employees and executives are not allowed to buy or sell any shares in their company. They are also averted from making changes to their pension plans. This period usually comes before earning announcements to prevent insider trading in the company.
2. Seeking Clearance
This is a process of seeking approval from the Chief Legal Officer (CLO). This is done to ensure that any purchase or sale made is totally legal and valid. It also avoids any conflict of interest or violation of security law that might take place. This policy includes the pre-clearance of all directors, officers, and designated employees. Generally, after 500 equity shares, this policy is applied.
3. Educational Programs
The firms come up with a lot of educational programs to deal with insider trading. These programs try to educate the company employees regarding insider trading. The program makes the specification about what “material”, “inside”, and “non-public” information is. These educational programs are compulsory for all new and old employees. Also, the programs make a differentiation between “helpful” and “non-public” information.
The firms try their best to prevent any loose ends that might lead to insider trading. With concrete diligence, this illegal activity can be averse. The firms should pay attention to all the buying and selling taking place in the company related to the employees of the company.