[Step-By-Step] How To Create A Solid Employee Trading Policy

BY: ComplyLog|November 3, 2021|Employee Trade Monitoring

An employee trading policy, also referred to as a Code of Ethics or Code of Conduct, is designed to prevent financial workers from using confidential information, gained due to their position, to inform their personal trades. Compliance departments should put in place checks and balances to ensure that employees gain pre-clearance for their trades and that these trades are above board and in accordance with the organisation’s standards. This forms the basis of the policy. Let’s find out more about this document and how you can formulate it. 

Table of Contents 

How To Create An Employee Trading Policy
      1. Understand the legislation
      2. Find out who is affected
      3. Decide on reporting requirements
      4. Describe the restrictions
      5. Decide on compliance monitoring and record-keeping technology
      6. Detail the consequences of non-compliance
FAQ
      What Is Insider Trading?
      Who Needs To Obtain Pre-Clearance?

 

Why Do You Need An Employee Trading Policy? 

There are some very good reasons why an employee trading policy is essential for financial businesses. Two of the most important ones are:

Compliance

There are many regulatory requirements to meet when it comes to employee personal trading. In the European Union and the United Kingdom, employee trading can, if unchecked, contravene the requirements of both the Market Abuse Regulation (MAR) and the Markets in Financial Instruments Directive II (MiFID II). 

Conflicts of Interest

Financial institutions owe a duty to their clients and that should always be at the forefront of their work. If there is a conflict of interest caused by an employee using inside information about that client, it can be ruinous for the working relationship. The policy should ensure that the client’s interest always outweighs that of any other party. 

How To Create An Employee Trading Policy

1. Understand the legislation

The relevant passages of EU and UK legislation that should inform your policy are: 

 

Regulation Rules
MAR Under MAR, employees making investment recommendations are required to declare conflicts of interest. This would include employees dealing with clients when they own stock in the same issuer they are recommending to that client, for example.  

It also features a prohibition on the misuse of inside information. This relates to informing decisions on buying or selling stock or cancelling orders already placed, based on precise information that would affect the price of an instrument if it were to become public.

MiFID II MiFID II requires investment companies to implement “adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and tied agents with its obligations under this Directive as well as appropriate rules governing personal transactions by such persons.”

Contravening either piece of legislation can lead to financial sanctions being levied against both a legal person and a natural person. This makes understanding MAR and MiFID II a key part of developing your employee trading policy.

2. Find out who is affected

MiFID II states that it covers “managers, employees and tied agents” of investment firms. Essentially, your policy impacts any person who:

  • has access to information on client strategies or potential trades
  • has access to systems that contain that information or even work in proximity to people who work with the client 
  • might hear or read such confidential information during the course of their work

These broker-dealers, investment advisers, portfolio managers and other third parties are the ‘relevant persons’ to whom the employee trading policy should apply. 

3. Decide on reporting requirements

In order to have an overview of your employees’ holdings, you must decide exactly what you require relevant persons to report. This should be enough to ensure that you comply with the various requirements, but not so much data that you risk your compliance with the General Data Protection Regulation (GDPR). 

GDPR says that you should limit the data you hold to what is “adequate, relevant, and limited to what is necessary for the purpose (‘data minimisation’).”

It is up to you as a data controller to decide what is sufficient. It might include: 

  • Trading account statements
  • Trade confirmations
  • Annual certification of holdings and accounts
  • Details of any new accounts
  • Any other information you deem necessary to be sure that your employees’ trades are compliant with current legislation.

4. Describe the restrictions

Employees need to know the restrictions and procedures they must follow in specific cases where conflict of interest may arise such as holding securities of the employer or doing short-term trading. 

You should detail your requirements for: 

  • General conduct: It relates to situations in which employees cannot, under any circumstance, make a trade. This includes when they have access to inside information, and when they have access to trades that are not available to the public or clients by virtue of their position in the company. 
  • Pre-clearance: This is the process of requesting permission to make a trade and prohibiting any applicable trade that does not pass the test. You should set parameters as to the threshold of what is an acceptable trade and use this in pre-clearance to allow or decline the transaction. You can save time and automate this process with employee trade monitoring software.
  • Closed periods: These prevent employees from making trades at the same time as making or recommending client trades. This is a tactic to prevent frontrunning a client’s trade — when the employee knows a client will make a big trade and then buys their own stock before the client, knowing that the large purchase will increase the share price and benefit the employee. 
  • Post-trade reviews: This means putting in place regular reviews of personal training with the Chief Compliance Officer who can analyse accounts for evidence of conflicts of interest or misuse of inside information. 

5. Decide on compliance monitoring and record-keeping technology

With so many potential trades occurring, it can be difficult to keep up manually. Even just handling the pre-clearance process would be onerous when performed by humans, which is why many companies opt to use a compliance monitoring system. 

TradeLog provides an automated solution for dealing with pre-clearance requests, based on the parameters you input for accepting and declining them. It continuously conducts surveillance on trades and alerts you to any perceived infringements of your policies so that you can investigate further.  The platform also maintains the records of each employee’s trades, their pre-clearance requests and the decision made.

6. Detail the consequences of non-compliance

Employees should be aware of the consequences for both the business and themselves as individuals for not complying with your employee trading policy. For example, a natural person can face a penalty of up to €5,000,000 for contravening Article 14 of MAR, relating to the misuse of inside information. In addition, a legal person, the organisation, could be fined up to €15,000,000 or 15% of the annual turnover from the last available accounts for the same offence. 

This is why it is so important to get compliance right. 

Employee Trading Policy Best Practices

  • Employ a top-down approach to compliance. If senior leaders buy in and show that they are behind the policy, employees further down the structure will be less inclined to try to “get away” with non-compliant behaviour. 
  • Automate pre-clearance to save time, reduce manual data entry and make the process more efficient for your business.
  • Be proactive about monitoring your employees’ trades.
  • Provide training to employees so that they understand what is expected of them and what the consequences are for non-compliance in terms of disciplinary action.

Employee Trading Policy Examples

FAQ

What Is Insider Trading? 

Insider trading, or insider dealing, is committed by people in possession of information, which, if it were known, would cause a significant change to the price of a financial instrument. They use this information to gain an advantage when buying or selling securities or cancelling an order already placed. Essentially, anyone conducting insider trading in advance of a public announcement has an advantage over a regular, reasonable investor, as they know which way the price of a security is likely to head and can make an investment decision based upon that to increase their earnings. 

Who Needs To Obtain Pre-Clearance?

Employees, advisers or agents, as well as management and senior leaders, should all gain pre-clearance and make disclosures about their intentions in order to make trades for their securities accounts in accordance with a company’s employee trading policy. From the chief executive officer and chief financial officer, down to the new starters, these people are referred to as access persons and the reporting requirements extend to their spouses, siblings, children, immediate family and other relatives when making personal securities transactions. 

Conclusion

Your employee trading policy is an essential element to help you avoid the costly penalties for contravening European Union and UK law, as well as to maintain trust in your organisation. Without a robust policy, there is a real risk that employees could abuse their positions to gain an unfair advantage over the market and create potential conflicts of interest with clients that could lead to the organisation losing business. 

As part of your policy, you can introduce a digital platform, such as TradeLog, to automate some of your processes, monitor trades and pre-clearance requests and keep your records compliant with all relevant laws and regulations. You can see TradeLog for yourself here

 

References and Further Reading

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