BY: ComplyLog|July 21, 2022|Insider list management
The European Union enacted the Market Abuse Regulation (MAR) to protect the integrity of the markets and provide companies with a framework to prevent insider trading and the unlawful disclosure of inside information.
As a result, the sanctions for insider trading, also known as insider dealing, can potentially reach €5 million for a natural person and €15,000,000 or 15% of the annual turnover from the last available accounts for legal entities. So, it is in the interest of all market participants and their employees to avoid insider trading.
With the potential for financial punishment and reputational damage for non-compliant behaviour, it is important you put in place systems and strategies to minimise this risk. This article explores the steps you need to take.
Table of Contents
III) How to prevent insider trading
MAR defines inside information as being:
“information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers 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 related derivative financial instruments.”
This might be information relating to a merger or acquisition, a financial shock to an organisation, an impending huge deal or anything else likely to significantly affect the price of a financial instrument in the future.
On deciding that a piece of information constitutes inside information, you should disclose it publicly as soon as possible. You can achieve this in the following manners:
|Press release||Send to agencies that you can reasonably assume will distribute this information in a swift manner across all EU member states. Examples include Reuters and the Financial Times.|
|Website||Announce the information on your own company website and social media.|
|National competent authority (NCA)||Inform your local authority in charge of financial markets. Examples include Autoriteit Financiële Markten (AFM) in the Netherlands and Autorité des Marchés Financiers (AMF) in France.|
MAR uses the term insider dealing, but it is interchangeable with insider trading. The regulation offers the following definition:
“insider dealing arises where a person possesses inside information and uses that information by acquiring or disposing of, for its own account or for the account of a third party, directly or indirectly, financial instruments to which that information relates.”
Essentially, if a person or someone they know benefits from non-public information that the person has access to, they will have an unfair advantage over the rest of the market. This also causes an imbalance and skews the market, adding to volatility. This is why the EU is keen to provide dissuasive sanctions.
You have to make a call on when information becomes inside information. To fit the definition of inside information, it must meet all three criteria:
It might be that, at one point in time, a piece of information only matches two of those criteria. In this case, it would not yet be inside information, and you do not need to disclose it immediately.
An example could be developing a new product with the potential to change your sector. In the early design stages, it might not gain much interest if made public as it is still only an idea. However, once you have a working prototype that shows it can achieve what it intends to, this might cause a sensation if made public. This is when the information about this development is likely to become inside information.
In this situation, some companies compile a confidential list that ensures all people with knowledge of it understand that there is the potential for it to become inside information and that they should be prepared for their responsibilities if this occurs. A confidential list is not a legislative obligation.
It is up to you to recognise and define when a piece of information becomes inside information.
If there is a legitimate reason to delay the disclosure of inside information, you should create an insider list.
To qualify for delayed disclosure, you must be certain that:
You should create an insider list for each piece of inside information, featuring only those within your organisation and any external stakeholders who have access to that information.
MAR requires that issuers create an insider list in a specific digital format and make every reasonable effort to ensure that any person on the insider list acknowledges in writing their legal and regulatory duties relating to the use of inside information and preventing insider trading.
This shows that each stakeholder understands the illegality of insider trading and reduces the likelihood of it occurring.
Managing an insider list can be a time-consuming task and pose regulatory risks. InsiderLog is an innovative online tool that saves all versions of the list when you update it, providing an audit trail in the case of an investigation. It also sends automated reminders to insiders until they respond, fulfilling your obligations.
Monitoring trades from your insiders is one way to flag suspected insider trading. If there are trades that do not fit with their regular trading patterns, this could be an indication that they are acting on inside information, and you should enquire further.
This does not mean that there is definitely insider trading occurring, but trade monitoring allows you to investigate at an early stage and stop any illegal behaviour.
Whistleblowers are invaluable to an organisation, acting as eyes and ears on the ground, alerting the company to non-compliant behaviour.
Many companies in the EU must already provide an internal whistleblowing reporting channel under the EU Whistleblowing Directive, and many others will fall under its scope soon. This allows people to report illegal activity such as insider trading in confidence and with protection from retaliation.
If you foster a speak-up culture and provide a reporting channel, even if you are as yet not obliged to, it makes it more likely that employees will alert you to insider trading activity within the workplace, and you can stop it before it grows out of control.
When it comes to whistleblowing reporting solutions, IntegrityLog enables you to track your reports while ensuring full compliance with the EU Whistleblowing Directive and GDPR, too.
The Markets in Financial Instruments Directive II (MiFID II) requires investment firms to monitor their employees’ personal trades for potential insider trading, as well as other non-compliant behaviour.
Implementing a pre-clearance procedure allows you to stop an employee from making a trade using inside information before it happens. TradeLog automates this process by allowing you to set parameters for acceptable trades. This could exclude those involving products on which your firm has inside information. In this case, any request to trade in that product would be immediately declined.
Targeted training on insider trading is one way to reduce the potential of it occurring. If you lay out employees’ legal obligations and the consequences for contravening the law, this will help dissuade them from conducting illegal activity.
Understanding the process for creating and maintaining insider lists, for example, is an important aspect on which to educate employees. Once they understand what it means to be on an insider list, they will be less likely to engage in insider trading.
An insider list is a record of all those individuals or external agents who have access to inside information. You keep an event list for each piece of inside information, updating it as people gain and lose access to that piece of inside information.
A closed period is a portion of time in which issuers prevent persons discharging managerial responsibilities (PDMRs) from trading in their financial instruments. This usually relates to the time around the release of financial results, with the implication being that the PDMR will have an idea as to how the earnings announcement will affect the price of that instrument when made public.
An insider is anyone with access to that company’s inside information. If an external body works with the company and has access to the information, they will occupy one place on the company’s list and will have to hold their own list of corporate insiders relating to that piece of information.
There are a number of ways you can prevent insider trading at your company. Insider lists are an obligation but also a reminder to insiders of their responsibilities. Monitoring trades, training staff accordingly and making use of automated solutions can complement your insider trading policies and ensure compliance.
Use InsiderLog to create and maintain insider lists, documenting your changes automatically and providing evidence of who knew what and when. The platform helps you fulfil the requirement to gain acknowledgement from employees of their duties and responsibilities. Request a free demo for your business today.