Guarding against insider trading: review your operating policies

Intro

Companies with securities listed on public markets will be well aware of the dangers of trading with inside information. It is both a criminal offense under the Criminal Justice Act 1993 ("CJA") and a civil offence under the UK Market Abuse Regulation ("UK MAR"). Companies and individuals found to be in contravention of UK MAR are, and have been, subject to far reaching financial penalties and individuals convicted under the CJA may even see jail time - for up to 10 years. The importance, therefore, of taking steps to guard against insider trading (or insider dealing as it is referred to under the relevant legislation) cannot be understated. This note serves as a reminder of best practice to help achieve that goal.

Guarding against insider dealing

The basic principle is that you cannot deal if you are in possession of inside information. One of the ways to protect the company, its directors and certain employees from liability for insider dealing is to establish clear and robust operating policies within the company that seek to ensure its members deal in the company's securities in a manner consistent with, and within the confines of, UK MAR. Key amongst these policies is the company’s share dealing code.

Share Dealing Code

A company's share dealing code ("Dealing Code") defines a set of rules that directors and certain employees of the company need to abide by if they wish to deal in the company's securities. The main rule is that clearance from the company is required before dealing (you will not be granted clearance if suspected of being in possession of inside information or if you are seeking to deal within 30 days of the company announcing its financial reports, subject to a few exceptions). Further, after having dealt (with the necessary clearance first obtained), the company and the FCA must be notified promptly. UK MAR imposes strict time limits for notifying the company and the FCA which should be made clear in the company's Dealing Code.

By requiring clearance and transparency, a company’s Dealing Code effectively helps prevent the offense of insider dealing from being committed. 

Role of the Company Secretary

The company secretary usually plays a key role in share dealing procedures and it's therefore important that the officer is comfortable with the company's Dealing Code. Should a director or employee wish to deal, they would usually submit an application form to the company secretary who in turn passes the application on to the person designated by the board for determining the outcome of applications. Notification of dealings to the company and to the FCA also usually pass through the company secretary.

Unlawful disclosure of inside information:

In tandem with need to guard against insider dealing, listed companies will also be aware of the offence of unlawfully disclosing inside information.

An unlawful disclosure arises where a person possesses inside information and reveals that inside information to a third party without following the proper processes and procedures for dissemination of that information.

In order to deter and detect the unlawful disclosure of inside information, UK MAR requires listed companies to draw up and maintain "insider lists" which are essentially lists of persons who possess inside information. It's important that these lists are correctly maintained as they are invaluable when investigating a leak of inside information to a third party.

It is also important for companies to have clearly defined inside information policies, alongside their insider lists, setting out exactly when and how inside information may be disclosed to third parties and to the public. Generally speaking, if inside information is going to be disclosed, it must be communicated to a regulatory information service before it is released to anyone else.

Concluding remarks

The FCA recommends that companies review their operating policies and procedures to ensure that they are able to manage the operational, reputational and legal risks of handling inside information.

Howard Kennedy's financial regulatory team has the experience to help you navigate the UK Market Abuse Regulation and implement clear and robust operational policies for handling inside information. Please do get in touch if you would like assistance.