Company Secretaries have an obligation to keep their employees informed about insider trading policies. It’s a big job that requires ongoing effort.
The best prevention for insider trading is education. While Company Secretaries carry the obligation to keep their employees informed, it’s a job that’s never done. Charly Duffy is uniquely qualified to give advice about how to prevent insider trading. She’s a Director at Coghlan Duffy + Co law firm and also Director and Principal at cdPlus Corporate Services, a company secretarial services provider. Charly says staff training is an essential part of reducing trading errors.
As a rule, insider trading occurs when information not known to the public is used to profit, prevent loss, or somehow manipulate the company’s share price. It makes no difference if insider trading happens intentionally or accidentally. It’s still a violation of the Corporations Act and can attract unwanted legal action including penalties and fines. In severe cases, insider trading can lead to prison sentences.
One misconception about insider trading is that it has to result in a gain for the employee. You can still be guilty of insider trading, even when you’ve incurred a loss. It’s not the only error employees make.
“Some employees think insider trading only applies to the securities that they acquire under an employee incentive plan,” Charly says.
“They don’t realise it applies to all the securities they hold, even if they bought them on market themselves.”
Key management personnel are likely to understand their governance obligations but they’re not the only employees who participate in insider trading. The risk extends to every member of staff, their close relatives, other businesses they control, and family trusts. It doesn’t stop there.
“If your staff communicates information to someone who then goes and trades, that’s also an insider trading offense, even if they don’t benefit from the trade,” Charly says.
An example might be a sales executive who finds out that their employer is about to cancel a contract with a listed company. If they hold shares in that company, and sell the shares knowing the contract is about to be terminated, that’s insider trading.
Even without malicious intent, there’s scope for people to mistakenly violate company trading policies[SM1] . A common example is unwittingly divulging sensitive information in a social setting like the pub or during a neighbourhood barbecue. In some cases, sharing circumstances of increased activity – like procurement teams working overtime or manufacturing hours increasing – can be seen as a tip that leads to insider trading.
Charly recommends the best way to keep insider trading from occurring is through education.
“It’s nearly impossible for employees to know what’s materially important information,” Charly says.
“You need to have processes clearly identified at the board level, and then communicate them throughout the business.
That gives employees a fighting chance to be aware when they come into possession of inside information.”
There’s no way around it: educating your team about insider trading is an ongoing commitment. Ideally, education about insider trading processes and procedures occurs in three different ways.
According to Charly, it’s critical that education starts from the earliest stages of employment.
“If you don’t have those obligations under your employment agreement, then the company doesn’t have a lot of leverage to force employees to comply with the securities trading policy,” Charly says.
One big challenge for companies is quarantining information to the right people. Smaller companies and fast-growing companies are more likely to encounter this problem in their enthusiasm to build a team culture. Announcing information before it becomes publicly available – like signing major clients or winning big contracts – can easily lead to security trading breaches.
“Smart boards will be very protective over who has any sort of price-sensitive information, and make sure people are brought in on a need-to-know basis,” Charly says.
Company Secretaries should leave no uncertainty about what’s being communicated and the obligation of the person receiving the information. Charly suggests the following language be used to explicitly state the obligation and reinforce the company trading policy. She also recommends the employee knows the exact dates and times the embargo covers.
“This is price-sensitive information. Do not communicate this to anybody else. You are effectively precluded from trading while this information is live.”
Write your policies in plain language and keep them as brief as possible to improve the chances they’ll be thoroughly understood. It’s also useful to illustrate the gravity of insider trading and the potential consequences.
“If you can use real examples or real-life cases of insider trading, it helps the information sink in a bit more,” Charly says.
“Try using anecdotal examples of what people actually did and what happened as a result.”
Guidance Note 27 in the ASX Listing Rules gives detailed information about how trading policies should be structured, how they should be enforced, and other recommendations about how listed companies should manage their obligations.
You can also use software to digitise your security trading policy. This allows you to automate your manual trading approvals process to help enforce your governance obligations. Drawbridge helps with the education process by providing an excellent way to communicate your trading policy to Company Directors, key management personnel, and the rest of your staff, even those without company shares.
Visit the Drawbridge website to view a demo and see how easy it is to insulate your company from the risk of insider trading.