Rule 10b‑5 under the Exchange Act in effect provides that anyone who possesses “material nonpublic information” regarding the company abstain from trading in company securities, for as long as such material nonpublic information remains undisclosed. Determining what information is “material” is often difficult, but the basic test is whether it is information a reasonable investor would consider important in determining whether to purchase or sell securities.
Government and private actions alleging insider trading have targeted not only individual violators, but companies as well for trading by their directors, executive officers and employees. Companies may be the target of insider trading charges if, among other reasons, a person “controlled” by the company engages in unlawful insider trading or the company “aids and abets” insider trading.
The scope and content of a company’s insider trading policy will vary depending on a number of factors, including size, maturity, number of employees and the trading market for the company’s securities, and should be adapted to fit a company’s particular facts and circumstances. A brief policy highlighting key principles may be enough for some companies, while a more robust policy with detailed procedures may be more suitable for others. A company may also embed its insider trading policy within its code of conduct rather than adopt a stand-alone insider trading policy, which is becoming an increasingly common practice.
The policy should include an overview or statement of purpose that contains a “plain English” definition or explanation of what constitutes insider trading. This section should also provide guidance on what “materiality” and “non-public” mean, concepts that are fundamental to an understanding of insider trading. Consider using examples to aid in setting forth these definitions.
Once an insider trading policy is in place, it is recommended that companies develop onboarding and ongoing training programs to provide education regarding insider training and the company’s policy. The company should also task someone, likely someone in the legal department or a compliance officer, with administering the policy and should also identify a back-up contact in case the primary contact is unavailable. These final steps are integral to enforcement of a company’s insider trading policy.
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