Compliance Points for Insider Trading, MNPI

The news headlines continue to be filled with insider trading scandals. Insider trading is based on a simple, well-established principle: if you receive material, nonpublic information about a public company from any source, you are prohibited from discussing or acting on that information.

Under the Advisers Act, the SEC may sue any person (or any person who controls or supervises such person) who trades while in possession of “material, nonpublic information” or who communicates or “tips” such information. Trading the securities of any company while in possession of material, nonpublic information about that company is generally prohibited by the securities laws of the United States and firm policy. Under insider trading laws, a person or company that illegally trades in securities of a company while in possession of material, nonpublic information about that company may be subject to severe sanctions, including civil penalties, fines and imprisonment.

Please refer to your Code of Ethics and Compliance Policies and Procedures Manual, along with the SEC for additional information on who is an insider and what is considered material, nonpublic information.

Here are some ways to identify sources of insider information:

  • Employees must report all business, financial or personal relationships that may result in access to material, nonpublic information;
  • The CCO should review all reportable personal investment activity for Supervised Persons and related accounts;
  • The CCO should periodically review firm trading activity (e.g., trade blotter review); and
  • The CCO should prepare a written report to management and/or legal counsel, as necessary, of any possible violation of the firm’s Insider Trading Policy for the purpose of implementing corrective and/or disciplinary action.

During routine e-mail surveillance, review communications to identify any wrongdoing or sharing of non-public information. In addition, conduct a review of the Firm’s trade blotter and document any anomalies in clients’ trading.

SEC enforcement actions demonstrate that persons with no intention of receiving MNPI may have relationships with the potential to lead to the sharing of MNPI, and that some persons attempt to take advantage of the information. A cursory search of “insider trading” results will include recent cases in which accountants, investor relations personnel, auditors, and investment representatives have shared MNPI.

Insider Trading Compliance Points:
  1. Your Code of Ethics may require reporting of Supervised Persons’ positions on the board of directors of a public company or other governing board of a public company. Such service with a public company could subject a person to inside information and therefore restrict such employee’s ability to trade such security or securities.
  2. The compliance reporting requirement and compliance reviews of personal securities transactions are, in part, designed to detect personal trading based on inside information.
  3. The portfolio holdings of client accounts and trading activity within such accounts are considered inside information by the Firm.
  4. Supervised Persons should be aware that inside information about public companies may be acquired from a broad range of sources, potentially including clients, accounting-firm clients or brokers with which the firm conducts securities activities. Supervised persons should be cognizant that it should not act on any third-party information that it believes may be inside information regardless of the source of such information.

Compliance Training Tip: Now is a great time to provide employees with additional training on what constitutes insider trading and the potential repercussions of acting on such information. Even an email communication to employees highlighting this section of the Code of Ethics can bring awareness of the topic to the forefront. We have also provided a link to download a ComplianceCast presentation on the topic of insider trading that you might find helpful.


Subscribe to CSS Blog

CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.

Latest Content

Texas Outlaws and a Silver Bullet: Position Limits in the USA

In this first installment on position limits, Regulatory Guidance expert Greg Hotaling surveys the current landscape of position limits imposed for U.S.-listed commodity derivative holdings, which can affect investment firms and other speculative investors regardless of where they are based. Stay tuned for coverage of EU position limits in the next edition. “Who shot J.R.?!” … Continued

FAQs From the Cyber Desk

Cybersecurity is a fast-moving target, so it is not uncommon for firms to have questions when it comes to assessing and understanding their cybersecurity risks. Here at CSS we receive a lot of cybersecurity questions, so we thought we would take the time to answer 10 of the most common Frequently Asked Questions. (1) What … Continued

EU Position Limits: Born in the USA?

This is the second installment of Regulatory Guidance Expert Greg Hotaling’s blog on position limits, this time addressing EU-listed commodity derivatives and related products.  As always, keep in mind that these limits can apply to asset managers, and other market participants, regardless of where they are based. In 2009, the European Union’s first comprehensive position … Continued