What is Insider Trading?
While inside this organization, you may learn important information about our company or hear details about other companies.
Valuable or material non-public information that you learn as an insider must not be used to improve your own financial situation; and the use of such information to avoid a loss is also prohibited.
And you may not share the “inside” information with others. If you do… that could be considered insider trading. This rule is so important to fairness in the marketplace and to preventing fraud that there are global laws to prevent insider trading. You need to comply with these laws inside and outside the workplace. If you don’t, the consequences to you and our company could be severe.
The first step in staying risk-free is understanding what insider trading is…
The rules apply to trading in any type of securities so that means shares of stock, as well as options that you might purchase or sell in the market or in a private transaction. To stay risk-free, you must not trade on inside information, and you must not share inside information with people outside the company. Now you know what we mean by insider trading. The rest of this topic will help you apply what you learned to your world.
Can you help Ali?
Ali is having dinner with Bill, a representative from a client company. Bill shares news of the impending acquisition of his company’s biggest competitor.
How should Ali react to this information?
- I’ll invest in his company based on this information. I didn’t ask Bill to tell me. He chose to share this information.
- Bill shouldn’t have mentioned the deal—it counts as inside information.
- Bill should have told me about the deal before we left the office, not in a public place.
If you find yourself in possession of commercially sensitive or inside information, remember that you cannot share or trade on what you know. If you share this information, or use it to buy or sell shares, you are likely to be breaching insider trading rules. You could face severe reputational, legal, and professional consequences.
Ali remembers that the week prior he instructed his broker to increase his shareholding in Bill’s company. His broker has just contacted him to say that he has been out of the office for the past week and hasn’t yet increased Ali’s shareholding in Bill’s company. He asks Ali should he go ahead and increase it now.
What should Ali do?
- Let his broker increase his shareholding. His request was made before he met with his client Bill.
- Email his broker to cancel the share purchase, without explaining why.
- Call his broker and explain about the deal and why he needs to cancel the share purchase.
Be sure to never share inside information, even if it means withholding an explanation for your actions from friends, family, or professional relationships. If, for example, you shared inside information with your broker, and if the broker then traded in the company’s stock—on your behalf or their own—you would likely be breaching insider trading rules.
Keep it between us
Ali tells his manager, Reshma, to let her know about the information his client shared. Reshma informs him that she recently purchased a small number of shares in the client company. Though not illegal, this could create the wrong impression, so Reshma asks Ali to keep this information to himself.
What should Ali do?
- Suggest to Reshma that she notify the Legal department, but otherwise stay out of it.
- Notify the Legal department.
- Keep it to himself. His manager bought the shares before she knew about the takeover deal, so she’s done nothing wrong.
Thanks for helping Ali
Reshma asked Ali to keep quiet about the fact that she recently purchased a small number of shares in the client company. Ali must ensure that the appropriate department is notified, by him or his manager. Reshma might not be happy, but she should not have asked him keep quiet. Thanks to you, Ali now has a clearer understanding of how to adhere to insider trading laws.
Remember, it’s important that you:
- Recognize if you are in possession of commercially sensitive or inside information.
- Don’t trade in shares when you have insider information. If you are unsure as to whether you have insider information, then be overly cautious and avoid trading until you can ask for clarification. You can find out who you can contact for clarification here.
- Speak up! If you see a red flag, alert the appropriate department immediately.