Insider Trading: Should Your Policy Cover More Than Legal Risks?
A recent paper from Stanford’s Rock Center notes that while most insider trading policies are designed to prevent violations of law, companies need to ask whether their existing insider trading policies need to cover more ground in order to be consistent with good governance practices. Here’s an excerpt:
Despite procedures designed to ensure compliance with applicable rules, news media and the public tend to be suspicious of large-scale executive stock sales.7 This is particularly the case when a sale occurs prior to significant negative news that drives down the stock price.
Public suspicion is exacerbated by inconsistent and nontransparent corporate practices—such as, lack of communication around why the sale was made, whether the general counsel approved the trade in advance, and whether the trade was the result of a 10b5-1 plan—and differing opinions about what constitutes “material” nonpublic information. Thus, an executive stock sale might pass the legal test but fail the “smell test” employed by the general public. A well-designed ITP lessens the likelihood of such a scenario.
The paper reviews 4 real-life vignettes involving insider transactions that, if not illegal, sure didn’t look very good. It raises a number of governance issues, like why companies don’t always make their insider trading policies public, mandate the use of 10b5-1 plans by senior execs or require pre-approval of all trades by the general counsel?
-John Jenkins, TheCorporateCounsel.net February 13, 2020
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