When employees of investment firms or listed companies in any industry trade company securities via personal accounts, they must ensure that doing so does not negatively affect the market, their employer or their clients.
To regulate this approach, firms establish strict trading policies which include restrictions for employee trading, trading compliance requirements and penalties for violation.
The most common trading restrictions
Here are the types of restrictions that companies can impose on employees to manage personal trading:
Blackout or closed periods
Blackout or closed periods are just before the company’s quarterly or annual earnings are released. They can also include the period of time between advising a client on a trade and them making that trade. During this time, employees are prohibited from trading in related securities.
Pre-clearance policies require employees to first obtain approval from the company’s compliance department or other relevant body before conducting any securities transactions.
Companies often maintain lists of financial securities that employees are not allowed to trade. These could include the company’s own stock and those of clients, partners and suppliers, but firms can restrict any type of trade if they feel it could open the door to market abuse or conflicts of interest.
In addition to blackout periods, some companies might designate trading windows i.e. periods when employees are allowed to trade company stock. These might occur after the public disclosure of financial results, for example.
To prevent short-term employee trading using confidential information, some companies may enforce holding periods that require employees to hold onto the stock for a specified duration before selling.
Disclosure and reporting requirements
Employees are obliged to disclose all their holdings and transactions to their employer. Some companies require broker statements to be submitted for auditing.
Conflict of interest declaration
Employees must declare any financial securities in their or their immediate family’s possession that could conflict with their duties to the company and its clients.
While not a restriction per se, companies encourage employees to report any suspicious trading activities in their knowledge by providing avenues for anonymous reporting.
Restricted access to information
Private company information should be disclosed only to essential parties in order to limit the number of employees with access who could use it for insider dealing.