Compliance Solutions for Investment Advisers

Alert – Insider Trading

The purpose of this Compliance Alert is to familiarize you with key insider trading concepts and issues.

What is Insider Trading?

The buying or selling of a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of “inside” information.

What is Inside Information?

Material information about securities that has not been disseminated to, or is not generally available to, the general public.

Who is an Insider?

The rule against insider trading prohibits trading while in possession of information which is received, directly or indirectly, from an “Insider” who discloses that information through a breach of duty. Insiders include officers, directors, members, and employees of a company.  In addition, a person can be a “temporary insider” if he or she enters into a special confidential relationship in the course of performing services for the advisory firm and, as a result, is given access to information solely for the company’s purposes.

When is Information Material?

Information is “material” if its disclosure would be likely to have an impact on the price of a security or if reasonable investors would want to know the information. Either positive or negative information may be material.

When is Information Public?

Information is “public” when it has been disseminated broadly to investors in the marketplace.  Tangible evidence of such dissemination is the best indication that the information is public.  For example, information is public after it has become available to the general public through a public filing with the SEC, publication on the Dow Jones Newswires, The Wall Street Journal or some other publication of general circulation and after sufficient time has passed so that the information has been disseminated widely.

How to Prevent Insider Trading

Any question as to what constitutes material nonpublic information should be resolved in the most conservative fashion (i.e. that the determination be made that the information in question is material nonpublic information) or the question should be referred to the Chief Compliance Officer.
Before trading for yourself or others in securities of a company about which you may have potential inside information, ask yourself the following questions:

Is the information material?

  • Is this information that an investor would consider important in making his or her investment decisions?
  • Is this information that would substantially affect the market price of the securities if generally disclosed?
Is the information public?
  • To whom has the information been provided?
  • Has the information been effectively communicated to the marketplace by being published in a publication(s) of general circulation?
If an employee receives information that may constitute material, nonpublic information, the employee:
  • Should not buy or sell any securities, including options or other securities convertible into or exchangeable for such securities, for a personal account or a client account;
  • Should not communicate such information to any other person (other than the Chief Compliance Officer); and
  • Should discuss promptly such information with the Chief Compliance Officer.
Under no circumstances should information that may constitute material, nonpublic information be shared with any persons not employed by the advisory firm, including family members and friends.
THE PREVENTION OF INSIDER TRADING IS THE RESPONSIBILITY OF EVERY PERSON ASSOCIATED WITH AN INVESTMENT ADVISORY FIRM.

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