''Insider trading'' is one of those topics that is endlessly fascinating for books, film and TV, but a total nightmare for any company caught up in a scandal - however, it's fascination rests in the fact that controlling it is more difficult in theory than in practice. It can not only turn operations on their head while investigations take place, but any insider trading risks huge fines and sanctions for the perpetrators and the company in question - even jail time is a risk.
It's no wonder, then, that boards want to keep tight control over insider trading, especially as the world's markets demand ever-increasing amounts of transparency around the whole operational and compliance process. And while no one wants to be the next Martha Stewart - and we don't mean emulating her culinary prowess - there are steps compliance teams can take to help control insider trading and keep track of any vested employee and stakeholder stock interests.
What Is Insider Trading?
Before we dive into possible ways to control insider trading, let's take a quick look at what we mean when we talk about ''insider trading.'' According to Investopedia, an insider ''is a person who possesses either access to valuable non-public information about a corporation or ownership of stock equaling more than 10% of a firm's equity.'' In other words, a company's directors and its high-level executives are insiders. Those insiders are legally permitted to buy and sell shares in the company of which they are an executive, but those transactions must be registered with the authorities, like the Securities and Exchange Commission (SEC) in the US. Legal insider trading includes things like the CEO buying back company shares or employees buying stock in the company where they work. This type of trade is absolutely legal, although it must be identified and reported. What we're really speaking about here is illegal insider trading, which is when non-public material is used for profit. This could mean someone using confidential company information, such as the discussions during a board meeting about new markets or entity rationalization, to make a profit for themselves, perhaps by buying stock before positive news is released or dumping stock when bad news is coming. And that person doesn't have to be an employee of the company - it could be a friend or family member, or someone who is otherwise connected and able to access this information. Increasingly, there is evidence that insider trading is occurring through company digital security being breached and hacked information being used for profit on the stock market.How to Control and Monitor Insider Trading
Insider trading is governed by multiple pieces of legislation, and which is applicable will depend on from where an entity or organization operates. In the US, the Securities Act of 1933 and the Securities Exchange Act of 1934 are the original pieces of legislation impacting US companies. Regulators keep a close eye on trade volumes to try to identify any anomalies that might indicate illegal insider trading. The volume of Company X's stock being traded generally increases after news is issued to the public, but if there has been a dramatic rise in trade without a news release, it raises a red flag for the regulators and can result in an SEC investigation. It's this threat of prolonged investigation, and the potential for that to get into the media and thereby sully the organization's reputation, that has publicly traded companies looking to monitor insider trading - and, of course, the desire to control insider trading.Strategies to Prevent Insider Trading
We've previously covered best practices to prevent insider trading, but let's recap five strategies that could help companies control insider trading:![With the right strategy and best practices, you can better prevent insider trading within your organization.](https://insights.diligent.com/wp-content/uploads/2019/08/strategies-to-prevent-insider-trading-1024x577.png)
The Role of Technology in Controlling and Identifying Insider Trading
Yes, technology - and, specifically, entity management software - is key to helping you to monitor and control insider trading. Historically, detecting insider training was a very manual and laborious process, involving trawling through trading records and employee data to try to identify anyone who has had access to confidential information that could be lucrative for trading. An ITMS uses technology to detect trades ahead of price movements or significant events, automatically gathering and sorting contextual information surrounding employee trades. Technology has made insider trading easier to detect, as AI and machine learning algorithms can scour emails, instant messages and other communications for potential red flags. But all of this cannot operate in isolation; insider trading detection must be accompanied by a robust and up-to-date governance and compliance workflow to ensure any anomalies identified can be compared against current access lists and the corporate record. This is where entity management software and a full governance cloud becomes essential in helping you to control insider trading. Wrapping your entity management software into a full governance cloud platform - such as that offered by Diligent - gives a compliance team the best possible chance to get ahead of insider trading. It offers a secure central repository for all entity-related information, including those top-secret board documents that contain trade-influencing information, as well as a way to securely share documents without sending attachments by email. The governance cloud seamlessly integrates entity management and board information to create a single source of truth for the corporate record, which makes investigations for insider trading more efficient and simpler - there's no hunting for documents, and all director and stakeholder information is securely stored and up to date. Get in touch and schedule a demo to see how Diligent can help keep your organization's governance and compliance in check, and help you to control insider trading.![](/-/media/project/diligent/master/au-whitepaper-images/whitepaper-images/a-buyers-guide-to-esg-data-management-software.png?h=511&iar=0&w=765&rev=263be577-e761-4e63-96ef-8ab461f2c7d1&hash=35A71501C65320AF30D85580C75077F4)
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