Insider Trading
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1 Insider Trading
The firm will comply with the Insider Trading and Securities Fraud Enforcement Act. The firm is required to establish, maintain, and enforce written policies and procedures that are “reasonably designed” to prevent and detect insider trading abuses, including the misuse of inside information by employees or the circulation of industry rumor that may harm markets and their investors. Failure to comply with these requirements can result in significant civil or criminal penalties. Regulators have the authority to examine firms for the adequacy of their insider trading surveillance systems.
1.1 Regulation and Firm Policy
Firm policy prohibits APs from effecting securities transactions in any fashion while in the possession of material, non-public information. APs are also prohibited from disclosing such information to others. The prohibition against insider trading applies not only to the security to which the inside information directly relates but also to related securities, such as options or convertible securities.
Trading prohibitions are for any account, whether for the firm, any client, their own account, and any accounts in which they have direct or indirect beneficial interest - including accounts for family members.
The prohibition against insider trading includes:
Being in possession of material non-public information about a company or the market for a company’s securities, one must either publicly disclose the information to the marketplace or refrain from trading.
Generally, disclosure is not an option and the effect is to require an individual to refrain from trading. The firm may not communicate inside information to a second person who has no official need to know the information.
Information is considered material if there is a substantial likelihood that a reasonable investor would consider it important in deciding to buy or sell a security. In addition, information that when disclosed is likely to have a direct effect on a security’s price should be treated as material. Examples include information concerning impending tender offers, leveraged buy-outs, mergers, sales of subsidiaries, significant earnings changes and other major corporate events.
Generally, a person violates the insider trading prohibition when that person violates a duty owed either to the person on the other side of the transaction or to a third-party (such as a client or employer) by trading on or disclosing the information. The insider trading prohibition applies to an issuer’s directors, officers and employees, investment bankers, underwriters, accountants, lawyers and consultants, as well as other persons who have entered into special relationships of confidence with an issuer of securities.
Virtually anyone can become subject to the insider trading prohibition merely by obtaining material non-public information by unlawful means or by lawfully obtaining such information and improperly using it. This is known as misappropriation.
If the firm or an AP receives material, non-public information as part of its legitimate business dealings on behalf of the firm or its clients, and that is used to trade in securities or transmit information to another person for purposes of trading in securities (so-called “tipping”), the AP or firm would likely be guilty of insider trading.
Insider trading liability may also be derivative, such as a person who has obtained inside information (so-called “tippee”) from a person who has breached a duty or who has misappropriated information may also be held accountable.
The firm may be deemed an insider when it comes into possession of inside information through its various activities with public and private corporate clients. The firm will remain an insider as long as it has inside information, regardless of whether the client or prospective client decides to engage another registered investment adviser firm or whether the firm declines to accept the proposed engagement.
1.2 Confidentiality of Material Non-Public Information
Material non-public information should be communicated only when there exists a justifiable reason to do so on a “need to know” basis. Before information is communicated to persons within the firm or another person believed to have a need to know, it must be pre-approved by the CCO. Contacts with other managers may represent an important part of the firm’s research and ongoing due diligence efforts. In the course of monitoring professionally managed funds or investments, the firm may obtain access to holdings, trading strategies and other forward-looking strategies or trading plans. It is understood that, in certain circumstances, information regarding proposed trades or other activities relating to securities held by the aforementioned funds may constitute material, nonpublic information. Consequently, when the firm becomes aware of forward-looking activities which may impact the price of a publicly traded security, such as planned trades, litigation, or any other potential fund manager strategy which may impact the price of a security, it is the firm’s policy to immediately add the security and/or issuer to its published restricted list.
1.3 Sanctions for Insider Trading
The sanctions for violations of Insider Trading laws are severe and include criminal penalty. Not complying may result in harsh consequences for individuals involved, including investigations by the SEC or state authorities, criminal and civil prosecution, disgorgement of profits realized or losses avoided through use of the nonpublic information, civil penalties of up to $1 million or three times profits or losses, whichever is greater, exposure to additional liability in private actions; possibly incarceration and criminal fines may also occur.
1.4 Annual Certification
All APs are required to annually certify their knowledge and compliance with firm policy, which includes insider trading.