World over, regulators tend to provide some level of exemption for Trading plans from requirements of insider trading compliances.
What are trading plans?
A trading plan is typically a pre-arranged plan that enables insiders to trade securities on a predetermined schedule. Essentially, it refers to pre-deciding the ‘what’ (security, transaction type and amount) and the ‘when’.
So let’s get into why these exemptions are allowed for insiders.
What is the regulatory thought process behind it?
Like most things in the financial sector, the exemption is allowable subject to conditions, key amongst which is that the plan not be established based on unpublished prices sensitive information (often referred to as material non-public information) that they might possess at the time of the transactions
Trading plans essentially provide a safe-harbor for insiders that would protect them from any accusations of insider trading so long as they comply with the specific conditions.
Critical Criteria include
A Pre-Determined Structure:
The trading plan must be established when the insider does not possess UPSI.
The trading plan must, at a minimum, specify the amount, price and dates of the trades.
At times, a formula or algorithm that would dictate such decisions is also allowed for since, again, the formula was pre-decided at a time that the insider was not in possession of UPSI. By allowing the plan to be set up only when the insider is not in possession of UPSI/MNPI, insiders are prevented from opportunistically capitalizing on the inside information.
Follow Through:
Once in place, insiders cannot make any changes. Changes indicate an exercise of judgement or influence over how, if and when the transactions occur. Essentially, the trades must stay within the plan parameters. Knowledge of UPSI must not change the plan. Lets take an example to illustrate the regulatory view point:
Insider A has no inside information and submits a trading plan to his Compliance Officer to buy 500 units of security B every month on the very first trading day starting May of that year. Insider A may, in September, come into possession of UPSI that indicates to him that the prices are likely to drop in the second week of October post quarterly results and may decide to delay the purchase till October. This, of course, isn’t acceptable as it is a judgement exercised based on inside information or UPSI, which is fundamentally prohibited.
As such, not only is the ‘what’ sacrosanct, so is the ‘why’ – since the trades are pre-scheduled, they reduce if not entirely eliminate any suspicions of opportunistic insider trading.
Documented:
Trading plans must be documented in writing to ensure subsequent review and to ensure transparency.
Going Forward:
Trading plans have met with varying degrees of success and acceptance across the countries in the world, depending on the sophistication of the markets and the general levels of investment discipline.
Countries like India have launched these relatively recently.
Penetration is expected to deepen significantly. For a compliance officer, however, verification that trades are executed in line with a pre-approved trading mandate tends to be an operational burden prone to error. Insider Trading Compliance management systems like Affinis help automate the verification of trades executed against such trading plans even as Affinis continues to update the beneficial ownership balances.
