Insider trading is the illegal practice of trading stocks and securities based on material, nonpublic information obtained by a person who holds a fiduciary or confidential relationship with a company. As an employee, you may be privy to information about a company’s operations and plans that could give you an unfair advantage if you use it to buy or sell securities. It is important to understand the rules and regulations that govern insider trading and to be aware of your obligations when you leave the company. In this article, we will discuss what you need to know to stay compliant with insider trading laws when you leave the company and get insider trading insights.
Insider Trading After Leaving a Company
Duty to Maintain Confidential Information
Even after an employee has left a company, they are still obligated to maintain the confidentiality of any information they have been given access to during their tenure there. Even after the individual’s employment with the company has ended, the corporation still expects them to maintain the confidentiality of any information deemed to be sensitive. This obligation extends to past workers as well as current workers, and it covers any information that is not readily accessible to the general public. Information that should be kept confidential, such as a firm’s trade secrets, client lists, and financial data, should be kept that way until the company decides to make the information public.
Restrictions on Trading
It is forbidden for anyone to participate in any kind of commercial transaction that could gain from the disclosure of confidential information. This includes buying or selling shares of the company as well as any of the companies that are the company’s competitors. In addition, persons are required to refrain from having any kind of conversation with anyone else that might lead to the disclosure of sensitive information.
Prohibited Communications
Individuals must not communicate with current employees, other former employees, or third parties regarding any confidential information. They must also avoid any discussions that could lead to the sharing of confidential information. This includes conversations about the company’s financial performance, plans, or potential investments. Additionally, individuals must not provide false or misleading information to anyone regarding the company’s financial performance or plans.
Best Practices for Compliance
Understand the laws and regulations related to insider trading
When an individual leaves a company, they must be aware of the laws and regulations related to insider trading. This includes understanding the regulations of the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) which govern the buying and selling of stocks. Additionally, individuals must be aware of their company’s policies and procedures regarding trading. All of this information can be found on the FINRA and SEC websites.
Refrain from discussing potential investments or trades
Former employees of a company should not discuss the possibility of future investments or trades with anybody, including members of their immediate or extended family, friends, or even past coworkers. To do so may be considered a breach of insider trading laws, which may result in legal action being taken against you.
Maintain a paper trail
Former employees are required to keep a paper record of any stock market-related investments, trades, and talks that take place after they leave the company. This should include records of when stocks were acquired and sold, as well as how those transactions took place. It is possible to utilize this information to establish compliance with the laws and regulations that pertain to trading on inside information.
Refrain from buying or selling stocks during a blackout period
Former employees should avoid buying or selling stocks during a blackout period. A blackout period is a period, usually between two and four weeks, during which employees are prohibited from buying or selling stocks. During a blackout period, the company’s financial information is subject to review and any trades made during this time could be seen as a violation of insider trading laws.
Avoid making trades based on confidential information
Ex-employees have a responsibility to avoid participating in financial dealings that are founded on the knowledge that is considered confidential. The following contains information that has not yet been made available to the general public or that has been obtained from a reliable source. If you decide to proceed in this fashion, you expose yourself to the possibility of facing legal action as well as significant financial repercussions.
Monitor Your Trades
When you leave a company, it is important to be aware of your trading activities and to ensure that they are compliant with the laws and regulations that govern insider trading. As an individual investor, it is important to monitor your trades and to have a clear understanding of the rules and regulations that you must comply with when trading in securities.
It is highly recommended that you keep a log of all of your trades, including the date, time, security traded, price, and volume. This will allow you to easily track your investments and ensure that you are not engaging in any activities that could be considered insider trading.
Avoid Tipping
Insider trading is illegal, and it is important to be aware of the risks associated with trading in securities after leaving a company. One of the most important aspects of avoiding insider trading is to avoid “tipping”, which is when you communicate confidential information to another person who may use that information to buy or sell securities.
For example, if you were to tell a friend or family member that a company was about to announce an acquisition, this could be considered tipping and could lead to insider trading charges. To avoid any potential legal issues, it is important to avoid tipping and to keep all confidential information to yourself.
Follow Corporate Policies
In addition to understanding the rules and regulations regarding insider trading, it is also important to be familiar with the corporate policies of the company you are leaving. Many companies have policies in place that restrict the trading of securities by former employees.
These policies are in place to ensure that the company’s confidential information is not shared with anyone outside of the company. It is important to be aware of these policies and to comply with them to avoid any potential legal issues.
Report Suspicious Activity
If you are aware of any suspicious activity related to insider trading, it is important to report it to the appropriate authorities. This could include reporting any suspicious trades that you become aware of, as well as any conversations or meetings that you believe may be related to insider trading.
By reporting suspicious activity, you can help to protect the integrity of the markets and to prevent people from engaging in illegal activities.
Seek Legal Advice
Finally, it is important to seek legal advice if you are ever uncertain about whether or not your trading activities are compliant with the laws and regulations that govern insider trading. An experienced securities attorney can provide you with valuable advice and can help you to ensure that you are complying with all applicable regulations.
It is important to remember that insider trading is a serious offense and can result in severe penalties. By following the best practices outlined in this chapter and seeking legal advice, you can help to ensure that you are not engaging in any activities that could be considered illegal.
SEC Regulations Governing Insider Trading
Section 16 of the Securities Exchange Act
Section 16 of the Securities Exchange Act of 1934 (the Exchange Act) is the primary law that prohibits insider trading. It applies to “insiders” of publicly traded companies, which includes officers, directors, and large shareholders who own more than 10% of the company’s stock. These individuals are subject to certain restrictions when buying or selling the company’s securities.
Under Section 16, insiders are prohibited from buying or selling the company’s securities when they possess material, non-public information (MNPI). This means information that is not publicly available and could have an effect on the stock price of the company. Insiders must also file a Form 4 with the SEC within two business days of buying or selling the company’s securities.
Finally, Section 16 requires insiders to disclose any transactions to the company’s board of directors or a committee of independent directors. This disclosure is typically made in the form of Form 5.
Rule 10b5-1 Trading Plans
Rule 10b5-1 trading plans are a set of guidelines issued by the SEC that allow insiders to buy or sell their company’s securities without violating Section 16. These plans provide a safe harbor from charges of insider trading because they are designed to ensure that insiders are not taking advantage of MNPI.
Under Rule 10b5-1, insiders must create a written plan that outlines the criteria for trading the company’s securities. These criteria must be set in advance before the insider possesses MNPI. The plan must also specify the amount and type of securities to be traded, the price at which they will be traded, and the date or dates on which the trades will take place.
To comply with Rule 10b5-1, insiders must also follow certain procedural steps. Insiders must provide a copy of the plan to the company’s board or a committee of independent directors. They must also disclose any trades they make under the plan to the SEC on Form 4. Finally, insiders must not modify or cancel the plan while in possession of MNPI.
By following the guidelines outlined in Rule 10b5-1, insiders can ensure that their trading activity does not violate Section 16 of the Exchange Act.
Conclusion
Insider trading after leaving a company can be a tricky area to navigate. It is essential for former executives and employees to understand the laws regarding insider trading and to stay compliant with them. Insider trading is a serious offense that can result in significant civil and criminal penalties. Former executives and employees should be aware of the laws and regulations that apply to them and should avoid engaging in any activity that could be considered insider trading. Additionally, they should consult with legal counsel to ensure they are complying with all applicable laws.
