Use of Blackout Periods to Curb Insider Trading
A couple of years back in 2012 a Manhattan office linked to the United States Attorney initiated criminal investigations to establish whether corporate executives from a list comprising of seven different companies engaged in insider trading by trading shares of their own company’s stock. Since then, it is uncommon to pick up a newspaper and miss an insider trading investigation. At a time when a former Yahoo executive pleaded guilty of committing a securities fraud, another trial was underway involving the director of Goldman Sachs who was accused of leaking insider information of both Procter & Gamble and Goldman Sachs to a friend.
In addition, former hedge fund Raj Rajaratnam has been convicted for insider trading proving that Securities and Exchange Commission is putting a lot of effort in investigating and prosecuting cases of insider trading. However, this does not help restore investor confidence in the financial sector. Some other corporate level strategies should be instituted to prevent governmental interventions in the issue. One such appropriate way is use of “blackout periods” to check flow of sensitive information during trading periods.
In all manner and fashion insider trading undermine investor confidence in relation to integrity and fairness of the securities market. Because of this, all jurisdictions around the world have legislations dealing with insider trading. Undisputedly, the United States has been the longest serving victim of the issue of insider trading. Most of the studies carried out on the issue are carried out in the US and some of the toughest legislations formed to deal with the matter originate from the United States of America (CFA Institute 4). Inside trading has a huge influence in the American financial market and other markets around the world.
The concept of insider trading has two major adverse effects. First, it injures investors by undermining their confidence regarding the financial markets of a company, country or a state. Regarding investors, inside trading makes them trade at a “wrong price.” In other words, an investor is duped to make a bad purchase or sale. Even though, this type of effect has been down played it has significant impacts on the change of perception of investors in any particular securities market. Secondly, inside trading injures Issuers this is because it will delay corporate plans by delaying transmission of information to provide sufficient time for manipulation of stock prices (Anderson 358). As a result, a company in question suffers massive reputation damage when the issue becomes common knowledge.
In addition, insider trading is plain theft. Therefore, inside trading is an issue to be addressed not only by the regulatory frameworks provided by the legislative bodies but also individual corporate initiatives. Form the statistics in figure 1 it is evident that even though financial market crimes are reducing the figures are still alarming. Companies all over the world have developed strategies for curbing insider trading within their management team. These strategies aim at reducing interventions by regulatory bodies such as SEC. Some of these strategies include ethical training programmes that aim at helping employees to avoid activities that would be termed as inside trading. However, one strategy stands out, that is “quiet moments” and “blackout periods.”
Use of windows, quiet moments and blackouts is an appropriate strategy in dealing with the problem of insider trading. Companies that have not institutionalised this method should consider it because of various compelling reasons. For instance, the strategy is preventive in nature, as a result, it minimises the chances of dealing with regulatory authorities in a lawsuit. Another reason is the fact that it helps reinforce investor confidence, because all interested parties are given a level playing ground. This strategy requires that regular windows should exist when directors, officers and employees of a company are kept in the dark regarding trading information.
In the modern financial markets many companies voluntarily create, “blackout periods” these periods commence at the end of a quarter and continues through a quarters’ earnings announcement (Polk 1). Therefore, the concept of blackout periods simply implies that certain officers or management staffs of a company have regular access to non-public information. Therefore, to curb insider trading a company should institute additional precautionary procedures that govern when people that have access to such kind of information should trade (Lanin and Daniela 5).
This strategy only allows individuals categorised as insiders to trade during an open window period. At this particular point, it is more unlikely that insiders possess vital material non-public information that can assist them to trade unfairly (Polk 3). However, several scholars doubt the effectiveness of blackout periods in controlling insider trading. It is argued that insiders do not restrict themselves during the blackout periods. It is merely a paper requirement that they should not trade before an open window is announced. In addition, there are no mechanisms of knowing whether an insider has been exposed to material non-public information (Polk 4). There is also an issue regarding the scope of definition of who an insider is and insider information. As a result, various suggestions have been put across that aim at dealing with insider trading in other ways other than legal interventions. Some of these suggestions include use of pre-arranged schedules for insiders to buy stocks and overlook the whole idea of insider trading. However, there are facts proving that “blackout periods” is the most effective way to prevent insiders from unfairly trading. This is because periods when insiders can be prevented from trading are flexible and can be adjusted as need arises before an open window is reached. Just as a demonstration of the strength of “quiet moments” in dealing with insider trading. There are designated quarterly “blackout periods” (Foley, Sean, Amy, Thomas and Richard 29). These are routine quite moments that are linked to a company’s quarterly release of financial results.
Primarily these periods are designed to keep insiders out of business when they are likely to possess information pertaining earnings of a company. In addition, to this there is event specific “blackouts periods” these are moments that are not linked to a company’s financial reporting cycle. These types of blackout are initiated when a company is facing a situation that complicates confidentiality of material non-public information (Lanin and Daniela 5). Some of these situations include legal proceedings, sales release and product developments, acquisitions and joint ventures can warrant event specific blackouts. Another advantage of this strategy is the fact that the list of people regarded as insiders can be increased in the event that a group of insiders is not clearly defined.
From the above analysis, it is safe to argue that “blackout periods” is an important tool for fighting insider trading. It is true that when it is not implemented appropriately its effectiveness significantly reduces (Lanin and Daniela 4). Prevention of insider trading at the corporate level is important for reducing headlines of insider trading frauds. Companies should be keen on when to uplift or do away with a “blackout period” this should only happen when all financial information has been released to the public and the securities market targeted has had an opportunity to review the information. All factors considered it is possible to reduce insider trading among companies significantly.
In general, it is important to take care of insider trading issue before they escalate to a national level. This will help in maintaining long-term strong reputational image of a company due to absence of insider trading issues. There are weaknesses that are displayed by the “blackout period” strategy. Some of these issues include, lack of sufficient description of an insider and insider information. There is also lack of a standard measure of how much an insider knows regarding a pending stock exchange. However, there are remedies to these situations, first a company can decide to increase its list of targeted insiders depending on their speculation and extend the “blackout periods” so that nothing is left to chance. This strategy depends entirely on the spirit and willingness of a company to eliminate insider trading in today’s financial markets. In addition, it prevents costs that are associated with legal proceedings that are attracted with insider trading. Therefore, in order to reduce national level intervention in the fight against insider trading all companies should consider the use of “blackout periods” to stop insider trading.
Work Cited
Anderson, John P. “Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to Rational Reform.” 2014.
CFA Institute. Literature review on Insider Trading and Insider Trading Regulation. 2013.
Foley, Sean, Amy Kwan, Thomas H. McInish, and Richard Philip. “Director Discretion and Insider Trading Profitability.” Pacific-basin Finance Journal 39 (2016): 28-43.
Federal Bureau of Investigation. Financial Crimes Report 2010-2011. Federal Bureau of Investigation. 5th November 2016.
Lanin, Ari В., and Daniela L. Stolman. “Building a Better Insider Trading Compliance Program.” Insights, 25.3 (2011): 1-9.
Polk, D. “Securities offerings during blackout periods and following quarter-end: What you need to know.” Harvard Law School Forum on Corporate Governance and Financial Regulation, 2012.
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