What Should Be Your Trading Restrictions For Employees?

When investment firm employees make personal trades with financial instruments, they do so on the proviso that the activity in their portfolio does not affect their employer or the market in a negative manner. In order to formalise this approach and ensure employee personal trading compliance, companies will often place trading restrictions for employees within their employee personal trading policies. 

This policy often forms part of your code of conduct and acts as a reference point for employees with regard to their behaviour. It details the compliance requirements, ensuring employee personal trading compliance with the pertinent legislation relating to your business, and informs staff of their obligations, the restrictions on their trades, and the consequences of failing to adhere to the policy. 

Why establish trading restrictions for employees?

Trading restrictions are essential for employee personal trading compliance, preventing your employees from engaging in transactions that negatively affect the organisation. There are a number of ways in which employee trading could damage the business, including:

Common employee trading restrictions

Restricting employee trades doesn’t mean stopping them from happening completely. It merely helps to prevent detrimental trading behaviours. Below are examples of restrictions you should add to your employee trading policy.

Requiring pre-clearance

Requesting that employees run their trades through a pre-clearance process allows you to set your parameters for what is an acceptable trade and monitor activity for compliance. 

With TradeLog, you can restrict certain activities for your employees. When they seek clearance to make a trade, they will use the platform and will not be able to request pre-clearance for any trades that fall outside of your accepted standards. 

By requiring all employees to follow this procedure, you ensure they do not take non-compliant decisions. You also have an audit trail to show that you have taken reasonable steps to remain compliant. 

Preventing insider trading

MAR prohibits the unlawful disclosure of inside information, described as information of a precise nature “which, if it were made public, would be likely to have a significant effect on the prices of financial instruments” and which “a reasonable investor would be likely to use as part of the basis of his or her investment decisions.” 

It also prevents insiders, those with access to the information, from using it to inform a trade. The reason being that it would give them an unfair advantage over the market, allowing them to confidently buy a stock that is likely to increase in price when the information becomes public. They could also cancel an order for a product that is likely to reduce in price once people hear the information. 

For these reasons, it is a good practice to set out restrictions for the use of inside information in your policy. 

Closed Periods

In order to prevent any compliance issues, many companies implement closed periods or blackout periods during which they restrict officers, directors, persons discharging managerial responsibilities (PDMR) and their close associates from trading in the company’s securities. 

This usually takes place around earnings announcements, with the assumption being that senior figures will have access to knowledge of the likely results and could be accused of using that information for personal gain. Even if the information they possess is not “of a precise nature” and technically not inside information, allowing them to make such trades is still seen as unfair to other market participants and could lead to sanctions against the individual or company. 

No financial transactions with a sanctioned government, entity, security or individual

With trading available on a global scale, your employees might come across opportunities to undertake transactions in a wide range of products. However, in keeping with the ethical approach that your company should promote and encourage, it should be forbidden to deal with any issuer, product or person who has been sanctioned by national governments. 

Although it may still be possible to make these trades on the market, it is unethical and often illegal to carry them out. The reputational damage of being associated with such activity means that these types of transactions should be featured on your trading restrictions list. 

Holding Periods

As a precautionary measure, you could implement a minimum holding period on the investments that your employees make. This is to protect against staff using inside information or other tactics like front-running and spoofing to quickly buy and then sell securities at an inflated profit.  

Setting a holding period of 30 days, for example, means that employees cannot trade the securities again until that period is over. This encourages more long-term investments and prevents quickly offloading products in a manner that could suggest a conduct risk that might reflect badly on the company. 

Conflicts of interest 

As a legal requirement under MAR, employees should declare conflicts of interest with clients if they already own securities that put them in a position of choosing between doing their best for the client and for their own financial standing. 

It makes sense that you should restrict trades that will put employees in a conflict of interest with your clients. This could mean buying shares in a rival, which might lead to them being less inclined to help the client to succeed.

No participation in investment groups or clubs

Being able to monitor employee trades and restrict the types of trades in which they take part requires the company to have oversight of the employee’s activity. 

When employees join investment groups, it is more difficult to monitor their activity and the types of transactions they are making because they are not directly making the trade. Some companies opt to require employees to make direct trades only, meaning that they restrict those conducted through an investment club. 

The importance of educational programmes

Compliance communication with your colleagues is essential to go above and beyond the trade restrictions that you implement. It is one thing to simply ban certain trades, but without understanding why you have restricted them, your employees might not grasp the gravity of breaching them.

Alongside the restrictions that you put in place, you should also educate your employees on the legislation, the sanctions for contravening it and the potential damage to the organisation in the event of non-compliance. 

Keeping lines of communication open between the compliance team and employees means that everyone understands their responsibilities and obligations and works together to prevent wrongdoing and suspicious activity. 

FAQs

Should employees be forbidden from trading?

Employees can carry out trading on their own behalf, but they must remain compliant with the law at all times. This is why it is important for companies to set out a trading policy that presents the restrictions on trades that could lead to regulatory issues for both the individual and the business. 

What is a restricted trading list?

A restricted trading list contains the securities in which an investment firm’s employees should not trade. It will often include those relating to the firm’s clients and, in particular, those that are related to inside information. 

Can a company restrict trading?

A company can restrict the trading of its employees through its policies and procedures. The restrictions are in relation to the various regulatory measures in the jurisdiction.