My ongoing tribute to 50 years of practical guidance from The Corporate Counsel continues this week with yet another article that I contributed to the publication that I find particularly useful and go back to time and time again in my practice. But first, yet another reflection on my interactions with The Corporate Counsel over the years.

When I served as Chief Counsel of the Division of Corporation Finance back in the 2000s, I would occasionally receive calls from Jesse Brill about topics that he was covering in The Corporate Counsel or The Corporate Executive. Even though some in Corp Fin told me not to talk to Jesse, I found it useful to discuss topics with him and understand his point of view, while of course trying to say as little as possible that he could attribute to me! Jesse was well known by the Corp Fin Staff, because over the years he was always willing to engage with the Staff in pursuit of providing the readers of The Corporate Counsel with the most practical, up-to-date guidance.

A topic that we frequently cover in The Corporate Counsel is insider trading policies, and for many years we have provided readers with a model insider trading policy and related materials. It has always been gratifying for me to see how many issuers follow The Corporate Counsel’s model policy, proving that it has been a great resource for companies seeking to implement effective insider trading compliance programs.

In the November-December 2018 issue of The Corporate Counsel, as part of our periodic update of the model insider trading policy, I wrote a piece that delved into the “why” of insider trading policies. I believe that understanding why companies adopt insider trading policies is very helpful when implementing an effective insider trading compliance program and dealing with compliance issues that come up over time. The article notes:

Often when we revisit an issuer’s insider trading policy and procedures, the question inevitably arises of “why do we need an insider trading policy?” As insider trading policies have become ingrained into issuers’ ever-expanding menu of controls & procedures, we fear that sometimes the importance of the policy and procedures (to both the issuer and the insiders/employees) is lost.

If insiders/employees are looking at the insider trading policy as yet another policy that they glance over in the employee handbook, unfortunate errors in judgment can prevail and an individual (and perhaps the issuer) could face an SEC enforcement action or private securities litigation. For these reasons, we do not think it hurts to review the legal basis for having the insider trading policy and whether the policy and the procedures that it contemplates operate in a manner consistent with that legal standard.

Enter ITSFEA and the Modern Insider Trading Policy. While insider trading policies have been a mainstay for regulated entities (e.g., broker-dealers, funds, banks) for many years, it was not until the enactment of the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) that the notion of having a detailed insider trading policy and implementing procedures for other types of issuers began to take hold. Prior to the middle of the 1980s, the insider trading enforcement tools at the SEC’s disposal were relatively weak, limited to seeking injunctions against future violations and disgorgements of profits or losses avoided.

With insider trading scandals running rampant at the time, Congress was prompted to act, first enacting the Insider Trading Sanctions Act of 1984 (which gave the SEC the authority to seek treble civil monetary penalties) and then ITSFEA. The changes to the securities laws in ITSFEA included: (i) mandating that regulated entities such as broker-dealers and investment advisers must adopt, maintain and enforce policies and procedures designed to prevent insider trading; (ii) providing that entities (including issuers) could be subject to insider trading violations by persons who the entities directly or indirectly control; and (iii) expanding the definition of
“controlling person.”

The concept of controlling person liability as contemplated in ITSFEA changed the dynamic between the issuer and its insiders/employees. Under the ITSFEA provisions, controlling person liability would not apply in situations where the controlling person has “acted in good faith and did not directly induce the violation;” however, if the controlling person allows access to material nonpublic information (either about itself or about other entities) without implementing procedures to prevent the improper disclosure of the information or insider trading, then the controlling person could be subject to liability based on the controlled person’s actions.

The hits just keep on coming, folks! Stay tuned for my final 50th Anniversary blog tomorrow! If these celebratory blog posts give you the irresistible urge to subscribe to The Corporate Counsel newsletter, please email info@ccrcorp.com or call 1.800.737.1271 to get signed up.

– Dave Lynn