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Another recent development that may affect insider trading policies is the SEC’s win earlier this year under the novel theory of “shadow trading.” In SEC v. Panuwat, a jury decided that an employee was guilty of insider trading for using information about his company to trade in the stock of another company in the industry. Although this case was highly fact-specific, it has spotlighted the notion of “shadow trading” – which gives companies a reason to take another look at how this concept is addressed in their own policies. The Orrick memo that I mentioned in our first blog today says that it’s common to have some sort of language in the policy on this point – but practice varies on how precise it is:

A significant majority of companies in both the software and life sciences sectors restrict at least some trading in the securities of another company, with a minority in each sector limiting the restriction to companies with which the issuer has a business or similar relationship. Considering the data, recent case law and other developments, companies should review their insider trading policies.

This BCLP memo takes a closer look at the case – and suggests points to consider in tailoring your policy (as well as codes of conduct, confidentiality & non-disclosure agreements, and employment agreements):

▪ Is confidential information limited to that obtained in the course of employment?

▪ Do the company’s policies limit or restrict trading in securities of other companies only to such other companies with which the company directly conducts business or has incurred
confidentiality obligations? Should the policies cover all companies that are in the same sector or industry, or in particular competitors?

▪ Should the company consider special blackout periods related to the other economically linked companies?

▪ Should other adjustments be made in the Company’s approach to non-disclosure agreements?

The memo cautions that at the same time, addressing “shadow trading” in your policy requires careful thinking. It recommends that companies consider these issues:

▪ The SEC’s theory that agency law can give rise to a duty of trust, confidence or confidentiality that triggers the misappropriation doctrine, regardless of language in an insider trading policy or confidentiality agreement. While including broader duty language in the policy language might serve to put insiders on notice of the risks related to potential liability, such language could also help demonstrate the existence of a duty where it was less clear under agency law principles.

▪ Whether to avoid creating differences in restrictions on use of confidential information in various documents, such as business codes of conduct, employee confidentiality
agreements, and employment agreements.

▪ Second-order effects from relaxing restrictions in one or more policies while maintaining tighter restrictions in other documents, or vice versa, which may result in disparate treatment of employees or officers.

▪ Whether preclearance of trading or other company policy enforcement should be revisited and enhanced.

– Liz Dunshee