We’ve all been blogging quite a bit about prediction markets in recent months. Many of those blogs have discussed the need for public companies to consider addressing issues associated with prediction markets in their insider trading policies. However, this BCLP blog says that recent enforcement actions highlight the need for companies to take into account the implications of prediction markets on other corporate policies & controls and procedures. Here’s an excerpt:

Even though wagers or participation in prediction markets may not necessarily involve trading in traditional securities, federal authorities view them as potentially implicating anti-fraud and related statutes – with focus on the use of material nonpublic or confidential information.

Companies should consider updating their controls and procedures, which were likely developed before the emergence of events contracts. Careful drafting will be important, including defined terms, scope of trading restrictions, and oversight for internal reporting, compliance and enforcement.

Codes of Conduct. Key areas of focus could include:

– Reviewing prohibitions on use of confidential information for personal gain – whether they capture new types of trading or betting.

– Consider expressly addressing prediction markets, as well as prohibiting betting or trading based on confidential information.

– Potential application of policies relating to conflicts of interest and reputational risk.

Insider Trading Policies.

– Consider addressing trading based on confidential information that may not involve securities, such as event-based contracts or otherwise not involving company stock.

– Consider whether to reference or include relevant provisions of the Code of Conduct in such policies.

– Any discussion of Rule 10b5-1 plans may need to be revised as it may not be clear how the Rule could work, if at all, for prediction market contracts.

Education.

Many employees may not recognize the relevance of compliance rules to prediction markets given the wide proliferation of betting on political, sporting and other public events.

– Consider whether to address these concerns in training materials, including examples of problematic event-based trades.

– Consider whether to address them in employee certifications.

The blog also points out that these issues may also be relevant to private companies and non-profits, since they often aren’t related to traditional transactions in securities. These enterprises would be prudent to undertake similar reviews of their own controls and procedures, codes of conduct, and policies relating to confidentiality, conflicts of interest or reputational risk, as well as codes of conduct.

– John Jenkins