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Firms should update policies after SEC expands insider trading definition

Lawyers recommend updating insider trading policies to explicitly restrict trading by insiders in third party companies that could be considered 'economically linked'

Following a US district court’s denial of former Medivation director Matthew Panuwat’s motion to dismiss a complaint against him, firms should update their insider trading policies and procedures in anticipation of the regulator’s more expansive interpretation of insider trading laws.

As affiliate publication Regulatory Compliance Watch reported, Panuwat’s lawyers argued that the complaint, alleging that Panuwat used material nonpublic information about Pfizer’s then-pending takeover of Medivation to profit on shares in a third public company – known as a ‘shadow trade,’ exceeded current insider trading law and violated his due process rights.

While the case is still in its early stages and its final decision and impact on insider trading prosecution is unknown, it shows that the SEC plans to broadly interpret its enforcement powers when pursuing insider trading violations.

The case also poses compliance risks for investment managers in drafting and implementing MNPI and restricted list policies and procedures. Law firm Seward & Kissel advised that investment managers review their compliance, employee training and insider trading policies in light of the risk that the SEC’s interpretation of illegal shadow trading come to encompass a broader range of securities beyond the parties to a transaction, such as competitors or comparable companies in an industry.

With that in mind, White & Case advised companies to consider explicitly restricting their insider trading policies to include trading by insiders in third party companies that could be considered “economically linked.”

White & Case offered the following policy as an example:

“No insider may buy or sell securities of another company at any time when the insider has material non-public information about that company or has material non-public information that could affect the share price of that company.”

Firms should also carefully review confidentiality or similar agreements to determine whether they create a duty wider in scope than refraining from trading the securities of the counterparty issuer.