The Wave of Insider Trading Measures Reaches Small and Medium Enterprises
When you hear “insider trading prevention,” many SME executives tend to think, “That’s only for listed companies.” However, as the Gold Online article “Considering Insider Trading Prevention (Compliance)” points out, this issue is far from irrelevant.
For SMEs aiming for an IPO or those doing business with listed companies, building a system to prevent insider trading is an unavoidable challenge. The Financial Services Agency’s monitoring is tightening every year, and the number of administrative monetary penalty orders in fiscal 2023 hit an all-time high.
A common pitfall for SMEs is the situation of “not knowing the rules” or “having no internal information management.” It’s not uncommon for executives themselves to handle important non-public information without understanding how that information flows within the company.
Why SMEs Need to Act Now
Insider trading prevention is not just a compliance issue. It involves the risk of losing trust from business partners, significant negative evaluations during IPO screening, and, most importantly, the possibility of executives themselves facing criminal penalties.
For companies preparing for an IPO, securities firms and audit corporations strictly check for the existence of an insider trading management system. The reality is that “I didn’t know” is no excuse.
The Core Challenges of Insider Trading Prevention
The fundamental problem for many SMEs is the complete lack of an information management system. Important non-public information exists only “in the executive’s head,” and it’s unclear who has access to that information.
As the Gold Online article also mentions, the basics of insider trading prevention lie in “proper information management” and “informing relevant parties.” However, SMEs face the following specific challenges:
Unclear Location of Information
There’s a risk that information known only to executives or a few managers could leak internally or externally at any time. Particularly, information about IPO preparations, M&A, or new business plans often becomes known to multiple people within the company.
Formalized Rules Without Substance
Even if an insider trading prevention policy is created, it’s meaningless without effective implementation. Many companies are satisfied with just creating the policy but fail to put it into actual practice.
Lack of Education
Employees often don’t correctly understand the definition of insider trading or its penalties. The perception that “buying stocks is a personal freedom” still lingers in many cases.
A Practical Approach to Designing Insider Trading Prevention
So, how should SMEs build their insider trading prevention system? We recommend proceeding with the following three steps.
Classification and Management Based on Information Importance
First, classify the information your company holds by importance. Identify information that could be considered insider information, such as IPO preparations, earnings forecasts, major project wins, and personnel changes.
Then, set access permissions for each piece of information, clearly defining who needs to know it. Thoroughly implement the “need-to-know” principle, limiting information only to those who need it.
Developing Internal Rules and Ensuring Effectiveness
When creating an insider trading prevention policy, cover the following points:
– Definition of material facts and a list of corresponding information
– Appointment of an information management officer
– Rules for information transmission (verbal, email, written, etc.)
– Setting of trading blackout periods
– Disciplinary rules for violations
The most important thing is not to “create and forget” the policy. Regular reviews and checks on actual operational status are essential.
Employee Education and Awareness Reform
The biggest barrier to insider trading prevention is employees’ mindset of “this doesn’t apply to me.” Executives themselves must lead by example in following the rules and instill their importance throughout the company.
Effective educational methods include:
– Conducting company-wide training at least once a year
– Case studies using specific examples
– Onboarding education for new employees
– Special training during the IPO preparation period
The Importance of Expert Utilization and External Collaboration
Building an insider trading prevention system is a difficult area to handle entirely in-house. Especially during IPO preparation, it’s crucial to collaborate with experts such as securities firms, audit corporations, and lawyers.
The role of experts is not just to create policies. It’s to design an effective system tailored to your company’s business model and organizational structure. Regular monitoring and improvement proposals are also key roles for experts.
Points to Delegate to External Experts
– Creation and review of insider trading prevention policies
– Support for conducting internal training
– Design of information management systems
– Advice on IPO screening responses
– Regular compliance checks
Actions Executives Should Start Today
Finally, here are three concrete actions SME executives can start today.
Take Stock of Your Company’s Information Management System
First, identify what important information exists in your company and how it is managed. This single task will highlight many problem areas.
Check for Existing Internal Rules
Confirm whether an insider trading prevention policy exists, and if it does, whether it complies with the latest laws and regulations. If not, consider creating one immediately.
Begin Informing and Educating Employees
Communicate the basics of insider trading and your company’s policy to all employees. Especially for companies preparing for an IPO, having everyone understand the rules is a prerequisite for the IPO screening.
Insider trading prevention should never be approached with a sense of obligation. It is a crucial management foundation for protecting your company’s value and achieving sustainable growth. Why not take this opportunity to review your governance system?
Comments