Insider Trading: Role of the Compliance Officer

A few years ago, SEBI’s Insider Trading Regulations were amended to specifically introduce the concept of self-regulation as a mechanism to enforce prohibitions on insider trading in companies. This particularly applies to trading by company insiders (such as directors and employees) in shares of a company prior to significant announcements. In that set of amendments, SEBI prescribed a model code of conduct that listed companies are expected to adopt. More importantly, each company is expected to appoint a compliance officer to ensure compliance of the code of conduct. The duties of the compliance officer include closure of the trading window prior to key announcements, during which period employees are prohibited from trading in securities of the company. By pinning responsibility on a single individual such as the compliance officer, the idea seems to have been to introduce an additional level of gate-keeping to ensure compliance with, and enforcement of, the prohibition on insider trading.

The role and responsibilities of the compliance offer under the Insider Trading Regulations came under scrutiny in a recent adjudication order of SEBI involving the compliance officer of Satyam Computer Services Limited. Specifically, SEBI’s charge is that the compliance officer failed to close the trading window of the company prior to its board considering the transaction involving the proposed acquisition of shares in Maytas Infra Limited and Maytas Properties Limited, which transaction has been the subject-matter of great debate previously in the context of corporate governance issues (which are not entirely relevant here). After the board meeting on Dec. 16, 2008 that considered the transaction (which ultimately fell through), the share price of Satyam dropped drastically, before which certain employees of Satyam had already sold their shares. Had the compliance officer closed the trading window, those employees would not have had the opportunity to cash out at a high price.

The key question for SEBI’s consideration was the extent to which the compliance officer must be deferential to the board. In other words, should the compliance officer act pursuant to the instructions of the board, or should he act independently? In the present case, Satyam’s compliance officer argued that since he did not receive any instructions from the board to close the trading window, he had no obligation to do so, and that he had therefore not flouted the model code of conduct. Moreover, he argued, the transaction was only in the form of a proposal, and that closing the trading window in that context might have led to adverse speculation. However, these arguments were not accepted by SEBI’s adjudicating officer, who returned a finding of violation of the code of conduct.

SEBI’s order seems to suggest that the compliance officer is not to be deferential to the board, or only act under its supervision. He is required to discharge certain responsibilities nevertheless. This stance is evident in the following extracts:

12. I find that as per the abovementioned provisions, the Noticee being the Compliance Officer of SCSL, one of the key personnel had very major role to play in the company, of monitoring adherence to the rules for preservation of price sensitive information and implementation of the Code. Even though the clause specifies that the compliance officer is to execute his responsibilities under the overall supervision of the Board, yet the provision confers key responsibilities on the compliance officer per se, which cannot be overlooked. …

14. … From the proposal stage itself, such information becomes price sensitive and remains so till decision thereon is disseminated to the public. As the proposal is not in public domain, it is imperative on the compliance officer to close the trading window so that insiders and connected persons do not take advantage of such information. In case any internal approvals are required, he may take them but ensure that the trading window is closed on time. As compliance officer, he cannot raise the defence that internal approvals were not available. Such contention, if accepted, would render the concept of appointment of compliance officer meaningless and is therefore not acceptable.

Consequent upon its finding on this question, SEBI imposed a penalty of Rs. 5,00,000 on the compliance officer of Satyam.

This approach seems to elevate the responsibilities of the compliance officer under the internal codes of conduct of companies (on insider trading) to the next level than might have been previously thought. It also seems to suggest an independent and impartial role to be played by the compliance officer in a manner that is independent of the board. Allegiance of the compliance officer is not owed to the company or its board, but rather, it appears, indirectly to the regulator. While it signals SEBI’s greater reliance on self-regulation as a method of enforcement, this is bound to raise some practical difficulties within companies’ organisational structures and reporting lines. It might be advantageous for companies to revisit their internal insider trading compliance measures in the light of SEBI’s order, but at the same time one may also have to wait and watch whether a different outcome would ensue if the compliance officer in Satyam’s case were to go on appeal.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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