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Leslie Bonacum
Neil Allen

CCH Analyzes NYSE Code Of Ethics Proposal As It Relates To Insider Trading

Significant New Demands Placed on Compliance Officers

(RIVERWOODS, ILL., June 11, 2002) – Among the more than one dozen new standards and changes in corporate governance proposed by the New York Stock Exchange (NYSE) recently is a change that would mandate that all its member companies establish and follow a code of business conduct and ethics. During these days of highlighted scrutiny for publicly held firms and diminished investor confidence, the code would apply to the directors, officers and employees of the more than 2,800 NYSE-listed companies.

While the recommendations proposed by the NYSE Corporate Accountability and Listing Standards Committee stopped short of specifically defining the code, the rules made it very clear what they expected to see in the code and the ramifications for not complying, according to CCH INCORPORATED (CCH), a leading provider of securities and business law information, software and services.

Among those topics the NYSE wants to require listed firms to include in their code of ethics are:

  • Prohibiting employees, officers or directors from using corporate information, property or their position in the organization for personal gain, and

  • Directing companies to "proactively promote compliance with laws, rules and regulations, including insider-trading laws."

Under the NYSE proposed rules, companies found in violation of the rules could ultimately be suspended or delisted from the exchange.

"The committee is making it very clear that it no longer just expects, but it is now mandating, that employees of publicly traded companies play by the same rules – with the same level of potential information – as any other investor," said Mitchel Kraskin, president of Compliance Tools, Inc. (CTI), a CCH Securities Group company. "The NYSE also is making it quite clear to companies that they can’t look the other way while employees, board members or directors profit from restricted knowledge. Under these rules, the NYSE is seeking permission to actively go after any member company that tolerates or doesn’t actively guard against such illegal behavior by its employees."

While compliance officers may see it as a Herculean effort to monitor the trading activity of hundreds or thousands of employees, it’s not impossible, according to Kraskin.

"Under federal law, the mutual fund industry has been required to monitor employee trading activity since 1994, and some companies that already have established voluntary codes of ethics have also begun monitoring their employees’ trading," said Kraskin.

Among the steps these organizations are taking to guard against inside trading and that publicly traded companies may need to consider if the proposed rules pass are:

  1. Pre-clearance of trades – Under this approach, employees must gain permission from their company prior to executing a stock purchase or sale. This can be done through browser-based technology, where employees tap into the company intranet to submit their trade requests. Those employee requests are then checked against the company’s list of restricted stocks. These are stocks the employer does not allow employees to trade in at particular times given a potential conflict, for example, the employer’s own stock at given times, or that of a potential acquisition, partner, etc. Based on the outcome of that check, employees are either granted or denied their trade requests.

  2. Back-end trade checking – As a second check, companies also can look at trades after they’ve been executed. In the mutual fund industry, for example, the employer receives a copy of any trade execution confirmation. This can be electronically compared against the firm’s restricted list to check that no violations have occurred. It also can help identify any potential patterns of abuse, for example, an employee consistently trading in a stock two days prior to it being added to the company's restricted list could indicate that the employee has potentially been trading on inside information.

"As the NYSE states in the report of its proposed rules, there’s no code of ethics that can replace ethical directors, officers or employees," said Kraskin. "But sometimes, whether intentionally or unintentionally, employees could be violating insider trading rules and, given the risks, there are steps that compliance officers are going to need to start to think about to help ensure that their companies are in compliance once the rules are enacted."

Based on the NYSE recommendations, once the rules are adopted, companies would have two years to comply.

About CCH Securities Group

CCH has been tracking, reporting and analyzing securities law since the creation of the Securities and Exchange Commission. Through CCH Wall Street (, CCH offers a suite of compliance tools and news products, including CTI rList™, an enterprise-wide software tool designed for organizations that need to maintain surveillance of their employees’ personal trading against restricted lists, and SEC Compliance Desktop software for administering and complying with SEC regulations relating to insider trading, employee stock purchase plans and stock option plans.


CCH INCORPORATED, founded in 1913, has served four generations of business professionals and their clients. The company produces approximately 700 print and electronic products for securities, tax, legal, banking, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at  The CCH Business and Finance site can be accessed at

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EDITORS NOTE: For members of the press, a complimentary copy of CCH Journalists' Guide to Writing About Securities is available by contacting: Leslie Bonacum, 847-267-7153 or



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