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I work for company C and in my contract I have information that I can't buy any company stocks, because it will be insider trading. However, there is an ETF which tracks an index 1:1 to which my company belongs (there are 20 companies in this index, almost equally distributed).

  1. If I buy this ETF, will this be considered insider trading or breaking the rule in my contract?

  2. If yes, then what should I do if I buy this ETF a few weeks before my company start to join this index and now I have this ETF with my company?

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First of all, insider trading is only illegal when you have material, non-public information that affects your trading decision. So if you do not have any pertinent information that could be considered the reason for your trade (i.e. you're making one-off trades and not part of a systematic trading program) then you'd be fine.

As to whether it's a violation of your company contract, read the contract. If it only mentions company stock itself (and probably derivatives, but ETFs are not derivatives) then you should be fine. I strongly suspect that buying (or keeping) an ETF that holds your company's stock would not be a problem.

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    Illegal insider trading is not defined in a company contract, but in the law. The answer then bypasses the question - what if he does have such information?
    – Aganju
    Mar 24, 2021 at 22:38
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    @Aganju It doesn't bypass the question. The question asks: "will [it be] be considered insider trading or break the rule in my contract". This answer neatly addresses both aspects.
    – JBentley
    Mar 25, 2021 at 10:23
  • @JBentley The question TITLE is poorly worded. The OP clearly wants to know if he is breaching contract, or more likely a Code of Businesses Conduct clause. It is also very common for such contracts to prohibit buying competitor stock. IBM employees prohibited from buying Amazon, Google. MSFT say.
    – mckenzm
    Mar 26, 2021 at 5:32
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    @mckenzm OP specifically mentions insider trading in the question body, and it has the insider trading tag. OP also mentions the contract. An answer which addresses both parts is perfectly reasonable. A trade can be insider trading but not in breach of the contract (e.g. OP uses inside information to buy a competitor stock and this is not forbidden in the contract), or it can be breach of contract but not insider trading (OP buys the company's stock without using insider information), or it can be both or neither.
    – JBentley
    Mar 26, 2021 at 8:19
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    @mckenzm It's also worth pointing out that if we interpret the question to be referring only to the contract then it is essentially unanswerable since we don't have a copy of the relevant terms (which is the point that this answer makes).
    – JBentley
    Mar 26, 2021 at 8:23
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Yes it can be, under some circumstances.

Consider the case of Microsoft senior manager who gave a 3rd person information about upcoming Microsoft public disclosure; the 3rd person made trades in an ETF that comprised 8% Microsoft shares.

https://www.sec.gov/news/press-release/2013-268

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    I had no idea. But ... to be fair ... those guys were actually trading in both Microsoft and Barnes&Noble (the other company involved in the disclosure) options directly. They also traded in that ETF that held 8% Microsoft ... but (maybe I'm being generous to them here) my naive impression is that that was just the SEC piling on. They were already nailed on their direct trading (where they made far more money too). (I love their business plan: "Let's use insider trading to get us the capital to start our own hedge fund!" I'm sure they would have gone far with that attitude!)
    – davidbak
    Mar 26, 2021 at 1:22
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Is buying an index ETF which contains my company insider trading?

If you make the decision to buy based on material, non-public information, then yes. Legally, buying an ETF that contains non-trivial quantities of a company's stock is the same as buying the company's stock for insider trading purposes.

If I buy this ETF is it will be considered insider trading or break the rule in my contract?

To know if it breaks the rule in your contract, we'd have to closely analyze the wording of the contract. I'd suspect it doesn't because you suggest that the contract only prohibits you from having a direct interest in the company stock. I suspect it probably would cover, for example, creating an LLC or trust and using it to buy the stock, but I doubt it would cover an ETF that is mostly not this company's stock.

If yes, then what should I do if I bought this ETF a few weeks before my company started to belong to that index and now I have this ETF with my company?

Since the contract probably only prohibits you from buying the stock itself (or something substantially equivalent to it, which the ETF isn't), there's probably nothing special you need to do. And, in any event, you didn't buy the ETF while you were bound by the contract anyway.

However, the bigger problem is not complying with the contract but complying with the laws on insider trading. I would strongly caution you not to sell the ETF at any time when you have material, non-public information about your company. If you pretty much always do and want to sell the ETF, use some safe harbor mechanism permitted by law, such as using a trading plan.

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