Restricted list

An intermediary knows things about its clients. A merchant banker running an issue, a law firm papering a merger, a broker executing a large institutional order — each holds information about a company that the market does not have.

The restricted list is how that knowledge is turned into a control without being disclosed. The compliance officer records, confidentially, the scrips in which the firm currently holds or is exposed to price sensitive information. When a designated person applies for pre-clearance, the application is checked against the list: on the list, refused; off the list, considered on its merits.

The list is deliberately not circulated. Publishing "we are restricted on Sunrise Pharma" would itself be a signal that something is happening at Sunrise Pharma.

The restricted list is a Schedule C control — the minimum standards for the code of conduct of intermediaries and fiduciaries — and it sits in a specific sequence.

1. Information is handled on a need-to-know basis, with Chinese Wall procedures and a defined process for permitting a designated person to "cross the wall".
2. Designated persons may trade, but trading is subject to pre-clearance by the compliance officer where the value exceeds the threshold the board or head of the organisation stipulates.
3. The compliance officer confidentially maintains a list of such securities as a "restricted list", which shall be used as the basis for approving or rejecting applications for pre-clearance.
4. Before approving, the compliance officer seeks a declaration that the applicant is not in possession of UPSI, and considers whether that declaration is capable of being rendered inaccurate.
5. A cleared trade must be executed within a timeframe not exceeding seven trading days, failing which fresh pre-clearance is required.

Note what is not in Schedule C: the notional trading window of Schedule B. For an intermediary or fiduciary the restricted list does that work, because the relevant information concerns other companies' securities rather than its own.

Meridian Capital is a merchant banker. In March it is appointed to a Rs 900 crore rights issue for Arcadia Infrastructure Ltd and is simultaneously advising Helios Cements on an acquisition.

The compliance officer adds Arcadia and Helios, and the likely target of the Helios acquisition, to the restricted list. Nobody outside compliance is told why any name is on it, or that the target is on it at all.

In April a designated person on Meridian's institutional equities desk applies for pre-clearance to buy 8,000 Helios shares at Rs 1,120 — Rs 89.6 lakh, above the board's Rs 25 lakh pre-clearance threshold. The application is refused. The dealer is not told that Meridian is advising Helios; he is told only that pre-clearance is declined.

In May the same dealer applies to buy Rs 40 lakh of an unrelated cement company that is not on the list. The compliance officer takes his declaration that he holds no UPSI, satisfies himself that the declaration is not obviously capable of being rendered inaccurate, and clears the trade — to be executed within seven trading days.

Once the Helios deal is announced and the information becomes generally available, the name comes off the list. Nothing about the list is ever published.

Chapter 7, Schedule C (minimum standards for the code of conduct of intermediaries and fiduciaries). The tested points are that the list is confidential, that it is maintained by the compliance officer, and that its purpose is to be the basis for approving or rejecting pre-clearance applications. A common question contrasts the Schedule B and Schedule C machinery and asks which control belongs to which.

• The restricted list is confidential. An option saying it is circulated to all designated persons, or published on the website, is wrong — and disclosing it would leak the very information it protects.
• It is maintained by the compliance officer, not by the board and not by the dealing desk.
• Its function is pre-clearance screening. It is not a list of securities the firm may not trade proprietarily, although a firm will usually impose that separately.
• Schedule C has a restricted list and no notional trading window; Schedule B has the trading window and no restricted list. Listed intermediaries operate both, for different securities.
• Refusal of pre-clearance is not an accusation. The applicant is told no, not why, because the reason is itself confidential.
• A cleared trade still has to be executed within seven trading days, and a decision not to trade after obtaining clearance must itself be reported in the format the code prescribes.