The law around insider dealing and market abuse is complicated and difficult to navigate. The penalties for falling foul of the law can be heavy and contravention can result in criminal prosecution. The law is a mixture of civil and criminal law covering primary, secondary and European legislation.
The summary below is a very brief analysis of a very complicated legal area. If you are in any doubt at all you should always seek independent legal advice.
What is inside information?
Inside information is information relating to a company that:
- Is precise
- Is not generally available
- Relates, directly or indirectly, to one or more issuers of qualifying investments or to one or more qualifying investments
- Would, if generally available, be likely to have a significant effect on the price of the qualifying investment
Qualifying investments include shares or debt securities of a company admitted to trading on the main market of the London Stock Exchange or AIM. From 3 July 2016, it will include shares and debt securities of a company whose shares are admitted to trading on a multilateral trading facility, such as Chi-X.
The following points are worth noting:
- Accuracy – the information does not have to be wholly accurate for it to be inside information. Even if there are some inaccuracies in the information disclosed, provided that the correct facts are recognisable, it will still be inside information
- Future events – there must be a realistic prospect that a future event will occur (rather than a ‘more likely than not’ test). The ‘realistic prospect’ test should not involve an assessment of percentage chances that an event might occur
- Effect on price – the user of the information does not need to know whether the price of the qualifying investment will go up or down in order for the information to be inside information
It is your responsibility to analyse whether information you have been given is inside information. Even if you have asked not to be given inside information, you must assess whether any information you receive could be inside information as the fact that you did not think the information was inside information is not a defence for the purposes of the civil market abuse offence (see below).
Examples of inside information include the following:
- Annual/interim/quarterly results
- Acquisitions and disposals
- A company’s intention to raise further money by way of an issue of securities
Why is it important?
There are two liability regimes relating to misuse of inside information, a civil regime and a criminal regime. Market abuse is essentially market manipulation or information abuse.
There are a number of civil market abuse offences but potentially more relevant offences for these purposes include:
- Dealing on the basis of inside information
- Disclosure of inside information otherwise than in the course of exercise of employment, profession or duties (known as ‘tipping off’)
- Effecting transactions to give a false or misleading impressions as to the supply or price of qualifying investments or to secure the price at an artificial or abnormal level
The criminal regime consists of three offences relating to insiders:
- Dealing when in possession of inside information
- Encouraging another person to deal when in possession of inside information
- Disclosing inside information otherwise than in the proper performance of the functions of an employment, office or profession
An insider must know that the information is inside information and that he has obtained it from an inside source.
Dealing would include not only buying or selling shares but entering into related contracts such as options or derivative transactions.
What are the penalties for market abuse and insider dealing?
Penalties for market abuse are imposed by the Financial Conduct Authority and include unlimited fines, restitution orders, private warnings or public censure.
The penalties for the criminal offences are unlimited fines and/or imprisonment for up to seven years.
Behaviour that constitutes market abuse can be a civil or a criminal offence under either regime.
Dos and don’ts
- Do not deal in a company’s securities if you think you have or may have inside information
- Always keep information confidential where it has been given to you on a confidential basis
- Seek independent legal advice if you are not sure