Revision - Insider Dealing, Market Abuse and Gifts Flashcards
What is insider dealing?
It is where a person buys or sells shares when he is in possession of some confidential information which affects the value of those securities.
The confidential information will generally be known because of links with the company such as being an employee, advisor or director.
Part 5 of the criminal justice act 1993 introduced new rules to replace the insider dealing act 1985.
What does the Criminal Justice Act provide about insider dealing?
It is an offence to deal in securities in a regulated market on the basis of inside information or to encourage others to do so, or to disclose inside information other than in the course of ones employment or profession.
S55 defines dealing as the acquisition or disposal of securities, or procuring another party to do so and that acquiring or disposing of securities include any agreement to do so in the future.
It is regarding information that is not public but which would have a significant impact on the share price.
S58 says that information is made public if it has been published in accordance with market regulations, it is contained in a public record or can be readily accessed by persons likely to deal in securities. Information is also deemed to be public even if only found by independent research or published outside the UK.
What are the penalties for insider dealing?
S61 says crown court prison sentence of up to 7 years and unlimited fine
magistrates court can impose sentence of up to 6 months and fine of up to £2000.
List some defences for insider dealing?
S 53 provides the following defences:
1) dealing without expecting to make a profit or to avoid a loss
2) dealing in the belief that the information had been sufficiently made public
3) Concluding a deal which one would have done whether or not aware of inside information.
Schedule 1 gives special defence to market makers who are partially exempt from the rules on insider dealing. So for example someone approaches a market maker to sell five million shares in ICI (inside information). The market maker cannot first sell his own shares. This is known as front running. However once the market maker has bought the institutions holding he can deal in those shares and gently offload them to the market at a high price even though the fat that the institution has sold them is not yet known to the public.
Schedule 1 also provides that price stabilisation activities, participating in share buy backs and operating an employee share scheme do not constitute insider dealing.
Schedule 2 provides that insider dealing covers more than simply shares and includes debentures, corporate bonds, depositary receipts, options, futures and contracts for differences.
List some cases of insider dealing.
R v Goodman 1993, the court of appeal upheld an 18 month prison sentence on the chairman of Unigroup plc, who knowing that the company profits had collapsed, sold his shares before the company’s results were released.
In April 1993 Mr Mackie, an employee of the brokers Bill Lawrie White, was fined £25,000 for insider dealing. He had downgraded his profit forecast for Shanks & McEwan after a private meeting with its Chairman. He did not profit personally but told two colleagues who then sold out of the shares before the company made a formal announcement.
In January 2005, Mr Butt, the vice-president in charge of Compliance at Credit Suisse First Boston was convicted of insider dealing. He had tipped off his friends about forthcoming takeover bids and they then placed ‘spread bets’ on the companies share prices. He made over 2m and was jailed for 5 years reduced to 4 on appeal.
Give an overview of market abuse?
It is not a criminal offence, but the FSMA say that the FCA can investigate and impose civil penalties for market abuse.
The FCA website says of insider dealing and market abuse that they:
1) impair the efficiency of financial markets
2) prevent fair and orderly markets, thereby undermining consumer confidence
3) Damage the company and its investors
4) Contravene good business ethics
5) Are immoral (and sometimes illegal) because such transactions rely on an inequality of information between the parties
Which 7 types of behaviour do the FSMA say constitute market abuse?
1) Acting as an insider and dealing in securities on the basis of inside information. Insider dealing is defined as having information through any means that is not available generally which would affect share price. Information as a result of research is not market abuse.
The following do not require one to be an insider
2) Disclosing information to a third party other than in the course of ones employment or duties. Misbehaviour of this sort frequently happens during a takeover bid.
3) Dealing (acquiring or disposing of an investment or agreeing to do so) on the basis of information which is not generally available but which a regular user (a reasonable person who deals regularly in the market) of the market would regard as relevant in deciding whether to enter into transaction and would regard the non-disclosure as falling below the standard of behaviour.
4) False of misleading impression of the market. Creating false impression as to supply, demand and price. This can arise when a large block of shares is bought at the end of the day to drive up the price, before selling the next day.
5) Ficticious trading. This could involve selling and repurchasing the same block of shares again and again or spreading rumours about shares.
6) Misleading the market by providing false information. Posting false information on the internet and then dealing.
7) Distorting the market by behaving in a certain manner.
What information does the FSMA require the FCA to publish
1) guidance on the application of the market abuse regime.
2) If the FCA is satisfied that a person has committed or encouraged market abuse it can impose a penalty on that person or issue a public statement that he has committed market abuse
3) FCA must publish a statement of policy on the penalties of market abuse - the FCA follows the usual enforcement procedures
4) The FCA may ask the court to issue an injunction agains persons who are likely to commit market abuse
5) The FCA can ask the court to make a restitution order in cases where the abuser has made a profit or caused a loss to other persons. Money obtained is paid to the FCA who distribute it to those affected by the abuse.
Describe the FCA Code of Market Conduct
The FSMA provide that the FCA publish a code giving guidance on the application of the market abuse regime. The code is entitled Code of Market Conduct forms part of the FCA handbook.
The code specifies whether or not a particular behaviour amounts to market abuse. The code therefore creates ‘safe harbours’ for companies and market practitioners.
Various provisions of the Disclosure and Transparency Rules and Listing Rules have been granted safe harbour. Others are buy-back rules, price-stablising rules, a rule relating to chinese walls.
The FCA Code of Market Conduct is not easily understood by regular people but states:
1) Market abuse can be committed by someone who is simply ignorant of the fact that what he is doing is inappropriate. It is not necessary to have a guilty mind.
2) A mere mistake will not usual constitute market abuse provided that reasonable steps have been taken to prevent such a mistake
3) Behaviour will be market abuse where one party is influenced by information which is not generally available.
4) Information is regarded as generally available if it can be obtained by research.
5) if there was a fire at a building you could quickly sell those shares as it is a public event
6) Giving a false impression of the market
The following do not amount to market abuse:
1) X agrees today to sell his shares to Y in 3 months time. He can complete the bargain even if he obtains inside information during the 3 month period
2) X agrees to sell shares to Y and then obtains inside information. He can complete the deal provided it is done on the original terms
3) A firm will not commit abuse if one department has information protected by a Chinese wall and another department deals in shares, not knowing of the information.
Explain Short selling and trashing and cashing
Short selling arises when traders borrow shares to sell in the hope of buying them back more cheaply in the very near future. The borrowed shares are then returned to the original owner and the difference in price represents the traders profit.
Short selling is frequently accompanied by ‘trashing and cashing’ where a false rumour is spread after the shares have been borrowed in order to ensure the price is driven down. Trashing and cashing was responsible for the dramatic falls in the UK 2008 bank crisis.
Hedge funds actively engage in short shelling, and pumping and dumping because their sole interest is to make a short term profit. They just want their annual bonus.
Certain types of short selling (e.g. naked short selling) is prohibited by the UK short selling regulation. Naked short selling arises where traders go short on shares without first borrowing them. The shares are usually bought back within a very short time of a rumour reaching the market.
There can be legitimate reasons for going short. It is down all the time by pension funds, insurance companies and fund managers if they expect bad news, such as a profits warning to reach the market.
To go short on shares is entirely within the law, but to do so after spreading a false rumour is an obvious example of market abuse.
Once a rumour has been spread anomously on the internet it only takes one major player to believe and act on it to move the share price. It only take it to hit the desk of Reuters to create a massive effect.
Explain Short selling regulations
During the financial crisis in 2008, the FSA introduced a number of restrictions on short selling. The rules have now been superseded by the EU Short selling regulation.
Disclosure rules on short selling for rights issues were introduced as an emergency measure in 2008 amid concerns that the severe vitality in the share was potentially damaging to issuers and the fairness of the UK market. The rules required persons with significant short position of 0.25% to disclose to the market their identity.
The FCA dispensed with this when the EU Regulation on Short selling came in 2012. The EU regulation is applicable in all EEA countries and imposes wider disclosure than previously was the axe
- requires investors to report significant net short positions in share traded on a regulated market of MTF when equal to 0.2% of the companies share capital.
- requires net short positions in such shares to be disclosed to the public when they equal 0.5% of the companies issued share capital
Issued share capital means the total of ordinary and any preference shares.
Forms for disclosing and details on this are available on the FCA website.
The FCA is required to prohibit or restrict short selling where the price has fallen significantly during a single day. The FCA must notify ESMA of its intention to do this and they will reply within 24 hours on whether these measures are deemed appropriate.
The EU Regulation gives ESMA power to coordinate the actions of competent authorities and implement measures.
What are chinese walls?
It is an information barrier within a firm to prevent exchanges of information that could cause conflicts of interest.
1) a chinese wall needs to be robustly monitored and enforced. This can be done by:
- having separate buildings for different sections of the business
- keeping different departments on different floors with different security passes
- restrict computer access between departments
- remind staff not to disclose passwords
- maintain separate fax and phone lines
- remind staff to read the house rules
- do not loan staff between departments unless essential
- adopt a clear desk policy
- adopt a shredding policy
What is the Model Code (Listing Rules)
Listed companies are required to ensure that Persons Discharging Managerial Responsibilities comply with the Model Code.
The model code provides that managers:
1) must not deal in securities with short term considerations in mind
2) may not deal in a ‘close period’ (this is a period covering 60 days prior to reporting half yearly or annual results)
3) director must obtain clearance from chairman before dealing
4) Chairman and CEO must obtain clearance from each other, or if not possible from the board committee nominated for that purpose or a senior independent director
5) Clearances must be given or rejected within 2 working days
6) company must maintain a written record of clearances
Most listed companies ask employees to declare shares who have inside information to prevent market abuse and insider dealing.
Give some examples on the FCA guidance on insiders
1) Written procedures should set out who bears responsibility for any control systems
2) the robustness of the system to be checked annually
3) lists of insiders must be maintained and updated regally. The number of insiders should be kept to the minimum practicable, and any additions or deletions should be made known to the others on the list
4) Employees should be regularly reminded about their responsibility to keep inside information confidential
5) A named person should be responsible for training staff handling inside information and giving induction courses
6) a policy should be in place for dealing with the enquiries from the press
7) Restricted areas and clear desk policies should be maintained
8) Hard copy documents should be numbered and shredded when not required. Electronic files should be passworded and leave a trail of who can access.
9) Confidential corporate events and other projects should be given a project name or code work which carries no obvious link
10) a clear procedure should be in place detailing the steps to be taken if inside information is accidentally sent to the wrong person
11) In instances where employers permit insiders to deal in secures, the insider must seek prior permission to do so and records should be maintained of this.
