5. Insider Dealing 6. The Financial Services Act 2012 Part 7

Question 1

5. What does the CJA define as inside information? (6)

Answer 1

Info which:
a. relates to securities traded on, admitted to trade on, or for which a request to admit to trading has been made on, a UK/EEA or Gibraltar Regulated Market, MTF or OTF
b. relates to securities traded on, admitted to trade on, or for which a request to admit to trading has been made on, NASDAQ, SIX Swiss Exchange and the NYSE
c. relates to securities not covered by point (a) or (b), the price of which depends on, or has effect on, the price or value of a security referred to in those points
d. is specific or precise
e. has not been made public
f. is price-sensitive (i.e. if it were made public, would be likely to have a significant effect on the price of any security, in that it would cause the share price to rise or fall significantly)

Question 2

5.1 When does a person commit the offence of insider dealing? (3)

Answer 2

if they:
- deal in price-affected securities when in possession of inside info
- encourage someone else to deal in price-affected securities when in possession of inside info
- disclose inside info, other than in the proper performance of their employment, office or profession

insider dealing info only applies for a deal on a regulated market or through a professional intermediary

Insider dealing cannot be committed by a company, only individuals

Question 3

5.1.1 Who can prosecute insider dealings in England and Wales? (3)

Answer 3

The FCA
The Secretary of State for the Department for Business, Energy and Industrial Strategy (BEIS)
The Crown Prosecution Service (CPS)

Question 4

5.1.1 What is the max punishment a magistrates’ court can impose for insider dealing?

And the Crown court?

Answer 4

Magistrates’
Max fine of £5000
Up to 6 months’ imprisonment

Crown
An unlimited fine
Max of 10 years’ imprisonment - increased from 7 to 10 years by the FSA 2021

Question 5

5.2.1 What are the defences for insider dealing or encouraging others to deal? (3)

Answer 5

• the defendant did not expect the dealing to result in a profit (or avoid a loss) due to the info
• they believed, on reasonable grounds, that the info had been sufficiently widely disclosed to ensure none of those taking part in the dealing would be prejudiced by not having the info
• they would have acted in the same way regardless of being in possession of the info

Question 6

5.2.1 What are the defences for disclosing? (2)

Answer 6

• they did not expect any person to deal
• although they may have expected a person to deal, they did not expect the dealing to result in a profit (or avoid a loss) due to the info

Question 7

5.2.2 What special defences do Market Makers get?

Answer 7

if they can show they acted in good faith in the course of their business as a market maker, they will not be deemed guilty of insider dealing or encouraging another to deal.

This means they could have unpublished price-sensitive info as an insider and continue to make a market in that security

Further defence if they were acting in connection with an acquisition or disposal where the price was under negotiation, and they facilitated the deal. They must show that the info was market info arising directly out of the negotiations

Question 8

5.2.2 What is considered Market Information?

Answer 8

i.e.
The sale of a block of securities is under consideration
The price at which it is likely to be done

Question 9

6.1 What are the three offences relating to misleading statements in the FSA 2012 (Part 7)

Answer 9

• making false or misleading statements (s.89)
• creating false or misleading impressions (s.90)
• making false or misleading statements or creating false or misleading impressions in relation to specified benchmarks (s.91)

Question 10

6.1 What is the difference between S.89 and S.90 in the FSA 2012 when compared to the old Section 397 of FSMA?

Answer 10

S.89 (misleading statements) only refers to a ‘false or misleading statement’, whereas the previous offence referred to a ‘promise or forecast’. Also, the new offence does not refer to ‘deceptive statements’
S.90 contains an additional offence of knowingly or recklessly creating a false impression for the purpose of (or with the knowledge that it is likely to lead to) personal gain, or the purpose of causing (or with the knowledge that it is likely to lead to) a loss to another person (or exposing that person to risk of loss)

Question 11

6.1 When will a person commit an offence under S.91 of Part 7 in the FSA 2012?

Answer 11

They either:
- Make to another person a false or misleading statement if they:
- make the statement in the course of arrangements for setting of a relevant benchmark
- intend that the statement should be used for the purpose of the setting a relevant benchmark
- know that the statement is false or misleading or is reckless

• Carrying out an act or engage in any course of conduct which creates a false or misleading impression as to the price or value of any investment or as to the interest rate appropriate to any transaction if:
  
  • they intend to create the impression
  • the impression may affect the setting of a relevant benchmark
  • they know that the impression is false or misleading or is reckless
  • they know that the impression may affect the setting of a relevant benchmark

It also applies to a person who creates a false or misleading impression of the market for, or the price of, an investment, inducing or deterring someone to interact with the investment

Question 12

What are the penalties for breaching any of the reqs under S.89-95 of the FSA 2012? (3)

Answer 12

On summary conviction, a fine not exceeding the statutory amount or a jail sentence not exceeding 12 months, or both
On conviction on inducement, a jail sentence not exceeding ten year or a fine, or both for offences committed after 1 Nov 2021
Offences committed up to 31 October 2021 will be subject to a jail sentence not exceeding 7 years

Question 13

6.2 What are the potential defences to a charge under S.89-S.92? (4)

Answer 13

• The person reasonably believed that their act or conduct would not create an impression that was false or misleading
• The person was acting in conformity with the price stabilisation rules of the FCA. *
• The person was acting in conformity with the control of information rules of the FCA**
• The person was acting in conformity with regard to stabilising financial instruments

*The price stabilisation rules of the FCA allow market participants, such as investment banks, to support the price of a new issue of securities for their clients, with the aim of preventing the market from being excessively volatile. The rules themselves require certain disclosures to investors considering investing in the stabilised securities and restrict the support operation to a particular period
**These rules relate to statements, actions or forecasts being made on the basis of limited info. The firm may know the remainder of the info, but it rests behind what is commonly called information barriers (Chinese Walls), and is not known to the relevant individual