5.1 Insider Dealing

Question 1

Which Act defines insider dealing as a criminal offence?

Answer 1

Part V of the Criminal Justice Act 1993

Question 2

Is insider dealing easy to prosecute?

Answer 2

Insider dealing is a serious offence but notoriously difficult to prosecute.

Question 3

Insider dealing equation examples

Answer 3

Question 4

What information do company directors and their professional advisors often have access to?

Answer 4

Price-sensitive information about a company’s results or prospects.

Question 5

What is a criminal offence under Part V of the Criminal Justice Act of 1993?

Answer 5

It is a criminal offence for anyone to benefit from price-sensitive information about a company’s results or prospects, prior to its release to the market as a whole.

Question 6

Which government department oversees the insider dealing legislation contained within the Criminal Justice Act 1993?

Answer 6

The Treasury

Question 7

List the three types of offences the Criminal Justice Act defines as ‘insider dealing’.

Answer 7

1. Dealing on the strength of inside information either on a regulated market or through a professional intermediary
2. Encouraging another person to deal on the strength of inside information with a reasonable belief that dealing would take place on a regulated market or through a professional intermediary
3. Disclosing inside information to another person other than in the proper performance of one’s duties. Note that disclosing information is only an offence when the person disclosing the information believes that the recipient is likely to deal on the strength of that information.

Question 8

What does it mean for a person to have information as an insider?

Answer 8

It means the person knows that it is inside information and knows that the information is from an inside source.

Question 9

List 3 examples of insider information.

Answer 9

1. Financial results
2. Takeover plans
3. News of the departure of key employees

Question 10

List the 4 characteristics that the insider dealing legislation states information must have in order to be classified as insider information.

Answer 10

1. It relates to a particular issuer (or issuers) of securities, or to a particular issue of securities
2. It is specific or precise
3. It has not been made public
4. It must be likely to have a significant effect on the price once made public

Question 11

What is another term for information which falls under the insider dealing legislation’s definition of insider dealing?

Answer 11

Unpublished, price-sensitive information.

Question 12

Name 6 types of published information.

Answer 12

1. Information from a regulatory information service or financial press
2. Information from public records
3. Information published overseas
4. Information selectively published
5. Information that can only be acquired by expertise or by payment of a fee
6. Information that can be acquired by observation e.g. news broadcasts

Question 13

What is the definition of an insider?

Answer 13

A person who has information that he or she knows is inside information and he or she knows that it is from an inside source.

Question 14

Name some examples of insiders

Answer 14

• Directors
• Employees
• Shareholders
• Anyone obtaining information because of their employment or profession.

Question 15

Define a primary insider.

Answer 15

Someone who acquires their inside information due to their connection with the company.

Question 16

Define a secondary insider.

Answer 16

Someone who comes across inside information, directly or indirectly, from a primary insider.

Question 17

What is another name for a secondary insider?

Answer 17

Tippee

Question 18

What does insider information relate specifically to?

Answer 18

Insider dealing legislation relates specifically to abuses of information in respect of financial securities. It therefore includes instruments based on securities, such as stock index futures, share warrants, depositary receipts and equity options.

Question 19

List 4 financial items which are excluded from the insider dealing legislation.

Answer 19

1. Assets with no secondary market, such as units in unit trusts and shares in investment companies with variable capital (ICVCs)
2. Commodities and commodity derivatives, e.g. copper options
3. Over-the-counter (OTC) markets, such as foreign exchange forward contracts
4. Insurance products

Question 20

Which transactions are affected by the insider dealing legislation?

Answer 20

Only transactions on an exchange or via a professional intermediary (such as a stockbroker) are covered. Thus, a private sale from one investor directly to another is not subject to the legislation.

Question 21

List 3 valid defences to the charge of insider dealing.

Answer 21

1. Information was being passed on in the proper course of employment and one did not expect the recipient to deal
2. The deal was not to make profit or avoid loss
3. The information was already publicly available: This is a very wide-ranging defence since, under the legislation, information disclosed to a ‘section’ of the public is deemed to be publicly available

Question 22

List the three further defences relevant to market professionals.

Answer 22

There are three further defences relevant to market professionals:
1) Stabilisation – a procedure used to maintain the price of new issues, carried out under strict rules.
2) Recipients of market information – this is designed to protect market participants where they have knowledge of transactions that have taken place, or are to take place, or that a transaction will not take place.
– Market information refers to information that market professionals may hear about and it would be unreasonable to prevent them from using. The criteria the court will apply is that ‘it was reasonable for an individual in their position to have acted as they did despite having that information as an insider’
– For example where a market professional knows of the client’s intention to enter into a large transaction, then the firm can continue to act on behalf of other clients or deal with them provided that it is reasonable to do so
– This defence allows a company planning a takeover of another to buy shares in the target company before announcing its full intentions. Although it has price-sensitive information of its own intentions at the time, it will not be found guilty of insider dealing. This defence is called ‘bid facilitation’
3) Market makers acting in the ordinary course of business -they are duty bound to buy and sell securities.

Question 23

How is the insider dealing legislation enforced?

Answer 23

The FCA has operating arrangements in place with the Recognised Investment Exchanges (RIEs) which set out the responsibilities of the FCA and the market operators for monitoring, investigation and prosecution.

The FCA also has responsibility for prosecutions, and has criminal powers granted under FSMA 2000, including the power to interview people under caution, and to search premises and seize assets under warrant.

Question 24

What are the penalties for breaching the insider dealing legislation?

Answer 24

• In a Magistrate’s Court the maximum penalty is a fine of £5,000 and six months in jail.
• In a Crown Court the maximum penalty is an unlimited fine and seven years in jail.