Insider Dealing / Market Abuse

Question 1

EU Framework

Answer 1

Market Abuse Regulation (MAR) repealed and replaced the previous directives in this area, to establish a single EU-wide framework to prevent market abuse.

It contains provisions on insider dealing, market manipulation and unlawful disclosure of insider information.

Articles 8 and 10 of MAR specifically address insider dealing.

Question 2

UK Framework

Answer 2

Part V of the Criminal Justice Act 1993 deals specifically with insider dealing in the United Kingdom.

Sections 52-64 and schedules 1&2 are the relevant areas to consider

Question 3

The offences in the CJA 1993

Answer 3

There are three offences of insider dealing:

1. insiders who deal in “price-affected” securities using inside information (s52(1) CJA)
2. Encouraging others to deal in price-affected securities (s52(2)(a)
3. disclosing inside information (s52(2)(b)

Question 4

Who has the power to prosecute?

Answer 4

FSMA 2000 s.402 the FCA has prosecution power

Question 5

What is the principal offence?

Answer 5

‘An individual who has information as an insider is guilty of insider dealing if, in the circumstances mentioned in ss.(3), he deals in securities that are price-affected securities in relation to the information.’

s52(1)

Question 6

What are the six elements of the principal offence?

Answer 6

Six elements:
1. offence is committed by an individual

2. who has information as an “insider”
3. individual must “deal” in securities
4. securities dealt in must be “price-affected”
5. price-affected “in relation to the information”

6 … acquisition or disposal on regulated market

52(3) CJA 1993:- ‘The circumstances referred to above [in s.52(1)] are that the acquisition or disposal in question occurs on a regulated market, or that the person dealing relies on a professional intermediary or is himself acting
as a professional intermediary.’

Question 7

What are the inchoate offences?

Answer 7

s52(2)

(a) he encourages another person to deal in securities that are (whether or not that other knows it) price-affected securities in relation to the information, knowing or having reasonable cause to believe that the dealing would take place in the circumstances mentioned in subsection (3); or

(b) he discloses the information, otherwise than in the property performance of the functions of his employment, office or profession, to another person.’

Question 8

What are some issues regarding the scope of information?

Answer 8

When it states it must related to “specific securities”, the use of specific suggests that it is not securities or their issuers in general. This requirement implies that the information be directly relevant to the securities or issuer involved.

“specific and precise” - the information must be clear and unambiguous, leaving no room for interpretation. Ryan v Triguboff highlighted the importance of “unequivocal expression” whereby there is not a requirement for too much deduction on the part of its recipient

“had not been made public” - once information becomes publicly available through official channels, it loses its status as inside information. However, speculative journalism, market rumours or leaks to the press arguably might not constitute public disclosure. If they are speculative and rumours they might lack the credibility of official information. It underscores the importance of distinguishing between genuinely public information and unsubstantiated rumours or speculation.

“significant effect on price” - thus it is relevant to price movement. Emphasises the materiality of the information in influencing market behaviour and price movements.

Question 9

Person having information in a capacity as an insider has two requirements

Answer 9

• it is inside information
• from an inside source

Inside source is through a:

director, employee or shareholder of security or

having access to the information by virtue of his employment, office or professionalism

Or the direct or indirect source of his information is a person within para (a)

Question 10

Defences to insider dealing

Answer 10

set out in 53(1) CJA 1993

Question 11

Market Abuse and Manipulation EU Framework

Answer 11

Market Abuse Regulation (MAR) repealed and replaced the Market Abuse Directive 2003. It expanded on the MAD provisions and introduced stricter rules to enhance transparency requirements.

Question 12

Market Abuse UK Legislation

Answer 12

FCA Market Abuse Rulebook sets out the rules and regulations governing market abuse and manipulation in the UK financial markets. The Rulebook incorporates the provisions of MAR into UK law

FCA Model Code supplements the rule book, providing additional guidance on the conduct of individuals with access to insider information such as directors, officer and employees of listed companies.

Question 13

Underpinnings of MAD and successor MAR

Answer 13

1. Preservation of Market Integrity. Seeks to preserve the integrity of financial markets by prohibiting behaviours that undermine fair and transparent trading. Market integrity ensures that markets function effectively and investors have confidence in the fairness and reliability of the market.
2. Aims to contribute to the development of an integrated and efficient financial market within the EU. By harmonizing regulations and standards across member stated. this facilitates cross-border trading and investment.
3. This recognises the importance of financial markets in driving economic growth and job creation within the EU. By maintaining market integrity and investor confidence, this supports investment, entrepreneurship and innovation, fostering an environment for economic expansion and employment opportunities.
4. This also acts to promote public confidence in securities and protect market participants, including investors and issuers from unfair conduct
5. Developing a pool of liquid capital requires confidence of a pool of investors. Investor confidence is essential for attracting capital, promoting investment and facilitating economic growth.

Question 14

Old framework for Market Abuse

Answer 14

Under FSMA 2000, there were 7 types of Market Abuse:

1. s118(2) Insider dealing
2. s118(3) Improper disclosure
3. s118(4) Misuse of information
4. s118(5) Manipulation Transactions
5. s118(6) Employing “manipulating devices”
6. s118(7) dissemination
7. s118(8) Misleading behaviour and distortion

Question 15

What compliments MAR

Answer 15

Criminal Sanctions for Market Abuse Directive
(2014)

by introducing minimum rules for criminal sanctions for market abuse

Question 16

What are the aims of the Market Abuse Regulations

Answer 16

1. Reinforcing Market Integrity. MAR aims to reinforce market integrity by prohibiting behaviours such as insider dealing, unlawful disclosure of inside information and market manipulation. By establishing clear rules and sanctions for market abuse, MAR helps maintain confidence in financial markets and ensures fair and orderly trading, thus preserving market integrity
2. Harmonisation of rules - MAR contributes to the harmonisation of rules for market abuse throughout the EU. By providing a common framework and standards for member states to follow, it promotes coherence and consistency in regulatory approaches across different jurisdictions. This enhances legal certainty for market participants and facilitates cross-border trading and investment within the EU.
3. MAR adopts a broader meaning under the MiFD II framework for financial instruments. It covers instruments admitted to trading or traded on Multilateral Trading Facilities (MTF), financial instruments trading on Organised Trading Facility (OTD) and emission allowances. By adopting this comprehensive definition, MAR ensures that a wide range of financial instruments is covered by its provisions, thereby enhancing the scope and effectiveness of market abuse regulation within the EU.

Question 17

Limits to the application of MAR

Answer 17

1. MAR includes exemptions for trading in own shares as part of a buy-back program under certain conditions. This means a company can purchase its own shares from the market, without falling afoul of insider dealing or market manipulation regulations, provided they comply with specified conditions.
2. MAR does not apply to public authorities when they engage in trading activities as part of a monetary, exchange rate or public debt management policy. This exclusion recognises the unique role and responsibilities of public authorities in managing financial and economic stability and allows them not to be subject to the provisions of MAR.
3. There are specific exemptions for EU climate and agricultural policy. These exceptions recognise the distinct characteristics and objectives of these policy area.

These limits and exceptions within MAR aim to strike a balance between maintaining market integrity and efficiency while accommodating legitimate trading activities and policy objectives.

Question 18

What are the types of Market Abuse under MAR

Answer 18

Insider dealing - Art 8
Disclosure of Insider information - Art 10
Market Manipulation - Art 12

Question 19

Harry McVea

Answer 19

• Concludes that insider dealing is wrong
• The economic conclusion there is nothing wrong with insider dealing, but non-economic values impinged upon the operation of stock markets in terms of fairness, is why the law should protect with regulations such as those against insider dealing
• insider dealing jeopardises the development of fair and orderly markets and by so doing undermines investor confidence insider dealing is immoral, and contrary to ‘good business ethic’; that it hurts corporations (and their shareholders), investors, and market-makers

Question 20

David Campbell

Answer 20

What is wrong with economic markets is that they would promote inefficiencies in stock markets

Question 21

McVea 2

Answer 21

• Economic arguments should not be determinative, since there are relevant non-economic considerations, such as investor protection, fair and honest markets that must sometimes prevail over, or at least rank alongside economic goals

Question 22

Why insider dealing is not bad

Answer 22

• it is not cost effective to regulate
• Having more information available means the stock market will more accurately reflect the profitability of a company
• Insider dealers possess valuable information which otherwise would not be made public, the release of that information assists in the determination of the securities price

Question 23

Why insider dealing is bad
(according to McVea)

Answer 23

• the process by which insider dealing discloses valuable information makes it clear that the information is valuable first and foremost to the insider dealer themself for they make high gains by dealing on the basis of superior information until the information is generalised
• by dealing off of this information, this is unfair
• a transaction is unfair unless the parties possess equal knowledge about the subject of the transaction. This market egalitarianism argument implies that all individuals should be placed on an equal footing insofar as that is possible
• Anyone making a trade based on superior information is stealing from other market participants by acting before the information is made available to all traders

Question 24

Market egalitarianism

Answer 24

• Equal access to information
• this would eliminate the use of all informational advantages and remove the incentive to produce valuable information

Question 25

Arguments in favour of insider trading

Answer 25

1. Market efficiency.
2. Incentives for information production
3. Capital Formation
4. Property rights

Question 26

Market efficiency

Answer 26

Some argue that insider trading contributes to market efficiency by ensuring that prices reflect all available information.

In efficient markets, prices accurately reflect the underlying fundamentals of securities, leading to the optimal allocation of resources. Allowing insiders to trade on private information helps incorporate valuable information into prices more quickly

Question 27

Incentives for information production

Answer 27

Permitting insider trading may incentivise individuals to engage in research analysis, leading to the production of valuable information. Insiders who possess specialised knowledge might be more inclined to conduct research if they have the opportunity to profit from their insights. This could lead to improved market transparency.

Question 28

Property rights

Answer 28

Mcvea - proponents of insider trading may frame it as an exercise of property rights, arguing that insiders have a legitimate claim to the information they possess by virtue of their position within the company.

Question 29

Fairness

Answer 29

Market egalitarianism - insider dealing gives certain individuals or entities an unfair advantage over other market participants who do not have access to the same privileged information.

This undermines the principles of fair and equal access to information in financial markets and erodes trust in the integrity of the market

Question 30

Fiduciary duties

Answer 30

Insiders such as directors owe a fiduciary duty to their company and its shareholders. Engaging in insider dealing breaches this duty by using confidential company information for personal gain, rather than acting in the best interests of the company and its stakeholders.

Question 31

Arguments against insider trading

Answer 31

Fairness
Fiduciary duties
Investor confidence

Question 32

Erosion of investor confidence

Answer 32

Insider dealing undermines investor confidence in the fairness and transparency of financial markets. When investors perceive that the market is rigged in favour of insiders, they may be reluctant to participate, leading to reduced liquidity and decreased market efficiency