ASIC's recent announcement that a technology systems upgrade will enable it to watch and tag trades by individual investors1 is a timely reminder that companies and persons in possession of "inside information" need to be aware of the law governing its use and disclosure.
This client update:
- briefly describes the general offence / what constitutes prohibited conduct; and
- highlights the extent of ASIC's recent activity in prosecuting insider trading and market misconduct offences.
A separate article providing companies with practical guidance on managing risk in this area will follow.
WHAT IS "INSIDE INFORMATION"?
Broadly, "inside information" refers to "information" that is not "generally available", and if it were "generally available", a reasonable person would expect it to have a material effect on the price or value of particular listed securities or other financial products. It does not matter if the information is false.
What amounts to "information" is very broad, and includes matters of supposition, other matters that are not sufficiently certain to justify public disclosure, and matters relating to the intentions, or likely intentions, of a person.
Such "information" will be "generally available" if it:
- consists of "readily observable matter2" (i.e. it is plainly apparent to anyone minded to look);
- has been made known in a manner that would (or would be likely to) bring it to the attention of persons who commonly invest / trade in shares and a reasonable period for it to be disseminated has elapsed; or
- it consists of deductions, conclusions or inferences made or drawn from such readily observable matter or previously disclosed information.
In short, there is a broad class of information that could potentially constitute "inside information" for the purposes of the prohibition. As a consequence, listed entities (and intermediaries / advisors etc. dealing with those entities who may obtain inside information) need to:
- have strong governance protocols / policies / procedures in place regarding the use and disclosure of "inside information"; and
- educate officers and employees regarding:
- the practical application of the insider trading and market misconduct provisions of the Corporations Act; and
- the importance of compliance with governance protocols / policies / procedures regarding use, handling and disclosure of "inside information".
WHAT IS THE PROHIBITED CONDUCT?
In summary, the "insider trading" provisions in the Corporations Act prohibit:
- the direct or indirect acquisition or disposal of "Division 3 financial products3" while in possession of "inside information";
- the procurement of another person to acquire or dispose of such financial products while in possession of "inside information"; and
- the communication of "inside information" to another person for the purpose of the other person acquiring or disposing of such financial products.
Where a contravention occurs, the potential individual penalties are significant.4
RECENT ASIC SUCCESS
Since assuming responsibility (from ASX) for the supervision of trading on Australia's domestic licensed equity, derivatives and futures markets, ASIC has been active in its prosecution of the insider trading and market misconduct5 offences. Recent announcements include:
Click here to view table.
- has recently completed a technology upgrade that will enable it to target individual trading activity;
- has been successful in its pursuit of insider trading and market misconduct offences; and
- will, given its core function of promoting confident and informed participation by investors and consumers in the financial system, continue to pursue possible contraventions and questionable conduct with vigour.
Accordingly, the need for appropriate governance protocols / policies / procedures and education for officers and employees regarding the practical application of the insider trading and market misconduct provisions of the Corporations Act is clear.