The FSA has published issue 21 of its Market Watch newsletter. In this issue of Market Watch the FSA covers its review of how firms control inside information that relates to public takeovers. The FSA began this review in 2006 and looked at four deals. Three of the deals involved an unusual degree of price volatility which indicated that there could have been a leak of information and one deal where this was not the case before the deal was first announced. The review of the deals was not a formal leak enquiry and therefore the FSA is not publishing details of the deals.

The review has helped the FSA with its thinking about the possible reasons for leakage in public takeover deals. The FSA has divided the types of leaks into 3 main categories being:

  • Accidental leaks which may be due to weak controls or a lack of awareness or training.
  • Intentional leaks to the media for strategic positioning by offerees or offerors or their advisers.
  • Intentional leaks for market misconduct purposes, where information is disclosed for improper purposes.

In the review the FSA found areas where firms could improve their control of inside information. The main areas of improvement included:

  • Some firms are too complacent and believed that their own internal procedures are sufficiently robust.
  • Few firms had a formatted policy setting out their thoughts on when it would be appropriate to consider some form of internal review following a leakage of information.
  • Firms should generally be applying more rigour in deciding who needed to know about the deal.
  • The IT technology controls of some firms could be improved.
  • Some firms could improve their training on market abuse and insider dealing.
  • When engaging a third party an over reliance was placed on confidentiality letters without any assurance from the firm to which the information was passed that it had the necessary controls to keep the information confidential.
  • Some firms needed to improve their monitoring of personal account dealing by employees.

The FSA has also set out examples of good practice which were found in the review. For example:

  • Some firms were found to maintain formal, documented policies that relate to information handling and that these policies were regularly reviewed and monitored.
  • Insider lists were complete, accurate and up to date so that any leak enquiries could be expedited.
  • Formal written procedures were provided to staff on the use of sensitive information.
  • The number of people who needed to know about the deal was limited to a practical minimum.
  • Chinese boxes were placed between individual deal teams.
  • IT access was restricted to only named individuals working on a specific deal rather than allowing open IT access to everyone in a certain department or business unit.
  • Staff were given sufficient training and were aware of their responsibilities on handling sensitive information.

Going forward the FSA will be discussing with firms the good practice points found in the review and what steps they are taking to reduce the risk of market abuse occurring in relation to public takeover activities. The FSA also plans to host some round tables with the large investment houses and relevant trade associations. For firms not regulated by the FSA, the FSA advises that it is working with industry to consider ways to share the good practice points.

View Market Watch newsletter - issue 21, (PDF 88.9KB), 2 July 2007