In issue no. 37 of its Market Watch newsletter (issued on 23 September 2010), the FSA has given a clear warning to the senior management of issuers, regulated firms (that is, firms that are authorised by the FSA and are made insiders due to the services that they provide to issuers) and non-regulated firms (that is, entities that are not authorised by the FSA, but are made insiders due to the services that they provide to issuers) that they need to do more to reduce the frequency of leaks of inside information. (For further analysis as to what constitutes inside information, please refer to our client note "Disclosure and Control of Inside Information by UK Listed Companies".) If the FSA sees no improvement in the level of leaks to the market it may consider rule changes. The FSA has also reminded market participants that insiders who leak confidential or inside information may be committing civil market abuse under the Financial Services and Markets Act 2000 and/or criminal insider dealing under section 52 of the Criminal Justice Act 1993.
Even though the newsletter is not FSA guidance, the message being sent to senior management is clear: improve your systems to prevent unauthorised disclosure of inside information and stop leaks if you want to avoid legal proceedings from the FSA and the introduction of further regulation. The FSA notes in the newsletter that any leak ahead of a transaction threatens market integrity, but it is especially concerned with deliberate leaks of inside information that are sanctioned by the senior management of an issuer or adviser with the intention of achieving a strategic advantage. The FSA considers these types of strategic leaks to be particularly damaging to market confidence because they do not serve the wider interests of shareholders and investors.
The FSA warning to senior management comes on the back of its enquiries into potential leaks of inside information to the media between 2008 and 2010. The FSA identified several reports in the media that contained specific and precise information about corporate transactions before those transactions were formally announced by issuers. As a result, the FSA then conducted formal interviews with the insiders that they believed had been in contact with the media prior to the publication of those reports. The FSA found that it was often the case that an insider holding a senior role on a corporate transaction had spoken to a journalist shortly before the relevant leak was reported on. Unsurprisingly, the FSA has expressed concern over such suspicious communications. While the FSA is particularly concerned with strategic leaks, it has reminded senior management that insiders who simply confirm details that journalists already have still potentially commit market abuse as they are, in effect, disclosing inside information through affirmation.
The FSA has said that it is essential that senior management of regulated firms, unregulated firms and issuers establish, and are seen to establish, a robust anti-leaking culture in their organisations. To assist, the FSA has set out a non-exhaustive list of recommendations for regulated firms and issuers that handle inside information. The recommendations are to be read in conjunction with the FSA recommendations made in issues no. 21 and 27 of Market Watch, but in the case of any inconsistency the best practice recommendations in issue no. 37 are to prevail. The FSA has commented that in addition to those recommendations that are specifically highlighted to apply to issuers, issuers may also wish to consider those recommendations and good practice points that are stated to apply to regulated firms and apply them as they deem appropriate to meet the issuer's obligations. Similarly, the FSA has said that non-regulated firms which hold inside information may wish to consider the recommendations and apply them as they feel appropriate.
The FSA has recognised that several recommendations could result in significant changes to the current media-handling practices at regulated firms, but the FSA believes these changes, particularly those concerning restricting or recording contact between non-media-relations personnel and journalists will substantially benefit firms (not least because the existence of these controls can help exonerate the firm and its employees in any leak enquiries).
The recommendations are divided into six areas as follows:
- media policies – the FSA has recommended that non-media relations personnel at regulated firms should be prohibited from directly responding to any initial enquiry from the media, regardless of their level of seniority. The media relations personnel should then consider whether the enquiry relates to inside information. If it does, internal policies should state that the media relations team then need to decide whether to involve non-media relations personnel, such as insiders on a corporate transaction, to respond to the media enquiry. The FSA has said that it expects that in most cases media enquiries that potentially relate to inside information will solely be handled by the regulated firm's media relations team with standard protocol responses. Our view is that more regulated firms will adopt a "no comment" policy as standard protocol as a result of these new recommendations even if the firm is not in possession of any inside information. If it is necessary to include non-media relations personnel to respond to a journalist's enquiry, they should only be permitted to verbally communicate with the journalist if a member of the media relations team is present and makes a contemporaneous record of the conversation, or if the conversation is held on a recorded telephone line. Written communications, including emails, by a non-media relations staff member to a journalist should only be permitted if media relations personnel are copied in. Internal policies for both regulated firms and issuers should make it clear that if it becomes apparent during a discussion with a journalist that inside information may already have been leaked, these concerns should be escalated to the compliance team so that a decision can be made as to whether the issuer needs to make an immediate disclosure under the UK Listing Authority's Disclosure and Transparency Rules and, where the Takeover Code is applicable, whether a Rule 2 announcement is required. If the relevant regulated firm does not have a media relations team, the FSA has suggested that the compliance team or legal team should instead take on the functions described above
- handling leaks – regulated firms have been told that if there appears to have been a clear leak of inside information they should not wait to be contacted by the issuer, FSA or Takeover Panel, but should instead commence their own leak reviews and tell the Market Conduct Team of the FSA, and the Takeover Panel if applicable, when they are launching the leak enquiry and why. If it is clear that a leak has occurred, the FSA favours issuers taking the lead on the enquiry and requesting all regulated and non-regulated firms working for them and who were in possession of the inside information to also undertake a leak enquiry. The FSA is of the view that issuer-led leak enquiries are likely to be more effective at preventing future leaks due to the commercial pressure that issuers can bring to bear on their advisers and other contracted third parties. The FSA also suggests that regulated firms should categorise the type of potential leaks (for example, strategic leaks or accidental leaks) so that resources can be efficiently directed. The FSA has indicated that a regulated firm's willingness to volunteer its own investigation results – whether legally privileged or not – is something that the FSA may take into account when deciding what, if any, enforcement action will be taken in relation to the leak
- training staff - relevant staff at regulated firms should receive regular training on their media and leak-related handling policies and on relevant aspects of the market abuse regime. They should also be aware that disciplinary action from their employer, as well as possibly the FSA, will follow if internal policies are breached or inside information is leaked
- regularly communicating with staff - senior management at regulated firms are told that they should regularly communicate with all staff directly to reinforce the prohibition against leaking inside information and that robust disciplinary action will be taken against anyone who breaches the prohibition
- establishing a strong reporting culture – the FSA recommends that regulated firms should establish separate reporting lines so that staff can raise concerns about leaks outside their normal reporting lines. This should help staff feel more confident in raising their concerns and thereby help to develop a stronger reporting culture within the organisation
- disciplinary action - a consistent theme throughout the recommendations is that all staff must be made aware that disciplinary action will be brought against them if they breach internal policies and/or improperly disclose inside information, and that this will be in addition to any action that the FSA deems appropriate. Senior management are urged to adopt a robust stance that helps to create a culture in their organisation that firmly and actively discourages leaks.
The FSA has said that it will continue to actively monitor suspected leaks of inside information and conduct enquiries. In the conclusion of issue no. 37, it re-iterates that it will take action if it considers unacceptable practices have occurred and/or if there have been breaches of relevant existing systems and control requirements applying to regulated firms or issuers. Issuers and regulated firms handling inside information would be wise to heed the FSA's warning and review their systems and controls in light of the FSA's latest recommendations.