In July 2007, the FSA published its Market Watch Newsletter setting out the findings of its thematic review of controls over inside information relating to public takeovers. For the full text please click here.

The FSA is concerned that its market cleanliness statistics indicate that the level of informed price movements ahead of takeover announcements, whilst moving in the right direction, remains a cause for concern. In its review, the FSA identified three main categories of leaks in public takeover deals:

  • accidental leaks – perhaps due to weak control systems or lack of awareness or training
  • intentional leaks to the media by parties to the bid or their advisers for strategic positioning
  • intentional leaks for market misconduct purposes – for example with the aim of insider trading or securing a financial gain

The FSA identified certain areas for improved control including:

  • High level policies and procedures – having strong high level policies and procedures that are understood by all relevant staff was identified as being key for keeping inside information secure. The FSA added that such policies ought to include a formulated approach on when it would be appropriate to conduct an internal review following a leak of information.
  • 'Need to know' – a more rigorous approach should be adopted in the application of the 'need to know' concept to avoid having too many insiders (the FSA cited one example of a firm having almost 200 insiders on just one deal).
  • IT – the implications of having open IT systems should be considered. It was suggested that firms consider restricting access to named individuals working on a specific deal or having secure data rooms where confidential documents are stored. It was also noted that some firms placed too much reliance on the use of code words to keep information confidential. Sometimes code words were poorly chosen and easy to interpret.
  • Training – all relevant staff should be adequately trained on market abuse and insider trading, including support staff or non-professional staff who will also, during the course of their duties, be privy to inside information. The FSA also suggested that firms should not rely on training alone, but should endeavour to foster a culture of on-going support.
  • Passing information to third parties – when passing information to third parties firms should not simply rely on confidentiality letters but should seek assurances that the third party has the necessary controls to keep the information confidential. A firm should also consider the degree of knowledge and experience of the third parties involved to decide whether they need to formally spell out the responsibilities that the third party has for handling the information.
  • Personal account dealing – firms should ensure that their staff do not use inside information for personal gain and should ensure that their staff are fully aware of the fact that to do so is a criminal offence. Firms should have written policies on personal account dealing by staff and should ensure that staff understand this extends to derivatives, spread betting accounts or similar products.