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Insider dealing and the market abuse regime

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Market abuse and insider dealing can be an extremely serious offence. Tom Rush and Paul Cliff join our host to discuss the rules and regulations of insider dealing that should be considered when buying or selling a business.

In this episode:

  • Why are there rules on insider dealing?
  • What is defined as insider information?
  • How is insider information obtained? 
  • What are the consquences if you are exposed to this type of information?
  • What are the consequences of beaching these rules, for both the individual and the company?
  • Defining market abuse
  • Top tips to minimise risk

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This episode is part of our straight talking business success podcast series. Learn more about the series and what we cover.

Read the transcript:

Host: Welcome to Straight Talking Business Success, your guide to growing and developing your business.

Host:Today I'm joined by Tom Rush and Paul Cliff, who are both partners in our corporate team. We're going to be discussing insider dealing and the market abuse regime. So to begin with, who is this podcast relevant for?

Tom Rush: Well it's relevant to a lot of people. So it's relevant to any director of a public company, relevant to the staff of public companies, and it's relevant to shareholders of public companies.

Host: So Paul, why do we have rules on insider dealing?

Paul Cliff: Well, anyone can buy shares in quoted public companies. So you need a level playing field to make sure that everyone has the same access to the same level of information, so no one can take advantage of information affecting a share price, which isn't in the public domain. Information which people hold in those circumstances is known as inside information.

Host: Okay. So can you tell us a little bit more about what constitutes insider information?

Tom Rush: Well, first for information to be inside information, there's four elements that need to be effectively ticked off. The first one is it has to be precise. It can't just be generic information about a company or its shares.

Tom Rush: It will be about a particular company and not just companies in general. It has to obviously not be publicly known, and if it was publicly known, it would have to have the ability to have an impact on the share price that's significant.

Paul Cliff: Yeah. So as Tom just said, I think one of the key things is that it has to be precise information. So an example of that would be specific news about a company, such as a major new tender win or a rumour. Let's say the company's chief executive is thinking of leaving. Or it could be very specific, like the chairman's just resigned, for instance.

Paul Cliff: It also must not be in the public domain. So that would cover, for instance, the year end annual results of the company before they'd been published or something that would have a significant effect, might include an acquisition, a disposal that the company's contemplating or the opening of a new major office or distribution center or manufacturing base. That sort of thing would constitute the sort of information that could be inside information.

Tom Rush: So looking at our own business, for example, the acquisition of GCL and the acquisition of Kiddy that we completed last year, they were prime examples of inside information until they were announced to the market.

Host: I understand that there are lots of different sources of this type of information. Does it matter how you come by it?

Tom Rush: No, not at all. It doesn't matter if it's been sent to you deliberately or if you overhear someone talking about it in the kitchen. It's all inside information and the consequences arise as soon as you have that information, no matter how you came by it.

Host: So if you're an individual in that business who is privy to that insider information, what are the consequences?

Paul Cliff: There's two really key things to note. Firstly, you can't buy or sell shares in the company or encourage anyone else to do so, that is insider dealing.

Paul Cliff: And secondly, you can't disclose the inside information to anybody else, either inside or outside the company. The only exception to that really is if you're disclosing it to somebody within your normal course of your employment duties. So there might be somebody you have to tell for instance and you'd be okay if that was the case.

Tom Rush: So it makes it quite tricky at home when you can't tell your wife what you're working on.

Host: Okay, and what would the consequences be if you were to breach those rules?

Tom Rush: If you breach the rules, there are some fairly serious consequences. There's criminal offenses and civil offenses. If you look at the criminal side of things, if you commit insider dealing or unlawful disclosure, you could be looking at an unlimited fine or seven years in prison or both.

Tom Rush: The civil offense, this is where the FCA can commence proceedings and they can also issue you with a fine, publicly censor you in the market, suspend your ability to trade in shares and individuals they can prevent from dealing in shares as well.

Tom Rush: Those are the kind of formal civil and criminal actions. If you're an employee of a business and you do one of these things, then you also face your own disciplinary proceedings internally.

Paul Cliff: Just building on what Tom said there, I think there is plenty of evidence around that the FCA are taking a tougher stance on insider dealing and breaches and there have been a couple of high profile cases recently of people who have been prosecuted and fined along with other sanctions for breaches of this legislation.

Host: Great. So we've talked about the implications of breaking those rules from the perspective of the individual. What are the consequences for a company when insider information exists?

Paul Cliff: So I mean the first primary responsibility of a company is to disclose the information to the public as soon as possible. At that point, it ceases to be inside information because it's in the public domain.

Paul Cliff: There are circumstances in which disclosure can be delayed. One example might be where immediate disclosure would prejudice the company's legitimate interests and/or that it won't mislead the public and the information will remain confidential, so no one is able to get hold of it and deal in shares on the back of it.

Paul Cliff: Examples might be where the company's in the middle of M&A negotiations or negotiating sensitive intellectual property rights where they need to keep the records, where they need to keep that information confidential, I should say.

Paul Cliff: And then finally the company has to keep records of any decisions it makes not to disclose information or to delay it. And when they're in the middle of a transaction in particular, the company is required to maintain what we call insider lists, which is a list of everybody in the organization who had access to the information and that can be requested at any time by the FCA.

Host: Okay. So in the introduction to this podcast, we mentioned briefly market abuse. Is that something different?

Tom Rush: No. Market abuse is the kind of wider term that is used to describe insider dealing, as well as other unlawful behavior in financial markets. For example, it also includes market manipulation, making false or misleading statements about companies or creating misleading impressions in the market in the way that you trade in shares. So a lot of these are more focused at the kind of brokers that deal in the shares.

Host: Excellent. So having covered those points, what key tips would you give to companies to minimize these risks?

Paul Cliff: Well, for me it really starts in the boardroom. It starts with directors having an awareness and understanding of what these rules are. Because from there, you can then develop appropriate policies throughout the company to protect against these things, which might include a share dealing code along with regular staff training on what that code means and what they can and can't do.

Paul Cliff: The company should have a policy on delaying the disclosure of inside information. More importantly, in modern times as well, every company should have a social media policy. Information can very easily leak out inadvertently through social media posts.

Paul Cliff: The company is also obliged to tell individuals when they become insiders to actually bring them across the wall as it's known and they should have robust policies, procedures, and keep records of how they deal with inside information.

Paul Cliff: And I suppose most importantly, we would say this, wouldn't we, but take advice, speak to your nominated advisor broker, speak to your lawyers, that's most important.

Tom Rush: Yeah, I agree with everything Paul just said. The key thing is education, particularly in a corporate business where you've got a number of staff, many of whom have never come across this legislation before. Education is the key. They really need that training on what they can and can't do.

Tom Rush: And particularly with inside information, you need to keep the pool of people with that knowledge as small as possible within the business, try and restrict those conversations that happen around the water cooler because you do need to maintain that confidentiality.

Host: Okay, so for anyone listening to this podcast and seeking advice, what should they do next?

Tom Rush: They should contact any member of our capital markets team. We're all vastly experienced in advising companies on this type of issue, and of course we're a listed company ourselves, so we're dealing with this issue on a day to day basis within our own business.

Host: Thank you for listening to Straight Talking Business Success. To find out more about the series, please visit Gateleyplc.com/businesssuccess. From here, you can subscribe for updates, meet our speakers, and get more information on all of the topics that we've covered.

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