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Insider Trading
United States
According to the SEC, Insider
trading is a term that most investors have heard and
usually
associate with illegal conduct. But the term actually
includes both legal and illegal conduct.
The legal version is when
corporate insiders—officers, directors, and employees—buy and sell
stock in their own companies. When corporate insiders trade in
their own securities, they must report their trades to the SEC.
Illegal insider trading refers
generally to buying or selling a security, in breach of a
fiduciary duty or other relationship of trust and confidence,
while in possession of material, nonpublic information about the
security. Insider trading violations may also include "tipping"
such information, securities trading by the person "tipped," and
securities trading by those who misappropriate such information.
Examples of insider trading cases that have been brought by the
SEC are cases against:
Corporate officers, directors, and employees
who traded the corporation's securities after learning of
significant, confidential corporate developments;
Friends, business associates, family
members, and other "tippees" of such officers, directors, and
employees, who traded the securities after receiving such
information;
Employees of law, banking, brokerage and printing firms who were
given such information to provide services to the corporation
whose securities they traded;
Government employees who learned of such information because of
their employment by the government; and
Other persons who misappropriated, and took advantage of,
confidential information from their employers.
Because insider trading undermines investor confidence in the
fairness and integrity of the securities markets, the SEC has
treated the detection and prosecution of insider trading
violations as one of its enforcement priorities.
The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider
trading issues where the courts have disagreed. Rule 10b5-1
provides that a person trades on the basis of material nonpublic
information if a trader is "aware" of the material nonpublic
information when making the purchase or sale.
The rule also sets forth several affirmative defenses
or exceptions to liability. The rule permits persons to trade in
certain specified circumstances where it is clear that the
information they are aware of is not a factor in the decision to
trade, such as pursuant to a pre-existing plan, contract, or
instruction that was made in good faith.
Rule 10b5-2 clarifies how the misappropriation theory applies to
certain non-business relationships. This rule provides that a
person receiving confidential information under circumstances
specified in the rule would owe a duty of trust or confidence and
thus could be liable under the misappropriation theory.The
objective is to create a level playing field for all economic
operators in the Member States as part of the effort to combat
market abuse.
Directive 2003/6/EC of the European
Parliament and of the Council of 28 January 2003 on insider
dealing and market manipulation (market abuse).
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"Inside information" shall mean information of a precise
nature which has not been made public, relating, directly or
indirectly, to one or more issuers of financial instruments or
to one or more financial instruments and which, if it were made
public, would be likely to have a significant effect on the
prices of those financial instruments or on the price of related
derivative financial instruments.
In relation to
derivatives on commodities, "inside information" shall mean
information of a precise nature which has not been made public,
relating, directly or indirectly, to one or more such
derivatives and which users of markets on which such derivatives
are traded would expect to receive in accordance with accepted
market practices on those markets.
For persons charged
with the execution of orders concerning financial instruments,
"inside information" shall also mean information conveyed by a
client and related to the client's pending orders, which is of a
precise nature, which relates directly or indirectly to one or
more issuers of financial instruments or to one or more
financial instruments, and which, if it were made public, would
be likely to have a significant effect on the prices of those
financial instruments or on the price of related derivative
financial instruments.
"Market
manipulation" shall mean:
(a) transactions or
orders to trade:
- which give, or are likely to give,
false or misleading signals as to the supply of, demand for or
price of financial instruments, or
- which secure, by a
person, or persons acting in collaboration, the price of one or
several financial instruments at an abnormal or artificial
level,
unless the person who entered into the
transactions or issued the orders to trade establishes that his
reasons for so doing are legitimate and that these transactions
or orders to trade conform to accepted market practices on the
regulated market concerned;
(b) transactions or orders to
trade which employ fictitious devices or any other form of
deception or contrivance;
(c) dissemination of
information through the media, including the Internet, or by any
other means, which gives, or is likely to give, false or
misleading signals as to financial instruments, including the
dissemination of rumours and false or misleading news, where the
person who made the dissemination knew, or ought to have known,
that the information was false or misleading. In respect of
journalists when they act in their professional capacity such
dissemination of information is to be assessed, without
prejudice to Article 11, taking into account the rules governing
their profession, unless those persons derive, directly or
indirectly, an advantage or profits from the dissemination of
the information in question.
In particular,
the following instances are derived
from the core definition given in points (a), (b) and (c) above:
- conduct by a person, or persons acting in collaboration,
to secure a dominant position over the supply of or demand for a
financial instrument which has the effect of fixing, directly or
indirectly, purchase or sale prices or creating other unfair
trading conditions,
- the buying or selling of financial
instruments at the close of the market with the effect of
misleading investors acting on the basis of closing prices,
- taking advantage of occasional or regular access to the
traditional or electronic media by voicing an opinion about a
financial instrument (or indirectly about its issuer) while
having previously taken positions on that financial instrument
and profiting subsequently from the impact of the opinions
voiced on the price of that instrument, without having
simultaneously disclosed that conflict of interest to the public
in a proper and effective way.
The definitions of market
manipulation shall be adapted so as to ensure that new patterns
of activity that in practice constitute market manipulation can
be included.
"Financial
instrument" shall mean:
- transferable securities
as defined in Council Directive 93/22/EEC of 10 May 1993 on
investment services in the securities field(9),
- units
in collective investment undertakings,
- money-market
instruments,
- financial-futures contracts, including
equivalent cash-settled instruments,
- forward
interest-rate agreements,
- interest-rate, currency and
equity swaps,
- options to acquire or dispose of any
instrument falling into these categories, including equivalent
cash-settled instruments. This category includes in particular
options on currency and on interest rates,
- derivatives
on commodities,
- any other instrument admitted to
trading on a regulated market in a Member State or for which a
request for admission to trading on such a market has been made.
"Regulated market" shall mean
a market as defined by Article 1(13) of Directive 93/22/EEC.
Member States shall prohibit any person referred to in the
second subparagraph who possesses inside information from using
that information by acquiring or disposing of, or by trying to
acquire or dispose of, for his own account or for the account of
a third party, either directly or indirectly, financial
instruments to which that information relates.
The first
subparagraph shall apply to any person who possesses that
information:
(a) by virtue of his membership of the
administrative, management or supervisory bodies of the issuer;
or
(b) by virtue of his holding in the capital of the
issuer; or
(c) by virtue of his having access to the
information through the exercise of his employment, profession
or duties; or
(d) by virtue of his criminal activities.
2. Where the person referred to in paragraph 1 is a legal
person, the prohibition laid down in that paragraph shall also
apply to the natural persons who take part in the decision to
carry out the transaction for the account of the legal person
concerned.
3. This Article shall not apply to
transactions conducted in the discharge of an obligation that
has become due to acquire or dispose of financial instruments
where that obligation results from an agreement concluded before
the person concerned possessed inside information.
Member
States shall prohibit any person subject to the prohibition laid
down in Article 2 from:
(a) disclosing inside information
to any other person unless such disclosure is made in the normal
course of the exercise of his employment, profession or duties;
(b) recommending or inducing another person, on the basis of
inside information, to acquire or dispose of financial
instruments to which that information relates.
Member
States shall prohibit any person from engaging in market
manipulation.
European Union
The European Parliament and the Council have adopted a
directive on insider dealing and market manipulation. It is
intended to guarantee the integrity of European financial markets
and increase investor confidence.
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