Compliance
Portal - Insider Trading,
from the
International Association of
Risk and Compliance Professionals (IARCP)
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.
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.
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)1.
"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.
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