The insider trading prohibition in section 307 of the Capital Market Act 2015 is wide. Read literally it would stop a bank trading because one employee elsewhere in the building knew a secret, and stop a unit trust paying out a departing unit holder. Sections 314 to 322 carve out those cases. Section 313 makes clear that the prosecution need not prove the absence of a defence; the accused must bring the facts within one. For the offence itself see what insider trading is.
Chinese walls: sections 314 and 315
A corporation is deemed to know what its officers know (section 314(1)), and a partner is deemed to know what fellow partners and employees know (section 315(2)). Without a defence every licensed dealer, fund manager and trustee company would be an insider most of the time. Section 314(3) therefore provides that a corporation does not contravene section 307(4) merely because of information in its possession if three things are true.
The decision to enter the transaction was taken on the corporation’s behalf by a person other than the officer holding the information; the corporation “had in operation at that time arrangements that could reasonably be expected to ensure” that the information was not passed to the decision-maker, that the officer gave no advice on the decision, and that the officer was not involved in it; and in fact the information was not communicated, no advice was given and the officer was not involved.
Section 315(3) applies the same structure to partnerships, and section 315(4) adds that a partner trading for himself, not for the firm, is not caught merely because another partner or employee held the information. A licensed firm should document its barriers: separate teams, restricted lists, access controls and compliance sign-off. A wall that exists only on paper fails paragraph (c), which requires that the information was in fact not communicated.
Underwriting, takeovers and clearing houses: sections 316 and 317
Section 316 excludes underwriting and sub-underwriting agreements, and the acquisition of securities under an obligation in such an agreement, from the trading prohibition; it also excludes communicating information to a person solely to procure them to underwrite. Section 317(1) takes out acquisitions, disposals and communications carried out under any other written law relating to schemes of arrangement, reconstructions and takeovers, such as the Companies Act 1997 and the Takeovers Code under Part VI. Section 317(2) and (3) protect a clearing house settling market contracts under its rules, and a stock exchange acting on its instruction.
Knowledge of one’s own intentions: sections 318 and 319
A large buyer’s own plan to buy is itself price-sensitive information under section 308(e). Section 319 says an individual does not contravene section 307(4) merely because he knows he intends to trade, or has traded, in those securities. Section 318 says the same for a corporation trading in securities other than its own, whether the knowledge is the corporation’s, an officer’s (gained in the course of his duties) or an agent’s.
Unsolicited transactions by dealers: section 320
A licensed dealer or its representative who executes a client’s order on the stock market does not contravene section 307(4) if the order was a specific, unsolicited instruction from the client, the dealer gave no advice and did not try to procure the instruction, and the client is not associated with the dealer. The broker whose research desk holds inside information can still fill an order a retail client phoned in unprompted. Section 320(2) gives the client who placed the order no protection.
Redemption of units under a buy-back covenant: section 321
The trustee of a liquid scheme stands ready to buy back units from members at a price calculated from the net asset value of the fund. The trustee inevitably knows things about the fund’s investments, pending distributions and cash flows that members do not. Each redemption is an “acquisition” of securities by a person holding information, and without section 321 every redemption would be a technical contravention. Section 321 therefore provides that section 307(4) does not apply to a redemption by a trustee under a trust deed in accordance with a buy-back covenant, at a price the deed requires to be calculated, so far as reasonably practicable, by reference to the underlying value of the assets, less liabilities and less any reasonable charge. The protection is tied to the pricing formula: a trustee that buys units at a price it chose, rather than one the deed requires, is outside it. See withdrawing units and a trustee buying units in its own scheme.
The parity of information defence: section 322
Section 322(1) applies only to securities that are not permitted to trade on a stock exchange, such as shares in an unlisted landowner company. A person does not contravene section 307(4) if the Court is satisfied that the other party knew, or ought reasonably to have known, the information before the deal, and the person neither obtained a gain nor avoided a loss because of the information and had no such purpose. Section 322(2) gives a tipping defence: it is a defence to a section 307(5) charge that the information came to the accused solely because it was made known in a way likely to make it generally available, or that the recipient already knew it.
The defences are exceptions to section 307(4) and (5): where one applies there is no contravention, so neither the criminal penalty nor civil recovery under section 325 follows. But the person relying on a defence must prove its facts, and an ineffective Chinese wall fails in both a prosecution and a civil claim. See recovering losses.
Sources
- Capital Market Act 2015 — ss 307, 308, 313–322, 325
- Companies Act 1997 (schemes of arrangement)
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.