When I hear the term “insider trading,” I tend to think of stories that make the headlines: Enron, Martha Stewart, and SAC Group. But what if you’re working for a company listed on the stock market, and need to speak to someone – say, your company’s lawyer – about an upcoming merger, profit warning, or mass redundancy?
It is not unusual for a public company to disclose important market moving information – such as advance warnings of earnings results – to analysts, lawyers, or selected investors before making the same information available to the general public.
Market moving information is a term used in stock market investing, defined as information that would cause any reasonable investor to make a buy or sell decision.
In regulatory parlance, when a public company reveals market moving information to a select group of people before it discloses that information to all investors at the same time, this is known as selective disclosure, or “wall crossing”. The problem with selective disclosure is that it creates an uneven playing field for investors, giving some people the opportunity to profit from market moving information before others.
But consider Facebook in 2012. In the weeks before the company’s IPO, the prospectus was amended to reflect a lower revenue forecast. A controversy later erupted over whether Morgan Stanley, the lead bankers on the deal, had discussed the changes – considered “inside information” – with some of its clients, but not with others. While the bank claimed to have followed normal procedures, it was later fined $5m by Massachusetts regulators (Financial Times).
How can you determine if your company can engage in wall crossing, without breaking the law? We start by looking at what constitutes Inside Information.
Under the Market Abuse Regulations (MAR), Inside Information is defined as:
- information of a precise nature
- which has not been made public
- relating to a specific company or that company’s securities (shares), and
- if the information were made public, it would be likely to have a significant effect on the prices of that security.
By way of example, say I’m a director of Ferryboat Manufacturing Corporation, a company listed on the London Stock Exchange. I tell my husband that Ferryboat Manufacturing is planning to make a hostile takeover bid to buy a rival company, Greenwich Tugboats. The acquisition of Greenwich Tugboats will make Ferryboat Manufacturing the largest and most profitable boat manufacturer in England.
This is specific information (the takeover) relating to a specific company (Ferryboat Manufacturing) that is likely to have a significant effect on share prices (the new Ferryboat Manufacturing + Greenwich Tugboat company will be profitable, so demand for shares will increase, driving up the price). If I tell my husband this information before my company makes a public announcement, I’ve just disclosed Inside Information. He now has an advantage over the general public, because he knows that shares in Ferryboat Manufacturing will likely go up.
To avoid this unfair advantage, the current regulatory regime requires listed companies to make a public announcement regarding inside information as soon as possible (Art. 17(1), MAR).
The problems associated with inside information are apparent on the other side of the Atlantic, too. The United States’ Securities and Exchange Commission rules on selective disclosure are regarded as very stringent, particularly when compared with the equivalent rules in Europe.
In the United Kingdom, the Disclosure & Transparency Rules (DTR 2.5.7) allow a company to delay making an announcement of inside information if:
- immediate disclosure is likely to prejudice the company’s legitimate interests;
- delay of disclosure is not likely to mislead the public; and
- the company is able to ensure the information remains confidential.
If these conditions for delay are met, the MARs allow selective disclosure of inside information, but only where the proposed recipient both owes a duty of confidentiality to the company, and requires the information to carry out those duties for the company. It is best practice to then require the recipient of the inside information to sign a confidentiality agreement or non-disclosure agreement.
Like the majority of financial services regulation in the United Kingdom, MAR was brought into domestic law from the European Union’s body of directives. This will doubtlessly be an interesting area of law to watch, now that Article 50 has been triggered. Brexit will allow the UK to put aside European laws, and the UK may very well seize this chance to make regulations surrounding selective disclosure more – or even less – onerous for companies listed on the London Stock Exchange.