Prohibitions on use and disclosure of inside information also apply to non-insiders
Over the past few years, the Financial Supervision Authority (FIN-FSA) has filed several requests for investigation to the Police on the abuse of inside information and unlawful disclosure of inside information. The cases are at different stages of processing by the Police and the prosecutor. The most recent final judgments on abuse of inside information, aggravated abuse of inside information and unlawful disclosure of inside information are from this year. The judgments given on four individuals were, at minimum, 75 day-fines and, at maximum, nine months conditional imprisonment. The proceeds of the crimes were ordered to be forfeited to the state.
Prohibitions on the abuse and unlawful disclosure of inside information apply to everyone
On its website, the FIN-FSA has published 10 trading guidelines for insiders of listed companies, aimed at steering insiders into a good code of conduct in their securities trading. With this article, the FIN-FSA also wishes to draw the attention of investors other than the company’s insiders to the prohibitions related to inside information, which include prohibitions on the disclosure and use of inside information as well as on advice related to inside information.
The prohibitions are universal and apply to all those operating and trading in the securities market, regardless of their status or duties. It is also important for every trader to understand and take into account these prohibitions in their own operations and trading.
Trading is monitored comprehensively and effectively
A requirement for the functioning of the securities markets is that investors can have confidence in the markets and market participants. If a person trading on a securities market takes advantage of precise, significant and undisclosed information about a particular listed company, i.e. inside information, they will gain an unjustified advantage at the expense of other investors due to their advance knowledge. Abuse of inside information undermines confidence in the impartiality of the market and the level playing field for investors and is therefore prohibited and punishable.
Monitoring of securities market trading is a broad entity involving several different parties. Surveillance systems, to a high degree automated, are comprehensively and effectively used in monitoring trading.
Market participants, such as investment service providers that receive and execute client orders, have an obligation to monitor their clients’ trading and to report suspicious transactions and orders they observe to the FIN-FSA. The FIN-FSA receives approximately 150–200 of these notifications each year.
The FIN-FSA monitors trading and investigates suspicious trading transactions using its own trading surveillance system. The surveillance system generates reports of exceptional and suspicious trading transactions for further investigation. The FIN-FSA has at its disposal very comprehensive and detailed information on trading, including information on trading outside Finland. The FIN-FSA receives, for example, precise information on any trader's transactions and orders for shares listed on the Helsinki stock exchange, even if a foreign intermediary is used in the transaction and even if the transaction has been executed elsewhere than on the Helsinki stock exchange. Investigations into the abuse of inside information extensively review suspicious transactions and also take into account, for example, family relationships and other connections between different individuals. In addition, the FIN-FSA works closely with supervisors in other countries.
An investigation may result in the FIN-FSA filing a request for investigation with the Police. Abuse of inside information and unlawful disclosure of inside information are punishable under the Penal Code. The penalty for abuse of inside information or unlawful disclosure of inside information may be up to two years’ imprisonment and in the case of aggravated abuse of inside information up to four years’ imprisonment. Attempted abuse of inside information is also a punishable offence.
Insider information must not be disclosed without an acceptable reason
If you are in possession of inside information, you must not disclose it to another party without an acceptable reason. The purpose of the prohibition on the disclosure of inside information is to prevent the dissemination of inside information and the possible use of the information in securities trading. Disclosure of inside information is therefore, as a rule, prohibited. There are, however, situations in which disclosure of inside information is acceptable; this is the case if the exercise of the duties of the person disclosing the information requires the disclosure of the information. In that case, the disclosure must take place as part of the normal exercise of the job, profession or duties of the person disclosing the information. With regard to the prohibition on disclosure, it is therefore important to note that, for example in the context of discussions in the workplace, you should not disclose inside information obtained in the course of your work unless this is necessary for the exercise of your duties.
Disclosure of inside information is prohibited, regardless of how the inside information was obtained. Prohibition may therefore include, for example, a situation where you have accidentally heard a conversation in which inside information was expressed or you have seen documents revealing inside information. You must not further disclose such information to another party or, indeed, use this information yourself. However, in the case of persons who are not insiders or shareholders of a listed company, the application of the prohibition requires that the person knows or should know that the matter is inside information.
Inside information must not be used nor should others be advised to use inside information
If you have received inside information, you are prohibited from acquiring or disposing of a financial instrument, such as a share, to which the information relates, whether or not you are entered in the listed company’s or an adviser’s list of insiders. Please also note that the prohibition also applies to acquisitions or disposals on behalf of another party, such as a family member or an investment company. If you have inside information, you accordingly cannot purchase financial instruments on behalf of your children or spouse, for example. Cancellation or modification of an order that you have given before you received inside information is also prohibited, if you have the inside information at the time of cancelling or modifying the order.
If you have received inside information, you are also prohibited from advising another party in the acquisition and disposal of a financial instrument to which the information relates. The prohibition applies to both direct and indirect advice. Direct advice is a recommendation or instruction to acquire or dispose of financial instruments on the basis of inside information. Indirect advice is, for example, the provision of investment tips, if the provider of the investment tip has inside information concerning the financial instrument in question. A recommendation given on the basis of inside information to cancel or change an order is also prohibited. The punishability of advice does not require that the person disclose the inside information in their possession or that the advice they provide results in the acquisition or disposal of a financial instrument.
What kind of information can be inside information?
Inside information is defined in Article 7.1(a) of the Market Abuse Regulation1. According to the definition, inside information means information of a precise nature, which has not been made public, relating to an issuer or financial instrument, and which, if it were made public, would be likely to have a significant effect on the price of the financial instrument or the price of a related derivative financial instrument.
The issuer, i.e. the listed company, must keep a list of all people who have access to inside information or who otherwise perform tasks through which they have access to inside information. Advisers used by the issuer have a corresponding obligation.
It may sometimes be challenging for a person who is not on insider lists to assess whether the information they have is inside information. Most commonly, the insider information concerning listed companies relates to, for example, a significant order of a listed company, a significant investment decision, an acquisition, a takeover bid or changes in the financial performance of a listed company. It is important to note, however, that the definition of inside information is quite broad and it is not limited only to the information listed above, for example. It is also worth noting that even if no insider project has been set up for a matter in a listed company, insider information may still be involved. Whether information is inside information should be assessed via the criteria for inside information presented above, i.e. the unpublished nature, precision and significance of the information.
Unpublished nature, precision and significance of information
By the unpublished nature of information included in the definition of inside information is meant information that has not been made public by the issuer in a stock exchange release or information that has not otherwise been available to the market.
Information is considered to be of a precise nature,
- if it indicates a set of circumstances or events which exist or which may reasonably be expected to come into existence and
- if it is specific enough to enable a conclusion to be drawn on the basis of it as to the possible effect of the information on the value of a financial instrument.
The precise nature of the information does not require the occurrence of the event or set of circumstances to be certain or to have a high probability of occurring. In order for the precise nature of the information to be fulfilled, it is sufficient that there is a real possibility, objectively assessed, for the set of circumstances or event to occur. Furthermore, the precise nature of the information does not require that the direction of the possible price effect be foreseeable on the basis of the information.
Significant information means information that, if disclosed, would be likely to have a significant effect on the price of an issuer’s financial instrument, and information that a reasonable investor would be likely to use as part of the basis for their investment decision.
- Inside information – FIN-FSA
- 10 trading guidelines for insiders
- Market Abuse Regulation (EU) No 596/2014
For further information, please contact
- Juha Manu, Senior Market Supervisor, juha.manu(at)fiva.fi, tel. +358 9 183 5323
- Pia Ovaska, Senior Legal Adviser, pia.ovaska(at)fiva.fi, tel. +358 9 183 5296
1 Market Abuse Regulation (EU) N:o 596/2014, acronym MAR