New Securities Law for
Investment Advisers and Market Participants
2008
Insider Trading
Introduction
This chapter provides information on the changes to insider trading law made by the passing of the Securities Legislation Bill in October 2006. The Bill made changes to the Securities Markets Act 1988 which contains the law relating to insider trading. The changes are effective from 29 February 2008.
Overview
In general, the new insider trading laws focus on the threat that insider trading poses to the integrity and confidence of the market, rather than the duty owed by officers or agents of a company to that company.
Liability for insider trading is not limited to those who are connected or related to the issuer. A person becomes an insider by possessing inside information, rather than by connection to the company to which the inside information relates (or to another listed company).
The new insider trading law applies to trading in securities that have already been allotted and are quoted on a registered exchange. It does not apply to new issues of securities or to securities that are not quoted.
Concepts
What is insider trading?
Insider trading is trading in securities of a public issuer on the basis of information about that issuer that is not generally available to the market and which, if it was generally known, would be likely to materially affect the price of the issuer's securities.
Who is an information insider1?
The law restricts trading and other activities by information insiders. A person is an information insider of a public issuer if that person:
- has material information about that public issuer that is not generally available to the market; and
- knows or ought reasonably to know that the information is material information; and
- knows or ought reasonably to know that the information is not generally available to the market.
An information insider of a public issuer can be liable for insider trading in securities of that company.
What is material information2?
Information about a listed entity is material information if a reasonable person would expect it to have a material effect on the share price of the company if it were generally known to the market.
The information must be about particular securities, and a particular listed company or companies, rather than about securities generally or public issuers generally.
This is an objective test. It is irrelevant how the information insider thinks the information would affect the price of the securities.
It doesn't matter where the information originates. It could be:
- information from the company, e.g. about its business results;
- information about specific business or regulatory changes directly affecting the company;
- information from other sources about the industry in which the company operates; or
- information about or from one of its competitors.
It is the effect of the information on the price of securities that matters, rather than whether or not the information affects the underlying value of the securities.
For futures contracts that are listed for trading on an authorised futures exchange, information is considered to be material information if a reasonable person would expect it to have a material effect on the value of the futures contract. The information must be about the particular futures contract rather than about futures contracts generally.
What is information that is generally available to the market3?
Information is considered to be generally available to the market if it has been published or if it is readily observable.
Information is also generally available to the market if it can be deduced, concluded or inferred from published or readily observable information.
Published information
Published information is generally available to the market if it has been made known in a way that brings, or is likely to bring, it to the attention of regular investors who are likely to be affected by it. A reasonable period of time must be allowed for the information to spread among regular investors.
The law gives one example of how information can be made known so that it will be generally available to the market, i.e. information given under a continuous disclosure obligation.This information is available immediately to participants in a registered exchange's market.
Example: If an issuer sends information to New Zealand Exchange Limited (NZX) for release to the market under the continuous disclosure requirements of the NZSX Listing Rules, the information is generally available to the market as soon as it is announced to the market through NZX. Most brokers who trade on NZX subscribe to services that give them access to market announcements. This information is usually provided electronically together with trading information.
There are other ways in which material information can be made known so that it will be generally available to the market. This depends on the type of information and the type of issuer and security. Information might be made known by appearing in:
- a daily or business newspaper, or a broadcast news report;
- public records;
- public governmental records e.g. registers held by the Companies Office;
- a publicly accessible web site; or
- a trade publication.
However, the information must have been made known in a way that it is likely to come to the attention of regular investors in the shares.
Example: If information about a pharmaceutical company appears in a specialist medical publication, that information may not be generally available to the market:
- if it has not been made known in another way; and
- if people who commonly invest in securities of pharmaceutical companies do not get information from the publication.
The length of time needed to disseminate the information after it is published depends on the type of security, the type of information, and how it was published. Information that appears in a publication regularly read by investors will take less time to be disseminated than information that appears in a publication that investors read less often.
Readily available information
If information is readily available to people who commonly invest, then the information is generally available to the market. Information is readily available if it can be obtained without difficulty. Information can be readily available by observation, use of expertise, purchase from an other person, or by any other means.
Footnote
- Section 8A
- Section 3 and 3A
- Section 4
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