New Securities Law

for

Investment Advisers

and

Market Participants

New Securities Law for
Investment Advisers and Market Participants
2008

Insider Trading

Defences

The law sets out a number of defences that, if proven, can mean that an information insider will not be found by a court to have breached the insider trading law. The information insider must prove these defences "on a balance of probabilities".

Lack of knowledge of trading¹⁴

Information insiders of a public issuer who traded in securities of the public issuer, will not have breached the law if they can prove that they did not know and could not reasonably be expected to know, that they traded the securities.

There is no similar defence for disclosing or advising.

Inside information obtained by independent research and analysis¹⁵

Information insiders of a public issuer:

• who trade in securities of the public issuer, or disclose inside information, will not have breached the law if they can prove that the information was obtained by research and analysis, and was not obtained directly or indirectly from the public issuer;
• who advise or encourage another to trade, will not have breached the law if they can prove that they advised or encouraged on the basis of inside information obtained by research and analysis, and not obtained directly or indirectly from the public issuer.

Research is defined as planned investigation undertaken to gain new knowledge and understanding.

Equal information defence¹⁶

Information insiders of a public issuer:

• who trade in securities of the public issuer will not have breached the law if they can prove that the opposite party to the transaction knew, or ought reasonably to have known, the same inside information that the insider knew before entering into the transaction;
• who disclose inside information will not have breached the law if they can prove that the person to whom the information was disclosed knew or ought reasonably to have known the same inside information before it was disclosed.

Acting as an adviser

Advisers who are information insiders and who can prove that they became an information insider or obtained inside information only through acting as adviser for a client, will not breach the law by disclosing the inside information to the client, or by advising the client to buy, sell or hold securities of the public issuer. This defence is available to advisers acting in a professional capacity, and includes lawyers, accountants, or investment advisers.

Options and trading plans¹⁷

Information insiders of a public issuer who trade in securities of the public issuer will not breach the law if they can prove that they traded under a fixed trading plan or under options to acquire existing shares with a fixed exercise price. The information insiders must also prove that:

• they entered into the options or the fixed trading plan before obtaining the inside information; and
• that in doing so they did not intend to evade the prohibition on trading on inside information.

A fixed trading plan is a plan that is fixed for a period of time during which the investor cannot withdraw from the plan.The investor cannot influence trading decisions after the plan has begun.

Chinese wall defence¹⁸

The Chinese wall defence can be used in respect of trading, disclosure of inside information, advice or encouragement to trade or disclose. These actions are called active decisions. This defence is provided so that incorporated bodies can set up arrangements and procedures to ensure that inside information is not spread within the organisation.

The incorporated body does not breach the insider trading prohibitions if the procedures are followed by all those involved so that the people making the active decisions are not aware of the inside information.

To prove this defence, the organisation must prove that the arrangements could reasonably be expected to ensure that those making the active decisions:

• would not receive or have access to the inside information; and
• would not be influenced in relation to the decisions by someone who had the inside information.

The organisation must also prove:

• that the arrangements were effective, i.e. that no person who took part in the active decisions had received or had access to the inside information or was influenced in relation to that decision by someone who had the information; and
• that every person who had the information and every person who took part in the active decisions acted in accordance with the arrangements or procedures.

Application of the insider trading laws to futures contracts¹⁹

The new insider trading laws also apply to futures contracts listed on an authorised futures exchange. There are some modifications because of the nature of the futures contract, such as:

• the reference to information insider of a public issuer must be read as information insider in relation to a futures contract; and
• reference to trade or hold the securities of a public issuer must be read as trade or hold the futures contract.

Trading by directors and officers of public issuers

An important difference between the new law and the old insider trading law is that there is no "safe-harbour" defence for trading by directors and officers of public issuers who follow an approved procedure and get the issuer's permission to trade.

Directors and employees of public issuers can still own and trade shares in their own companies, but need to be careful that they do this only when they are not in possession of inside information, or that their trading qualifies for one of the exceptions, such as a fixed trading plan.

Public issuers can help their directors and employees to comply with the law by putting in place a share trading policy that explains the ban on insider trading. All public issuers should consider adopting a formal trading policy as a governance and risk management tool.

The Listed Companies Association has published guidelines and a template policy that could assist issuers with their policies. These guidelines are available on the Listed Companies Association website at www.listedcompanies.co.nz. Each company should consider its own business and governance circumstances in formulating their policy.

Enforcement

Under the new law it is a criminal offence²⁰ to knowingly breach insider trading laws. If convicted, an individual is liable for a term of up to 5 years imprisonment or a fine not exceeding $300,000 or both, while a body corporate is liable for a fine not exceeding $1 million.

The changes also include greater civil penalties²¹ for breach of the insider trading laws. The Commission can take cases seeking penalties and compensation. The maximum penalty that can now be imposed is the greater of:

• the consideration paid for the transaction;
• 3 times the profit made or loss avoided; or
• $1 million.

Footnote

14. Section 10
15. Section 10A
16. Section 10B
17. Section 10C
18. Section 10D
19. Section 11E
20. Sections 8F and 43
21. Section 42W

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