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Addleshaw Goddard

XY event hosted by Addleshaw Goddard’s Will Chalk and David Pygott

On 26 September, Addleshaw Goddard LLP’s Will Chalk and David Pygott hosted the most recent XY, the Group’s 20th event. The topic covered was ‘Insider Lists: What they are and why they matter’; the event was attended by many of the Group’s FTSE Company Secretariat professional members.

The content of the presentation was very well received. Set out below are some of the key points covered.

What is Inside Information?

For information to become ‘Inside Information’ it must:

  1. be precise — indicating circumstances which already exist or may reasonably be expected to come into existence, an event that has occurred or may reasonably be expected to occur, and which is specific enough to enable a conclusion to be drawn as to the possible effect of the circumstances or event on price;
  2. not have been made public;
  3. relate directly or indirectly to one or more issuers or one or more financial instruments e.g. a listed company’s securities; and
  4. be likely to have a significant effect on price of the financial instrument (or the price of related derivatives) — i.e. be information that a reasonable investor would be likely to use as part of the basis of his or her investment decisions.

Tips for Identifying Inside Information

Firstly, understand the basis on which investors are currently dealing. Armed with this, it will be easier to weigh up what might happen to the market if it had the new information. Considering the likely reaction of the market if the information were to be made public is one practical way that can help to decide whether or not a piece of information is Inside Information.

Secondly, be aware of the types of information likely to be considered relevant. This could include information relating to:

  • assets and liabilities;
  • performance or expectations as to performance; and
  • the financial condition of the business.

Mishandling Inside Information

There are two principal types of offences which might be committed:

1. Insider dealing, which:

  • is a criminal offence under the Criminal Justice Act 1993; and
  • a civil offence under the EU Market Abuse Regulation (MAR).

If an individual trades when he/she is in possession of Inside Information, it is presumed that the information was used as the basis of the transaction.

2. Unlawful disclosure of Inside Information, which:

  • is a civil offence under MAR.

A person in possession of Inside Information disclosing it to any other person outside the normal exercise of their profession, employment or duty may be liable under the ‘unlawful disclosure’ offence in MAR.

Insider Lists: Purpose and Obligations

The basic purpose of an Insider List is to record who has Inside Information and when they come into possession of it. Insider lists are intended to control and track the flow of Inside Information within a company and among its advisers.

The Financial Conduct Authority (FCA) (and other agencies) use it as a means of understanding who had access to what information and when; particularly in the context of insider dealing investigations to prove that someone was in possession of Inside Information when they traded and to track back and identify potential sources of ‘leaked’ Inside Information/unlawful disclosure.

Therefore it is crucial that those required to do so:

  • maintain an accurate Insider List;
  • update it;
  • record the date and time when each update occurred;
  • keep versions of it as needs be;
  • take reasonable steps to ensure those included on the list acknowledge in writing their legal and regulatory duties and the sanctions attended to the misuse of such information;
  • make list available to FCA on demand; and
  • keep lists for at least five years after they were last updated.

A failure to follow these rules will be negatively viewed by the FCA and could lead to enforcement action, including a fine.

What to Expect from the FCA

There are number of reasons why the FCA may be interested in why an Insider List has been created, including if they have:

  • identified significant movements in a company’s share price through their own market monitoring — e.g. a fluctuation before a transaction is announced;
  • received a suspicious transaction and order report from a market participant;
  • received information from an FCA-regulated firm — e.g. a bank;
  • obtained information from another regulator/agency — e.g. the Serious Fraud Office or an overseas regulator; or
  • been approached by a ‘whistleblower’.

Where the circumstances suggest that a rule breach may have occurred, the FCA has wide powers to:

  • make initial inquiries;
  • conduct a formal enforcement investigation;
  • impose sanctions such as fines within its own regulatory enforcement process; and
  • in some instances, pursue a prosecution before the criminal courts — e.g. for insider dealing.

Should the FCA begin an investigation, this is likely to be initiated with an enquiry in the form of an ‘s.122B letter’ which will be sent to the Company.

Such letters are likely to request:

  • a copy of the relevant Insider List which the FCA would expect to already be in place and, therefore, to be provided to them in short order;
  • a chronology of events relating to matter which gave rise to the existence of Inside Information — covering key calls, meetings, emails etc.; and
  • the provision of other key supporting documentation — e.g. emails, board minutes, etc.

Responses to such enquiries require careful attention not least because it is a criminal offence to mislead the FCA.

If the FCA is concerned about the initial response received and considers there may be an issue, it can begin a formal enforcement investigation against the company concerned, an individual or both. Should this occur, the relevant party may need to provide substantial amounts of further documentation. The FCA may also seek to interview or obtain witness statements from those involved, which could include connected parties.

FCA Commentary

In their December 2018 Market Watch magazine (Issue 58), the FCA commented:

“We have observed varying quality in the Insider Lists we have received to date. We encourage issuers to ensure that all staff with access to Inside Information are included on the Insider List. This includes those who have accessed information according to electronic access logs…”

On the 13th February 2019, the FCA Director of Market Oversight, Julia Hoggett, commented that “Market abuse requires a dynamic response to a changing risk profile”.

These comments highlight that MAR and Insider Lists remain a key area of focus for the FCA and that companies need to ensure they are correctly adhering to their obligations.

Further Information

If you are interested in joining XY and hearing more about their events, you can do so via their LinkedIn group.

If you would like to be added to Addleshaw Goddard’s Corporate Governance mailing list, please contact Shelley Goff who will arrange this.

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