When information constitutes insider information is defined in the Market Abuse Regulation (MAR), which entered into force on 3.7.2014 and which has applied since 3.7.2016. Accordingly, it applies that:
- It must be information of a precise nature that has not been made public.
- It must be directly or indirectly related to one or more issuers or to one or more financial instruments.
- It must be capable of having a significant effect on the price of a security in the event of it being published.
- It must be such in its nature that an informed investor would be likely to use it as part of the basis of their investment decisions.
Insider information is precisely defined in Article 7 MAR. It also includes confidential information about client orders that have not yet been executed, which also constitutes inside information for persons in charge of executing such orders (e.g. traders for clients).
The activity of the misuse of inside information
Misuse of insider information is an offence, relevant both in terms of administrative penal law as well as a crime under penal law. The legislator prohibits the misuse of inside information pursuant to Article 154 para. 1 nos. 1 and 2 of the Stock Exchange Act 2018 (BörseG 2018; Börsegesetz 2018) or Article 163 BörseG 2018.
This offence coves any person making use of insider information for themselves or for a third party. This may be by buying, selling, changing or cancelling trading orders or recommending securities or by disclosing the information to third parties.
In the case of there being a well-grounded suspicion of a breach of market abuse provisions, pursuant to Article 167 para. 1 BörseG 2018 the Financial Market Authority is required, provided that the breach lies within the competence of the courts, to notify the Public Prosecutor’s Office, and may be appointed by the Public Prosecutor’s Office to conduct further investigations.
The misuse of insider information where it falls under the competence of the courts may be punished with a custodial penalty of between six months up to five years. This applies for so-called primary insiders for a breach against the prohibition of insider dealing, as well as the giving of recommendations where intent exists. In the case of secondary insiders this penalty shall only apply where it occurs deliberately.
In the case of the unauthorised disclosure of insider information there is the possibility of a custodial penalty of up to 2 years imprisonment.
Pursuant to Article 163 para. 4 BörseG 2018, primary insiders are people who have access to inside information, as members of administrative, management or supervisory bodies of the issuer (e.g. executive directors or members of the supervisory board) or because of their job (e.g. as external auditors or interpreters) or as a result of holding part of the issuer’s capital.
Anyone who has access to inside information, without being an insider pursuant to Article 163 para. 4 BörseG 2018 can be qualified as being a secondary insider. This includes for example the life partner of a member of the executive board or a cleaner.
In the case of the FMA being the competent authority for administrative penalties, persons shall be punished for the misuse of insider information pursuant to Article 154 para. 1 nos. 1 and 2 BörseG 2018 in conjunction with Article 14 MAR with a fine of up to Euro 5 000 000 or up to three times of the amount gained by the breach including an avoided loss, where such a gain is able to be determined.
In any case, i.e. regardless of whether courts are competent or administrative penal law, the legal person may be held to account (up to EUR 15 million or 15% of the net total annual turnover).
Effects on the Capital Market
Based on the challenged relating to the provisions set forth in Directive 2003/6/EC (Market Abuse Directive – MAD) the European Court of Justice has provided interpretations in recent years about the terms insider information and insider dealing. Both terms have been specified in detail. It is currently assumed, that these decisions and the interpretations contained therein will also continue to be valid in light of the new legislation. Below, in addition to listing effects on the capital market, some selected decisions are also shown.
An insider exploits trust (of the investors) to give him/herself the edge. Where the misuse of insider information is not punished, then investors lose confidence in the market, and will pay less for financial instruments. An entity that is known for insiders misusing their information, will suffer a fall in its share price and capital costs will increase significantly. Investor confidence falls in companies that profit at the expense of others.
In addition some investors leave the market, and the capital costs for all undertakings increase, and the real economy sustains a welfare loss. The quality of prices falls, in the sense of how prices reflect all available information, as does the volume of trade. Market failures or in the worst case the collapse of the capital market may occur as a result.
This also has an effect on the affected undertakings. The possibilities for capital markets financing deteriorate with investment and economic growth being impeded. It is plausible that the necessary equity capital needed to invest in company may not be raised by means of a capital increase, as the costs of the capital have risen as a result of the loss of confidence and increased risk premiums.
The European Court of Justice states in a judgment of 23 December 2009 that the issue of whether the prohibition of insider dealing has been breached must be checked in light of the objective of the Directive. This exists by “protecting the integrity of financial markets and enhancing investor confidence, a confidence which depends, inter alia, on investors being placed on an equal footing and protected against the improper use of inside information”.
The judgment also interprets the aforementioned Directive and clarifies how this is the case. Where an insider on their own account or on the account of others directly or indirectly acquires or disposes of financial instruments, or attempts to do so, then this action implies that insider information is used. Rights of defence remain unaffected by this allegation.
The question was raised to the European Court of Justice of when precise information in conjunction with protracted processes is deemed to exist, that are considered to be reasonably expected. In its judgment of 28 June 2012 the court stated that the intermediate steps of a procedure connected to the realisation of the circumstance or the event may also constitute insider information.
“Adequate probability” that circumstances or events will exist in the future, is based on the assessment of future circumstances or events. Where the detailed appraisal concludes that it can actually be expected, that such circumstances may occur or exist in the future, then adequate probability is deemed to exist. There is no interpretation regarding the extent of the effects on the price of the financial instruments must be taken into consideration.
In a further legal dispute the issue of the interpretation of the term “precise” information was revisited by the Court. The Court explained in its judgment of 11 March 2015, that classification as precise information does not require the direction of a change in prices to have to be anticipated.
The judgment states as a clarification that the Market Abuse Directive does not demand the direction of the price movement to be determined. Informed investors act as the yardstick for assessing whether a piece of information constitutes insider information. The question is raised whether or not the information can be used by an informed investor as part of the basis of their investment decision. It is difficult to estimate exactly in which direction the prices of financial instruments may move due to the complexity of the financial markets. From these considerations the Court infers that “in order for information to be regarded as being of a precise nature for the purposes of those provisions, it need not be possible to infer from that information, with a sufficient degree of probability, that, once it is made public, its potential effect on the prices of the financial instruments concerned will be in a particular direction.”
Compliance with Trading Rules
Reporting of Suspicious Transactions and Orders