Uncertainty has existed in the market for some time as to whether or not insider trading rules apply when new financial products are being issued. That will all change from 7 June 2018 when amendments to the Financial Markets Conduct Regulations 2014 (FMC Regulations) set out clear expectations for listed issuers, investors and market participants.
The FMC Regulations will now exclude application of the prohibition on insider trading to conduct that relates to a trade involving a new issue of a quoted equity, debt or managed investment product (but not quoted derivatives). Conduct relating to an issue of quoted managed investment products that are continuously offered in the ordinary course of its business (except under a dividend reinvestment plan) remain subject to insider trading rules.
Listed issuers often issue new financial products under exclusions set out in the FMCA that require all material information to be disclosed prior to the offer. In that context, the risk of insider trading is and remains low. In our view, the biggest upside from the law change will be for listed issuers issuing financial products to senior managers and directors (who often hold inside information) under incentive schemes where no such disclosure requirement exists. The change will provide comfort to those parties that they can participate in such schemes with confidence.
Under the previous Securities Act regime, insider trading rules were not considered to apply to a new issue of financial products. When the Financial Markets Conduct Act 2013 (FMCA) came into force in 2014, the FMC Regulations maintained that position on a temporary basis (initially for 12 months and then extended for a further 12 months) whilst MBIE considered that position.
However, since the expiry of that transitional period on 30 November 2017, listed issuers carrying out capital raisings and investors and market participants involved in those primary offerings have been unsure of their legal position. From next month that uncertainty will end.
Same class offers
Under the transitional provisions, the insider trading rules continued to apply to an issue of financial products carried out under the exclusion for quoted financial products of the same class set out in clause 19 of schedule 1 of the FMCA. That position will not be carried over to the new FMC Regulation.
We agree with that approach. It is a condition of relying on the same class offer exclusion that all material information relating to the issuer is disclosed to the market prior to the offer of new financial products being made. Failure to comply with that condition will put the listed issuer in breach of the disclosure requirements under the FMCA, but it will no longer expose the listed issuer or investors to potential liability for insider trading.
We would be happy to discuss these changes with you in more detail. If that would be helpful, please get in touch with your usual Bell Gully contact or any of the partners in our capital markets team.