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Insider Trading Law and Practice

REPORT ON QUESTIONS ARISING FROM AN INQUIRY INTO TRADING IN THE SHARES OF FLETCHER CHALLENGE LIMITED IN MAY 1999

SECURITIES COMMISSION
WELLINGTON, NEW ZEALAND

PART 6 - OBSERVATIONS

  1. The Commission does not consider that action should be taken against any person under the Amendment Act in respect of the events described in this report.

  2. This case highlights the need for stringent security in electronic communications regarding sensitive company information. It also highlights the need for all companies to have in place procedures for prompt action in the event of any breach of electronic security. In the Commission's opinion FCL acted responsibly in attempting to minimise the effects of the accidental placement of this information on the Notice Board and in promptly reviewing its procedures after the event with a view to preventing similar occurrences in future.

  3. In the Commission's opinion the events described in this report provide examples where the current liability provisions might operate inappropriately against those who have made no gain, and where, on the policy of the law, the current legislation might be too narrowly stated to catch all whose actions should be penalised under insider trading laws. We raise the following questions:

    1. Should liability to restore losses incurred by parties who trade with persons who have been tipped by an insider fall on the insider in every case as at present, or should it be extended to the tippee who has gained from the trade? If so, should it extend to the tippee only where that person traded with knowledge that the tip came from an inside source or was based on inside information?

    2. Should the insider tipper's liability for loss sustained by a counterparty of a tippee be subject to a defence where the tipper establishes that he or she acted without knowledge that the information concerned was inside information?

    3. Should the definition of insider under section 3(1)(c) be extended to include as an insider a person who obtains or receives inside information from any insider, including a person who is an insider under section 3(1)(c), and who holds that information in circumstances importing an obligation of confidence in respect of the information?

    4. Should section 3(1)(c) of the Amendment Act be clarified to state clearly that a person is an insider who obtains or receives inside information from another insider and who holds the information in circumstances importing an obligation of confidence in respect of that information?

  4. The Commission considers that the events described also raise a serious question of whether New Zealand law should provide express sanctions against various forms of misleading, deceptive, or manipulative conduct relating to dealing in securities.

  5. The Commission has not at this time reached conclusions on these questions. We would welcome public comment.

  6. Lastly, the Commission restates its opinion that disqualification from management of a company should be a discretionary restraint able to be imposed under the Amendment Act rather than an automatic result of any judgment against a person under Part I of the Amendment Act.

  7. The Ministry of Economic Development is currently considering questions of insider trading law reform. The Government has announced that the first priorities for insider trading law reform will be to address questions of prevention of breach, detection, and enforcement of insider trading law, and the possibility of introducing criminal penalties. These are important questions. The Commission also considers it is important to re-examine certain questions about liability and the concept of "insider" under the Amendment Act. The questions raised in this report seek to refine these parameters of liability without disturbing the core policy of our insider trading legislation.

  8. We are referring this report to the Ministry of Economic Development for consideration in the context of the Government's more general review of insider trading law.


Euan H Abernethy
Chairman of the Securities Commission

20 November 2000
Securities Commission
WELLINGTON

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