A person could not trade NZUs if they have material non-public information about government policy
The FMC Act insider trading provision prohibits a person from buying or selling financial products that are ‘quoted’ (ie, listed for trading) on a licensed market if they hold material non-public information, being information that:
- is not generally available to the market
- a reasonable person would expect to have a material effect on the price of the financial product on the licensed market if the information was generally available.
This includes provisions for an information insider (Person A) of a listed issuer to not directly or indirectly disclose inside information to another person (Person B) if Person A knows or ought reasonably to know or believes that Person B will, or is likely to:
- trade quoted financial products (ie, NZUs) of the listed issuer
- advise or encourage another person (Person C) to trade or hold those products.
Table 9 provides a summary of this proposed prohibition.
Table 9: Proposal to prohibit insider trading for quoted financial products and NZUs
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Quoted financial products
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NZUs (proposed)
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Information insider /
Person A
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Prohibited
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Prohibited (modified meaning of ‘material information’)
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Person B
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Prohibited
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Prohibited (as above)
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Person C
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Prohibited
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Prohibited (as above)
|
However, there could be scenarios where, for example, a person who receives inside information may need to trade to meet a legal obligation that may require forms of exclusions or exemptions.
In these circumstances, we consider a likely source of a person becoming an NZU information insider is through targeted consultation. In this instance, it may be appropriate for the Government to first consider its approach to consultation, and whether it may have a negative impact on one or more persons with legal surrender obligations.
Second, matters may also be manageable by clearly stating that the terms of the targeted consultation may involve the recipients becoming NZU information insiders and are thereby prohibited from trading for a defined period. We may also consider whether future exclusions and/or modifications may be appropriate if this approach is insufficient.
Government information as material information
In relation to NZUs, we propose a much narrower and more tailored definition of material information for prohibitions on insider trading, which would apply where a person holds material non-public information about government policy only.* As part of this discussion document, we are seeking your feedback on:
- what information should be considered government policy – for example, decisions approved by Cabinet or policy under active consideration
- what stakeholders expect from the Government in terms of disclosures and publishing of information.
Our objective is to provide sufficient transparency and to not impede the Government’s ability to consult on and test proposals with the marketplace.
However, the definition of ‘information insider’ is broad enough to capture third parties if they hold material information relating to the government that they ought to reasonably know is material information and generally not available to the market.
Example
If a government employee or other person (Person A) became aware that the Government was planning to announce a policy that would materially reduce demand for NZUs, and Person A encouraged another person (Person B) to trade NZUs, Person B would be prohibited from trading if a reasonable person would expect that information to have a material effect on the price of NZUs on the licensed exchange(s).
The proposed approach reflects that information about government policy is the source of information most likely to have a material impact on NZU price. It provides greater clarity for NZU market users about what is and is not insider trading.
Example
A person is not prohibited from trading if they have knowledge that a large emitter that is an NZU market user is planning to stop operations and reduce future demand for NZUs, because that emitter is neither an issuer of quoted financial products nor subject to any disclosure (or continuous disclosure) obligations in the NZU market.
Also, knowledge of a person’s own intentions or activities is not considered insider trading. This generally allows for an NZU market user to buy and sell NZUs in the course of normal business, and for an adviser to advise a NZU market user to buy or sell NZUs in the course of normal business.
We propose that the same offences and penalties could apply as in financial markets where, in serious cases, insider trading may amount to a criminal offence and can be punishable with up to five years’ imprisonment and a maximum fine of $500,000 for individuals or $2.5 million for companies.
*See below in relation to proposals to apply the prohibition to both licensed markets and beyond.