Employee share trading and market integrity
Published by the Stockbrockers and Financial Advisers Association of Australia in the Stockbrokers and Financial Advisers Monthly, March 2017.
In the last year we have come across several instances of employees, consultants or contractors of listed entities (or their related parties) trading before material announcements. This activity has raised our suspicions of information leaks and insider trading ahead of major announcements such as merger or takeover deals.
In some of these cases we were satisfied that no insider trading had occurred (after making enquiries). In others we started formal investigations which are ongoing. In all of these cases, the connection of the trader to the company and the timing of the trade raised sufficient concerns to dig deeper.
Markets can only operate fairly when information is accurate and available to all. Information leaks can create false markets and affect market integrity. To ensure market integrity, we examine all trading surrounding significant market announcements to identify market misconduct and insider trading.
If you are a market participant and you have reasonable grounds to suspect that a person has placed an order or entered into a transaction while in possession of inside information, you are required to lodge a suspicious activity report (SAR) under Rule 5.11.1 of the ASIC market integrity rules for the ASX, Chi-X and SSX markets.
You must notify us in writing with details of the transaction or order and the reasons for your suspicions. This applies even if you don’t know the identity of the trader or the details of the order or transaction.
While you are required to lodge a SAR if you spot any unusual trading activity – such as large and timely orders before material, price-sensitive announcements – you should also look out for transactions or orders placed by clients that are connected to your business. For example, if a client is an employee, consultant or contractor (or a family member of one), and they place a trade before a material announcement, you should consider whether a SAR needs to be lodged with ASIC.
When deciding whether to lodge a SAR, you should ask yourself the following questions:
- Did the client buy before a positive announcement or sell before a negative one?
- Has the client traded in the security before and is the trading consistent with their trading history?
- How close to the announcement did the trade occur?
Remember, timing is important. SARs must be submitted when you become aware of the conduct, not after you have investigated it.
Lodging a SAR is quick and easy. You can submit your SARs by emailing us at email@example.com or through our Market Entity Compliance System (MECS) portal. Form M57 Suspicious Activity Report on the MECS portal will guide you through the information you should provide and can be submitted online.
Suspicious activities that should have been submitted as a SAR, but which come to our attention in other ways, will be investigated. When this happens, we will consider remedial or disciplinary action.
To find out more about your SAR obligations, take a look at Regulatory Guide 238 Suspicious activity reporting.
Various financial services entities, including banks, AFS licensees and market participants also have an obligation to submit suspicious matter reports (SMRs) to AUSTRAC under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
If, at any time, you form a suspicion that a matter is related to an offence, tax evasion, or the proceeds of crime, you must provide an SMR to AUSTRAC within three business days. Offences include money laundering, terrorism financing, operating under a false identity or any other offence under a Commonwealth, state or territory law.
To avoid double-reporting, if you have submitted an SMR to AUSTRAC you are not required to notify ASIC of the same information: Rule 5.11.1(2) of the ASIC market integrity rules for the ASX, Chi-X and SSX markets.