Insider trading occurs when a trade is made based on the inside information. Making a trade based on rumours is not enough to constitute insider trading, however making a trade after being told by an insider that the rumours are actually true constitutes insider trading
A violation of insider trading laws can lead to both civil and criminal penalties, as well as reputational and career damage. Section 78 of the Financial Markets Act (hereafter the FMA) prohibits insider trading in the securities of a company while being aware of inside information about the company. Inside information means information that is both material and non-public.
● Information is material if it is likely to affect the security price. It must be material in that a reasonable investor would want to know the information when deciding whether to buy or sell the security.
● Non-public information refers to information about a publicly-traded company that has not been reflected in its security price. To become public, information must be effectively announced and allowed a certain amount of time for it to reflect in the price of the security and thus absorbed by the investing public.
Material information would include information on mergers, acquisitions, regulatory approval or disapproval of a major project, and financial results. Less obvious examples of material information may include a change in senior management, suspected fraud or other crime, major litigation or product issues.
Typical insiders would include those “in the know” such as board members, legal advisors and auditors.
Insider tips come with a cost: The basis on which the FSCA calculates penalties
The cost of insider trading is high. The basis on which FCSA calculates penalties is in terms of section 82(1) and subsection 82(3) of the Financial Markets Act and may include::
● Administrative sanctions of up to 1 million Rand.
● The equivalent of the profit / loss avoided and additional civil penalties of up to three times the profit / loss avoided by the trade.
● Interest; as well as cost of suit, including investigation costs.
The law against insider trading is not limited to trading for one’s own benefit.
Using inside information for personal gain or passing on inside information to someone who uses it for personal gain is prohibited. In terms of section 82 (3) you can be held liable both for your own transactions and for the transactions carried out by someone who received the tip. Both the tipper and the tippee ( the person receiving the tip) can face severe penalties. This can also be extended further to 3rd parties (the tippee of a tippee).
It is imperative for a company to create awareness about the dangers to prevent insider trading violations in the company. As potential insiders, every stakeholder must make a personal commitment to uphold the confidentiality of the information entrusted to them and remain compliant in their day-to-day activities.
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