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The Financial Markets Authority (FMA) has responded to industry concerns about its ‘shadow insider trading’ report by clarifying when non-public information relating to a listed issuer (Issuer A) may comprise material information in relation to another listed issuer (Issuer B).
The clarification was provided through an educational Information Sheet (the Information Sheet), published on 19 November to replace the 25 August report (the Report). The Information sheet deliberately avoids using the term “shadow insider trading” due to the confusion about its potential ambiguity and differing interpretations in other jurisdictions (see Chapman Tripp’s commentary here).
What is insider trading?
Subpart 2 of Part 5 of the Financial Markets Conduct Act 2013 prohibits an “information insider” of a listed issuer from engaging in certain misconduct. An information insider is someone who has “material information” relating to a listed issuer that is not generally available to the market, where the person knows or ought reasonably to know that the information is material and is not generally available.
“Material information”, in relation to a listed issuer, is information that a reasonable person would expect, if it were generally available to the market, to have a material effect on the price of quoted financial products of the listed issuer, and that relates to particular financial products, a particular listed issuer, or particular listed issuers.
Information is considered "generally available to the market" if it has been widely communicated to investors or is easily accessible to them, including information that can be inferred from public sources. Information released to the market under an issuer’s continuous disclosure obligations is treated as immediately available.
Materiality
The FMA’s view is that information that relates to Issuer A, is capable (in some cases) of constituting material information about Issuer B, due to the relationship, degree of connection or similarity between Issuer A and Issuer B. The key assessment under the statutory test will always be whether a reasonable person would expect the information, if it was generally available to the market, to have a material effect on the price of the quoted financial products of Issuer B.
The time at which materiality is assessed is the time at which the information is held, not later with the benefit of hindsight. New Zealand case law considers the “reasonable person” to be one who commonly invests in shares and holds them for a period of time based on their view of the inherent value of those shares.1
Practical considerations
The FMA recognises that situations where non-public information about Issuer A will comprise material information about Issuer B will be rare. The FMA says this may arise where there is a significant relationship or similarity between the companies, such as operating in the same sector with closely correlated share prices. The risk may be heightened in sectors with few listed companies and where major players dominate.
However, the FMA say the assessment is fact-specific and depends on the nature of the information and its probable impacts. When participants come into possession of non-public information, they should consider whether a reasonable person would expect that information to have a material effect on the price of any quoted financial products they intend to trade while in possession of that information.
Case study
In the Information Sheet, the FMA summarises the findings of a recent investigation where an institutional investor received confidential information about a large capital raise by Issuer A. Within 30 minutes, the investor sold a significant volume of shares in Issuer B, which the FMA considered was a close sector peer. After the capital raise was publicly announced, Issuer B’s share price dropped and the investor repurchased shares in Issuer B at a lower price. While the FMA determined not to take an intervention approach in respect of that situation, the FMA considered the investor did not have adequate documentation or a clear rationale for its trades, which raised concerns about potential insider trading.
Risk management and best practices
Each potential insider trading situation should be assessed based on the specific facts and context of the information’s materiality. To better manage insider trading risks, the FMA recommends several strategies for market participants:
- Ensure sufficient processes: Implement processes that require staff to pause and assess whether any non-public information they receive could be material to any listed issuer, especially if trading strategies change after receiving such information.
- Information barriers: Use information barriers within organisations to ensure trading decisions remain independent when other areas may have access to confidential, material information.
- Keep evidence of trading strategy: For sector-specific funds, demonstrate that trading is conducted in a way that spreads impact across the sector and minimises price effects.
- Shorten deal windows: In capital markets transactions, the FMA suggests lead managers could help investors by shortening deal windows to limit the period during which investors have non-public information about one or more listed issuers and insider trading risks may need to be managed.
The FMA also suggests entities keep detailed, contemporaneous records of trading strategies and rationales, particularly when in possession of non-public information. Clear documentation, including reasons why information is or is not considered material, will be viewed favourably by the FMA in any regulatory response. While this suggestion may help active investors who focus on a limited number of stocks, it is less practicable for institutions investing in a wide portfolio of stocks on a regular basis.
Our thoughts
Chapman Tripp commends the FMA for taking on board feedback from a range of market participants on the Report. Our concern, noted in our earlier commentary, that the approach taken in the Report would have a “chilling effect” on transactional activity within New Zealand’s capital markets has proven to be the case so we are pleased that the FMA has taken this corrective action.
We acknowledge that the FMA has a statutory mandate to promote confident and informed participation in New Zealand’s financial markets. By replacing the Report with the Information Sheet, the FMA has demonstrated that it is willing to uphold this mandate.
The Information Sheet still recognises a potential issue for market participants who trade securities of one listed issuer, whilst in possession of material non-public information of another, closely related listed peer. However, in our view, the FMA no longer overstates the issue. Rather, the Information Sheet expressly recognises that these situations will be rare. Most importantly, the Information Sheet emphasises that the key question investors should consider turns on the materiality of the non-public information: would a reasonable person in possession of non-public information about Issuer A expect the information, if it was generally available to the market, to have a material effect on the price of the quoted financial products of Issuer B?
In our view, the Information Sheet now correctly reflects the legal position in New Zealand on insider trading and cross-issuer information.
- Huljich v R [2025] NZCA 155 at [57].
