What we do in the shadows: FMA misses the mark with misguided insider trading report

What is insider trading?

The FMC Act prohibits an “information insider” of a listed issuer from engaging in certain conduct. 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.

In general, information insiders are not permitted to:

• trade the quoted financial products of a listed issuer
• disclose material information to any other person (where they know or ought reasonably to know that the person will trade the quoted financial products of a listed issuer), or
• advise or encourage others to trade in the quoted financial products of a listed issuer, in respect of whom they are an information insider.

Penalties for knowingly engaging in insider conduct are significant. These include up to five years’ imprisonment and/or a fine of up to $500,000 (for individuals) or a fine not exceeding $2.5 million in any other case.

How does the FMA apply the FMC Act to shadow insider trading?

The FMA’s view is that information about a listed issuer, or about a particular sector, industry or other matter that relates to a listed issuer, is capable of constituting material information about another listed issuer. If a person possesses non-public information about Issuer A that is material to Issuer B, they may be considered an information insider of Issuer B.

The FMA focuses on two transactional examples as an illustration of what constitutes shadow insider trading in their view:

• Capital Raising Scenario: The FMA asserts that market announcements regarding a capital raise by one major listed issuer can reasonably be expected to influence share prices of its peers, especially in smaller sectors with a handful of dominant listed issuers in play. Where a person becomes aware of non-public information about the upcoming capital raise, acting on this information (for example, by selling down holdings in a listed issuer peer and subsequently repurchasing at a lower price) may indicate the use of material information that is not generally available for strategic gain.
• M&A Scenario: If a person becomes aware of a confidential transaction involving one listed issuer that is likely to revalue a target issuer, that person may infer that similar listed issuers in the same sector will also benefit through potential investor sentiment or valuation benchmarking. If the person trades in a closely comparable peer before the acquisition is made public, that trading may constitute insider conduct.

Influence from the USA?

It is unclear from the report what initially drew the FMA’s attention to shadow insider trading, given the lack of specific examples provided in the report. However, recent developments from the United States may have played a part.

Shadow insider trading was considered in the 2024 decision of SEC v. Panuwat, where the US Securities and Exchange Commission (SEC) successfully argued that Mr Panuwat, an employee of pharmaceutical company Medivation, engaged in insider trading by purchasing short-term “out-of-the-money” call options in a closely comparable company, Incyte, shortly after becoming aware that Medivation would be bought out. The case is under appeal to the Ninth Circuit, and the decision has been the subject of sharp criticism.

Whilst the FMA may have drawn the term “shadow insider trading” from this decision, the SEC’s success, for now, in Panuwat actually highlights important distinctions in how New Zealand approaches insider trading, when compared to our US counterparts.

The US does not have any specific statutory prohibition on insider trading, and instead relies upon a body of case law that has developed as to the circumstances where insider trading breaches the general prohibitions on manipulative or deceptive conduct. The case law has developed on the basis that a breach of fiduciary duty is required in order to establish there has been insider trading. In Panuwat, a fiduciary duty of trust and confidence was found to have arisen from Mr Panuwat’s employment at Medivation, which he breached by contravening the confidentiality and insider trading policies that he had signed.

By contrast, New Zealand’s regime is codified in the FMC Act and turns on statutory definitions (including “material information”) rather than fiduciary duty theories.

These differences matter; importing a US theory developed through case law into a New Zealand statutory framework risks misalignment, especially while Panuwat remains on appeal and contested on causation and correlation.  

Our thoughts

Shadow insider trading itself is not a novel concept. The definition of material information in the FMC Act already recognises that information may be material information in respect of a listed issuer because it relates to another particular listed issuer or group of particular listed issuers or particular financial products. The key assessment is whether or not a reasonable person would expect that information, if it was generally available to the market, to have a material effect on the price of the quoted financial products of the relevant listed issuer.

This is where the difficulty lies in the sweeping generalisations made by the FMA in its illustrative examples. There are real challenges in assessing how information about another listed issuer might affect the share price of other listed issuers. That assessment is inherently fact specific and often requires expert analysis.

In our view, it will only be in exceptional circumstances that information about a particular listed issuer could reasonably be expected to have a material effect on the share price of another listed issuer. This is consistent with criticism of the Panuwat case in the US, which highlights the difficulty of determining the correlation between two listed issuers given the need for expert evidence and multiple different ways of determining the correlation between listed issuers.

While fund managers and other institutional investors are mindful of their insider trading obligations and will carefully consider the potential for material information about one listed issuer to be material information to another, it would seem entirely impracticable and unrealistic for an employee or retail investor to undertake a sophisticated empirical stock price study to determine whether there is any correlation between one listed issuer and another before trading. Yet the report’s framing suggests a de facto expectation that market participants avoid trading in undefined “peers,” which is not required by the FMC Act and is operationally unworkable.

The FMA states that a market announcement about a major listed issuer undertaking a capital raising can reasonably be expected to influence the share price of its peers. We disagree with this assertion. There are a range of factors to consider in assessing whether or not a capital raising by one issuer may have any impact on another issuer. Issuer specific fundamentals, prevailing market conditions, financial product structure and investor expectations frequently drive divergent outcomes.

We are observing this overly simplistic approach lead to real conservatism by capital markets participants. Applying the FMA’s approach, in a small market like New Zealand, is likely to have a chilling effect on our capital markets by making parties less willing to participate early in transaction processes or by limiting price discovery through investors being benched from trading in our listed issuers when in possession of material information about another.

“Wall crossing” of investors by listed issuers ahead of significant capital raisings is a well-accepted and important practice to successfully raise capital to fund growth or shore up balance sheets. We are aware that, in response to the FMA’s report, certain institutional investors are instructing market participants not to provide them with non-public material information as part of these processes, or to only be wall crossed over a weekend, with those investors feeling they would need to step out of the market for a broad range of issuers due to shadow insider trading concerns as a result of the FMA's sweeping generalisations. This will ultimately compromise capital raisings, block trades, and M&A activity for all NZX listed issuers.

We are also concerned by the statement that shadow insider trading is “common industry practice”. The FMA does not offer any evidence to support this assertion, nor does it appear to have undertaken any industry consultation ahead of publishing its report.

In the absence of any real evidence being put forward by the FMA that shadow insider trading is in fact occurring, we consider that the report should be reconsidered following a proper period of consultation. An evidence based consultation with issuers, investors, intermediaries and subject matter experts is crucial to allow the FMA to test its assumptions, calibrate its guidance to the statutory framework, and avoid unintended consequences.

At a time when the Government and NZX are continuing to explore ways to remove compliance barriers and encourage both our existing issuers to remain listed on NZX and listing aspirants to join NZX, the FMA’s report has dealt a blow to confidence in the effective regulation of our capital markets.

As such, we urge the FMA to announce that the report should be regarded as a consultation draft, pending a suitable consultation process.

FMA thematic review

Shortly before publishing its report on shadow insider trading, on 21 August 2025 the FMA notified all issuers with equity listings on the NZX Main Board of an upcoming thematic review of financial product dealing policies (Trading Policies).

In its communication to listed issuers, the FMA made its first mention of shadow insider trading by noting that some of the “better” Trading Policies include “ETFs and concepts considered as emerging risks by the FMA, such as shadow insider trading” as securities covered by the policy.

In our view, it is inappropriate for a listed issuer’s Trading Policies to apply to the securities of another listed issuer.

While Trading Policies could usefully remind individuals that material information in relation to the issuer they are connected to could be material information in respect of another issuer (and therefore to exercise caution), directors and senior managers should not be asked to determine whether or not persons subject to the Trading Policy can trade in the securities of another listed issuer based on predictions about cross issuer price effects - that is complex and uncertain.