Insider trading is the trading of securities
or a wider set of financial products while in possession
- which is not generally available; and
- if it were, would be likely to have a material
effect on the price or value of the security.
Insiders can be anyone and they do not have
to be directly related to the company. However,
because of their roles, directors are more likely
to be in possession of inside information so they need
to exercise great care as there are very severe penalties
if found liable for insider trading.
What activities are prohibited?
There are three specific prohibitions on persons with
- trade securities or financial products or enter into
agreements to trade;
- get another person to trade or enter into agreements
- directly or indirectly communicate the information
to someone who they think might trade, enter into
agreements to trade or get another person to trade.
What is the meaning of ‘inside information’
and other definitions?
Important definitions associated with insider trading that
all directors should be aware of are:
- Insiders – They can be either natural persons or
- Financial products – This refers to securities,
derivatives, interests in managed funds, debentures,
government‑issued stocks or bonds, some
superannuation products and other financial products
able to be traded on financial markets (s 1042A).
- Generally available – This consists of readily observable
matters (for example media reports), or matters that
have been made known in a way likely to bring them
to the attention of those who commonly invest and
a reasonable period for dissemination has elapsed, or
matter that can be deducted, concluded or inferred from
the previous points (s 1042C).
- Inside information – This is information not generally
available and, if it were so, a reasonable person would
expect it to have a material effect on the price or value
of financial products (s 1042A).
- Material effect – This is an effect where a reasonable
person would expect it to influence a person who
commonly invests to decide whether to buy or sell
financial products (s 1042D).
Are there any exceptions?
Numerous exceptions exist for insider trading. They are
covered in ss 1043B to 1043K of the Corporations Act
2001 and include withdrawing from registered schemes,
underwriters, acquisitions, Chinese walls, bodies corporate
and holders of Australian financial services licences.
For example, some defences relate to specific types of
financial products and can include exceptions for insurance
underwriters and the revealing of information under legal
obligation. These exceptions can be used as a defence in
court. It is incumbent on the prosecution to prove that
these defences do not apply
Can there be insider trading where
information is false?
The High Court, in Mansfield v The Queen (2012) HCA 49,
has held that a person can be guilty of insider trading even
where the information on which the trading was based
is false. At the original trial, the prosecution had not led
any evidence as to the truth of the relevant information
and the defendants argued that the prosecution had failed
to show that they had received 'information'. The trial
judge held that the information which was acted upon had
to be a 'factual reality'. On appeal, the High Court rejected
this information, saying that the ordinary meaning of
'information' is not confined to 'knowledge communicated
which constitutes or concerns objective truths'. 'Information'
can include knowledge which is false. Heydon J
“ the insider trading provisions, read
as a whole, catch conduct by those
who trade on the basis of untruths.”
The High Court also noted that the prohibition of the use
of false information was consistent with the objectives
of the insider trading legislation.
What are the penalties for insider trading?
There are serious penalties for insider trading. The penalty
for an individual for insider trading is up to 10 years
imprisonment and/or the greater of $495,000 or three
times the profit gained or loss avoided. For companies,
the maximum penalty is the greater of $4.95 million,
three times the profit gained or loss avoided or 10 per
cent of the body corporate’s annual turnover in the
In a speech to the 2010 Supreme Court of Victoria Law
Conference on 'Insider trading and market manipulation',
the then ASIC Chairman, Mr Tony D'Aloisio, noted the
following on sentencing in this area:
"A recent review of insider trading cases (Juliette
Overland) has shown that courts had most commonly
taken into account 17 criteria:
- amount of profit made
- character of the offender
- any expression of remorse or contrition
- any extra-curial punishment
- general deterrence
- manner in which the information was acquired
- personal circumstances of the offender
- any breach of confidence
- manner in which the trial was conducted
and guilty plea
- relationship with the relevant company
- any delay in prosecution
- prospects of rehabilitation
- relationship with the securities industry
- specific deterrence
- acceptance of pecuniary penalty order
- amount of money wagered
- any hardship to the offender's family."
Under s. 1043L, persons affected can sue for compensation
for damages suffered. ASIC can also institute an action
on behalf of the issuer of the financial product.
Are companies required to have a trading policy?
The ASX Listing Rules require that a listed entity must
have a trading policy that complies with those rules.
Rule 12.12 provides that, at a minimum, a trading policy
will have to include:
- The entity’s closed periods (fixed periods specified
in the trading policy when an entity’s key
management personnel are prohibited from trading
in the entity’s securities);
- The restrictions on trading that apply to the entity’s key
- Any trading which is not subject to the entity’s
- Any exceptional circumstances in which the entity’s key
management personnel may be permitted to trade during
a prohibited period with prior written clearance;
- The procedures for obtaining prior written clearance
Further, where an entity makes a material change to their
trading policy, the entity must give the amended trading
policy to the company announcements office for release
to the market within five business days of the material
change taking effect.
This document is part of a Director Tools series prepared by the Australian Institute of Company Directors. This series has been designed to provide general background information and as a
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