Amendments in the Regulations Concerning Insiders

Amendments effective as of 1 July 2005 have been introduced in the Finnish Securities Markets Act, Act on Financial Supervision, and certain other acts (HE 137/2004). A transition period is set for certain regulations. The amendments in legislation are due to the bringing into force nationally of the Market Abuse Directive (2003/6/EC1), and the so-called secondlevel directives the Commission gave pursuant to this. Along with the amendment, the regulations concerning the management and use of inside information have also changed. The Financial Supervision Authority has issued a new standard on insider declarations and registers. The Stock Exchange will probably revise its instructions during this autumn.

The definition of inside information was detailed, and transferred from the Penal Code to the Securities Markets Act. Inside information refers to precise information related to a publicly traded security that has not been made public or is not otherwise available on the market, and is likely to have a critical effect on the value of such security.

The precise nature of the information is a new element in the definition, derived from the directive. According to the basis of the law, precision implies that the information is related to circumstances or events that are already evident or have taken place or can reasonably be expected to become evident or to take place. Precision also implies that such information is sufficiently exact to form a basis for conclusions about the effect of such circumstances or events on the prices of financing instruments or related derivative financing instruments.

Concerning the information being critical, the definitions in the directives mainly correspond to what was implied before the amendment. The factual possibility of affecting the price remains sufficient evidence that the information is of critical importance. According to the Committee’s definition directive, when assessing the critical nature of information, it should be considered whether an intelligent investor would be likely to base his or her decision to invest on such information.

A new regulation is incorporated in the Securities Markets Act, prohibiting unjustified disclosure of inside information. The purpose of the prohibition against the disclosure of inside information is to prevent the risk of abuse of inside information. Inside information must not be disclosed to another person, except as part of the normal execution of the work, profession, or tasks of the person disclosing it. There must also be a good reason for disclosing information from the point of view of a company’s operation, and the recipient of information must be aware of the confidentiality of the information received.

The prohibition against disclosure defines a stricter responsibility for a board member not to disclose inside information to a significant shareholder. However, the prohibition against disclosure does not concern, for example, companies within a group, since disclosure of information can in such cases be considered to be part and parcel of the discharge of a person’s normal tasks.

The starting-point of the directive is that companies publish inside information directly related to them as soon as possible. The Act also stipulates that if the issuer, or someone acting for or on behalf of it, discloses to another person unpublished information that is likely to affect critically the value of a security, such information shall be published immediately.

However, it is not necessary to publish such information prematurely because of disclosure, if the person to whom it was disclosed is under a non-disclosure obligation. A non-disclosure obligation, according to the regulation, can be based on law or on a non-disclosure commitment given in connection with agreement negotiations.

The law forbids anyone who, as shareholder of the issuer, or by virtue of his or her status, position, or tasks, has obtained inside information, to use such information. As before, the forbidden actions are the acquisition and transfer of a security on behalf of oneself or another person, and the advising of another person directly or indirectly in trade related to the security.

The prohibition against the abuse and disclosure of inside information also concerns anyone who knew or who should have known that the information he or she obtained was inside information.

The amendment widened the range of those included in the register of insider holdings. Such persons in the top-level management of a company, who regularly obtain inside information and who have the right to make decisions concerning the company’s development and business arrangements, are also subject to the disclosure requirement. It is the duty of the company to name such persons; they may include the management group members and those responsible for the central business areas or for the subsidiaries of the company.

Other persons now subject to the disclosure requirement are the spouse of such person, a person under his/her guardianship, and other family members who have lived in the same household with him/her for at least a year (e.g. children, other than those under guardianship; grandchildren; and parents). The control and influence spheres of these persons shall be correspondingly declared in the register; which extends the earlier requirements. Ownership by a cohabitation partner, however, need not be made public even from now on.

The basic declaration shall be made within 14 days of appointment to a position. The regulation concerning the declaration of changes are stricter than before. Changes must be declared within 7 days (previously within 14 days).

A further new requirement is that a listed company with publicly traded securities is obliged to make its registry information available to the public on the Internet, e.g. on its website.

The Securities Markets Act also requires a listed company to maintain a so-called companyspecific register of insider holdings; this is an internal, non-public register.

The company-specific register of insider holdings contains:

1. persons employed by the company, who by virtue of their position or duties regularly obtain inside information (e.g. members of the company management group),
2. other persons who work for the company by virtue of employment or other contract and who obtain inside information (including socalled project-specific insiders who can also be external experts), and
3. members of company bodies who obtain inside information (e.g. the Managing Director and Board members).

The law makes it possible to divide the company-specific register into sub-registers so that those who remain in the register for the same fixed period are entered in one sub-register. In this way, it is possible, for instance, to separate a register of permanent insiders (items 1 and 3 above) from projectspecific registers (item 2 above), and to separate project-specific registers related to various projects from each other.

The law also requires agents (such as lawyers’ offices, auditing firms, issuers) acting for or on behalf of a listed company to maintain their internal company-specific register, containing the names of the persons in their service and any other persons who obtain inside information.

The law sets a six-month transition period for the public registers of insider holdings to be brought into compliance with its requirements, i.e. the transition period ends on 1 January 2006. This means that persons subject to the disclosure requirement, and listed companies, must include the required new information in the registers no later than 1 January 2006.

A further transition period of 12 months is set for making the register information available on the Internet. Listed companies must make their information concerning their public register of insider holdings available for the public on the Internet no later than on 1 July 2006.

The law sets a transition period according to which companies must establish the statutory company-specific registers of insider holdings as defined by law within six months of the entry into force of the law, i.e. by 1 January 2006.

Significant Changes in the Regulations Concerning Insiders

• Detailed definition of insider information

• Prohibition against disclosure of inside information

• Top-level operative management included in public register of insider holdings

• Obligation to maintain a company-specific register on insider holdings

• Spouses of insiders included in the obligation to declare, and in the register of insider holdings

• Assistants and agents obliged to maintain their own insider registers

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.