While the London Stock Exchange may have laboured to produce a mouse in its advice on price-sensitive information, some of the City's biggest corporate lawyers are warning that the new insider dealing provisions of the 1993 Criminal Justice Act could tie up in knots the free markets in securities and their derivatives.
Those provisions take effect on Tuesday. Simultaneously the Traded Securities (Disclosure) Regulations come into force, with the aim of cutting the opportunity for insider dealing by reinforcing the obligation of companies to disclose price-sensitive information. Both measures have been prompted by the need for British law to come into line with the relevant European Union directives.
It is also yet another attempt by the UK's parliamentary draftsmen to come up with a water-tight formula for trapping insider dealers. So far, the prosecution record has been abysmal.
Tiphook, the troubled former container group, went through a spell last year when its share price moved in advance of a series of price-sensitive announcements leading to a parallel series of Stock Exchange investigations. In April, Tiphook shares fell sharply, followed within days by a profits warning. Sellers of Tiphook shares made another killing last July, when the shares plunged immediately before news that it was making significant changes to its accounting policies. No prosecutions have followed.
Nevertheless, whether or not the new law catches more villains, it certainly threatens to change the way the City does business. Slaughter & May, solicitors to 180 listed companies including the merchant banks Kleinwort Benson Group, Schroders and SG Warburg Group, has told its clients: 'There must be some concern as to whether 'legitimate' activities will now be circumscribed to an extent that constrains the free flow of information, to the ultimate detriment of the markets.'
Legislation against insider dealing - making illict use of information which, if made public, would have a significant effect on the price of securities - has been gradually tightened since it was first introduced into Britain in 1980. Pressure to make the law more effective has been steadily increasing since the scope for insider trading was widened by Big Bang, the deregulation of the London Stock Exchange, in October 1986. The shift from floor trading to telephone dealing was far too tempting for insiders to resist.
When Sir Martin Jacomb, the then deputy chairman of the Securities and Investments Board, claimed that insider dealing was 'a victimless crime,' it became clear that the City could not be left to clean itself up.
The latest version of the much-debated insider dealing law comes into play less than a fortnight after the Scottish Court of Criminal Appeal quashed the conviction of Thorold Mackie, one of the best-known investment analysts north of the border.
In September 1991, clients of Mr Mackie's broking firm, Bell Lawrie White, sold about 2 million shares in Shanks & McEwan, a waste disposal company, after Mr Mackie had a conversation with Shanks's chairman.
The legal position of analysts is made much more difficult by Tuesday's law, which could make it harder for the fund managers of big institutional investors, such as pension funds and insurance companies, to allocate their funds accurately.
That in turn may affect the savings of millions of policyholders. Freshfields, lawyers to Scottish Widows' Fund and Pearson, publisher of the Financial Times, points out: 'An analyst will be an insider under the new law if, through his own research, he arrives at a price- sensitive conclusion about a particular company - even though he has no connection with that company and does not have any inside information in the traditional sense.'
Two groups of analysts in particular are placed under a strong spotlight: those specialising in small companies and so- called star analysts. Small nuggets of information can have a disproportionately significant impact on those companies' shares, while the very fact that a star analyst can change his or her view can in itself move a price.
'If they can classify me as a star analyst under the new Act, I'll put in for a pay rise,' joked Nick Knight of the Tokyo- based Nomura, whose lower forecast for the FT-SE 100 index recently took that index down by 16 points in a morning. 'Seriously, markets are very skittish and my compliance people haven't so far had any discussion with me on what I can and cannot say.'
Until Tuesday, market strategists such as Mr Knight are largely outside the law. But from then on, insider dealing will cover derivatives as well as shares and debt securities, including gilts. An influential interest-rate forecast will affect the fixed-interest market, and the views of Mr Knight and his ilk about market prospects will have a direct impact on index futures and options.
Peter Cowap, Nomura's compliance officer, said: 'I am particularly concerned about the shift away from company- specific to sector-specific information. That could be very difficult.'
There is also going to be far more pressure to ensure that conversations with analysts, journalists or fund managers are recorded, or at least witnessed.
The Mackie case revolved around whether what Peter Runciman, the chairman of Shanks & McEwan, told Mr Mackie amounted to inside information. Mr Runciman told the court he advised Mr Mackie that the company was about to issue a profits warning, which it did after Bell Lawrie's clients sold and the share price had fallen.
Mr Mackie insisted that all Mr Runciman told him was that it was never going to be a vintage year for the company and there would not be much growth in earnings per share.
As Mr Runciman's evidence had to be corroborated to count under Scottish law, Mr Mackie's version was accepted by the appeal court. On that basis, he would presumably have escaped conviction under the new law, but the widespread advice to listed companies now is to have at least two people present when they meet an analyst - and, in the belief that there is safety in numbers, to have as many analysts together as possible.
This is an ironic reversal of the former edict, during takeover bids anyway, that company directors could not address gatherings of analysts as that would be deemed to be an attempt to influence the market. So they had to meet them singly.
Peter King, a partner of Linklaters & Paines, lawyers to Lloyds and National Westminster banks and to the London office of Nomura: 'The new Act simplifies the law on insider dealing, in that there are fewer offences, but it greatly widens its scope. Analysts have always had sources of information, both public and what they get by asking difficult questions. There is nothing in the law to stop you publishing that information. The greater danger is that analysts are there to inform their sales desks. At that stage the information they are passing is still potentially inside.'
However, it is one thing for the law to prohibit certain behaviour: it is quite another for the authorities to enforce that law.
Mr Cowap argued: 'I don't see how the new Act will change the low rate of successful prosecutions. Unless they come up with a central City policeman, it won't work.'
Jonathan Agnew of Agnew & Co, the former chief executive of Kleinwort Benson, tried to start the ball rolling on just that process with a discussion paper prepared for the SIB.
Published on 15 February, the paper called for a market conduct regulators' group that would develop benchmark standards of integrity for City business. Responses have been requested by the end of May.
Alongside this would be a central monitoring system to allow unified surveillance of trading across all markets, including the Stock Exchange and the London International Financial Futures Exchange. At present each exchange is responsible for keeping an eye on its own transactions, which inevitably means that some slip between the cracks.
Mr Agnew explained: 'You have a lot of regulatory authorities at the moment, producing rules which impact on the equity market. The suggestion is that the best thing would be to make sure that all the rules are updated properly together.'
But compared with the Securities and Exchange Commission in Washington, Britain's insider police have always lacked resources, both the money and the bright young people willing to tear themselves from merchant banks and catch their less than scrupulous contemporaries.
Until that commitment is considerably stepped up, the determined crooks will still side-step the new law.
What is a crime
A person can be an insider even if he is totally unconnected with the company to which his information relates, and irrespective of the source.
It will be an offence to encourage someone to deal on the basis of inside information.
Insider dealing will cover fixed-interest securities and derivatives as well as shares - if the information 'would be likely to have a signficant effect on the price of ANY securities'.
The law covers dealings on any regulated market, including exchanges in 19 countries of the European Economic Area, and all dealings involving a professional intermediary.
The definition of published information is widened to include facts 'readily acquired' by observation or for a fee.
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