With the constant increase in stock market transactions, the rules on market abuse are becoming more stringent in Switzerland. Insider trading is punishable under Swiss law, both at an administrative and criminal level.
In addition, the Swiss Financial Market Supervisory Authority (“FINMA“) imposes penalties for people committing insider trading. In 2017, for instance, FINMA concluded enforcement proceedings in two separate cases of market abuse, one of them concerning the area of insider trading [1] .
This article explains and shed light on acts that may constitute a insider trading.
Definition and general aspects
What is “Insider Information”?
According to Swiss law, it is “confidential information whose disclosure would significantly affect the price of securities admitted to trading on a Swiss trading venue” (“Insider Information”). [2]
The term “securities” captures shares, derivatives and bonds and any buying (“upward information”) or selling (“downward information”) anticipating a fluctuation in the share price is captured in the prohibited conduct. [3]
Insider trading can be punishable both at an administrative level (article 142 FMIA) and at a criminal level (article 154 FMIA).
What type of information is considered Insider Information?
“Insider Information” generally includes the following type of information:
- past or present facts, that may be proven;
- projects or intentions of the relevant entity; [4]
- estimations and prognostics [5] ;
- in some situations, subjective advice. [6]
Knowledge of the information must be clear and certain but the relevant person does not need to have detailed knowledge of the information to be caught within the provision. [7]
What kind of information may significantly affect the price?
An event “significantly affecting the price of securities” must be exceptional and cause an important variation in the share price outside the usual fluctuations. In other words, would a reasonable and experienced investor who knows the market well be influenced in their decision to invest if they knew this information? [8]
Elements that can have a significant effect on the share price may include major strategic alliances or joint ventures, restructuring measures, significant changes to the financial results compared to expectations or significant changes to the management or the board of directors. [9]
Who can be considered as an Insider?
Information is deemed confidential if only a limited number of persons has access to it, as opposed to non-confidential information which is known to a large number of stock market users [10] .
Anyone who conducts an activity which gives them access to Insider Information is captured in this definition. [11]
Article 154 FMIA only targets individuals who commit insider trading and not entities. [12]
However, an entity can also be punished when an individual at fault cannot be individually determined due to a lack of organisation and when the act was committed while exercising commercial activities in conformity with the company’s purposes. [13]
Financial Advantage
An advantage will be that the relevant person obtained a gain or avoided a loss, typically by selling shares before the information is released and the price then drops or buying before the information is released and the price increases.
It is not necessary that the person sells their shares or derivatives at the most opportune moment, as the gain will be realised even if, after an initial increase due to the information being published, the share price then drops in value to a price lower than when the acquisition occurred. [14]
Penalties
Criminal Penalty
Article 154 FMIA sets forth the criminal aspect of insider trading.
Imprisonment not exceeding three years or a financial penalty shall be imposed on “any person who as a body or a member of a managing or supervisory body of an issuer or of a company controlling or controlled by them, or as a person who due to their holding or activity has legitimate access to Insider Information, if they gain a pecuniary advantage for themselves or for another with Insider Information by:
- exploiting it to acquire or dispose of securities admitted to trading on a trading venue in Switzerland or to use derivatives relating to such securities;
- disclosing it to another; or
- exploiting it to recommend to another to acquire or dispose of securities admitted to trading on a trading venue in Switzerland or to use derivatives relating to such securities.” [15]
An intention to exploit Insider Information does not need to be shown under the criminal provisions.
Article 154 FMIA requires for the relevant person to gain a pecuniary advantage to be liable (unlike article 142 FIMA, where there is no requirement for a pecuniary advantage).
Penalties for undertaking insider trading under article 154 FIMA range from a fine to up to 5 years of imprisonment depending on the severity of the offence.
Administrative Penalty
Pursuant to article 142 FMIA, any person who has Insider Information and who knows or should know that it is Insider Information or who has a recommendation that they know or should know is based on Insider Information commits insider trading when they:
- exploit Insider Information to acquire or dispose of securities admitted to trading on a trading venue in Switzerland or to use financial instruments derived from such securities;
- disclose Insider Information to a third party; or
- exploit Insider Information to recommend to a third party to acquire or dispose of securities admitted to trading on a trading venue in Switzerland or to use financial instruments derived from such securities.
Exceptions to Insider Trading
The Ordinance on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading dated 25 November 2015 (“FMIO”) provides a number of exceptions to the prohibition of insider trading under articles 142 and 154 FMIA [16] , which include:
- operations implementing a decision to carry out a securities transaction, so long as the decision was not made on the basis of Insider Information [17] ; and
- when a buyback of own equities takes place [18] ; and
- price stabilisation after a public placement of securities [19] .
Insider trading case initiated by FINMA
FINMA has became aware of incidents of insider trading being committed by a former board member of various Swiss companies. In this case, between 2013 and 2016, a director repeatedly and systematically used information from companies of which he was a director, in order to obtain economic benefits of the expected variations in share prices.
FINMA concluded that the aforesaid board member’s conduct was illegal and decided to share its observations with the Office of the Attorney General of Switzerland and ordered the confiscation of profits of approximately CHF 1.4 million [20] .
Footnotes:
[1] FINMA, Press release dated 23 June 2017, FINMA imposes sanctions for insider trading and market manipulation, available on https://www.finma.ch/fr/news/2017/06/20170623-mm-marktverhalten/; see corresponding section below.
[2] Art. 2 letter j of the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading dated 19 June 2015 (“FMIA”).
[3] Olivier THORMANN and Cédric REMUND, Commentaire Romand du Code pénal II, 2017 at 586.
[4] Olivier THORMANN and Cédric REMUND, Commentaire Romand du Code pénal II, 2017 at 576.
[5] L Farländer, Der revidierte schweizerische Insiderstraftatbestand, Zurich, 2015 at 364.
[6] L Farländer, Der revidierte schweizerische Insiderstraftatbestand, Zurich, 2015 at 364.
[7] Olivier THORMANN and Cédric REMUND, Commentaire Romand du Code pénal II, 2017 at 572 at 576.
[8] Olivier THORMANN and Cédric REMUND, Commentaire Romand du Code pénal II, 2017 at 579.
[9] F Huber, P Hodel, C Staub Gierow, Praxiskommentar sum Kotierungsrecht der SWZ Swiss Exchange, Zurich/Bale/Genève, 2004 at 362 and Olivier THORMANN and Cédric REMUND, Commentaire Romand du Code pénal II, 2017 at 585.
[10] FINMA Circular 2013/8 « Règles de conduite sur le marché », at 4.
[11] Olivier THORMANN and Cédric REMUND, Commentaire Romand du Code pénal II, 2017 at 573.
[12] Message fédéral sur la loi des bourses et des valeurs mobiliers, at 6361.
[13] Olivier THORMANN and Cédric REMUND, Commentaire Romand du Code pénal II, 2017 at 594.
[14] Olivier THORMANN and Cédric REMUND, Commentaire Romand du Code pénal II, 2017 at 589.
[15] Article 154 par. 1 FMIA.
[16] Although Article 122 FMIO states that the first three exceptions listed herein are relevant only for article 142, majority doctrine shows that the exceptions apply to conduct otherwise breaching article 154.
[17] Article 127 FMIO.
[18] Article 123 FMIO.
[19] Article 126 FMIO.
[20] FINMA, Press release dated 23 June 2017, FINMA imposes sanctions for insider trading and market manipulation, available on https://www.finma.ch/fr/news/2017/06/20170623-mm-marktverhalten/.
