In brief
- The offence of insider dealing punishes dealing in financial instruments, cancelling or amending orders, or recommending that a third party deal, using information that is precise, not public and capable of having an appreciable effect on the market price.
- It is punishable by imprisonment of six months to six years and a fine of two to five years (or a fine calculated on the profit obtained, the profit procured or the loss avoided, where that amount is higher), provided that the profit or loss exceeds €500,000, the value of the instruments exceeds €2 million or there is a serious impact on market integrity.
- Unlawful disclosure of inside information is a separate offence, punishable by imprisonment of six months to four years and a fine of twelve to twenty-four months, even if no transaction takes place.
- The company may incur criminal liability for both offences; an internal code is not enough on its own if there are no real controls.
The offence of insider dealing (uso indebido de información privilegiada) punishes anyone who, using precise, non-public information that could have an appreciable effect on the market price, acquires, transfers or assigns financial instruments, cancels or amends an order, or recommends that a third party deal. This conduct undermines equality between investors and damages confidence in the securities markets.
The conduct is not limited to buying shares ahead of an announcement: it may also consist of selling, amending an order, recommending a transaction or disclosing confidential information outside the permitted professional sphere.
What is inside information?
It is information of a precise nature, which has not been made public, relating directly or indirectly to one or more financial instruments or to their issuers, and which, if it were made public, could have an appreciable effect on their price.
It may concern, for example:
- a takeover bid;
- a corporate transaction;
- financial results not yet published;
- a significant sale;
- a capital increase;
- a regulatory decision;
- an event that could significantly change the value of the securities.
Not all internal information is inside information. It must be sufficiently precise, remain confidential and be objectively capable of influencing the price. General rumours and market opinions are not, in themselves, equivalent to inside information.
What conduct is prohibited?
The main conduct consists of carrying out, directly or indirectly, including through a nominee, acts of acquisition, transfer or assignment of a financial instrument using inside information. It also includes cancelling or amending an order when this is done on the basis of that information.
Recommending that a third party use the information to carry out those transactions is likewise punishable.
The prohibition applies to anyone with privileged access by reason of their position, employment, profession, duties or holding in the entity, but also to anyone who obtains the information by other means and deals knowing that it is inside information.
Unlawful disclosure of inside information
There is also a specific offence of unlawful disclosure. It is committed by anyone who possesses inside information and communicates it outside the normal exercise of their employment, profession or duties, thereby endangering the integrity of the market or investor confidence.
Improper disclosure in the course of a market sounding may also be a criminal offence if it does not comply with the requirements of the applicable regulations.
What is the penalty for insider dealing?
Unlawful use or recommendation is punishable by imprisonment of six months to six years and a fine of two to five years (day-fine system), or by a fine calculated on the profit obtained, the profit procured or the loss avoided, where that amount is higher.
For an offence to exist, at least one of the following circumstances must also be present:
- a profit or loss exceeding €500,000;
- a value of the instruments used exceeding €2 million;
- a serious impact on market integrity.
The penalty is imposed in the upper half of the range if the offender habitually acts in this way or if the profit, the loss avoided or the damage is of considerable significance. It is also aggravated where the offender works for an investment firm, a credit institution, a supervisory authority or a market operator.
Penalty for unlawful disclosure
Unlawful disclosure of inside information is punishable by imprisonment of six months to four years and a fine of twelve to twenty-four months. In this case there is no need for any purchase or sale to take place: it is sufficient that the improper communication endangers market integrity or investor confidence.
Confiscation and administrative infringements
In addition to the penalty, the court may order confiscation of the profits obtained or of the assets or instruments used to commit it. Administrative market abuse infringements may apply where the conduct does not reach the thresholds of the criminal offence.
Can a company be criminally liable for insider dealing?
Yes. Corporate criminal liability is provided for both insider dealing and unlawful disclosure of inside information.
The company may be liable where the offence is committed in its name or on its behalf and for its direct or indirect benefit by directors, representatives or persons with powers of organisation and control. It may also be liable for acts of employees acting in the course of the business where the offence was made possible by a serious breach of the duties of supervision, monitoring and control.
An internal code is not enough on its own. The company must show that it has implemented real controls:
- insider lists;
- information barriers;
- trading restrictions;
- prior authorisation of transactions;
- training;
- access logs;
- reporting channels;
- independent oversight.
The main penalty for a legal person (company) is a fine. Depending on the case, it may be a fine of two to five years or an amount equal to three to five times the profit obtained or that could have been obtained, if the resulting amount is higher. Other penalties provided for legal persons may also be imposed.
Civil liability and other consequences
Civil liability arising from the offence comprises restitution, reparation of the damage and compensation for material and non-material loss where damage has been directly caused and the causal link can be proven.
In many insider dealing cases the harm does not correspond to the loss of a particular investor, but to the distortion of equality and transparency in the market. For this reason, the main financial consequence may be confiscation of the advantage obtained, without prejudice to any civil claims that may be brought where a person or entity can prove specific damage.
A legal person convicted of the offence is jointly and severally liable in civil terms with the natural persons convicted for the same acts. It may also face administrative proceedings, financial sanctions, loss of authorisations, operating restrictions and significant reputational damage.
Business example
The chief financial officer of a listed company knows that the company is about to announce a transaction that is expected to raise its share price. Before the public announcement, he buys shares through a related company. He also tells a supplier so that the supplier can deal before the announcement.
The purchase and the recommendation may constitute insider dealing if the legal requirements are exceeded, and the communication to the supplier may give rise to additional liability.
How can a company prevent insider dealing?
The company should treat as potentially inside information any precise information that could influence the share price until it has been properly disclosed. It is advisable to:
- restrict access;
- identify insiders;
- notify them in writing of their obligations;
- monitor transactions by directors and employees;
- record the date on which the information is received, changed or ceases to be confidential.
Frequently asked questions
What is considered inside information?
Information of a precise nature, not made public, relating directly or indirectly to one or more financial instruments or to their issuers, which could have an appreciable effect on their price if it were made public. General rumours and market opinions are not, in themselves, equivalent to inside information.
When is it a criminal offence rather than just an administrative infringement?
At least one of these circumstances must be present: a profit or loss exceeding €500,000, a value of the instruments used exceeding €2 million, or a serious impact on market integrity. Administrative market abuse infringements may apply where the conduct does not reach the thresholds of the criminal offence.
Is it an offence to disclose inside information even if no shares are bought or sold?
Yes. Unlawful disclosure is punishable by imprisonment of six months to four years and a fine of twelve to twenty-four months, and no purchase or sale is required: it is sufficient that the improper communication endangers market integrity or investor confidence.
Is an internal code enough to protect the company?
No. An internal code is not enough on its own: the company must show that it has implemented real controls, such as insider lists, information barriers, prior authorisation of transactions, training and independent oversight.