General informationThis page describes the law, not any particular trade. ASIC administers the Corporations Act, and a lawyer can say how it applies to a particular person or transaction.
The trading limb, element by element
Section 1043A(1) is built from a small number of elements. Each one has to be present before the prohibition bites.
- A person possesses inside information. The Act calls that person “the insider”. Inside information is defined in section 1042A: it is not generally available, and if it were, “a reasonable person would expect it to have a material effect on the price or value of particular Division 3 financial products”. The guide to inside information takes both halves apart.
- They know, or ought reasonably to know, both halves. The insider must know, or be someone who ought reasonably to know, that the information is not generally available and that it would be material if it were. The test is partly objective: what the person ought reasonably to have known counts.
- They deal, or agree to deal. The insider must not apply for, acquire or dispose of the affected products, or enter into an agreement to do any of those things, whether acting for themselves or as someone’s agent.
- Or they procure someone else to. Getting another person to deal is caught in the same way. Under section 1042F, inciting, inducing or encouraging someone to act is taken to be procuring them.
“(b) the insider knows, or ought reasonably to know, that the matters specified in paragraphs (a) and (b) of the definition of inside information in subsection 1042A(1) are satisfied in relation to the information …”
Corporations Act 2001, section 1043A(1)(b)The tipping limb
Section 1043A(2) is separate. It applies when “relevant Division 3 financial products are able to be traded on a financial market operated in this jurisdiction”. Then “the insider must not, directly or indirectly, communicate the information, or cause the information to be communicated, to another person if the insider knows, or ought reasonably to know, that the other person would or would be likely to” deal in the products or get someone else to.
The person passing the information on does not need to trade at all for this limb to apply. The conduct is the communication itself.
Which products it covers
The prohibition attaches to what the Act calls Division 3 financial products. Section 1042A lists them:
- securities
- derivatives
- interests in a managed investment scheme
- “debentures, stocks or bonds issued or proposed to be issued by a government”
- superannuation products, other than any the regulations exclude
- any other financial products that can be traded on a financial market.
Section 1040B adds bank accepted bills and negotiable certificates of deposit, which the Part treats as if they were Division 3 financial products.
Who it reaches
The prohibition is written about any person. Two further rules decide whose knowledge counts and where the law reaches.
- Companies and partnerships. A body corporate is taken to possess information an officer holds from the performance of their duties, and is presumed to know what an officer knows because of that role (section 1042G). Section 1042H makes a similar rule for partners and partnership employees.
- Inside and outside Australia. The Division covers acts in this jurisdiction in relation to Division 3 financial products, wherever the issuer is based, and acts outside it in relation to products issued by a person who carries on business here or a body corporate formed here (section 1042B).
Exceptions written into the Act
Sections 1043B to 1043K set out situations where the prohibition does not apply. These are the main ones, summarised. Each has conditions in the text that this summary does not repeat.
| Section | What it covers |
|---|---|
| 1043C | Applying for or acquiring products under an underwriting or sub-underwriting agreement, and some communications made to arrange underwriting. |
| 1043D and 1043E | Acquisitions the Act itself requires, and communications a government or regulatory authority requires. |
| 1043F and 1043G | “Chinese wall” arrangements: a company or partnership is not caught merely because one officer, member or employee holds the information, if the decision was made by others, the arrangements could reasonably be expected to keep the information and advice away from them, and they did. |
| 1043H and 1043I | Knowing your own intentions: a person or company is not caught merely because they know about their own proposed or past dealings in another issuer’s products. |
| 1043K | A licensee or its representative carrying out a client’s specific instruction, where information barriers were in place and worked, and the client is not an associate. The client remains subject to the prohibition. |
There are also two defences in section 1043M. One applies where the information came to the person solely because it had been made known in a way likely to bring it to the attention of people who commonly invest in those products. The other applies where the other party to the trade knew, or ought reasonably to have known, the information before trading. The person relying on either carries an evidential burden.
Crime and civil penalty, both
Each limb of section 1043A is an offence, and each is also a civil penalty provision. So a breach can lead to a criminal prosecution, or to civil proceedings for a pecuniary penalty and other orders. The amounts and other consequences are set out in the guide to penalties.
Insider trading sits beside a separate group of rules on market manipulation, sections 1041A to 1041F, which deal with artificial prices, false impressions of trading, and false or misleading statements and concealment. Those are covered in the guide to market manipulation.