IR as gatekeeper - again

Sitting here this afternoon trying to organise my thoughts for an appearance on a BBC radio programme on Sunday on the subject of insider trading. First thought is that it is interesting that this is thought be an interesting subject for a general audience. Next is “why now”?

Obviously we have seen a sequence of prosecutions around insider trading and market abuse in recent days and weeks. Which begs the question of whether this level of insider trading is new, or we have become better at detecting it. Certainly the FSA signalled its get tougher stance 4 or 5 years ago, a 'heavy hand' to go with the ‘light touch’ approach.

All of which should be welcome; insider trading is inherently unfair, makes proper price formation impossible, to the disadvantage of most investors. Mind you, it wasn’t always that way. In the 1950’s it was almost the norm that insiders took advantage of their status.

So will the new range of prosecutions make any difference? Will they deter as they are presumably are meant to? Is the existence of an improved Sabre oversight system which analyses trading data and identifies patterns of possible illegal dealing going to make the difference? There are few problems with this idea.

First, investment banking is full of inherent conflicts of interest, which must be resolved by improved procedures. Next the ‘chain’ of controlling inside information – on which insider dealing must be based – is very long. In the past we seen prosecutions of accountants on transactions, of financial printers, of company employees and even solicitors .

So the idea that insider trading/ market abuse is limited to City Slickers is not correct. But this heightened activity does say that IR teams may want to look – once again – at their Inside Information policies to see whether the controls are in place.

Pre-emption rights; international standards emerging?

The FSA, as part of its review of the listing regime, has just launched new rules requiring foreign issuers in its Premium segment to follow UK practice in offering pre-emption rights to their shareholders. However the application of the principles remains very different around the world.

Last year 1,012 companies across the world raised $196.3bn via rights issues, according to information from Dealogic. Three-quarters of this sum was raised in Europe, much of it from existing shareholders, who are the key resource for new cash calls.

Pre-emption rights are jealously guarded by all shareholders. They give existing shareholders in a company the right to subscribe for their pro rata share of any new shares in that company issues for cash, providing them with protection against inappropriate dilution of their investments.

They are important to all shareholders, but in Europe, pre-emption varies country by country. The concept has been enshrined in European law since the 1970s. But the provisions in the 2nd Company Law Directive provide for variation between the regimes in different Member states.

In the US, only pre-emption rights that are enshrined in company charters are enforceable. Managements can sell what they want to the highest bidder and investors have limited protection from their actions. Many other countries impose rules on share issues, forcing companies to tell existing shareholders of their plans or give existing shareholders the right of first refusal of new shares.

Do the changes under way at the FSA to mandate pre-emption for foreign companies signal the start of a global regime?