The pre-announcement purchase in a trading halt
You are an adviser at an NZX market participant. At 9:05am a longstanding client, a retired teacher, instructs you to buy 60,000 shares in Kauri Energy Ltd (NZX: KEL) at market. She says her nephew, a contractor at KEL, told her last night that KEL will announce a major contract at 10am and the shares 'will jump'. KEL is in a trading halt pending the announcement. The client's account has $45,000 cash and the order would be about 40% of her liquid investments. She asks you to place the order immediately and not to tell compliance because 'everyone does it'. She adds that if you cannot buy now, you should at least buy at 10:01am before the price settles.
1. Identify the conduct issues and the immediate steps you must take.
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The key issue is whether the nephew's information is material and not generally available. Advance knowledge of a major contract announcement from a contractor is likely to be inside information. Under the FMCA insider trading prohibitions, you must not trade KEL shares, procure the client to trade, or tip anyone else. The trading halt independently prevents trading. The client's request not to tell compliance does not override firm procedures or your legal obligations. Preserve the client instruction, the time, the source described, and the halt notice. Escalate immediately to compliance and follow the firm's suspicious-activity and market-conduct reporting process; if appropriate, this may involve reporting to the FMA or NZX. Do not contact the nephew, do not repeat the information, and do not enter an order that could be seen as front-running the announcement.
2. What do you tell the client, and what must you record?
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Tell her plainly that you cannot place the order while the stock is halted or on information that may be inside information. Do not confirm the reason for the halt or repeat the nephew's tip. Explain that after the announcement is public and the halt lifts, you can assess a normal order against her objectives, cash resources, and concentration limits. Record the refused instruction, the client's reasons, the halt status, the escalation time, and the compliance response. Record that no order was placed and that the client was told why. Avoid any communication that could be characterised as tipping or as encouraging her to pass the information to someone else.
3. If the client insists after 10:01am, can you place the order? Explain the conditions.
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Once the announcement is public and the halt has lifted, the information is no longer inside information merely because the client heard a rumour earlier. But you must confirm the announcement is actually public, that the client has no other material non-public information, and that the order is suitable. Her $45,000 cash and a 40% allocation to one stock raise concentration and liquidity issues. You should discuss the price movement, the risk of chasing, and diversification. If she gives a proper instruction, the order can be placed on normal commercial terms, subject to firm procedures. Record the basis for acting, the suitability assessment, and the fact that the earlier tip was not the reason. If the information was not public, or if you are unsure, do not act.