Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.

 Skip to Content

ETF Share Transactions Based on Nonpublic Information: An Illegal Secret Ingredient?
May 25, 2023
Those with nonpublic information about a merger or acquisition involving a company appear to be profiting by trading in shares of exchange-traded funds based on indexes that include such companies’ shares, according to a recent study by Swedish and Australian researchers.

Securities law liability could very well be simmering in the background for people engaging in this type of activity. The SEC, for example, is known to have recently expanded the range of circumstances in which it has alleged insider trading violations. In this connection, we have previously reported on an SEC action against an executive who used nonpublic information about his company’s impending merger to trade options on the shares of a competitor company. See “SEC Cultivates Shadow Trading Theory,” Expect Focus – Life, Annuity, and Retirement Solutions (April 2022). The competitor company’s value was likely to be affected by the merger, even though the company wasn’t involved in the transaction.

Since the SEC has been willing to pursue that type of “shadow trading” activity, it likely also would pursue insider trading in ETF shares, although the exact parameters of such insider trading liability are far from clear. Presumably, any such liability would not be limited to M&A but would extend to other types of material nonpublic information as well.

The study’s authors found that ETFs focusing on the industry or sector that include the companies involved in an M&A transaction were most likely to be used for trading on the basis of the M&A information. This is not surprising, as the shares of the companies involved in the transaction would be most likely to comprise a significant proportion of that type of index. However, at least in theory, insider traders also could seek to use other types of ETFs or even non-ETF mutual funds.

Accordingly, those responsible for developing and implementing firms’ insider trading compliance procedures would be well advised to continue to be alert to the expanding range of possible violations.
Authored By
Image: Thomas C. Lauerman
Thomas C. Lauerman
Related Practices
Financial Services Regulatory Life, Annuity, and Retirement Solutions Securities Transactions and Compliance
Related Industries
Securities & Investment Companies Life, Annuity, and Retirement Solutions Life, Annuity, and Retirement Solutions
©2024 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.