FMA expands scope of New Zealand's insider trading prohibitions

In August 2025 the Financial Markets Authority (FMA) published a report, titled “Shadow insider trading: Regulatory expectations and emerging conduct risk”. The report considers the controversial concept of “shadow insider trading” and sets out the FMA's view that this concept can constitute illegal insider trading.

The report represents an expanded interpretation of the prohibition against insider trading, with market-wide implications. Fund managers, issuers, investors, and other capital markets intermediaries need to act now to ensure their internal trading policies are robust to avoid inadvertent insider trading liability. 

The FMA has invited dialogue on its report, and we encourage capital markets participants to engage with the FMA.

 

What is “shadow insider trading”?

“Shadow insider trading” is a form of insider trading where a person in possession of non-public material information (NPMI) about one listed issuer uses that information to trade in the quoted financial products of another “economically related” listed issuer.

This significantly expands the application of the Financial Markets Conduct Act 2013 (FMC Act)'s prohibitions against insider trading, which have hitherto been considered to prohibit trading in the quoted financial products of the listed issuer directly associated with the NPMI. In light of the report, trading decisions made with the benefit of NPMI may constitute illegal insider trading regardless of whether the trade involves the issuer to whom the information directly relates.

While not mentioned by the FMA, its report may be in response to a disruptive 2024 US decision, SEC v. Panuwat, in which the US Securities and Exchange Commission (SEC) successfully applied the concept of shadow insider trading for the first time.

In that case, the defendant, Matthew Panuwat, became aware of confidential details about a potential acquisition of his employer, a publicly traded biopharmaceutical company. Shortly after learning this information, Panuwat allegedly bought call options in a rival company. When news of his employer's acquisition became public, the value of those options reportedly surged, resulting in a profit of over USD100,000. Although he didn't have inside information about the company in which he invested, the SEC successfully claimed that Panuwat's trades were based on confidential information he had misused from his own employer.

Importantly, the Panuwat decision is currently subject to an appeal to the US Court of Appeals for the Ninth Circuit. The SEC's success relied on an expansion of the misappropriation theory underpinning US insider trading law – which holds that one may not trade based on NPMI in breach of a fiduciary duty owed to the source of the information – on the basis the defendant breached his employer's insider trading policy, which prohibited trading in other companies, including “significant collaborators, customers, partners, suppliers, or competitors” of the employer. It is yet to be seen whether shadow insider trading, in the absence of any prohibition in an internal insider trading policy, will be sufficient to breach securities law in the US.

A brief filed by interested investment professionals in the appeal notes, “The SEC's extension in this case of the law of insider trading to 'shadow trading' implicates important issues relating to both the scope of materiality and the circumstances under which duties of trust and confidence arise that could profoundly affect how fund managers and others operate in a competitive, information-driven marketplace.” It states that the brief was submitted “to assist the Court in understanding the potential market-wide implications of an overbroad ruling on two key issues, which could chill legitimate investment activities that benefit all market participants.”

 

What does the FMA say about shadow insider trading?

The FMA's view is that information about a listed issuer, or about a particular sector, industry, or other matter that relates to a listed issuer, is capable of constituting “material information” about another listed issuer under s 231(1) of the FMC Act. This means that conduct comprising shadow insider trading can breach the prohibition on insider conduct under s 240 of the FMC Act, in relation to trading (s 241), disclosing information (s 242), or advising or encouraging trading (s 243).

The report gives two examples of shadow insider trading scenarios which may give rise to insider trading liability, in relation to capital raises and mergers and acquisitions.

First, in relation to capital raises, the report says in circumstances where the issuers operate within a small sector, the link between one issuer's upcoming capital event (e.g., a capital raise) and its effect on a peer's share price may be sufficiently material that trading in the peer could fall within the scope of insider trading prohibitions.

Secondly, in relation to mergers and acquisitions, the report gives the example of an individual who, after being informed of an upcoming acquisition that is likely to positively revalue a target issuer, infers that similar listed issuers in the same sector will also benefit through investor sentiment or valuation benchmarking. If that individual trades in the peer issuer before the acquisition is made public, the trading may constitute insider conduct.

The FMA sets out its regulatory expectations in relation to shadow insider trading:

1. Individuals and institutions in possession of NPMI are expected to carefully assess the potential implications of their trading activity across all related quoted financial products. When trading in correlated shares or within concentrated sectors, decision-makers must consider whether the information they hold could be viewed as material to the broader market or related issuers.
2. Entities should be vigilant in documenting and reviewing trade rationales, particularly when they involve significant transactions outside of normal trading patterns or coincide with known market-moving events.
3. Entities should ensure their internal governance and compliance frameworks are robust.

 

Our view

Academics, industry participants, and other commentators have expressed concern that the US decision in Panuwat will undermine efficient price discovery – a core function of public markets – as knowledgeable market participants (e.g., industry experts) may be barred (or chilled) from trading in their own sectors.

There will be clear-cut examples of when knowledge learned as an insider of one issuer operating in a sector is material information of other issuers in that sector – such as knowledge of impending (but not yet public) tax impost or relief to be applied to a sector. The difficulty is knowing where to draw the line as to when NPMI about one issuer is not NPMI about another. Given the serious consequences of breaching (or being accused of breaching) insider trading laws, market participants will be cautious.

Commentators have raised the inevitable question of what constitutes a sufficient economic connection between entities such that a reasonable investor would expect information relating to one issuer to have a material effect on the share price of another issuer. Will traders need to conduct an analysis of economic correlation between the two entities' historic share prices? If so, over what time horizon and how will other variables be accounted for? At what point does any correlation become “material”?

We share these concerns in the New Zealand context, particularly given the relatively small size of New Zealand's capital markets. The FMA's four-page report appears to assume homogeneity between entities in the same sector and opens the door to a flood of potential insider conduct by leaving the concept of “economically related” undefined. For example, would knowledge of a potential acquisition of a listed property company stop informed employees and advisers from trading in all other listed property entities? This may hamper capital raising activity in New Zealand.

While shadow insider trading can fit within a (liberal) interpretation of the FMC Act's insider conduct provisions, this is a departure from accepted practice globally and represents an expansion of the rules.

We are unaware of any judicial rulings, legislation, or regulatory guidance in Australia which prohibits shadow insider trading in this way, and unaware of any enforcement action taken in the EU or UK for breaches of their prohibitions on shadow insider trading, further muddying the waters for New Zealand capital markets participants.

Market participants should review their insider trading policies, including trading procedures, staff training, and compliance monitoring, in light of the FMA's report. Given the report, those policies need to include a requirement of careful consideration about when NPMI about one issuer could be material to other issuers. Market participants will also want to consider whether they wish to become insiders and be given the NPMI.

The FMA has invited discussion on its report, and we encourage affected parties to take part in this. We would be happy to assist with any FMA engagement in response to its report.

Please let us know if you have any questions about the FMA's report or if you would like to discuss shadow insider trading more generally.