Fri Nov 19

Australia's insider trading laws don't apply to most superannuation products – here's why they should

Written by Juliette Overland, Associate Professor, Corporate Law, University of Sydney Business School, University of Sydney

Insider trading is something that only happens in companies listed on the stock exchange, right?

It could be happening in Australian superannuation funds.

The Australian Securities and Investments Commission suspects so.

It has examined the behaviour of 23 members of the trustee boards of Australian super funds (both retail and industry) during the early days of the pandemic.

Super funds hold assets which are only revalued on its books from time to time ^[1], sometimes monthly, sometimes quarterly.

When asset values were falling sharply last year, it meant super fund trustees had early access to information about valuation decisions and the ability to influence those decisions.

Using information ‘for personal gain’

ASIC wanted to find out whether some trustees were “using this information for personal gain” by switching their own personal super investment options based on their knowledge of the timing of the revaluations yet to be announced.

It says the conduct it uncovered “fell below ASIC’s expectations”.

The investigation follows an inquiry by the parliament’s economics committee ^[2] that found executives at AustralianSuper, NGS Super, Rest, First State, Hostplus and Intrust Super had switched their own personal super out of options exposed to revaluations at the start of the pandemic.

It’s behaviour that seems to have a lot in common with insider trading ^[4], in which insiders use inside information for their own benefit at the expense of other investors.

But while insider trading in relation to financial products is illegal, the definition of financial products used in the Australian legislation excludes superannuation products that are not provided by a “public offer entity”.

Not caught by the law

This means that the laws do not apply to some industry super funds, but might apply to others that are open to all members of the public regardless of the industry they work in.

As well, “trading” in financial products is held to only occur where a person applies for, acquires, or disposes of those products, or enters into an agreement to do so.

This means that insider trading laws might apply when a person first joins a public superannuation fund, but not when they switch their investment options within a fund.

ASIC has conceded this result in its announcement, saying the activity it has detected might not be caught by the insider trading prohibition, but is “similar to insider trading and may contravene other provisions of the law”.

Not always glamourous. 20th Century Studios ^[6]

When insider trading laws were last amended two decades ago under the 2002 Financial Services Reform Act ^[7], the financial products to which the laws applied were expanded to include “functionally similar” products – but not to all super funds.

At the time super funds held less than A$500 billion ^[8].

They now hold more than $3 trillion ^[9], which is much more than the entire Australian economy turns over in a year, and constitute for most Australians their biggest financial investment outside the family home.

The restriction, especially the distinction between some kinds of industry funds and others, no longer makes sense.

The Australian Law Reform Commission ^[10] is currently undertaking an inquiry into financial services regulation, which includes the provisions of the Corporations Act prohibiting insider trading.

We invest more in super than in shares

It would be timely to amend insider trading laws so that they catch the switching of superannuation investment options within funds and eliminate the distinction between different types of funds.

Australians invest more money in super than in the Australian share market ^[11].

There is no obvious reason why it shouldn’t be as well regulated.