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Tightening rules to curb insider trading

Tightening rules to curb insider trading

WEDNESDAY, August 3 was the last day for the submission of public comments to the Pakistan Stock Exchange on proposed amendments in the ‘Code of Corporate Governance’ relating to ‘Access to Insider Information Regulations, 2016’. The amendments are designed to check insider-trading offences at the local bourse.

Insider trading is a market abuse as old as the origins of the securities markets itself. Section 129 of Part X of the Pakistan’s Securities Act, 2015 defines ‘insider information’ as information which has not been made public, relating, directly or indirectly, to one or more issuers of listed securities or to one or more listed securities and which, if it were made public, would possibly effect prices of those listed securities’.

The Securities and Exchange Commission of Pakistan (SECP) has made it mandatory for listed companies to record the name of persons having access to inside information.

The amendments sought to be incorporated include: ‘All listed companies shall maintain and regularly update a register to enlist persons employed under contract or otherwise, who have access to inside information in the manner as provided in Access to Insider Information Regulations 2016’.

The amendments also provide that a listed company shall designate a senior management officer who shall be responsible for entering or removing names of persons in the said register ‘in a timely manner’.

The Securities Act also directs: ‘Whenever a listed company discloses any inside information to any third party in the normal exercise of profession or duties, complete and effective disclosure of that information must be made simultaneously (to the public)’.

Several knowledgeable persons, on condition of anonymity argued that though the iron hand of law, which falls on the company employees suggest that they were principal suspects of indulging in insider trading, the practice was surreptitiously followed by a vast array of vested interests. Those included friends and families of sponsors and directors, bankers, stockbrokers, high-net worth individuals, securities analysts and companies’ statutory auditors.

There were also well-knit groups of high-ranking officials and directors of different companies who shared insider information true to the proverb: ‘You scratch my back, I scratch yours’.

A corporate lawyer mused that it was quite a difficult task to prove that someone was responsible for insider trading because offenders are careful to find a way around the law by trading through nominees, ‘benami accounts’, offshore companies, and other proxies.

Markets, all over the world, discourage unfair practice of insider trading. The US Securities and Exchange Commission does not have criminal enforcement authority, but can refer serious matters to the US Attorney’s Office for further investigation and prosecution.

In 2014, the European Union (EU) adopted legislation (Criminal Sanctions for Market Abuse Directive). All EU member states agreed to introduce maximum prison sentences of at least four years for serious cases of insider dealing, and at least two years for improper disclosure of insider information. A person who claims to have dabbled in shares in several developed and emerging market says: “Most such markets take insider trading as a serious criminal offence and once convicted, the trader, however powerful, is put behind bars”.

Following international best practices, the newly enacted Pakistan’s Securities Act, 2015 has also declared insider trading as a criminal offence. The law provides: ‘Any person who commits an offence under section 128 relating to insider trading shall be liable in case of an individual to imprisonment for a term which may extend to three years or to a fine which may extend to Rs0.2m or three times the amount of gain made or loss avoided by such person, or loss suffered by another person, whichever amount is higher; and in the case of company, to a fine which may extend to Rs0.3m or three times the amount of gain made or loss avoided by such company, or loss suffered by another person, whichever amount is higher’.

But a market watcher said that if the detection of insider trading, like most ‘white collar crimes’, was difficult, even more challenging was to prove the offence in a court of law.

“Much of the development of insider trading law in world markets has resulted from court decisions”, he says: “And since there are no precedence in our country for the courts to handle such offences, the cases when filed are likely to drag on for years”. He believed that the supporting court system would evolve over time.

Another person suggested that it was not enough to detect insider trading but also to prove that the trader had profited by such knowledge. “Insider trading is a grey area”, he argued: “Because the market operates on information and why would anyone want to buy a security until they have the information ahead of the trading public. “Yes, whether the information was obtained by fair means of research and market observation or foul means through an ‘insider’ is questionable”.

Published in Dawn, Business & Finance weekly, August 8th, 2016

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