With the alleged insider trading scandal against the US financier Raj Rajaratnam, ‘insider dealing’ has become a highly discussed topic. According to section 32 (1) and (2) of the US Securities and Exchange Commission Act 2003, it shall be unlawful for a connected person with a company, who is in possession of unpublished price sensitive information, to trade in securities of that company; or to trade in securities of a related company, with a view to the making of a profit or the avoidance of a loss.
Raj Rajaratnam being taken into custody |
In Sri Lanka the topic of ‘insider dealing’ is covered by part IV of the SEC Act and Take-overs and Mergers Code of 1995 and applicable ‘only to listed companies’. However , Part V of the now repealed Companies Act, No. 17 of 1982 contained provisions that penalize insider dealings with respect to ‘all companies’, whether listed or not. In the UK, under the Financial Services and Markets Act, 2000 (FSMA), the Financial Services Authority (FSA) has the discretion to bring either a ‘civil action’ under the lighter burden of proof or a ‘criminal action’ under the Criminal Justice Act of 1993, whereas, in Sri Lanka, it is a ‘criminal offence’ as per the section 33A of the SEC Act.
In the UK, FSMA makes the offence of market abuse applicable to most ‘legal entities’ (including corporations) and ‘natural persons’. However, in Sri Lanka, section 32 refers to ‘an individual’ and liability does not extend to legal entities. Nevertheless section 33A of the SEC Act refers to ‘any person’ (which could be legal or natural) and therefore there is no harmony between section 32 and 33A. Though section 51(3) of the SEC Act , refers to any offence committed by a ‘body corporate’, as it is a ‘general provision’; section 33A which is a ‘specific provision’ for PART IV (Insider Dealing) should take into account while interpreting section 32.
In the UK, the Criminal Justice Act of 1993 replaced the ‘connection with the company’ test with ‘access to information’. However the SEC Act of Sri Lanka has not replaced the ‘connection with the company’ test with ‘access to information’, but merely adds into the two fold definition of ‘connection’ a third category of persons. The 2003 amendment imposes liability by reference to ‘informational advantage’ as opposed to ‘status’, and therefore, a repairer who in the course of doing maintenance work in the office premises obtains inside information may be considered as an insider (temporarily). Most jurisdictions have rejected the U.S. fiduciary relationship (or relationship of trust and confidence) model to define the scope of illegal insider trading and tipping. Further in Sri Lanka there is no requirement that the price sensitive information should have emanated from an ‘inside source’.
Under the SEC Act, ‘a shareholder’ would not be regarded as an insider. However, public listed companies are required to make a prompt announcement of full details of any trade which amounts to 10% or more of the voting rights of the entity (see Listing Rules 2009-CSE, Appendix 8A (7)). In contrast in the UK, ‘all shareholders’ are regarded as insiders and in the USA only ‘controlling shareholders’ are regarded as insiders.
Section 34 (2) (b) of the SEC Act provides a very problematic definition on “price sensitive information” comparable with the section 58 of the CJA 1993 (UK). Further listing rule 8.1 of the CSE, 2009 explains what is meant by ‘price sensitive information’. In order to attract the provisions of the SEC Act 2003, the information must relate to ‘specific’ matters. ‘Specific’ is broader than ‘precise’ so that specific information might typically be that a bid was going to be made. ‘Precise’ information would be the price at which the bid was going to be made; see Parl. Deb. House of Commons, UK, Standing Committee B, 10 June 1993, Minister, Col, 176. In Sri Lanka, both tipper and tippee are liable under the SEC Act .
xamples of insider trading cases are cases against: Corporate officers, directors, and employees; Friends, business associates, family members, and other “tippees” of such officers, directors, and employees; Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded ; Other persons who misappropriated, and took advantage of, confidential information from their employers; and Government employees who learned of such information because of their employment by the Government, however not members of the SEC as they are simply not ‘public servants’ (but the Take-overs and Mergers Code covers SEC members during the offer period) who traded the securities after receiving such information.
In addition CSE Listing Rules recognise a director’s spouse and children under 18 years of age also as a connected person; see Rule 8.6.a. ‘Close period rules’ prevent directors from dealing during the close period which is assumed to be the two months leading unto the publication of the interim or preliminary results (if the company reports on a half yearly basis) or to be one month if a company reports quarterly. However in Sri Lanka the SEC has not identified close period rule like other jurisdictions. Generally the SEC takes the time duration between proximity of the trade and announcement to the market referred to as ‘sensitive period’ although it is suitable to introduce close period rule in Sri Lanka, like the UK.
Countries such as the UK and South Africa provide a defence of ‘non-use’ of inside information to charges of insider trading. Ideally non-use defence can be a defence in Sri Lanka; however it has never been put to test in Sri Lankan courts; see section 32(8) and 32(9) of the SEC Act. No jurisdiction is perfect in addressing the offence of insider dealing and what matters is an efficient enforcement framework. For example, in spite of the purported shortcomings in the U.S. securities regime, effective enforcement lifts up the U.S. framework to pre-eminence among securities markets.
(The writer is the author of the book titled “Principles and Practice of Company Law in Sri Lanka, 2008”.
The article is based on intense research carried out by the writer in 2008/09 in the USA.)
|
E-mail