The following paper investigates the concepts of insider dealing. While the first part offers an overview of the relevant legislation, the second part aims to answer the question as to whether insider trading should be prohibited by legislation.
Insider dealing refers to the use of non-public and price-sensitive information for the purpose of gaining an unfair advantage and involves trading with company shares or other securities in a public financial market. Such conduct is both a criminal offence and a regulatory infringement under the civil code.
There are various theories dealing with insider trading that offers arguments for and against the prohibition of insider trading. The misappropriation theory, the unfairness approach and the idea that insider dealing will negatively affect market confidence are all considered to be distinct reasons for regulating insider dealing. On the other hand, opponents argue that legalization of insider dealing would lead to increased market efficiency, fairer share pricing and fraud prevention.
Despite the high costs required for prevention of insider dealing and the fact that very few if any companies have ever sued its officers for inside trading, it is widely regarded by the governments as being immoral and damaging for the markets and is therefore prohibited. The offences can be dealt with either civil or criminal regime, with the latter being far more difficult to apply in practice and thus less effective.
1. Introduction
The following paper investigates the concepts of insider dealing. While the first part offers an overview of the relevant legislation, the second part aims to answer the question as to whether insider trading should be prohibited by legislation.
Insider dealing refers to the use of non-public and price-sensitive information for the purpose of gaining an unfair advantage and involves trading with company shares or other securities in a public financial market (Martin and Law, 2009, p287). Such conduct is both a criminal offence and a regulatory infringement under the civil code (MacNeil, 2010).
2. Legal regulation
The history of legal regulation of insider dealing in the UK is relatively short, particularly in comparison to the US, where first legislation on insider dealing was introduced in 1934. Unlike the US, the common law that regulates insider dealing has not developed in the UK before the implementation of the statutory legislation. Also it is generally treated less seriously in the UK than in the US (MacNeil, 2010).
2.1. Criminal regime
In the UK insider dealing was first made a criminal offence when Part V of the Companies Act 1980 came into force (Griffin, 2006, p198). The original legislation was re-enacted in the Company Securities (Insider Dealing) Act 1985 and further amended by the Financial Services Act 1986. This was superseded when the EC agreed in 1989 on a Directive to co-ordinate the legislation of insider trading, as a result of which Part V of the Criminal Justice Act 1993 was brought into force (Cole, 2007). Under the Act, Sc 52 if a person has an ‘inside information’ and he has the information as an ‘insider’, it is criminal offence if he:
- deals in price-affected securities in relation to the information himself or through professional intermediary on a regulated market
- knowingly encourages other person to deal so (even if the other person is not aware of this) or
- improperly discloses the specific information to another person (Dignam and Lowry, 2009, pp78-79).
An ‘inside information’ refers to a confidential, specific and price-sensitive information while the ‘insider’ is a person who has the information through being a shareholder, director or employee or through access of his employment or another inside source (Rose, 2009, p26). The individual must know that the information is ‘inside information’ and that it comes from an ‘inside source’ (Dine and Koutsias, 2007, p237). The Act exempts individuals who have to pass on inside information through employment as well as persons operating as dealers.
The Act, Sc 61 provides for the maximum punishment of seven years’ imprisonment and/or an unlimited fine (Rose, 2009, p26).
In order to prosecute for insider trading under the criminal code it is required to prove the necessary elements of mens rea (intention) and proof beyond reasonable doubt. Due to the considerable burden of proof, prosecutions for insider dealing offences have proven to be complex and often unsuccessful (Dine and Koutsias, 2007, p235; Griffin, 2006, pp199-203). Since the introduction of the offence there have been fewer than 20 convictions in the UK, some of which was followed by pleas of guilty. Dine and Koutsias (2007, p240) suggest that the criminal law does not promote compliance with the prohibitions as it is ineffective. They further argue that it is a misuse of the criminal law and an ineffective implementation of the EC Directive.
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- Linda Vuskane (Autor:in), 2010, The Concepts of Insider Dealing, München, GRIN Verlag, https://www.grin.com/document/154388
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