What Is Insider Trading?

Part IX of the Securities Industry Act, 1995 (“the Act”) addresses “Dealing by Persons Connected with Issuers.” This practice is commonly referred to as Insider Trading.

Insider trading is the purchasing or selling of a security by persons who are connected to the issuer of the security and who have knowledge of price sensitive information by virtue of said connection.  

Section 120 (1) of the Act defines price sensitive information as “specific unpublished information which, if generally known, might reasonably be expected to affect materially the price or value of (a security.)” Section 120 (2) goes on to provide the circumstances under which a person is considered to be connected with an issuer of securities. Section 121 lists specific persons and the situations under which they are prohibited from trading and exceptions can be found under Section 124.

There are many forms of insider trading and it is important to note that you do not have to make a trade yourself to be held liable for insider trading. Once you share price sensitive information which is not publicly available with someone who makes a trade based on the information you have provided, (commonly referred to as Tipping), both you and the person who actually make the trade, may be found guilty of insider trading. The connected party is referred to as “tipper” and the recipient of the information is referred to as the “tippee.”

Additionally insider trading does not only apply to people who work directly for a company. In a nutshell, once an individual has access to material, non-public information, he/she cannot make a trade based on that information. This means that nearly everybody, including brokers, family, friends, and employees, can be considered an insider. A clear examples is  the CEO of a company telling his daughter to sell her shares of his company’s stock knowing that the imminent release of certain information will cause the value of the stock to drop. In such a case, although the CEO himself did not actually make a trade, he might nevertheless be  found guilty of insider trading. Furthermore, although not an employee of the company, his daughter might also be found guilty of insider trading.

The essence of timely disclosure is one of equal opportunity since investors must be allowed to be privy to all price sensitive information in order to reach an informed investment decision. In light of the potential liability and adverse publicity that may accompany insider trading allegations, it is imperative that companies establish, enforce and constantly review their policies and procedures to prevent and detect insider trading.

It is evident that insider trading undermines investor confidence in so far as it affects the fairness and integrity of the securities markets. The Commission has issued “Guidelines of the disclosure of Price Sensitive Information” as well as “Policy Guidelines for Listed Companies’ handling of Price Sensitive Information.”

These documents are available on the TTSEC website at http://www.ttsec.org.tt


How The Commission Protects The Rights of Investors

The Trinidad and Tobago Securities and Exchange Commission is responsible for ensuring that the securities industry operates in a fair, transparent and efficient manner in order to protect the rights of investors.

Q. How does the Commission regulate the securities market?

The Commission regulates the market by:

  • Registering all securities issues to the public; all issuers of those securities; all market actors i.e. brokers, dealers, traders, underwriters, securities companies, and investment advisers; and all self regulatory organizations (for example, stock exchanges and securities associations);
  • Maintaining constant surveillance over the market to ensure that there is transparent,fair and equitable dealing in securities;
  • Hearing and investigating complaints from aggrieved persons;
  • Enforcing the penalties of the Securities Industry Act, 1995;
  • Conducting Investor Education programmes

Q. How does registering with the Commission provide investors with protection?

  • All issuers of securities and market actors (registrants) must provide the Commission with information on the company, its directors and the securities being offered to the public or to investors.
  • Firms and individuals are registered by category. Each registration category has different education and experience requirements and permits different activities.
  • Registration will not be granted unless the Commission is satisfied that an applicant is fit and proper, meets the requirements of the law with respect to capital and educational qualifications and discloses any information that may affect the conduct and integrity of his business.
  • Market actors and issuers must continuously provide the Commission and investors with information inclusive of changes which may positively or negatively affect the performance of their business.

For more information on how the Commission protects investors visit our website at http://www.ttsec.org.tt 

Understanding Your Investor Responsibilities

In our last post, we wrote about your rights as an investor. Remember, along with your rights, you also have responsibilities as an investor. Here are three key responsibilities you bear as investors which can help you protect your interests.

Check The Registration

The first thing to understand is that everyone in the securities marketplace  must register  and provide background information to the Commission. Therefore your first line of protection is ensuring that you are dealing with a registered issuer, security company, investment adviser or broker. They must meet specific criteria to register. Our website, http://www.ttsec.org.tt provides a comprehensive list of registrants.

Ask Questions 

Even though you may be dealing with registered persons yous hould still thoroughly evaluate the background of any financial professional and firm with whom  you intend to do business.s Not asking the relevant questions can result in huge losses for you in the securities marketplace.  Make sure your questions are answered to your satisfaction.

Know what you are investing in

It is in your best interest to compare information on similar products from different sources. You should also read documents thoroughly especially the fine print. Understand how the investment works as well as your risk.

How Does The Commission Protect Investors?

  • We ensure that market intermediaries who distribute securities or engage in securities transactions on behalf of others, are registered with the commission as indicated above.
  • We ensure that companies offering securities to the public provide or disclose certain information about their entities, the securities they are offering for sale and the risks of investing in those securities.
  • The Commission also conducts ongoing market surveillance  to ensure that registrants comply with the provisions of the law.
  • The Commission has enforcement powers under the Securities Industry Act, 1995 to deal with those who contravene the law.
  • We aim to ensure that investors are educated about capital markets, through outreach sessions, seminars and workshops, so that they can make informed investment choices.

Knowledge is power, know your rights and responsibilities!

What’s Your Scam IQ?

As world economies continue to reel from the global financial meltdown, investors are seeking “safe havens” to secure their financial assets.  This makes for an  environment ripe with opportunists and scam artists ready to swindle the last dollar from unassuming and ill-informed investors.

Here are three of the most common scams out there, read on and don’t be fooled!

The West African Letter Scam

Here’s how it works: You get an email from someone who claims to be a high-ranking official from a developing nation. They ask for help. Their government has millions of dollars in an account, but they can’t get at the money. They ask you to give them your bank account number so they can move the money there. They promise you a big share. Next thing you know, your account is empty and you never hear from them again.

The Boiler Room Scam

You get a phone call from someone you don’t know, offering you “the chance of a lifetime” to make money. It’s a “sure thing.” As long as new people keep buying, the value of the stock goes up. Everyone is happy, so they keep buying.  The company is also happy because it makes money on every sale. Sooner or later, though, people stop buying and start selling. The stock price falls because it had no real value. You and a lot of other investors end up losing lots of money.

The Ponzi  or Pyramid Scam 

Made famous by American businessman Bernard Madoff who orchestrated the largest ponzi scam in history, these usually work something like this: Someone gives you the chance to join a special group of investors, who are supposedly going to get rich on a great investment. It may be a friend of someone you know from work. The person behind the scam hopes that you will jump in, and tell all your friends to join up, too. In some instances they even give you some money at first and encourage you to let the funds roll over for even better returns. They only catch is that more people have to be recruited all the time. Inevitably new people stop joining and since it is the funds form the new investors that keep the pyramid going, the pyramid begins to totter.  Since there is no more money to pay out, you and countless others lose your investment.

You work hard for your money and you want it to be safe. We all do, and while every investment has an element of risk, there is a big difference between taking a risk on a well-researched investment and being tricked into losing your money.

Here are six key things to help you make wise investment decisions and protect yourself from fraud.

Know thy source!

Ignore e-mails and telephone calls from people or companies you don’t know offering investments. Scam artists often use company names that are similar to well-known companies.

Avoid hot tips and inside information

Hot tips are usually just that, “hot” as in illegal! If someone says they have inside information, don’t trust them.   Also, keep an eye out for stocks that are too good to be true. Cheap stocks are often manipulated to drive prices up, and usually inevitably crash leaving your stock worthless.

Take care in choosing your adviser 

Different types of  investments require different advisers. Make sure that your adviser is registered to buy and sell the investments that interest you.  Take the time to find an adviser that’s a good fit for you, you’ll reap the benefits of better investment decisions if you do.

Educate yourself 

Don’t buy an investment that you don’t understand. You’re much more likely to lose money.  Always seek out more information than you need, you’ll feel safer and more confident about your decisions.

Be willing to say “no” 

A good financial adviser won’t try to pressure you. Only say “yes” when you know the person, understand the investment, and feel that it’s right for you. If your instincts tell you “no,” listen to them.

Look at the future, not just the past 

Past performance of an investment is not a full proof indication of the future health of an investment.  Make your investment decisions based on the outlook for the future.

Remember, bad information can lead to bad choices. If something sounds too good to be true, it most likely is.