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Section 120 (1) of the Act defines price sensitive information as “specific unpublished information which, if generally known, might reasonably be expected to affect materially the price or value of (a security.)”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