Abstract
One of the essential requirements of trading in a financial market is symmetric access to market information. However, the insiders of corporations have access to non-public price sensitive information which is often ill-used for informed trading or insider trading. Although the line between what information is fair and unfair is the subject of legal determination varying between jurisdictions, but a general prohibition of insider-trading has become a tenet of securities market worldwide contoured by securities laws and regulations. This paper discusses the insider trading policies in Bangladesh by evaluating the relevant laws while exploring the legal provisions of popular foreign jurisdictions. In addition, the paper refers to several leading judicial decisions from the United States in order to grasp the rationale and scope of the insider-trading policies therein and fathom the cavities in our policies. This is because, for a market as volatile, the securities regulators in Bangladesh needs to adopt stringent measures on prohibiting insider-trading, because informed trading not only hinders stock market integrity and transparency, but shake investors’ confidence as well which can have a significant impact on the overall economy.
- Introduction
A basic gist of insider-trading encompasses the unfair use of material, nonpublic information concerning an issue of securities and using that privileged knowledge for trading of securities.[1]While there is ample debate on prohibiting insider-trading whereby the proponents assert that it is nothing but breach of fiduciary duty entailing a classic corporate agency problem, the opponents proclaim that insider-trading can ameliorate both firm-level and overall market efficiency by providing an incentive to invest more.[2]However, a legal viewpoint vanquishes the latter argument due to an apparent reason of unfairness because a gain made by bereaving the general shareholders cannot be justifiable by law. Therefore, prohibition on insider-trading has been an international initiative since quite some time now because of its significance in regulating the capital market in every economy. Following several market crashes, the securities regulations have witnessed many changes and legal reforms, like stricter disclosure requirements, international standard surveillance and so on.[3] Yet, underlying reasons like insider-trading and market manipulation behind such crises remained unheeded from public sentience.[4]This paper discusses the insider-trading policy in Bangladesh by evaluating the existing legal provisions prohibiting insider-trading in contrast to insider-trading laws pertaining abroad, such as in the US, EU, Japan, as well as the synthesis provided by the International Organization of Securities Commission (IOSCO). Finally, the paper concludes with a brief discussion on the roles of the supervisory institutions of the securities market and the duties of the companies being exposed to insider-trading activities in Bangladesh.
- Background
Originally, states did not prohibit insider-trading but merely opted for a return of the profits made by informed trading. For instance, United States being the first country to regulate trade by corporate insiders did not actually prohibit anyone from trading on inside information, but merely required the profits so made to be returned to the corporation.[5] It was after 1942 that a rule was promulgated and decades after was it finally brought to use.[6] The insider trading regulation witnessed a bloom during the period of 1980’s to 1990, and finally by early 2000’s, a good eighty-seven countries adopted insider-trading prohibition laws with a handful of countries adopting at least one measure of prosecution.[7] Likewise, the laws governing insider-trading in Bangladesh is considerably anew as it was not initiated during the promulgation of the parent law on securities, the Securities and Exchange Ordinance, 1969. (Hereinafter ‘Ordinance 1969’) However, during the mid of 90’s, Bangladesh alike many other nations took the initiative and the Securities and Exchanges Commission (Prohibition of Insider-Trading) Rules 1995(hereinafter ‘Rules 1995’) was enacted as a more specific law which has been the catalyst to the insider-trading policy regime in Bangladesh.Later on, other laws and orders from the BSEC further supplemented this policy which will be discussed in the following potion of the paper.[8]
- Laws Governing Insider-Trading in Bangladesh
Insider trading is an issue of global malpractice that is rampant in the securities market of both developed and developing countries, and Bangladesh is not immune to it either. It is not beyond surmise that lacking in implementation of laws on insider-trading haspermitted many clandestine insider trading activities. In fact, it is quite surprising, if not alarming, that the very first move of the BSEC against insider-trading scam took place back in 2007 upon Jamuna Bank’s sponsor shareholders and four other affiliated companies for purchasing heavy number of shares based on inside information of declaring 1.5% cash and 25% stock dividend for the year. The Chairman of BSEC said such misappropriation of non-public information was an “eye-opener” and imposed a cumulative fine of 13 lakh taka along with a two-year halt on the shares purchased.[9]
The law governing insider trading in Bangladesh under the parent law concerning securities, the Ordinance, 1969 is grounded under three distinct provisions, although originally the Ordinance 1969did not contain any provision acknowledging the notion of insider-trading, let alone penalizing it. Initially, it was only section 19 that conferred some sort of restriction on disclosure of privileged inside information. It wasn’t until 2012 that prohibition of insider-trading was addressed in the parent law, and the restriction was elongated to be pertinent upon the former and existing Chairman, Member and employees of the Securities and Exchange Commission.[10] More so, contravention to such restriction for reason of insider trading was finally made punishable under the Ordinance 1969.[11]
It is noteworthy that law on prohibition of insider-trading existed from way back than the abovementioned addition to the Ordinance. This takes us to the second, and in fact the primary source of law designed to deter insider-trading in Bangladesh by specifically addressing the substantive aspects of it under the Rules, 1995. The provisions hereby is articulate enough in defining the elements along with prohibiting the insider trading activities. Itrequires BSEC toenquire into an allegation, outlines the consequences of such action and leaves an opportunityfor appeal by the aggrieved.
Besides, the emphasis on prohibiting insider-trading can be found on several other provisions of securities law in Bangladesh. For instance, under theBangladesh Securities and Exchanges Commission Act, 1993 it is one of the function of BSEC to monitor and proscribe insider-trading of securities.[12] Again, one of the essential element of insider-trading is the use of material non-public information. In this regard, Dhaka Stock Exchange (Listing) Regulations, 2015 provides for halting of listed securities for non-disclosure of material information or manipulation resulting in unusual market action[13] and further suspending trade of such securities.[14]However, resorting to these secondary sources of regulation without implementing the primary laws can bring a hailstorm of questions and criticism. For instance, DSE’s move to de-list shares of Rahima Food Corporation and Modern Dyeing Limited in 2018 for ‘gambling in the name of trading shares’ and suspending trade of shares on finding ‘possible price manipulation induced by insider trading’ were probed as being an ineffective response to the issue because “the regulators cannot just wash its hands away with delisting or suspending trade without punishing the persons engaged in insider-trading”.[15] Therefore, in order to curb down potential insider-trading, stringent action needs to be taken to set better examples, because offences as insider-trading has the ultimate bearing on general public.
- The Prohibition of Insider Trading:
Insider trading as defined in Bangladesh is when an insider having knowledge of any Price-Sensitive Information (PSI) engages in trading of any securities by means of sale, purchase transfer, etc. based on thatPSI.[16]Therefore, in assessing whether a trader has engaged in insider trading, few things needs to be specifically addressed by the law.
4.1 Inside information
First and foremost, it is important to ascertain the credentials of inside information. According to Rules, 1995 any information capable of having an influence upon the market price of the concerned security is considered as PSI and dissemination of PSI by an insider is prohibited.[17]Additionally, illustrative list of information likely to have an impact on market price is also provided which may comprise of financial condition, information on dividend, bonus, right shares, sale or purchase of immoveable property, or any other non-financial aspect of the company such as establishment of new unit, basic change in company plan or policy etc.[18]However, considering the wide nature and scope of PSI, countries like US, Australia, or the EU requires the information to be non-public and material.[19] This is particularly important because even for PSI there are appropriate disclosure policies, compliance of which would not trigger the occasion of offence. Moreover, factors beyond control of accompany, such as any change in government policy may also have an impact over price and may act as PSI.[20]Thus, Bangladesh should also include provision of materiality and non-public information in prohibition of insider-trading.
4.2 Insider:
The essential idea of an insider is the consideration of the zero-sum game as the insider takes advantage of the asymmetric information to make gains out of the uninformed party to the well informed party. Thus, in making a determination as to who is an insider, the Rule 1995 in this regard includes both primary and secondary insider, meaning not only the management, supervisory and administrative bodies, and even general officers, employees, advisors and auditors of a company is included, every person connected with them or the company, or by virtue of designation is capable of having access to inside information is included. Moreover, companies, partnership firms and organizations dealing in securities also falls under the purview of an insider and is subject to liability under insider-trading provision.[21]The US in this regard simplifies the scheme by considering the existence of fiduciary relationship of the insider, as reflected in the case of O’Hagan[22] and Chiarella.[23] While the Supreme Court found O’Hagan guilty of insider-trading for misappropriation of confidential information despite him not being involved in the work, but he still had a fiduciary duty toward the client of his law firm. Conversely, Supreme Court found Chiarella not guilty based on the rationale that insiders have a fiduciary duty toward the shareholders which Chiarella, an employee of a printing company did not have. Although this may seem to create a loophole in the law since secondary insiders may not at times have any fiduciary duty toward anyone, but he EU directives’ approach fills the blank by elaborating that ‘anyone who obtains information from an insider picks up the insider’s duty to not trade’.[24]Finally, an interpretation of Rule 4 would bring tippers under the purview of an insider-trading law as personal advice or help on trading of securities is prohibited and hence punishable. Whereas the broad scope of defining an insider may seem like a safer choice, mobile operator company Grameenphone in August 2017 had requested BSEC to revise and modernize the definition of the term insider alleging it was too wide and unfeasible for actual monitoring of any and every person within the company. The BSEC committee analyzing the periphery of the term decided that the definition is in par with international standard and is consistent with the local culture of a country where even the gateman of a company can have access to insider information.[25]
4.3 Prohibited Activities and Punishments:
Lastly, the most basic activities prohibited under insider-trading policy include trading and tipping, though many jurisdiction follows a fusion of the two. For instance, tipping is not prohibited in Japan, but EU law even sanctions secondary trading. Moreover, requirements of knowledge and intent may also be a factor in the assessment of insider-trading in various other jurisdiction. In Bangladesh, dealing in any insider-trade by sale, purchase, transfer, or in any other means including tipping in the form of personal advice, help or supply of PSI is prohibited.[26]In Fact, law in Bangladesh in comparison to other jurisdictions may seem to be more rigid at times, for instance, in the US trading or tipping for benefit is prohibited,[27] but in Bangladesh, the defense of not making any benefit from purchase of share by the director of Pubali Bank Ltd was not accepted by the SEC and a fine of 5 lac taka was nevertheless imposed.[28]
Moving on, the consequences of insider-trading was initially only administrative in nature through cancellation or suspension of license, SEC taking charge over such securities or refraining their transfer, but the Commission by notification in 2006 included pecuniary penalty without mentioning any amount.[29] However, SEC Ordinance 1969 extended the punitive measure to a maximum of five years imprisonment and a least of five lakh taka fine, or if deems fit, a combination of both can be imposed.[30]
- Conclusion and recommendation:
There is a strong nexus between integrity of securities market and public interest as the capital market of an economy has an impact that goes beyond mere shareholders. Thus, securities regulators can take several steps for bettering the insider-trading policy implementation, such as improved market surveillance through consolidated audit trail to track trading patterns of market participants, as done in US and Canada. Regulators, like those in the EU can require banks and brokers to mandatorily report suspicious transactions and introduce a voluntary reporting system by individuals and organizations.[31]Lastly, IOSCO suggests refining investigation mechanism and undertaking educational activities comprising of investor, market participants and law enforcement agencies.[32]Correspondingly, companies dealing in securities too have some obligations like formation of professional codes of conduct explaining actions against the company policies, inclusion of a self-regulatory system to oversee dealers, advisors, financial analysts, auditors, and everyone having access to PSI, diligent disclosure of PSI in accordance with law, keeping records of persons having knowledge of material inside information and track insider transactions or even imposing trade restrictions on insiders from time to time as done in Thailand.[33]In brief, the insider-trading policy in Bangladesh is reasonably consistent with international legal standards, though, the level of implementation still seem to be very limited. Hence, the securities regulators should be more cognizant of such activities in order to preserve market integrity and confidence of the investors by ensuring compliance with the legal policies by securities issuers.
Bibliography
Franlin A. Gevurtz, ‘The Globalization of Insider Trading Prohibitions’ (2002) 15 Global Business & Development Law Journal 63
Hayne E. Leland, ‘Insider Trading: Should It Be Prohibited?’ (1992) 100(4) The Journal of Political Economy, 859-887
Oliver Perry Colvin, ‘A Dynamic Definition of a Prohibition Against Insider Trading’ (1991) 31(3) Santa Clara L. Review, 603
Tariqur Rahman, ‘Capital Market of Bangladesh: Volatility in the Dhaka Stock Exchange (DSE) and Role of Regulators’ (2011) 6(7) International Journal of Business and Management
Utpal Bhattyacharya, Hazem Daouk, ‘The World Price of Insider Trading’ (2002) 57 The Journal of Finance 91
Cady, Roberts & Co., (1961) 40 S.E.C. 907
Chiarella v United States(1980)445 U.S.222
Dirks v. SEC (1983) 463 U.S. 646
United States v O’Hagan (1997) 521 U.S. 642
Bangladesh Securities and Exchanges Commission Act 1993, (Act No. 15 of 1993)
Dhaka Stock Exchange (listing) Regulations 2015
Securities Act of 1933, 15 U.S.C. §§ 77a-77mm (1934)
Securities and Exchange Ordinance 1969, (Ordinance No. XVII of 1969)
Securities and Exchanges Commission (Prohibition of Insider Trading) Rules 1995
The Daily Star, ‘16 persons and three firms fined 2.29 Cr.’, 21 February 2019
Md. Rizwanul Islam, ‘The delisting, suspension of trading in shares and the regulators’, The Daily Star, 21 August 2018
Mostafizur Rahman, ‘BSEC body turns down GP plea for redefining ‘insiders’, New Age 10 May 2018
Niaz Mahmud, ‘Pubali Bank director fined for insider trading’, Dhaka Tribune, 10 April 2018
Nironjan Roy, ‘Curbing the tendency of insider trading’, The Financial Express, 30 May 2018
Sohel Parvez, ‘SEC fines Jamuna sponsor shareholders for insider trading,’ bdnews24.com (online), 25 June 2007
Austin, Janet Elizabeth, When Insider Trading and Market Manipulation Cross Jurisdictions: What Are the Challenges For Securities Regulators and How Can They Best Preserve the Integrity of Markets? (PhD Dissertations, York University, 2016)
Insider Trading: How Jurisdictions Regulate it, Report of the Emerging Markets Committee of the International Organisations of Securities Commission (2003)
Khondaker Golam Moazzem, Md. Tariqur Rahman, Stabilizing the Capital Markets of Bangladesh:Addressing the Structural, Institutional and Operational Issues (Working Paper: 95, Centre for Policy Dialogue (CPD), 2012)
[1] Oliver Perry Colvin, ‘A Dynamic Definition of a Prohibition Against Insider Trading’ (1991) 31(3) Santa Clara L. Review, 603.
[2]Austin, Janet Elizabeth, When Insider Trading and Market Manipulation Cross Jurisdictions: What Are the Challenges For Securities Regulators and How Can They Best Preserve the Integrity of Markets? (PhD Dissertations, York University, 2016), 24-6.
[3] Tariqur Rahman, ‘Capital Market of Bangladesh: Volatility in the Dhaka Stock Exchange (DSE) and Role of Regulators’ (2011) 6(7) International Journal of Business and Management, 87.
[4] This is because even after two major market crashes, stories of speculations, inside trading and market manipulation were not brought before public to create awareness about the offences committed by the institutions. However, in recent times, several incidents of investigation, prosecuting and fining insider traders were highlighted by news media which helped portray the diligence of the BSEC to deal with such offences.
[5]Securities Exchanges Act 1934, Section 16(b) was basically a provision to prevent short-wing transactions by insiders like directors, officers and owners holding more than 10% of stocks of the list corporation.
[6]The Rule 10b-5 was inserted under section 10b of the Act 1934 because the language of the original section prosecuted misrepresentation for selling securities, hence, to close the gap of misrepresentation for purchasing securities, Rule 10b-5 was inserted and nearly two decades passed until it was first implemented in Cady, Roberts & Co., (1961) 40 S.E.C. 907.
[7]Franlin A. Gevurtz, ‘The Globalization of Insider Trading Prohibitions’ (2002) 15 Global Business & Development Law Journal 63, 65.
[8] For instance,BSEC made order on disclosure of Price Sensitive Information on 2015, again, the definition of material information is contained in DSE (Listing) Regulations 2015 along with several other provisions on unfair trade practices which obviously includes insider trading as well.
[9]Sohel Parvez, ‘SEC fines Jamuna sponsor shareholders for insider trading,’ bdnews24.com (online), 25 June 2007 <https://bdnews24.com/business/2007/06/25/sec-fines-jamuna-sponsor-shareholders-for-insider-trading>.
[10]Securities and Exchange Ordinance 1969, Section 19A. Inserted by the Securities and Exchange Commission (Amendment) Act, 2012.Read: “No person shall, except with the permission of the Commission, communicate or otherwise disclose to any person not legally entitled thereto any information which has been entrusted to him or which he has obtained or to which he had access in the course of the performance of any functions under this Ordinance.”
[11]Ibid, Section 19B, read: “19B. (1) The disclosure of any information in contravention of section 19 or 19A for the purpose of making profit through insider trading shall be an offence.
(2) Whoever contravenes sub-section (1) shall be punishable with imprisonment for a term which may extend to five years, or with fine not less than taka five lakh, or with both.”
[12]Bangladesh Securities and Exchanges Commission Act 1993(Act No. 15 of 1993), Section 8(g).
[13]Dhaka Stock Exchange (listing) Regulations 2015, Article 49.
[14] Ibid, Article 50.
[15]Md. Rizwanul Islam, ‘The delisting, suspension of trading in shares and the regulators’, The Daily Star, 21 August 2018<https://www.thedailystar.net/news/law-our-rights/the-delisting-suspension-trading-shares-and-the-regulators-1623559>.
[16]Securities and Exchanges Commission (Prohibition of Insider Trading) Rules 1995, Rule 2(e).
[17] Ibid, Rule 3.
Additionally, BSEC by publishing an Order no. SEC/CMRCD/2009-193/171/Administration/64 on 7 December 2015 has made it mandatory for all listed companies to report to the Commission and the Stock Exchange within 30 minutes of taking any decision regarding Price-Sensitive Information or at the earliest of having knowledge of any information regarding PSI and publish such information in two daily newspaper in Bengali and English and in one online newspaper without delay.
[18]Ibid, 2(d).
[19] Above n 4, 69.
[20]Nironjan Roy, ‘Curbing the tendency of insider trading’, The Financial Express, 30 May 2018 <https://www.thefinancialexpress.com.bd/views/curbing-the-tendency-of-insider-trading-1527694983>.
[21] Above n 12, 2(c) and 2(e).
[22]United States v O’Hagan(1997) 521 U.S. 642, 653.
Here, O’Hagan was an attorney at a law firm which was planning a tender offer for an English Company. Even though O’Hagan were not working at the project, he came to know of the tender offer from one of his colleague in the law firm and on purchasing shares of the English Company made a profit of around $4 million and finally was convicted under US laws of insider trading by US SEC.
[23]Chiarella v United States(1980)445 U.S. 222, 224.
Here, Chiarella was an employee of a printing company whereby despite his customers covering the names of the company, he was able to identify them and thus came to know price-sensitive information of those companies. Ultimately he made a profit of $30,000 from stock purchase for which the US Securities and ExchangeCommission held him convicted for trading on informed knowledge.
[24] Above n 4, 80.
[25]Mostafizur Rahman, ‘BSEC body turns down GP plea for redefining ‘insiders’, New Age 10 May 2018 <http://www.newagebd.net/print/article/36397>.
[26] Above n 12, Rule 2(f), 3 and 4.
BSEC by notification in the official Gazette (Notification no. SEC/CMRCD/2001-26/32/Administration) in 23rd March 2010 has prohibited the sponsors, directors, beneficial owners, officers, employees, auditors, and lawyers of every listed companies to purchase, sale or transfer any shares from two months prior to preparing annual report until the board of directors have finalized the report.
[27]Dirks v. SEC (1983) 463 U.S. 646, 666-67.Supreme Court in Dirksheld that trading by tippees violates Rule lOb-5when, but only when, an insider breaches his or her duty by passing on the tip in order for the insider to obtain some personal benefit.
[28]Niaz Mahmud, ‘Pubali Bank director fined for insider trading’, Dhaka Tribune, 10 April 2018 <https://www.dhakatribune.com/business/2018/04/09/pubali-bank-director-fined-insider-trading>.
[29] Above n 12, Rule 5.
[30]Above n 6, Section 19B.
However, recently in 2019, BSEC imposed a fine of 2.29 crore upon 16 persons and three firms and stayed the licenses of three stock broker firms for insider trading and price manipulation.
The Daily Star, ’16 Persons and three Firms fined 2.29 cr.’ 21 February 2019 https://www.thedailystar.net/business/news/16-persons-3-firms-fined-tk-229cr-1705252>.
[31]Above n 2, 119-25.
[32]Insider Trading: How Jurisdictions Regulate it, Report of the Emerging Markets Committee of the International Organisations of Securities Commission (2003) 19.
[33] Ibid, 20-22.
Submitted By: Rozina Akter Ripa