Insider dealings and market abuse Essay

Insider dealings and market abuseCriminal Liability and Civil LiabilityInsider dealings and market abuse are common forms of misuse seen in financial markets across the board. Criminal liability seeks to protect the integrity of public markets. A person who issues misleading statements and indulges in manipulative practices is liable for criminal prosecution for unlawful interference with the proper operation of markets.

Criminal conspiracy to defraud is another regulatory aspect which needs to be ensured in policing the market. However these regulatory injunctions were not applicable to simpler issues such as insider dealings unless there has been manipulation and fraudulent conduct. Applicability was also to individuals and as the term, “individual” excludes corporations and companies, these were above the authority of criminal liability for market abuse.[1] This provided great leeway for companies and corporations to proclaim their non liability in cases of market manipulation and insider trading.Civil liability on the other hand enables effective enforcement of the regulations for market abuse as a person can be found guilty without the criminal evidential test of, “beyond reasonable doubt” being satisfied, which is invariably difficult to prove.[2] It includes companies and corporations and not just individuals as per criminal liability. It also includes all persons within its purview and not only those companies and individuals regulated by the Financial Services Authority.

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A civil offence is considered more powerful in the case of market abuse as it can regulate market behavior according to the impact with less emphasis on individual motivation of the behavior in question.  This enables effective regulation of the market and reduces the scope of volatility. Under civil liability unlike under the criminal liability, a person cannot be imprisoned and only fines can be imposed. However individual liability can continue for which a criminal offence can be charged separately. Thus the application of the civil liability reduces substantially, shortcomings in the application of criminal liability in instances cases where it is seen to be too narrow to cases of misuse of information either to gain  profit or avoid  loss.

This is also strictly territorial in focus and the high standards required of criminal evidentiary make it ineffective to regulate and police market abuse.[3]A civil liability is imposed on each and every person operating in the market whether he is an authorized player or not. This considerably reduces fraud through third party. Civil liability also extends to commodity derivatives.

Another facet is that civil regime has an extra category of ‘misuse of information’ which includes conduct not caught under insider dealing or improper disclosure. Under the Market Abuse Directive, a substantial change is brought about in the civil regime, but the criminal offences regime on insider dealing and market manipulation continues to remain the same.Implementation Market Abuse Directive (2003/6/EC)            The Market Abuse Directive while originally attempted to replicate the UK regime underwent a series of changes which will affect UK laws differently.  Under the existing regime only three types of offences of market abuse have been defined in general terms and broad information of inside information is provided. The directive describes the behaviors prohibited more effectively, thereby making these easier and more specific in application.[4] One such change is the new obligations by the Directive which requires an issuer of listed securities to promptly disclose insider information and senior managers of the listed issuers to report their transactions and the need for banks to report any suspicions of market abuse to the FSA.

More financial instruments have been also been placed under its purview and territorial scope of the same has been widened.  Seven types of behavior associated with insider dealings and market manipulation have been identified. These are insider dealing, improper disclosure of inside information, misuse of information, manipulating transactions, manipulating devices, disseminating information likely to give a false or misleading impression and market distortion. The, role of,  “regular user” which was used for sheltering abuse on the plea that an objective regular user would have found it acceptable has now been restricted. Some additional stipulations for revealing insider information include that if a regulatory information service is not open for business, this may not be sufficient grounds for not revealing information. Secondly the holdings announcements can be delayed for a short time as far as such announcements are made before any leak of insider information takes place.

No comment approach to market rumor can be adopted when it is prudent to do so. The FSA can fine current and former directors for breach.An issuer of listed securities has to maintain a list of its own employees with access to inside information and also contacts with firms to whom it has direct links and with which it is suspected of insider information. Apart from the directors, the senior managers have to notify their transactions in the shares of the issuer. Stabilization rules too have been substantially changed. The scope of permitted ancillary stabilizing activity has been reduced thereby limiting the scope of lucrative transactions which are generally undertaken during the stabilization safe harbor period of buying securities to maintain confidence during the issue period.

  The Act also has jurisdiction in markets which are spread across the European Union thereby a person trading from UK will be liable across all markets in the European Union.[1] Alexander, Kern. INSIDER DEALING AND MARKET ABUSE:THE FINANCIAL SERVICES AND MARKETS ACT 2000. ESRC Centre for Business Research, University of Cambridge. Working Paper No.

222[2] Financial Services and Insurance. Pinsent Masons. July 2005.[3] Alexander, Kern. INSIDER DEALING AND MARKET ABUSE:THE FINANCIAL SERVICES AND MARKETS ACT 2000.

ESRC Centre for Business Research, University of Cambridge. Working Paper No. 222[4] EXPLANATORY MEMORANDUM TO THE Financial SERVICES AND MARKETS ACT 2000 (MARKET ABUSE) REGULATIONS 2005.

2005 No.381


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