Legal Perspective: Insider trading harmful to investor confidence

Insider dealing is seen as an abuse of an insider's position of trust and confidence, and is harmful to the securities markets resulting in the ordinary investor losing confidence in the market.

Insider dealing is prohibited so as to maintain the assurance afforded to investors that they are placed on an equal footage and they will be protected against the improper use of insider information.

Tipping of certain information to a third party is also prohibited, because the information is given to certain persons and not the public at large.

Normally there are three types of insiders:

1. True insiders such as directors
2, Quasi insiders such as professional advisers, lawyers, auditors and financial advisers.
3. Tippers - those who are given information by an insider.

The information of insiders is that type of information which is likely to affect the price of securities if it were public. In all cases the necessary material information ought to be disseminated to the market/public before the insider deal.

Otherwise the insider could publish the information and then act immediately before the market could absorb it. Timing is of essence and enough time should be given to the public before the insider benefits, alone, from such material information.

Sanctions for insiders could be civil or criminal or both. However, normally there must be actual knowledge by the insider that the information is inside information. In other words, insider dealing must be known and deliberate.

As to the securities covered by the insider dealing prohibition, there are two approaches. Outside the U.S., the tendency is to limit insider trading prohibition to publicly available or listed securities. There is no such limitation in the U.S. and the prohibition applies to all types of securities being listed or unlisted.

In certain instances, it has been observed that there is conflict of duties because trading on insider information is prohibited and at the same time there is a duty to trade to protect the interest of your client.

This could emerge in cases where a broker or a bank managing a discretionary investment account and he becomes aware of unpublished price sensitive information, there may be a conflict between his duty not to trade and his duty to act in the best interests of his clients.
The prohibition of insider trading is usually overriding.

One possible solution for this issue is a Chinese wall between the bank/underwriting department on one side and the investment/advisory or sales department on the other.

A Chinese wall, if effective, stops confidential information passing from individuals on one side of the wall to individuals on the other side.

All regulations relating to securities markets are very clear regarding the prohibition of insider trading. This clear stand is based on the philosophy of giving equal information to all investors.
The laws regulating the securities market in the UAE clearly prohibit insider dealing at the cost of other investors.