The uk authorities and the cfa criminal law and civil law

Introduction

Insider dealing is considered to be legally and morally wrong by the UK authorities and the CFA. In UK, both criminal law and civil law cover the regulation for insider dealing,many investment analysts who are the members of CFA Institute behave under the CFA Code of Ethics and Standards of Professional Conduct. Before the description and effectiveness analysis of UK laws and CFA ethical rules which regulate insider dealing, it is necessary to discuss the reasons for regulating insider dealing.

Although there are many arguments and reasons against regulation, it is generally acknowledged that insider dealing is detrimental to common investors, listed companies and stock market. Firstly, stock market is a just, fair and open market, but insider dealing violates this essential principle. With a convenience access to insider information, some use the information to trade in the market, it is not fair for other investors without access to insider information; Insider dealing makes the few profitable and the great majority unprofitable, it is not just; Insider information is not public and open for every investors. Secondly, insider dealing causes losses for investors by misleading them. To some extent, this would discourage investment by undermining investor confidence in stock market and even scare investors away. Thirdly, insider dealing does incalculable harm to reputation and market value of company. When a company scandal of insider dealing is exposed publicly, investors probably believe that they have been treated unequally even cheated by this company, so investors will lose confidence in this company, causing damages to company reputation. Moreover, common investors lack of capital, time and professional skill, on purpose of risk reduction, they are willing to buy stock of the company with good reputation and without scandals of insider dealing. For the whole stock market, if there are no regulations for insider dealing, it cannot function normally and healthily, because investors will lose confidence in the fairness and profitability of stock market and then decrease and even stop doing transactions to prevent them from being victims of insider dealing. Finally, insider dealing may bring about moral hazard problem. Overall, there is no doubt that regulations for insider dealing are essential.

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In UK, insider dealing is regulated under the criminal law by Part V of the Criminal Justice Act 1993 (“the 1993 Act”). The structure of part V of “the 1993 Act” is shown below:

1. Table of Contents of part V of “the 1993 Act”1
2. The offence of insider dealing
3. The offence.
4. Defences.
5. Interpretation
6. Securities to which Part V applies.
7.  “Dealing” in securities.
8. “Inside information”, etc.
9. “Insiders”.
10. Information “made public”.
11. “Professional intermediary”.
12. Other interpretation provisions.
13. Miscellaneous
14. Penalties and prosecution.
15. Territorial scope of offence of insider dealing.
16. Limits on section 52.
17. Orders.

S52 and S53 state the general definition of the offence of insider dealing, and in what circumstances, an individual who has information as an insider is (not) guilty of insider dealing. If an individual who has information as an insider, in the circumstances mentioned in subsection (3), deals in securities that are price-affected securities in relation to the information; encourages another person to deal in those securities; discloses the information to another person improperly, he is guilty of insider dealing. If an individual has information as an insider shows that he did not at the time expect the dealing to result in a profit; he believed on reasonable grounds that the information had been disclosed widely; he would have done what he did even if he had not had the information; he did not at the time expect any person, because of the disclosure, to deal in securities in the circumstances mentioned in subsection (3), he is not guilty of insider dealing.

The sections of “Interpretation” expound the definition and explanation of several terms for the purposes of this Part. Briefly speaking, these sections tell us what are securities and “dealing” in securities mentioned in this part; what is “insider information” and information “made public”; who is “insider” and “professional intermediary”; interpretations of other terms such as “regulated market”, “issuer”, “company” and “public sector body”.

S61 states the penalties for an individual guilty of insider dealing: on summary conviction, to a fine not exceeding the statutory maximum or imprisonment for a term not exceeding six months or to both; on conviction on indictment, to a fine or imprisonment for a term not exceeding seven years or to both. It also states that proceedings for offences under this Part shall be instituted in England and Wales by or with the consent of the Secretary of State or the Director of Public Prosecutions. S62 states that an individual is guilty of an offence of insider dealing if: he was within the United Kingdom at the time of alleged dealing; the regulated market on which the dealing is alleged to have occurred is regulated in the United Kingdom; the professional intermediary was within the United Kingdom at the time of the offence committed; the alleged recipient of the information or encouragement was within the United Kingdom at the time of receiving the information or encouragement.

In UK, the system of civil law of insider dealing involves legislations of “Financial Services and Markets Act 2000(FSMA)”, “The Code of Market Conduct of FSA (Financial Services Authority)” and “The Market Abuse Directive Instrument 2005 of FSA”. First of all, Part VIII of “FSMA” created the ‘civil offence’ of “market abuse” which includes insider dealing. According to Section 1 in Part I of “FSMA”, the body corporate known as the Financial Services Authority (“the Authority”) is to have the functions conferred on it by or under this Act.7 This means that “FSA” is the regulator of the financial services industry in the UK, given statutory powers by the Financial Services and Markets Act 2000. Part VIII of “FSMA” states the general definition of market abuse, and gives the authority power to prepare and issue a code containing such provisions as the Authority considers will give appropriate guidance to those determining whether or not behaviour amounts to market abuse, 8 and to impose penalties in cases of market abuse.

It also gives the authority power to investigate and court power to impose penalty in cases of market abuse. In the next place, “The Code of Market Conduct” given by FSA provides us the descriptions of different behaviours of market abuse. As the description stated in “The Code of Market Conduct”, insider dealing is where an insider deals, or attempts to deal, in a qualifying investment or related investment on the basis of inside information relating to the investment in question. In the sector of MAR 1. Market abuse (insider dealing), it provides several descriptions of behaviours and relevant factors and some examples of insider dealing, which give appropriate guidance to those determining whether or not behaviour amounts to insider dealing. Finally, about “The Market Abuse Directive”, “FSA” makes this instrument in the exercise of the powers and related provisions in relevant sections of the Financial Services and Markets Act 2000 and defining terms of market abuse. Overall, “FSMA” is a frame Act, and gives the power to “FSA” to publish the “Code on Market Conduct” which has been amended to implement the “Market Abuse Directive”.

As a professional organisation, CFA Institute has issued self regulatory “Code of Ethics and Standards of Professional Conduct” for their members and candidates. In the first place, standard I (A) provides that members and candidates must understand and comply with all applicable laws, rules, and regulations of any government, regulatory organization, licensing agency, or professional association governing their professional activities. In the event of conflict, members and candidates must comply with the more strict law, rule, or regulation. Members and candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations.10 So the members and candidates of CFA in UK are responsible for understanding and complying with UK criminal law and civil law of insiderdealing. Next, standard II (A) provides that members and candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.

According to S56 of the “1993 Act”, the material nonpublic information that could affect the value of an investment is insider information, and according to S57 of the “1993 Act”, those members and candidates who possess insider information are insiders. Specifically, guidance for Standard II (A) gives members and candidates of CFA below contents for more attention. Members and candidates must be particularly aware of information that is selectively disclosed by corporations to a small group of investors, analysts, or other market participants. Information that is made available to analysts remains nonpublic until it is made available to investors in general. Corporations that disclose information on a limited basis create the potential for insider trading violations. Issues of selective disclosure often arise when a corporate insider provides material information to analysts in a briefing or conference call before that information is released to the public. Analysts must be aware that a disclosure made to a room full of analysts does not necessarily make the disclosed information “public”.

Analysts should also be alert to the possibility that they are selectively receiving material nonpublic information when a company provides them with guidance or interpretation of such publicly available information as financial statements or regulatory filings. A financial analyst gathers and interprets large quantities of information from many sources. The analyst may use significant conclusions derived from the analysis of public and nonmaterial nonpublic information as the basis for investment recommendations and decisions even if those conclusions would have been material inside information had they been communicated directly to the analyst by a company. Under the “mosaic theory,” financial analysts are free to act on this collection, or mosaic, of information without risking violation.

Part V of the Criminal Justice Act 1993 defines insider dealing as criminal offence, it is universally known that criminal offence is very severe illegal-activity, so to some degree just the existence of this criminal law of insider dealing can stifle some criminal offences of insider dealing. In event of insider dealing, this criminal would punish an individual who committed insider dealing to indirectly protect other investors without any compensation, but this indirect protection is not effectively enough.

When control rights are concentrated, the restrictions may simply transfer profits from insiders to informed outsiders, leaving uninformed investors no better-off, unless the regulator ensures a concomitant improvement in investor protection standards.14 On the other hand, there are some problems and difficulties enforce this criminal law. First, insider dealing is happened in private and secret by just a phone call, a chat or something which do not leave any actual evidence, so if without effectively investigative techniques it is very difficult to detect or to collect evidence.

Even though this can be done, the process will be costly. Moreover, for an individual who seriously committed insider dealing, fines and seven-year sentences is too light when compared with millions of pounds profit. UK civil law in some cases supplements criminal law, FSA can impose penalties of return of profit and restitution for those who can establish loss, but actually few victims can prove loss. CFA code of ethics and standards are self-regulations which have their own strengthens and weaknesses. There are six factors of self-regulation strengthen: flexibility, speed, expertise, acceptance, cost-efficiency, cross-border application, and of its weaknesses: contestability of markets, competitive distortions, insufficient scope, inadequate enforcement, regulatory arbitrage, conflicts of interest.

Bibliography

1. Part V of the Criminal Justice Act 1993
2. Part I of the Financial Services and Markets Act 2000
3. Part VIII of the Financial Services and Markets Act 2000
4. The Code of Market Conduct in Financial Services Authority Handbook
5. Market Abuse Directive Instruments of Financial Services Authority
6. CFA Study Session 1
7. Eva Hupkes, Journal of Business Law 2009 Regulation, self-regulation or co-regulation?
8. Art A. Durnev and Amrita S. Nain, The Effectiveness of Insider Trading Regulation Around the Globe

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