SECP opposes criminal penalty for insider trading

SOHAIL SARFRAZ

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) here on Tuesday opposed introduction of criminal penalty (imprisonment) for committing the crime of ‘insider trading’ on the stock exchanges under the proposed Securities Act and strongly suggested to change criminal penalty to civil penalty for charging heavy fine, speedy recovery and implementation of other administrative/enforcement actions in capital markets.

While explaining the objectives of the proposed Securities Act at National Assembly Standing Committee on Finance, SECP Chairman Muhammad Ali shared with the committee that some vested interests in Karachi, having no role in stock market, have threatened SECP that they would try to block the approval of Securities Act from NA body as well. “We want insider trading as civil offence, as it is very difficult to prove insider trading in criminal law”, the SECP chairman said.

He said that there is no role of common man in country’s stock market and the new legislation would help them make safe investment in securities. Through the effective legislation, the proposed Securities Act, it would restore the confidence of the small investors and encourage them to make investment in the capital market.

He said that the present law is silent on the issue if anyone establishes stock exchange without SECP approval. From legal point of view, at present this is not a crime and SECP is not able to go after the persons who would do so.

When MNA Bushra Gohar termed the new legislation as martial law for stock market, Muhammad Ali assured the committee that at all present practices of stock market are being made part of the proposed Securities Act so as to regulate them accordingly and nothing unfair would be included in it. SECP termed 90 percent players in stock market as good guys and said that there is a need to have a proper legislation to deal with 10 percent bad guys.

He said that proposed Securities Act would help meet the national obligations related to anti-money laundering in stock market as the proposed legislation would make it mandatory for the brokers to get in filled all the documents required for identity and safer investment. He said that a key section of proposed legislation would make it mandatory for disclosure of price-sensitive information by the companies to shareholders as well as investor so that no one on the Board of Directors or key official, including chief executive of the company, would use this information for his personal benefit through insider trading.

The representative of the Ministry of Law clarified to the committee that the Finance Ministry has proposed to consider insider trading as criminal offence and Law Division had not floated this proposal. On the recommendation of the Ministry of Finance, insider trading has been treated as criminal offence to fulfill obligations under the anti-money laundering law.

The SECP Chairman informed the committee that due to anti-money laundering obligations, a criminal penalty for insider trading in stock market has been proposed. However, he said, SECP strongly supports civil penalty like fine and removal from key posts or Board of Director upon proof of insider trading.

Despite the fact that the insider trading has been declared as criminal offence in many modern regimes, Pakistan’s stock markets are young as compared to other markets which are operating for last many years. “It is very difficult in our jurisdiction to prove insider trading as criminal offence due to prolonged litigation”. The punishment of the insider trading under the criminal offence is imprisonment and when any judicial system is going to give punishment of imprisonment, the evidence should be very strong to prove such harsh punishment to the violators, Muhammad Ali added.

He further stated that although criminal penalty like imprisonment is proposed in new legislation, it would be difficult to prosecute the persons involved in insider trading. Practically, the cases would take decades to decide and people involved in insider trading would be at liberty to continue insider trading and distort the market. The civil penalty would help improve compliance and help menace of insider trader. It is hoped that the insider trading would come to an end after making it a civil offence. If the insider trading would continue to be a criminal offence under the proposed law, there are apprehensions that the menace of the insider trading could not be controlled in the stock exchanges.

Muhammad Ali also referred to two cases of insider trading in USA where imprisonment over six months was given to the persons who committed the offence.

He admitted that there is rampant manipulation in stock market which is evident from the present state of affairs in the capital market. He said that stock market crisis of 2005 and 2008 was due to the selling of client’s shares by the brokers and then winding up of brokerage houses. To stop this kind of practice in brokerage houses, SECP has barred the brokers from clubbing their own assets and assets of the claims in proposed Securities Act.

He said that no matter the big players sit at night and set strategy for lowering or raising price of shares for next day at stock market, SECP has put in place a mechanism for elimination of this act by putting condition of display of transactions on stock market computer screen as well settlement of these transactions through clearing house the same day. Explaining the proposal contained in the proposed SECP Act on establishment of SECP Tribunals for quick disposals of cases, SECP Chairman said that Supreme Court of Pakistan has already termed placing 30 days or 90 days deadlines and relevant clauses in legislations as recommendatory in nature.   A director of the SECP informed the committee that the commission can seek assistance of the local police for taking administrative actions under the proposed Securities Act. The new law is separate and a self-contained law. “We can call the local police for enforcement actions required under the law”.