Prohibition of Insider Trading in Australia
Discuss about the Securities Law for Regulating Financial Services.
Australian Corporations Act, 2001, part 7.10, Division 3 deals with the prohibition of insider trading. Insider trading is the process of trading of securities while they are in the possession of the information. The information is mostly available easily and also, if the information were traded, it would have an adverse effect on the price of the value of the security. The information would have a material effect which will deprecate the values of the security. In Australia, trading in securities while being in possession of price-sensitive information or non-public information is prohibited. The pre-requisite of insider trading is that the person who has been alleged of insider trading needs to have inside information. The definition can be imputed in the cases of traders being persons but the question is how a company can be deemed to be an insider trader. In cases when the company is the insider trading, the difficulty is in proving how the company is possessing information. What constitutes possession of information and what are the parameters. Is merely physical withholding of information important or is it important to be just aware of all the inside trading. Under the Australian Law, it is essential to state that there are certain deeming provisions which reinstate that the company’s directors and officers impute knowledge to the company. The instances when the Australian companies have been prosecuted for indulging in insider trading have been very few and almost there have been no situation when a big corporation in Australia has been subject to civil penalties for dealing in insider trading. Therefore, it is important to prove that the trader is in possession of information before going ahead with the accusation of insider trading.
Section 1043 A and section 1042A of the Corporations Act 2001 talks about insider trading which can be defined as any person who possesses certain information which is not easily available to the general public, to which he has access[1]. The trader is aware that the information he has is classified and it not available to the general public. The information has to be such which has a material value, that is, a material information related to the company which seems to be of value to a reasonable man. The information should have an effect of hampering the profits of the company and shall also be capable of affecting the price of certain securities. The trader has to be aware of the profitability of the information and should also be material. The trader ahs to be in possession of those information while he is trading. By trading, it means, that being in possession of the securities, he should be able to buy or sell those securities or he will get someone else to do it for him. The question that needs to be first resolved is how a company can fall into the definition of ‘person’ because by mere interpretation of section 1043A of the Corporations Act, it is apparent that the liability only extends to persons[2]. The Corporations Act does not specifically talk about the company being an insider trader. However, by clear interpretation of the Acts Interpretation Act, Section 22(a), by taking into consideration of the Commonwealth Statute, it states that the persons shall also include a body politic or any corporate, which is also inclusive of an individual[3]. Therefore, it can be concluded that the provision of insider trading shall apply to both corporations as well as persons. There are some provisions of the Corporations Act that are exclusively invested with the liability of companies, for example, section 1043F of the Corporations Act. Section 1043F talks about the exceptions that apply to companies under the Corporations Act. Section 1043I of the Corporations Act is an exception for any other body corporate that proposes to acquire or sell shares in any other body corporate[4]. Section 1042G of the Corporations Act talks about the particular circumstances under which it will be held that the company officer possesses some information. There is a difference in the penalties that are attached to a corporation and to a natural person. The penalty for a body corporate is a fine of 10,000 penalty and the penalty for a natural person is different, that is, 2,000. These provisions go on to prove that insider trading applies to corporations and persons alike. Information is defined as any matter that has the intentioned a person or likely intention of a person and it also means matters that warrant being made known to the public. Information is not limited to the above mentioned instances but also extends to details about mergers which are unspecific in nature by has been made official by verbal disclosure of the executive chairperson of a company. Information could also pertain to any court decision which has been concluded in a foreign country. Any information related to takeover which has been disclosed under a veil but has the potential of imputing knowledge shall be held to be information. Any “rumour” which does not have any substantial value and the person talking about does not have sufficient backing but goes on indulging in that rumour shall be also termed as information under the Corporations Act. The information could be in tangible form, like, documented in a paper which is in the physical custody of the directors or the company officials. The information could also be in an intermediate physical sense, that is, it could be available in a computer disk or equipment which makes the information accessible electronically. A non-tangible forum is when the information is accessed by mere knowledge of the persons which does not have any evidentiary value. More than physical custody of the information, it is more important to prove that the person was in possession of the information which was made public. Under Australian law, insider trading is prohibited based on the principles of ‘market fairness’ and ‘market efficiency’. The Federal Government follows the policy that the economy should not be hampered by insider trading and there shall be equal opportunities meted out to all the corporations in Australia.
Defining Information for Insider Trading
The protection of the integrity of Australia’s financial and insurance sectors is important for the proper functioning of the Australian economy. Australian Securities and Investments Commission play an important role in regulating financial market misconduct. The aim is to ensure that there is transparency in the financial market and there is proper regulation of the economy of Australia. The financial market regulation will also make sure that the investors are properly informed and confident about the investments that the company makes. There is a strict need to adhere with the rules and regulations of the ASIC’s principles. The Federal legislations ensure that there is strict compliance with the rules and regulations that the ASIC makes and in cases where there no compliance, there shall be penalty. The review will deem that there are no compliance and in such cases, the penalties imposed shall be very harsh and stringent. There is a substantive regulation of the companies that they owe to the statutes. The nature of the penalties makes sure that there is an effective cultural and normative change within the corporate set up. Role of the ASIC
The trend is showing that the directors and the shareholders are motivated by greed and therefore is a lack of integrity which needs to be reinstated by implementing stricter rules and penalties. The punitive scheme that ASIC follows is that they attack civil financial penalties and also criminal financial penalties, which can be either in the nature of corrections and can be compensatory in nature. The ASIC receives complaints of misconduct and then processes them within a time frame of 28 days. With the growing globalization and commerce, companies have started to indulge in misconduct. The stories of financial misconduct in the financial market do not seem to end and with every passing day financial market misconduct is increasing in proportion. The misconduct is ever growing and companies are engaging in abusive practices, that could be either manipulation of foreign exchange or duping interest rates, companies are entering into abusive mortgage practices. These reports point towards a crisis in the financial market, both economically and ethically. Though there are regulations in place that stop the executives from indulging in malpractice but there is a lack of stringent laws to bring the malpractices to book. There is a growing need for promoting transparency and accountability to prevent the financial market misconduct from spreading any further.
Applicability of Insider Trading to Corporations
Corporate are selling mortgages by using abusive practices where the company is gaining undue profit by fooling the investors. Big corporations are also manipulating interest rate and also manipulating foreign exchange markets. The deregulations have also gained a trend which is deregulating the banks’ entry into any non-traditional field. The activities that the companies are dealing with are only profit centric where the directors and the executives are gaining. ASIC wants to regulate the economic conditions and to be successful at that, it is important to attach penalties for any cases of wrongdoing. There are civil penalties for companies when they indulge in grave contraventions of the Australian Corporations Act, but these civil penalties are not available for any corporate wrongdoing. Section 911A talks about carrying on nay financial business without license which is a corporate misconduct and is liable to be penalized[5]. Section 912A of the Corporations Act talks about violation of the general financial principles which the companies are obligated to follow[6]. If a company makes any false statements or promotes any misleading statement that induces any person or any company to sell or buy any financial product, then there shall be a clear violation of section 1041E of the Act[7]. Therefore, from these provisions, it is evident that ASIC is taking proactive steps that will change the current situation where financial market misconduct is happening rampantly. The ASIC has also made recommendations to the Australian Government that ASIC should be given banning powers that will help in imposing strong penalties that will also decrease the level of misconduct that is happening currently. The recommendation also included that ASIC should be given the power to impose higher penalties both civil and criminal matters so that it acts as an effective deterrent. The deterrence is needed more in cases of bigger firms because they show a larger trend of contravening financial statutes. These point towards a better enforcement and regulation by the Federal Government. Any violation of the provisions of chapter 7 of the Corporations Act shall be termed as a financial misconduct[8]. Chapter 7 is an enormous and powerful clause that has the power to regulate financial conducts and also settles facilities in the Australian corporate sector. The three elements that lead to financial market misconduct are: licensing, any violation of conduct obligations and also prohibition of disclosure agreements that are present in legislations. Section 1317E(1) lists down civil penalties within the definition of the Act and the civil penalty provisions are mutually exclusive in the applications that are made. These penalties are attracted in cases of financial breach sections 952C-952M of the Corporations Act talk about financial service disclosures that are considered violations of the Corporations Act[9]. The core obligations of the Act are concerned with improper conduct that deals with all the prohibited conducts under part 10 of the Act[10].
Conclusion
These stringent provisions go on to prove that the federal Government is taking effective steps in regulating financial market misconduct so that the rights of the investors are not exploited. The negative languages of the Act show that the forbidden conduct needs to be properly evaluated so that these do not happen rampantly. The Act imposes specific obligations on the directors and the shareholders so that there is a restriction on continuing offences as well. In cases when the corporate or any financial corporate indulges in a y financial fraud, the penalty imposed shall be payable, the maximum of which shall be 5 times the offences that have been provided under schedule 3 of the Act.
References
(2018) Law.unimelb.edu.au https://law.unimelb.edu.au/__data/assets/pdf_file/0004/1743475/FinancialServicesMisconductandtheCorporationsAct2001WorkingPaperNo2.pdf
Acts Interpretation Act, 1901
Australian Corporations Act, 2001
Boosting Penalties To Protect Australian Consumers From Corporate And Financial Misconduct | The Hon Scott Morrison MP (2018) Sjm.ministers.treasury.gov.au https://sjm.ministers.treasury.gov.au/media-release/boosting-penalties-to-protect-australian-consumers-from-corporate-and-financial-misconduct/
CCH Iknow | Australian Tax & Accounting (2018) Iknow.cch.com.au https://iknow.cch.com.au/document/atagUio487802sl14522396/corporations-act-2001-section-952c-offence-of-failing-to-give-a-disclosure-document-or-statement
CCH Iknow | Australian Tax & Accounting (2018) Iknow.cch.com.au https://iknow.cch.com.au/document/atagUio487673sl14521058/section-912a-general-obligations
CCH Iknow | Australian Tax & Accounting (2018) Iknow.cch.com.au https://iknow.cch.com.au/document/atagUio488060sl14525559/corporations-act-2001-extracts-section-1043i-exception-for-bodies-corporate
CORPORATIONS ACT 2001 – SECT 9Dictionary (2018) Www5.austlii.edu.au https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html
CORPORATIONS ACT 2001 No. 50, 2001 – SECT 1013Liability For Insider Trading (2018) Www5.austlii.edu.au <https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1013.html>
Regulating Financial Services And Markets In The Twenty First Century (2018) https://download.asic.gov.au/media/1259634/rg121-published-30-july-2013.pdf
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