Stopping Gekko: SECP strengthens rules against insider trading

Most disclosure requirements today are those of the exchange, not the regulator.

KARACHI:

Insider trading in Pakistan may become a little more difficult, after the Securities and Exchanges Commission of Pakistan announced new rules that legally mandate a greater level of disclosure from publicly listed companies, strengthening the hand of prosecutors to go after capital markets fraud.

In a statement released on Wednesday, the country’s top capital markets regulator announced that it was strengthening the legal requirements for publicly listed companies to disclose material information to shareholders “immediately”, and outlined a detailed procedure for them to make such information public.



The requirements appear to enforce through the legal code what was already mandated by the country’s stock exchanges as part of their listing requirements. They do not appear to impose any additional requirements – beyond some procedural differences – than the ones that the Karachi Stock Exchange already requires its listed companies to do.

The regulatory changes were instituted done by issuing a notification under Section 15D of the 1969 Securities and Exchange Ordinance read with section 40B of the 1997 Securities and Exchange Commission of Pakistan Act.

The reason for issuing the new regulations appears to be to strengthen the ability of the regulator to crack down on insider trading. A company or an official that violates KSE listing requirements faces no criminal prosecution, only a civil lawsuit that the exchange may or may not decide to bring forth on behalf of investors. But a violation of the 1997 SECP Act or the 1969 ordinance is something that the regulator would have the mandate to prosecute in court.



The SECP, however, appeared to downplay the threat of prosecution. “Yes, this will help prosecution also, but more than that, we are interested in bringing more transparency to the market by requiring listed companies to inform the public of any material changes that could affect the stock price,” said Imran Butt, the director of the securities market division at the SECP.

Insider trading is when a person takes advantage of information from within a company to trade in a stock before that information becomes public. Regulators seek to crack down on this activity because it undermines confidence in the country’s stock market if it is seen as a rigged game where only connected insiders can make a profit.

The SECP’s efforts to criminalise insider trading are likely to be welcomed by brokerage houses as a welcome event, since it may increase the level of trust ordinary investors have in the market. The regulation, however, is unlikely to be effective without public prosecutions of insider traders.

Published in The Express Tribune, February 14^th, 2013.

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