Insider Dealing Compliance Issues And Cases Test

Section 279 of the Securities and Futures Ordinanice imposes a duty on an officer of a corporation to take all reasonable measures to ensure that proper safeguards exist to prevent the corporation of which they are an officer from acting in any way which would result in the corporation engaging in market misconduct including insider dealing. SFC licensed corporation should review their compliance controls and process from time to time to prevent any market misconduct including insider dealing.

Under sections 247 and 287 of the Securities and Futures Ordinance (SFO), an individual is connected with a corporation
if: a. he is a director or employee of that corporation or a related corporation; b. he is a substantial shareholder (i.e. has an interest in 5% or more of the issued voting share capital) in the corporation or a related corporation; c. his position may reasonably be expected to give him access to inside information concerning the corporation by reason of:i. a professional or business relationship existing between himself (or his employer or a corporation of which he is a director or a firm of which he is a partner) and that corporation, a related corporation or an officer or substantial shareholder in either corporation; or ii. his being a director, employee or partner of a substantial shareholder of the corporation or a related corporation; or d. he has access to inside information by virtue of being connected (within the meaning of a, b or c above) with another corporation where that information relates to a transaction (actual or contemplated) involving both corporations or involving one of them and the listed securities of the other or their derivatives, or to the fact that such transaction is no longer contemplated; or e. he was connected with the corporation within the meaning of a, b, c or d above at any time within 6 months preceding any relevant dealing.

Non-public price sensitive information is referred to as “relevant information” in the Securities and Futures Ordinance (“SFO”). Under sections 245 and 285 of the SFO, “relevant information”, in relation to a corporation, means specific information about: (a) the corporation; (b) a shareholder or officer of the corporation; or (c) the listed securities of the corporation or their derivatives, which is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but which would if it were generally known to them be likely to materially affect the price of the listed securities.

Peter plays the role of "Tipper" that he tips off his girlfriend who is a "Tippee". His girlfriend conducts insider dealing of the relevant shares based on price sensitive and confidential information as provided by Peter who is an insider of that listed company.

Under sections 247 and 287 of the Securities and Futures Ordinance (SFO), an individual is connected with a corporation if: a. he is a director or employee of that corporation or a related corporation; b. he is a substantial shareholder (i.e. has an interest in 5% or more of the issued voting share capital) in the corporation or a related corporation; c. his position may reasonably be expected to give him access to inside information concerning the corporation by reason of:i. a professional or business relationship existing between himself (or his employer or a corporation of which he is a director or a firm of which he is a partner) and that corporation, a related corporation or an officer or substantial shareholder in either corporation; or ii. his being a director, employee or partner of a substantial shareholder of the corporation or a related corporation; or d. he has access to inside information by virtue of being connected (within the meaning of a, b or c above) with another corporation where that information relates to a transaction (actual or contemplated) involving both corporations or involving one of them and the listed securities of the other or their derivatives, or to the fact that such transaction is no longer contemplated; or e. he was connected with the corporation within the meaning of a, b, c or d above at any time within 6 months preceding any relevant dealing.

Under the Securities and Futures Ordinance (SFO), there is a dual civil and criminal regime for insider dealing, market
manipulation, spreading false or misleading information about securities or futures and other abuses, collectively called “market misconduct”. This dual civil and criminal regime is one of the SFO’s most important features. The regime’s goal is to better protect Hong Kong’s markets and investors from serious crime and misconduct which can undermine investor confidence and cause severe financial losses.

SFC Guidelines on Disclosure of Inside Information issued in June 2012 lists out examples of information that can be possible inside information concerning a corporation that needs to be disclosed to the public. Market rumours and media speculation may not be an inside information concerning a corporation. However, a corporation should develop procedures for responding to market rumours, leaks and inadvertent disclosures.

The Market Misconduct Tribunal may under subsection 257(1) of the Securities and Futures Ordinance impose a disqualification order on any person found to have committed market misconduct that a person shall not, without the leave of the Court of First Instance, be or continue to be a director, liquidator, or receiver or manager of the property or business, of a listed corporation or any other specified corporation or in any way, whether directly or indirectly, be concerned or take part in the management of a listed corporation or other specified corporation for up to 5 years.

All forms of market misconduct (including insider dealing) are liable to prosecution as a criminal offence under Part XIV of the Securities and Futures Ordinance. The maximum criminal sanctions is 10 years’ imprisonment and fines of up to HK$10 million.

Sections 271 and 292 of the Securities and Futures Ordinance provide for defence available to a person relating to insider dealing such as acting as agent; he did not select or advise on the selection of such listed securities or derivatives; and he did not know that the person for whom he acted was connected with that corporation or had the inside information etc. Reasonable use is NOT a statutory defence under the Securities and Futures Ordinance relating to insider dealing.

At the end of any proceedings, the Market Misconduct Tribunal may under subsection 257(1) of the Securities and Futures Ordinance impose the following sanctions on any person found to have committed market misconduct: a disqualification order; b. a cold shoulder order; c. a cease and desist order; d. a disgorgement order; e. Government costs order; f. SFC costs order investigation; and g. disciplinary referral order.

Securities and Futures Ordinance does not set the percentage of which a share price change is deemed to be "material' or "significant" or "substantial" in the context of insider dealing. SFC Guideline on Disclosure of Inside Information issued in June 2012 states that : "The standard by which materiality is to be judged is whether the information on the particular share is such as would influence persons who are accustomed or would be likely to deal in the share, in deciding whether or not to buy or whether or not to sell that share. A movement in price which would not influence such an investor may be termed immaterial. Price is, after all, to a large extent determined by what investors do. If generally known, it is the impact of the information on persons who are accustomed or would be likely to deal in the share, and thus on price, which has to be judged.The test of whether the information is likely to materially affect the price is a hypothetical one in that it has to be applied at the time the information becomes available. The exercise in determining how the general investor would behave if he was in possession of that piece of information has necessarily to be an assessment at the time the disclosure was to take place."