Insider information and other manipulative practices under the Securities Regulation Code
Credit to Author: KELVIN LESTER LEE | Date: Tue, 12 Nov 2019 18:27:43 +0000
Part of the Securities and Exchange Commission’s (SEC) mandate is to encourage investments and more active public participation in the affairs of private corporations and enterprises. In line with this, the SEC works to protect the integrity of the market by combating securities fraud such as insider trading and manipulative practices.
Section 3.8 of Republic Act 8799, otherwise known as the “Securities Regulation Code (SRC),” defines an insider as a person who has access to material nonpublic information about the company or the security that is not generally available to the public. The term “insider” includes the management, directors, government agencies, and other people who learn of such information by communication from the preceding persons.
Rule 27.2 of the 2015 Implementing Rules and Regulations (IRR) of the SRC Rules describes material nonpublic information as “information that has not been disclosed to the public and would either likely affect the market price of the security when disseminated to the public or would be an important consideration by a reasonable man to either buy, sell or hold certain security.”
The SRC prohibits not only the trading of securities by persons possessing material nonpublic information, but also the disclosure by insiders of such information to other persons who they believe will consequently trade the concerned securities.
To be sure, Rule 27, specifically, Rule 27.1 of the SRC Rules, defines insider trading as “trading security with the knowledge of nonpublic material information.” The SRC Rules, however, provide that “an insider may still trade if he proves that the information was not gained from his connection or function or that the insider proves that the person he transacts with is aware of the non-material information.”
Aside from insider trading, Rule 24 of the SRC Rules also prohibits manipulative devices and schemes that affect normal trading prices in order to induce other people to buy or sell a security.
A common manipulative device is what we call the pump and dump, or the hype and dump. Rule 24.1.5.4 of the SRC IRR explains hype and dump as “engaging in buying activity at increasingly higher prices and then selling the securities at a higher price in the market.” In practice, persons or a group of persons will spike up the share price by trading among themselves. When the public is already enticed to buy the security, hoping that the price will go higher, the person or group of persons will then dump the security to the public, at the already pumped up higher price. After the “dump,” the security will then likely fall.
In this light, allow me to reiterate the SEC’s advice to the public to take caution when it comes to trading securities, especially those whose prices are or have been increasing without any reason as this could be a manipulative scheme to entice you to buy a security at a high price.
In trading, it pays to do your research. Before selling or buying securities, assess the prospects of the company as well as the industry and the overall economy. For one, you can check the company’s financial statements, track relevant economic indicators, monitor changes in the market, and consult your trusted brokers.
It also pays to do the right thing. Never allow yourself to participate in or benefit from insider trading and other manipulative devices. Otherwise, you shall suffer a fine of not less than P50,000 nor more than P5 million or imprisonment of not less than seven years nor more than 21 years, or both, for every violation.
About the writer: Kelvin Lester K. Lee is a commissioner of the Securities and Exchange Commission (SEC). He is the co-chairperson of the SEC Committee on Memorandum Circulars To Operationalize Revised Corporation Code Provisions. The views and opinions stated herein are his own. You may email your comments and questions to oclee@sec.gov.ph.