Market Regulators Here and Abroad
Regulators of U.S. and foreign markets frequently face the same challenges. In trying to meet those challenges they often have powers which may appear similar but are very differently administered. Consider the following examples drawn from recent events in overseas markets.
Since the passage of the Sarbanes Oxley Act, the officer/director bar has become a standard enforcement remedy. When the remedy was first added to the SEC’s arsenal in the 1990 Remedies Act, the agency had to prove that the person was “substantially” unfit to obtain a bar. SOX changed all that by dropping the “substantially” requirement, morphing a little-used remedy into a staple of the enforcement division.
Nevertheless, the SEC does not have the kind of authority claimed by its Irish counterpart – at least as to officer/director bars. Section 160 of the Irish Companies Act provides for entering disqualification orders which prohibit a person for a specific period of time from involvement in the management of a company on grounds of unfitness. In a recent court hearing, the Director of Corporate Enforcement reminded the Irish High Court that under this section he had the authority to enter a bar order following a finding by the court that the person engaged in insider trading. However frequently the U.S. SEC may invoke its officer/director bar authority, neither Chairman Cox nor Enforcement Director Linda Thomsen have this kind of authority.
A new study published in the Turkish Weekly argues that the threshold used by regulators to monitor suspicious trading should be lowered as the size of the deal team increases. After studying possible insider trading in various types of markets, the paper concludes that “regression analysis reveals that syndicate sizes explain our measures of abnormal trading activity.” Intuitively this clearly seems correct – the larger the group that is “over the wall” and knows about the deal, the more activity resulting in more “leakage,” as economists call it.
The findings of the study in turn suggests that enforcement agencies should consider altering their monitoring mechanisms based on the size of the syndicate, lowering the threshold for detecting suspicious activity as the size of the syndicate increases. This of course is only the first step in insider trading enforcement the study authors acknowledge. The real difficulty is identifying the traders and differentiating between lawful and unlawful trading activity.
In contrast to the increasing emphasis on enforcing insider trading laws by U.S. officials, the Securities and Exchange Board of India, or SEBI, plans to relax insider trading laws by removing a provision that authorizes criminal actions against employees of a company who do not comply with a code of conduct specified in the current insider trading laws. SEBI’s idea apparently stem from the view that the company should have appropriate controls to prevent insider trading by its employees. In this context, insider trading represents a control failure by the company. Imposing criminal liability on the employee under these circumstances is overly harsh according to the regulator.
SEBI does not intend to simply deregulate insider trading, however. Rather, the regulator intends to permit the market to punish companies for their failures. Listed companies will be required to disclose the insider trading of their employees. This is intended to put a greater burden on management to have appropriate controls.
Last year there were comments that insider trading is rampant in U.S. markets. In Australia matters appear to be worse. Studies by leading funds including Vanguard, BT Investment Management and the Victorian Funds Management Corporation conclude that there are “unacceptably high” breaches of disclosure rules. According to one study directors at more than 20 corporations on the ASX traded shares in their companies between the time the books were closed and the announcement of the results. Another study found that almost half of the top 200 companies listed on the ASX failed to comply with a listing rule requiring changes in the shareholdings of directors be made public within five days.