FSC Targets Securities Market as it Clamps Down on Insider Trading and Market Manipulation

The Financial Services Commission (FSC) will be playing a more aggressive role in policing the securities market, as it clamps down on market manipulation and insider trading.

Executive Director of the FSC, Brian Wynter in his address at a market manipulation and insider trading conference held at the Jamaica Pegasus Hotel on June 29, said that the FSC would apply sanctions and institute court proceedings when warranted.

“This is an important movement away from the previous posture, which concentrated more on education and seeking to develop within the industry, the capacity to meet the requirements of the law,” he stated.

He noted that the FSC, at its conception continued the approach taken by its predecessor, the Securities Commission, “so we patiently worked with licencees to correct breaches found in examinations that were conducted by the Commission. Those days have come to an end. In order to ensure that market participants recognize the legal provisions enshrined in statute, the FSC will, without fear, favour, or equivocation, enforce the law and where necessary or appropriate and where there is sufficient evidence to carry a successful prosecution, the FSC will seek to have legal proceedings instituted against suspected offenders,” Mr. Wynter told the gathering.

He pointed out that breaches of investor trust had consequences far greater than the prospect of court action for the offenders.

The implications for market integrity, he continued, were particularly negative “because of the central role of market integrity in the stability and development of financial markets and by extension, the economy”.

Mr. Wynter cited a number of corporate scandals, which have over the past five years made headlines in the international press, such as those involving Enron, Worldcom, and style guru Martha Stewart.

Market manipulation and insider trading may affect the efficient operation of securities markets.

They both involve a person having some prior knowledge of the likely effect of the information they have acquired and knowledge of whether using this information may allow them to profit from the transaction.

Market manipulation he pointed out further, “harms the integrity of the securities markets by distorting prices and creating an artificial appearance of market activity and this of course, undermines public confidence”.

Often, there is a fine line between disclosure of base market manipulation and insider trading.

“The difference may depend on whether the information is accurate or misleading and on the use to which the information is put,” Mr. Wynter noted.

“Insider trading involves a person trading on confidential information which, if publicly known, would affect the price of the relevant securities. Disclosure of based market manipulation generally involves a person releasing false or misleading information to the market, which materially affects the price of the securities,” he asserted.

In Jamaica today, the Securities Act is the only substantive body of law specifically targeted at addressing market manipulation and insider trading.

“Many people don’t realize that in a casual conversation, you can make comments about an issue, which would on the face of it provide regulators at least with a cause for conducting an investigation into insider trading or some other form of market manipulation,” Mr. Wynter noted.

He said market offenders come in various guises and could be directors business partners, office managers, and even spouses.

“There is no particular level, type of person, type of activity that you can exclude from the persons, who may be involved and may face prosecution for insider trading. Those of us who are regularly privy to price sensitive information about listed companies should examine very carefully how we use this information and with whom we share it,” he cautioned.

Speaking to the inherent challenges of enforcing the law against perpetrators, the Executive Director said market manipulation had always been difficult to prove as the underlying act of buying or selling securities was a legal activity.

However, he said, “that doesn’t negate the responsibility of the Jamaica Stock Exchange and the FSC in detecting, enforcing and prosecuting such offences”.

He noted that direct evidence of insider trading was very rare and depended mostly on an investigator’s ability to piece together certain bits of information.

“There is usually no physical connection to the act and unless the insider confesses his knowledge, evidence is almost entirely circumstantial,” he said, adding that the identification process required onerous steps.

“It involves the analysis of stock prices and the sizes of trades, along with an analysis of relationships between the insiders of the companies and the persons trading. It includes an analysis of the relationship between the insiders of the company and the persons trading, the dates, the times and otherwise innocuous events, which may or may not prove useful in establishing that some trading has been done on wrongfully obtained information,” he expounded.

Such an investigation involves proof of market manipulation, an investigation into the possible distortion of the laws of demand and supply, which involve determining whether or not the manipulator was capable of influencing the market price with or without the control of supply or demand and determining whether or not there was proof of intent.

“The collection of information for these breaches can prove futile or at best incredibly cumbersome. These are the realities of this sort of offence. These challenges are usually overcome when someone with intimate knowledge of the offence comes forward and provides material information that the perpetrator of an improper act had the intent to illegally take advantage of other market participants,” Mr. Wynter stated.

In seeking to safeguard the Jamaican securities market from the erosive effects of this activity, he said, assistance from other local and regional regulators was important so that timely information regarding suspected market abuse could be provided and acted on.

Although the FSC is the primary regulator of the securities market, the JSE shares the responsibility with the Commission for surveillance of the equities market and is therefore in an advantageous position to monitor manipulative activities and to share the relevant information with the FSC.

“So the sharing of market surveillance information and other exchange to exchange cooperation play important roles in combating manipulative activities. Not only is the cooperation among regulators important, but the FSC wants to foster cooperation amongst securities dealers, issuers, lawyers, accountants, shareholders, investors, minority shareholder groups and other industry professionals in deterring market manipulation and insider trading,” Mr. Wynter told the conference.

Sharing of surveillance information had become one of the frontline issues across the regulatory globe in an attempt to increase consumer protection and confidence, while seeking to attract investments and retain them, he said.

Mr. Wynter also used the opportunity to urge persons who had information, which may relate to market manipulation or insider trading to contact the FSC.