Insider trading is exploitation of confidential information which is based on the sale and purchase of financial instruments of a corporate entity referred to as insider. The information pertaining to financial instruments can influence the public at large if disclosed. An act will be called insider trading if such information is provided to a third party who benefits from his investment activities post receiving such information. It is a term used commonly in the securities market and usually relates to illegal conduct.

However, insider trading can be both be legal and illegal. In generic terms, insider trading means buying and selling of stocks and shares based on significant information which is publicly not available. Apart from creating a biased field which disadvantages other investors, insider trading by corporate employees breach their utmost responsibility to work in the best interest of the shareholders. The Corporate Lawyers in Dubai will assist the readers in understanding the legal consequences of insider trading in accordance with UAE laws.

The legality of insider trading depends on the time when the insider’s official trades the information. Analyzing a global perspective, in most countries, insider trading is not illegal if the information provided by key personnel of a company in a way which does not allow an individual to take advantage of insider information. Importantly, the higher officials of a company are not restricted to trade in their company’s shares as contrary to the general rules; it would be unfair to prevent these officials making company’s significant decision from investing in stocks. The term insider trading is used to allude to an act in which an insider or a related party exchanges non-public confidential information of an entity amid his performance of his duties at the company. Illicit trading in this way incorporates tipping others when you have any sort of sensitive information not available publicly. Not only directors can be convicted under such offence, but the law can also penalize the brokers as well as the family members to misuse the information.

The Legal Framework

Federal Law Number 4 of 2000 concerning the Emirates Securities and Commodities Authority (the SCA Law) regulates and prohibits the act of insider trading. The regulatory authorities governing such acts are the Central Bank, Securities Commodities Authority (SCA) Department of Trade and Finance, police and Public Prosecution. Whereas, the Dubai International Financial Free Zone (DIFC), the financial free zone in Dubai has a separate central regulatory authority named Dubai Financial Services Authority (DFSA) who regulates the economic activities of the companies established within DIFC.

Article 37 of the SCA Law though does not wholly define the act of insider trading, however, consider any exploitation of confidential non-public information which might cause severe impact on the price of the securities is prohibited, and such actions will be null and void. The Law allows higher officials or members of the board of the company whose shares are listed in stock exchange to carry out transactions in securities if:

a. They publicly provide the information pertaining to the acquisition or sale. The report shall include all the details regarding the price or quantities or any other information relevant for the market;

b. They sought approval on every stage from the board of directors.

In lieu of the foregoing, any activity which is not in line with the aforementioned procedure will be declared as null or void (Article 37). The law further restricts any corporate official who has received any private and non-public information of the company to deal in securities, which he has received due to his position in the entity, reference to Article 39. All the corporate officials including the higher management are restricted to disclose private information or spread rumours about the acquisition or sale of shares. Any activity in this regard will be declared null and void.

The law subsequently provides for penal provisions on violation of any regulation as mentioned under Article 41 which states that any breach of the foregoing clauses, an individual subjected to insider trading will be imprisoned for a period of not less than 3 months and not more than 3 years and shall be liable for a fine ranging between AED 100,000 to AED 1 Million. A specific breach of Article 38 will attract imprisonment for a period not more than 3 years and a fine not more than AED 1 Million.

Recent Developments

Abu Dhabi Securities Exchange (ADX) has banned the insider trading until the companies disclose the financial statements. The concerned decision was to take in consonance with Article 14 of the Securities and Commodities Authorities’ Decision Number 1 of the year 2001 concerning the regulations on trading, clearing transfer of ownership and custody of securities. The concerned article states that the any employee or corporate official including the chairman and the board members who have access to insider information are prohibited either themselves or through others to trade in securities of the same company or any of its subsidiaries or sister companies, if they are listed on stock exchange, during a period of 15 days prior to disclosing the financial statements of the company until they are revealed.

ADX has further through the concerned circular, requested all the public listed companies to update their insiders’ data urgently and regularly on their websites. The concerned disclosures or transparency regulations either promulgated by SCA, ADX or Dubai Financial Market (DFM) imposes a duty to report to the directors of the board any insiders’ information whose securities are listed publicly.

Every securities market is required to maintain a record pertaining to securities trading transactions and must submit such report on daily basis to the Authority including the price and quantities of such securities and a number of transactions in total. Any corporate entity or issuer of security which is willing to trade its security must submit an application before the Authority, and such applications shall include a detailed report issued by the board members of the applicant. It is the liability of the member, so the board of the applicant to confirm the accuracy of such information provided in the application submitted to the authority or the relevant securities market. The SCA law also restricts the public listed companies to change their ownership, unless specifically approved by the Authority, as such sanctions will be imposed considering the threats of insider trading and circulation of wrong information.