SEC seeks enforcement power on insider trading

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In a move to fully enforce the prohibition against insider trading, the Securities and Exchange Commission (SEC) will seek authority from Congress to recover damages in behalf of losing investors and impose due penalties against the violators.

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Teresita Herbosa, chairperson of the SEC told the Manila Times, that under the present Securities Regulation Code (SRC), the agency has no “disgorgement” power, similar to that granted by law to the courts of justice.

“Under the present SRA, the SEC has only the power over administrative cases, such that we can revoke licenses and/or file criminal charges when the act committed under the law constitutes a violation or an offense, but we do not have any disgorgement power,” Herbosa said.

‘Disgorgement’ is an action for repayment of wrongful gains that is imposed on violators by the courts. Conversely, the funds or profits that were received through illegal or unethical business transactions are disgorged, or paid back, with interest to aggrieved parties.

Illegal insider trading includes tipping others, when such insider has “any material nonpublic information.” Material information, on the other hand, is deemed “nonpublic” when such information is not readily available to investors concerned.

“A simple illustration is that say here is a listed corporation, which has high-valued shares, then an insider [of that company]obtained a nonpublic material information by reason of his position or through another insider. Then, let us say such information contains that in two weeks time, said corporation will announce bankruptcy or has incurred substantial losses, then such insider sold his interest [in whole or in part]in that company at the prevailing price to innocent investor when such material information is not yet public. Then after a short period of time [when such material information is made known to the public]the value of said stocks plummeted to its record low. That is insider trading,” Herbosa explained.

‘Hands are tied’
The SEC chief further explained that should the aggrieved investor opt not to file a civil case, the violator would literally be “off the hook.”

“When insider trading takes place, our hands are tied. It is only the aggrieved party himself, the person left in the dark regarding the insider information who could initiate a complaint in the court of law to recover damages. We also know that court proceedings entail a lot of time,” she added.

Hence, the government official said that there is indeed a pressing need to seek legal authority from Congress that would allow the agency to assume a more proactive role in the enforcement of the law that prohibits insider trading.

“We would like to be the one to recover [the damages], and include it as one of our [SEC] administrative powers,” she noted.

Herbosa said that once such power is granted by Congress, the agency will be able to recover the excess amount constituting wrongful gains from the insider trader, even though the aggrieved investors do not seek relief from the courts.

The Congress will resume its session in May.

“The excess constituting profit on the part of the violator will be returned to the victim. Correspondingly, the SEC will also impose penalties in the form of fines on the violator,” she said.

Under Section 3, paragraph 8 of the SRC, an “insider” includes the issuer, a director or officer or person performing similar functions, or a person controlling the issuer, or a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public, government employee or director, or officer of the SEC who has access to material information about the issuer or a security that is not generally available to the public. It also covers persons who learn such information by communication from any of the foregoing insiders.

Thus, directors or officers are not the only ones who may be guilty of illegal insider trading. People such as brokers and even family members can be found guilty as well.

Meanwhile, Section 27 of the same law prohibits insider trading, “It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public.”

“We will seek an amendment of the SRA, the moment the Congress resumes its session. As the country’s corporate regulator, we want to assume a more proactive role in ensuring that the investing public are adequately protected,” Herbosa said.

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