Nearly 20 years ago, a prominent businessman for the first time was successfully prosecuted for insider trading in Singapore after what was claimed to be the longest running trial at the time. In 2004, the collapse of China Aviation Oil (Singapore) Corp, following spectacular losses of US$550 million from speculative trading, resulted in the punishment of six senior company executives.

 “Insider trading has long been regarded as reprehensible as far as securities regulation is concerned in Singapore,” states Singapore Management University law professor Wan Wai Yee in a recent article in the Company Lawyer (Comp. Law. 2007, 28(4), 120-127, published by Sweet & Maxwell).

Wan provides an overview of how Singapore’s insider trading regulations have evolved, pointing out, for example that insider trading was first made a specific offence under the Companies Act 1970. Insider trading regulation has since undergone significant amendments, the first of which was the enactment of the Securities Industry Act 1986 (SIA), itself catalysed by the dramatic collapse of Pan-Electric Industries Ltd which caused the first and only temporary closure of the Stock Exchange of Singapore.

Definition of Insider Trading

 The SIA was repealed when the Securities and Futures Act 2001 (SFA) was passed. The latter represented a fundamental shift in the definition of insider trading conduct, from the “person-connected” approach to the “information-connected approach.” Under the “information-connected approach,” insider trading liability is not dependent on whether a person trading on price-sensitive information is connected with the relevant company but whether the person is in possession of price-sensitive information. If in possession of such information, the person is prohibited from trading. This wider definition addresses the shortcomings of the “person-connected approach” where a person who falls outside the specified categories of an “insider” (e.g. a director, substantial shareholder, or a “tippee” who received information from an insider) could not be prosecuted under the SIA.

Wan notes that, after the insider trading provisions in the SFA came into being, there was a significant increase in the number of successful prosecutions and convictions of insider trading cases. For example, between January 2005 and September 2006, there were at least 10 insider trading convictions obtained. In comparison, under the SIA, only five successful prosecutions were obtained up to January 2001. “The presence of successful enforcement sends a clear message to the market that the local regulators will have no hesitation in enforcing such prohibitions,” says Wan.

Under the SFA, insider trading comprises the “dealing” and “communication” offences. A dealing offence occurs where a person deals, or procures another person to deal, in securities on the basis of information he or she knows is price-sensitive information that is not generally available. A communications offence occurs when a person in possession of price-sensitive information (the insider) conveys such information to another person who the insider knows is likely to trade in, or procure a third party to trade in, the securities.

Given the broader scope of insider trading definitions under the SFA, Wan notes that both the SFA and its subsidiary legislation also provide wider defences and exceptions, including the general Chinese Walls defence (which are internal procedures to ensure that there is no flow of confidential information within the organisation, except to persons who need to have such confidential information), and parity of information defence (where the trading parties are on equal footing as they knew, or ought to have known, of the same price-sensitive information before entering into the transaction).

Regulations in Other Markets

Singapore’s broad-based, information-connected approach is derived from the experiences of developed markets such as Australia and the United Kingdom. In the United States, however, the situation differs in that, under its insider trading regulation, equal access to information is not considered the basis for regulating insider trading. Rather, the basis for regulation lies in the fiduciary theory (where there must exist a relationship of trust and confidence owed by the insider to the company or the counter-party), or the misappropriation theory (where the insider owes a duty to the source of the information). Similarly, insider-tippers are found guilty of insider trading where they breach relationships of trust and expect to benefit from communicating price-sensitive information.

Wan points out that the justifications for insider trading regulations based on fiduciary and misappropriation theories are narrower than the justification based on equal access to information theory. Under the fiduciary and misappropriate theories, insiders unconnected with the company concerned will not be liable. For example, an employee further down the information chain who receives price-sensitive information and is given the employer’s consent to trade in securities on the basis of this information, will not be considered liable since there is no breach of a fiduciary relationship. However, the employee would be liable on the basis of equal access to information.

On the other hand, the experience of the U.S. in successfully carrying out civil actions for enforcing insider trading has influenced Singapore’s introduction of civil penalties for insider trading. Civil penalties have several advantages over criminal actions, such as requiring a lower burden of proof and less stringent rules about admissibility of evidence.  In actions for civil penalties, the U.S. Securities and Exchange Commission is allowed to seek up to three times the profit made or loss avoided.

Singapore follows a similar regime, subject to a minimum amount of S$50,000 for individuals and S$100,000 for corporations. If no profit was made or loss avoided, a penalty of between S$50,000 and S$2 million can be imposed. The Monetary Authority of Singapore (MAS), which plays the dual role of central bank and securities regulator, is empowered to pursue such civil action. Contemporaneous traders who have suffered losses from insider trading can also pursue compensatory claims against the insider trader.   

Lack of Applicable Defences

The difficulty with Singapore’s stringent insider trading rules, suggests Wan, relates to three specific areas. The first arises when they are applied in the context of take-over transactions. For example, a prospective offeror, when considering whether to acquire a target, may obtain price-sensitive information as part of its due diligence exercise. Further in a hostile take-over situation, the target company may choose to divulge price-sensitive information to encourage rival bidders to make offers. In the case of the former, Wan points out that there is a lack of clarity as to whether the communications offence is contravened by the target disclosing price-sensitive information, even if the recipient undertakes not to trade in the securities while in possession of price-sensitive information.

Somewhat surprisingly, there is no applicable defence in the SFA. In the case of a hostile take-over where a target chooses to selectively disclose price-sensitive information to prospective white knights or other bidders in order to encourage them to make bids, there is a similar lack of defence.

This approach under the SFA is unduly restrictive as a prospective offeror in a take-over situation will not be able take such information into account before deciding whether to make an offer. From the market fairness perspective, there is no unfairness in the communication since mere possession of price-sensitive information is not objectionable in itself.

Second, the SFA abolishes the requirement, established earlier in the decision of the Singapore High Court, that the prosecution must show that there was an intention by the defendant to use the price-sensitive information. Wan argues that there is nothing inherently unfair about trading in securities if the insider has not traded on the basis of price-sensitive information. As an alternative, Wan suggests allowing a limited defence where the burden of proof would rest with the defendant to show that the decision to trade was taken before receipt of price-sensitive information.

The third problematic area concerns the limited exception currently permitted for the purchase of securities where an offeror attempts to increase its shareholdings in a target in advance of a take-over. In this situation, the offeror can be said to possess price-sensitive information relating to knowledge of its own take-over plans. However, the exception is allowed only where the offeror acts in the same capacity for both the take-over and dealing in the securities.

Wan points out that this exception is very narrow and will not apply to individual members purchasing on behalf of consortium vehicles making the take-over bids. Similarly, the exception does not apply to persons acting on a no-profit basis together with an offeror. “If the underlying basis of regulating insider trading is based on market fairness and efficiency, it is hard to see why the exception operates to restrictively,” says Wan. In this regard, the author suggests that this defence be expanded to allow dealings by any person working with or under the direction of the trader.  

Wan argues that Singapore's broad-based regulatory framework, based on market fairness and market efficiency, may have led to over-regulation, which runs counter to its overall objective of encouraging market vibrancy and investor confidence. “By having an overly encompassing offence, the danger is that the determination of what is the range of acceptable conduct will lie in the discretion of the regulators”, Wan says. IThis makes it difficult for businesses and investors to take decisions, and runs counter to the objective of building investor confidence and deepening capital markets so as to make Singapore a key financial centre.