Insider trading is illegal in the Philippines. Section 27 of the Securities Regulation Code provides that: “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.” This, in essence, is the definition of insider trading. It has three elements: (1) the person must be an insider; (2) the insider sells or buys the security of the issuer; and (3) the insider is in possession of material nonpublic information with respect to the issuer or its security. These are discussed in seriatim below.
I. PERSONS WHO ARE CONSIDERED “INSIDERS”
For a person to be liable for insider trading, the person must be an “insider” included in this enumeration:
- (a) the issuer;
- (b) a director or officer (or any person performing similar functions) of, or a person controlling the issuer;
- (c) 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;
- (d) A government employee, director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or
- (e) a person who learns such information by a communication from any forgoing insiders.
The enumeration provided under the SRC, as reproduced above, shows that persons outside the company may be considered insiders under certain circumstances. These are:
(a) Regulators. These persons have access to material nonpublic information about an issuer or a security, such as: (i) a government employee; and (ii) a director or officer of an exchange, clearing agency and/or self-regulatory organization.
(b) Close relationships. These are persons whose relationship or former relationship to the issuer give or gave them access to material nonpublic information about the issuer or the security. There is, in fact, a presumption that a purchase or sale of a security has effected while in possession of material nonpublic information — if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for market to absorb such information — when the purchase or sale is made by the following:
- (i) the insider; or
- (ii) such insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law.
(c) “Outsiders“. These are persons who learn such information by a communication from any forgoing insiders. The connection can be very remote, as when the third person learns of the material nonpublic information from regulators or common-law partners of the insider.
Nevertheless, the Securities Regulation Code provides that there is no insider trading if the insider proves that the information was not gained from such relationship.
The SRC specifically provides for an additional liability for any insider who communicates material nonpublic information about the issuer or the security to any person who, by virtue of the communication, becomes an insider, where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer whole in possession of such information.
The SRC also provides for a separate prohibition, that a registered person shall not deal in any securities for himself or for any account in which he has an interest based upon advance knowledge he possesses of pending transactions for or with clients or any other non-public information, the disclosure of which would be expected to affect the price of such securities and violate the prohibitions related to insider trading.
II. TRADE: DISCLOSE OR ABSTAIN
There can be no “insider trading,” even if an insider is in possession of a material nonpublic information, if the insider does not trade the security of the issuer. Selling or buying the security is an indispensable element of the offense of insider trading. Note, however, the applicability of the general principle in criminal law that the person who induces another to violate a law is likewise liable.
Insiders have the duty to disclose or abstain, which means that insiders are obligated to disclose material information to the other party or abstain from trading the shares of his corporation. The gravamen of insider trading is the insider’s misuse of nonpublic and undisclosed information. According to the Supreme Court: “The intent of the law is the protection of investors against fraud, committed when an insider, using secret information, takes advantage of an uninformed investor.” The Supreme Court added that: “This duty to disclose or abstain is based on two factors: first, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone; and second, the inherent unfairness involved when a party takes advantage of such information knowing it is unavailable to those with whom he is dealing.” (SEC vs. Interport Resources Corporation, G.R. No. 135808, 6 October 2008)
III. MATERIAL NONPUBLIC INFORMATION
The Securities Regulation Code is replete with provisions using the term “material information.” Insider trading requires that the information must not only be material, it must also be nonpublic. Information is “material nonpublic” if:
- (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or
- (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.
Neither the Securities Regulation Code nor the 2015 SRC Rules defines the concept of a “reasonable person.” This was discussed by the Supreme Court in the same 2008 case noted above. A reasonable and prudent person is the average man on the street, who weighs facts and circumstances without resorting to the calibrations of our technical rules of evidence of which his knowledge is nil. Rather, he relies on the calculus of common sense of which all reasonable men have in abundance.
The material information must be be available to the public. If the material information has been disclosed to the public, whether or not pursuant to mandatory disclosure requirements, there can no longer be insider trading based on such public information.
The SRC provides that there is no insider trading if the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information.
INSIDER TRADING IN TENDER OFFERS
Where a tender offer has commenced or is about to commence, it shall be unlawful for:
- 1. Any person (other than the tender offeror) who is in possession of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and
- 2. Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and any insider of such issuer to communicate material nonpublic information relating to the tender offer to any other person where such communication is likely to result in a fraudulent transaction.
If a person shall become aware of a potential tender offer before the tender offer has been publicly announced, such person shall not buy or sell, directly or indirectly, the securities of the target company until the tender offer shall have been publicly announced. Such buying or selling shall constitute insider trading.
CRIMINAL AND CIVIL LIABILITY
The Securities Regulation Code provides that any person who violates these prohibitions may be penalized with imprisonment of not less than 7 years nor more than 21 years, or a fine of not less than P5,000 nor more than P5M, or both, at the discretion of the court.
Any person found guilty of insider trading and its related prohibitions may, in addition to administrative sanctions, be held civilly liable in an amount not exceeding triple the amount of the transaction, plus actual damages, exemplary damages, and attorney’s fees. [See Prescription of criminal and civil actions]