When SFC can't define a crime, who then should do the time?
with Jake van der Kamp
The government has backed down on stock market reform again, substantially diluting a proposal to make breaking disclosure rules a criminal offence punishable by imprisonment, after seven years of deliberation.
SCMP, March 30
Shocking news indeed. I mean, did it actually take our lawmakers seven whole years to realise that sending someone to jail for a crime they cannot even define is perhaps a little over the top?
That's right - cannot even define. Our securities regulators have just put out a 25-page consultation paper to make the attempt, and while it certainly establishes that inside information is, in their view, the same as relevant information and price-sensitive information, the paper has more difficulty in telling us just what this is.
Perhaps it is excusable given that we have a very short history of being worried about it. Until a little over 30 years ago, insider dealing wasn't even an offence. We then made it one, and the penalty, if you were caught (ha ha), is the government could say bad things about you.
It was made a crime only seven years ago, and it was only 12 months ago that we first sent anyone to jail for it. What we have here, you understand, is hardly a law written in stone since the dawn of time.
But the Securities and Futures Commission is not satisfied. Aside from just making it a crime to deal on inside information, the SFC wanted to give statutory backing to rules requiring companies to divulge all price-sensitive information to the market as soon as possible. In other words, if you don't tell us everything that we think people should know as soon as we think they should know it, well, clang, it's plain congee and a plastic cup of water for you tonight.
Whew! Tough stuff, and the SFC wants listed companies to apply the test of it to everything they do. Better bone up, in that case, on what constitutes inside/relevant/price-sensitive information.
Right, here we go with some samples:
'For information to constitute inside information, there must be a likelihood that the information would cause a change in the price of sufficient degree to amount to a material change.'
Yes, but how sufficient must this sufficiency be? Would 10 cents a share on a $10 stock qualify? How about 20 cents? Over how long a period would we have to expect it to move that much? What if the whole market moves that much? Does our stock have to move more? Just what precisely constitutes a material change when applied to anything that a company does?
'The test of whether information is likely to materially [sic] affect the price is a hypothetical one in that it has to be applied at the time the information becomes available.'
Translation: 'You should know when it happens, but we don't know what it will be.' Take note of that word 'hypothetical'. For the wrong choice of hypotheses, our regulators were trying for seven years to put you in danger of a very non-hypothetical jail sentence. Let's be grateful someone saw sense at last.
'The exercise in determining how the general investor would behave if he is in possession of that piece of information has necessarily to be an assessment.'
Yes, an assessment, an appraisal, a subjective judgment, an opinion, a belief, an estimation, but don't you dare arrive at the wrong one.
'Care must be taken to ascertain whether and how the investors' response once the information is stripped of its confidentiality and becomes public knowledge is attributable to the information released and/or affected by other events or considerations.'
Uh-huh. But how does anyone 'ascertain' this with any confidence of getting even close to the right probability figure? Have any of you people at the SFC ever run a company? Hands up, now. I can count past zero if I need to.
And here is a gem that particularly appeals to me: 'However, press speculation, reports and rumour in the market cannot be contended to be information generally known to the market.'
Hey, boss, did you know that our subscribers don't actually read this newspaper? So says an SFC consultation document.
Note also the disparagement of rumours here. I spent almost 20 years in the stockbroking business and learned to respect rumours. They were almost always good.
The lies were in official filings with the stock exchange, but these are what the SFC regards as 'generally known to the market', despite the fact that only lawyers ever read them and even then only very occasionally.
Read them and love them, however. A lawyer friend of mine sitting across the bar the other night was rubbing his hands at the prospect of having new SFC rulings to interpret.
'We're going to make a lot of money out of this one,' he said.
Indeed he will.