Insider trading: ‘Not generally available to the public’

Our Securities Regulation Code (SRC) penalizes insider trading by providing that “[i]t 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” (Sec. 27.1).

The question is: When is information considered “not generally available to the public” for purposes of determining whether there is insider trading?

For example, can a director or officer of a listed company be held criminally liable for insider trading if he buys or sells his company’s stocks on the basis of material information that he has obtained from the public domain (newspapers, website, radio, etc.) but before it is disclosed to the Securities and Exchange Commission (SEC) and Philippine Stock Exchange (PSE)?

First school of thought

The first view is that a director or officer is not liable for insider trading because the information is already public by virtue of it having been published in the mass media.

This view is consistent with a statement of the Supreme Court in Securities and Exchange Commission vs. Interport Resources Corp. (G.R. No. L- 135808, October 6, 2008), wherein the high court implicitly recognized that publication of material information affecting a listed company may constitute a valid defense in an insider trading case.

This is consistent with regulation Fair Disclosure (FD) of the United States where listed companies may disclose material information either by filing US SEC Form 8-K with the SEC or through another method (or combination of methods) reasonably designed to provide broad, non-exclusionary distribution of the information to the public. Other regulation FD-compliant methods of disclosure include press releases, conference calls, press conferences and webcasts, so long as the public is provided adequate notice (generally by press release) and granted access.

In fact, the New York Stock Exchange (NYSE) has amended its disclosure rules in 2009 to conform to the modes of disclosure recognized by regulation FD.

Second school of thought

But the opposite view contends that the statement of our Supreme Court in the Interport case should not be taken hook, line and sinker.

First, the disclosure rules are different in the Philippines.

Unlike in the United States, which expressly recognizes disclosure via mass media, the Philippines limits disclosure of current material information for listed companies through the filing of SEC Form 17-C with the SEC.

SRC Rule 17.1 requires a listed company to file “a current report on SEC Form 17-C … to make a full, fair and accurate disclosure to the public of every material fact or event that occurs, which would reasonably be expected to affect investors’ decisions in relation to those securities. In the event a news report appears in the media involving an alleged material event, a current report shall be made … in order to clarify said news item, which could create public speculation if not officially denied or clarified by the concerned company.”

The same rule provides that “if the issuer is listed on an Exchange,” the “current report on SEC Form 17-C” must be filed with “that Exchange within ten (10) minutes after occurrence of the event and prior to its release to the public through the news media, copy furnished the Commission.”

Consistent with this SEC rule, the PSE disclosure rules provide that  “[u]pon its receipt of any material non-public information, the Exchange shall request the Issuer concerned to confirm or deny the veracity of the said information (e.g., newspaper/newswire reports, information coming from third parties, broker’s market letter, etc.) pertaining to the Issuer or any of its subsidiaries” (Sec. 4.5).

These rules of the SEC and PSE clearly show that disclosure of material current information affecting listed companies cannot be done through press releases, conference calls, press conferences and webcasts without simultaneously disclosing it to the SEC and PSE.

Secondly, proponents of this view point out that the parties in the Interport case did not squarely rule on the interplay between the SEC/PSE disclosure rules and publication of material information through mass media. Accordingly, the proponents of this view posit that the case cannot be a binding precedent for purposes of determining the issue at hand.

Need for resolution

I encountered this issue during my PSE days. There is a host of questions that need to be answered before the issue can correctly be resolved. For example, is it part of the fiduciary duties of insiders, especially directors or officers, not to take advantage of material information regardless of where they get the information? Assuming that it does, does it mean that they are guilty of insider trading? If we recognize publication in the mass media as a valid defense, would it not make it extremely difficult for the regulators to prosecute cases of insider trading? (Surely, the defendants will claim that they got access to the material information from the media. In such case, it would be next to impossible for the regulators to disprove such claim.) Is disclosure one thing, and proving that the information is actually “generally available to the public” quite another thing?

Otherwise stated, if the information is public knowledge because it had been published through the mass media, then it should be considered factually “generally available to the public” even if it has not been disclosed to the SEC and PSE through the mode expressly authorized by them. Isn’t it that the insider trading provision of the SRC, particularly section 27.1, merely requires that the information “is not generally available to the public,” without requiring that the disclosure be done solely through the modes of disclosure sanctioned by the SEC and PSE?

These and other questions need to be answered in case the issue is brought before our courts of law.

Better still, our SEC and PSE may want to update their disclosure rules, as was done in the United States and other jurisdictions, to reflect modern day developments in the market.

(The author, formerly president of the Philippine Stock Exchange, is now senior partner of Angara Abello Concepcion Regala & Cruz Law Offices (Accralaw). His opinion in this column are solely his views and should not in any way be attributed to Accralaw. He may be contacted through [email protected].)