Insider Dealing

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1. Introduction

Insider dealing has been affecting the efficiency of stock markets in different places like United States, United Kingdom and Australia. Hong Kong is of no exception. Basically, insider dealing refers to the trading of a corporation’s stock or other securities by individual with potential access to non-public information of the company. The law of insider dealing in Hong Kong provides a much more detailed definition and is very comprehensive. However, when it comes to enforcement, it seems not very effective. In the following, the law of insider dealing in Hong Kong will be summarized. After analyzing the comprehensiveness of the law, the underlying reasons of the difficulty in enforcement will be identified. Some recommendations will then be made in order to improve the law. These recommendations will be based on the reasons identified, with reference to other jurisdictions.

2. Comprehensiveness of the current law

2.1 Description of the law and its comprehensiveness
Hong Kong is a relatively new player in insider dealing law as there is no law until 2003. Nevertheless, we now have a very comprehensive ordinance concerning the issue. The primary source of the law relating to insider dealing is contained in Parts XIII and XIV of the Securities and Futures Ordinance. The most straightforward and common example when insider dealing takes place is when a person connected with a listed company who has relevant information in relation to that company (which he knows to be relevant information) deals or counsels or procures another to deal in the listed securities of that company or a related corporation or their derivatives, knowing or having reasonable cause to believe that such person would deal in them. The law explains the 4 major concepts, which are “connected person”, “relevant information”, “dealing, counseling, procuring” and “securities and derivatives” of insider dealing very thoroughly.

2.2 Connected person
The Ordinance defines persons who are connected to a corporation in very broad terms. A person is connected with a corporation if he is (now), or has within the previous 6 months been: a director or employee or a substantial shareholder of that corporation or a related corporation, an occupant of a position or a person which may reasonably be expected to give him access to relevant information in relation to the corporation.

2.3 Relevant information
This means specific information about the corporation, about a shareholder or officer of the corporation, or about the listed securities of the corporation or their derivatives, which is not generally known to those persons who are accustomed or would be likely to deal in the listed securities of that corporation, but which would, if it were generally known to them, be likely materially to affect the price of the listed securities. An example of relevant information is knowledge of a contemplated take-over offer which is not public knowledge. Once the information becomes generally known, it is no longer a piece of relevant information and therefore, no insider dealing can possibly happen with the information.

2.4 Dealing, counseling, procuring
Insider dealing can occur when there is a deal in listed securities or their derivatives. A person "deals" in securities or their derivatives if he buys, sells, exchanges or subscribes for listed securities or their derivatives or agrees to do so, or acquires or disposes of, or agrees to acquire or dispose of, the right to buy, sell, exchange or subscribe for, any listed securities or their derivatives. Insider dealing can also occur when a person counsels or procures another to deal in listed securities or their derivatives.

2.5 Securities and derivatives
Securities which are listed on The Stock Exchange of Hong Kong Limited (the Hong Kong Stock Exchange) and their derivatives are the only types of securities in respect of which insider dealing can occur. The definition of "securities" is...
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