Related article: Suppressing the Predators in Business: A Brief Discussion on the Philippine Competition Act of 2015 (Republic Act No. 10667)
The Philippine Constitution provides that the State recognizes the role of peace and order, protection of life, liberty, and property, and the promotion of the general welfare in the exercise of the people of the blessings of democracy (Article 2, Section 5 of the 1987 Constitution). Along with the promotion of democracy is the establishment of free market and protection of effective market competition. In view thereof, Republic Act No. 8799 (RA 8799) or The Securities Regulation Code was enacted to establish a socially conscious, free market that regulates itself, encourage the widest participation of ownership in enterprises, enhance the democratization of wealth, promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market (Sec. 2 of RA 8799).
Insider Trading: Brief Discussion of Essential Elements
The provisions of the Securities Regulations Code are focused on preventing unfairness as a result of fraudulent devices and insider trading. In an insider trading, the main perpetrator called the “insider” profits from the material information that are not available to the public. These pieces of information are called “Material Non-Public Information”.
Material non-public information is an information about the security or the issuer that is not generally available to the public. Further, under Section 27.2 of RA 8799, an information is considered “material non-public” if 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 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.
Who is an INSIDER?
An insider could be any of the following (Sec. 3 Par. 3.8 of RA 8799):
- An issuer;
- A director or officer of the issuer (or any person performing similar functions) or a person controlling the issuer;
- A person who has a relationship or former relationship with the issuer and the latter gives or gave access to the material non-public information;
- 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;
- A person who learns such information by a communication from any of the foregoing insiders.
In furtherance of the protection of the investing public, the Securities Regulations Code provides a presumption that in the event of a purchase or sale of a security of the issuer made by an insider or his/her spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, it shall be presumed to have been 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. Nevertheless, this presumption may be rebutted upon a showing by the purchaser or seller that he was already aware of the material nonpublic information at the time of the purchase or sale (Sec. 27.1 of RA 8799).
Insider’s Duty to Disclose When Trading (Sec. 27 of RA 8799)
As discussed in the previous paragraphs, 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 rule commits to certain exceptions, and these are:
- The insider proves that the information was not gained from such relationship; or;
- If the other party selling to or buying from the insider (or his agent) is identified, the insider proves:
- that he disclosed the information to the other party, or
- that he had reason to believe that the other party otherwise is also in possession of the information.
Civil Liabilities
Under Section 61 of RA 8799, any insider who commits “insider trading” by purchasing or selling a security while in possession of material information not generally available to the public, shall be liable in a suit brought by any investor who, contemporaneously with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class unless such insider, proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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