Nigeria: The fine line between directors’ dealings and insider trading
The frequency and preponderance of directors’ dealings activities that are going on at the Nigerian Stock Exchange are worth noticing and analyzing. In the month of August alone, which is only halfway done, the Exchange has been notified of about 20 director dealings. That is an average of 2 per business day.
While directors’ dealings have been said to lead to stock market efficiency, they could as well provide some positive trading signals to watchful investors and analysts. The reason behind that thinking is that, since directors are insiders, they know one or two things that the outside investor may not know, so much that a buying spree by the directors oftentimes connotes confidence in the company while selling activities by directors denote less confidence in the company’s performance.
Irrespective of the advantages of and signals that could be gleaned from directors’ dealings, the question on the minds of many outside investors and indeed should be pondered by the regulatory authorities is, where do directors dealings end and insider trading start?
Why ask the question?
Though directors dealings happen everywhere, its frequency in Nigeria is nothing compared with that of the UK. The difference is that in such countries like the UK, the authorities are laser-focused on detecting, charging, prosecuting, and punishing insider traders but that may not be said about Nigeria.
What are Directors Dealing?
Directors’ Dealings are or are said to occur when a director or directors of a company buys or sells shares of the company.
What is Insider Trading?
Insider trading occurs or is said to occur when an individual or entity buys or sells shares while knowingly relying on or in possession of some confidential nonpublic information which is most likely to materially influence the price of the shares of such information if made available to the public.
Who are Insiders?
An insider, for insider trading, is anyone, who, at any time within the last six months, is knowingly connected with the company. If this sounds confusing, you are not alone, because it is, like most statutes enshrined in legal parlance.
To make it a little easier to understand, a connection with a company is usually determined by two types of relationships. Firstly, a person is deemed or assumed to have a connection if he is a director of a company or another company that is related to the first.
Secondly, officers and employees of a company or related companies are considered to be insiders as long as such officers or employees are in positions in the company where they may be reasonably expected to have access to price-sensitive information within the company that should not be disclosed in the ordinary course of business. To be precise, this group of employees considered as insiders include accountants, solicitors, bankers, and even management consultants of a company.
Time is of the essence
After looking at what directors’ dealings and insider trading are and who insiders are, one may be quick to say that directors’ dealings are insider trading. Not so fast!
However, it is often not easy to differentiate between the two or know when the line has been crossed from one to the other. In many places and markets, it is the timing of the dealings or transactions that have helped to draw the line. This is because, while directors’ dealings are legal, how and when such dealings occur can be a crucial factor in knowing whether they crossed the line.
Acting (buying or selling) before price-sensitive information becomes public triggers insider trading suspicions and prosecutions. That is why at certain times of the year, like before the presentation of a company’s annual financial statements, directors’ dealings are prohibited in more advanced markets.
To guide against insider trading, companies in the US and other places use the concept of Blackout Periods. A blackout period is a period set aside by a company within which all or its employees in sensitive positions are not allowed to trade on the company shares. The main, if not the only purpose of blackout periods, is to prevent insider trading.
Usually, the legal or shareholder, or investor relations departments of the companies send mass emails to company employees reminding them of an approaching blackout period, usually a week in advance, and warning them not to deal with the company shares. Violators are either fired or punished in other forms.
Insider Trading Laws in Nigeria
While I cannot recall if anyone has been charged or prosecuted or even convicted of insider trading in Nigeria, there is insider trading law in the Nigerian corporate governance system. Sections 614-624 of the Company and Allied Matters Act (CAMA) of 1990 provided for insider trading.
Unfortunately, the 2004 edition of CAMA was silent about it although its sections 279,280 and 282 which deal with the fiducial duties of company directors could be relied upon when bringing charges of insider trading against anyone. Again, sections 87, 88, and 93 of the Investment and Securities Act, 2004 covers issues relating to insider trading.
What this boils down to
As already noted, directors’ dealings are not bad per se, if anything, they help with market efficiency and can provide useful signals to investors. However, the authorities should have an eye on it to review and find out when such dealings become abused and transcend into the realm of insider trading.
On the other hand, companies should instil confidence in the public and investors by letting them know that the directors’ dealings are not insider trading activities. This they can do by imposing and strictly observing blackout periods.
Company directors and employees too should adhere to the observance of such blackout periods when imposed as the credibility of the entire stock market depends on us all.