The Regulation of Insider Dealing:
An Applied and Comparative Legal Study towards Reform in
the UAE.
Submitted by Abdulsalam Albelooshi, to the University of Exeter as a thesis for the degree
of Doctor of Philosophy in Law, August 2008.
This thesis is available for Library use on the understanding that it is copyright material and
that no quotation from the thesis may be published without proper acknowledgement.
I certify that all material in this thesis which is not my own work has been identified and
that no material has previously been submitted and approved for the award of a degree by
this or any other University.
(signature)---------------------------------
1
ACKNOWLEDGEMENTS
I would like to express my sincere gratitude to His Highness Sheikh Mohammed Bin
Rashid Al Maktoum, the UAE Prime Minister and Vice-President, and Ruler of Dubai. His
vision inspired me to strive for excellence.
I would like to express my sincere thanks to my supervisor, Mr. Robert Drury for his
enthusiastic supervision.
I am indebted to my family and friends who have been understanding and supportive.
I am deeply grateful to my wife and my daughters Shaima, Jawaher and Alhanoof. Without
their support this thesis would not have been possible.
2
ABSTRACT
Insider dealing on the basis of inside information has been identified as an action against
the principle of equal access to information for all those who need such information to
make investment decisions. This thesis examines the regulation of insider dealing in
financial markets. It analyses in particular the problem of the regulation of insider dealing
in the United Arab Emirates (UAE), the shortcomings of this regulation and how it can be
improved. The primary objective of the thesis is to offer reasonable recommendations for
the reform of insider dealing in the UAE. There have been controversies regarding whether
insider dealing should be regulated, the basis of such regulation and the form in which the
law should intervene. This thesis has attempted to provide its own approach to the problem
of insider dealing. This approach forwards the proposition that allowing insider dealing on
the basis of inside information is against the principle of equal access to information and it
is detrimental to market transparency. Based on this proposition, the thesis investigates the
shortcomings of the current regulation of insider dealing in the UAE. Following this the
applied study, which consists of a questionnaire and interviews conducted in the UAE,
provides a clearer picture of the current regulation in the country. The study aims at
measuring opinions and attitudes of investors and other experts towards the basis and
effectiveness of the regulation of insider dealing in local markets in the UAE. This is
followed by a legal comparative study. This is both a ‘macro-comparison’ and a ‘microcomparison’ between the regulation of insider dealing in the jurisdictions of the US, the UK
and the Dubai International Financial Centre (DIFC). The ‘macro-comparison’ draws
conclusions from comparing the broader systems of regulation in the three jurisdictions.
The ‘micro-comparison’ concentrates on a functional comparison between the specific rules
related to insider dealing. The legal comparative study is combined with the information
generated by the applied study. Together these provide solutions (represented as
recommendations) for the reform of the UAE larger system of regulation, and amendments
to the rules related to insider dealing.
3
List of Contents
ACKNOWLEDGEMENTS ................................................................................................ 2
ABSTRACT ........................................................................................................................ 3
List of Contents ................................................................................................................... 4
List of Abbreviations........................................................................................................... 8
List of Cases ........................................................................................................................ 9
List of Laws, Statutes, Regulations and other Official Documents .................................. 11
List of Tables and Figures ................................................................................................. 12
Introduction ....................................................................... Error! Bookmark not defined.
Chapter 1: the problem of insider dealing and the policy of its regulationError! Bookmark
not defined.
Introduction ................................................................... Error! Bookmark not defined.
Part 1 Should insider dealing be regulated at all? ......... Error! Bookmark not defined.
The evolution of the debate ........................................... Error! Bookmark not defined.
Fairness and the ethics of insider dealing ..................... Error! Bookmark not defined.
Insider dealing as entrepreneurial compensation .......... Error! Bookmark not defined.
The effect of insider dealing on transparency, informativeness and efficiency of the
market ............................................................................ Error! Bookmark not defined.
Economic arguments for and against the regulation insider dealing ............. Error!
Bookmark not defined.
Protection of investors and confidence in the market ... Error! Bookmark not defined.
International regulatory standards ................................. Error! Bookmark not defined.
Part 2 Legal theories in regulating insider dealing........ Error! Bookmark not defined.
Market regulation of insider dealing ............................. Error! Bookmark not defined.
Examples of policies of regulation ........................ Error! Bookmark not defined.
Conclusion..................................................................... Error! Bookmark not defined.
Chapter 2: the law and the problem of insider dealing in the UAEError! Bookmark not
defined.
Introduction ................................................................... Error! Bookmark not defined.
The history of financial markets in the UAE ................ Error! Bookmark not defined.
The informal and unregulated over-the-counter marketError! Bookmark not defined.
The launch of formal financial markets ........................ Error! Bookmark not defined.
Shortfall in the enforcement of the timely disclosure and insider dealing regulation
....................................................................................... Error! Bookmark not defined.
The law of securities markets in the UAE .................... Error! Bookmark not defined.
Insider dealing regulation in local financial markets in the UAEError! Bookmark not
defined.
The regulation of timely disclosure in the UAE ........... Error! Bookmark not defined.
Conclusion..................................................................... Error! Bookmark not defined.
Chapter 3: applied study: opinions and attitudes of investors and other experts on the
regulation of insider dealing in the local markets in the UAEError!
Bookmark
not
defined.
4
Introduction ................................................................... Error! Bookmark not defined.
Research Methodology.................................................. Error! Bookmark not defined.
Research questions ........................................................ Error! Bookmark not defined.
Hypotheses .................................................................... Error! Bookmark not defined.
Research methods.......................................................... Error! Bookmark not defined.
Questionnaire ........................................................ Error! Bookmark not defined.
Interviews .............................................................. Error! Bookmark not defined.
Results and analysis of the applied study ...................... Error! Bookmark not defined.
The questionnaire .......................................................... Error! Bookmark not defined.
Interviews ...................................................................... Error! Bookmark not defined.
A summary of the results of the applied study .............. Error! Bookmark not defined.
Conclusion..................................................................... Error! Bookmark not defined.
Chapter 4: comparative regulation of insider dealing ....... Error! Bookmark not defined.
Introduction ................................................................... Error! Bookmark not defined.
The regulation of financial markets in the US .............. Error! Bookmark not defined.
The regulation of insider dealing in the US .................. Error! Bookmark not defined.
Section 16(b) of the Securities and Exchange Act 1934 and Section 17(a) of the
Securities Act 1933 ....................................................... Error! Bookmark not defined.
Section 10(b) of the Securities and Exchange Act 1934 and SEC Rule 10b-5 ..... Error!
Bookmark not defined.
The ‘disclose or abstain rule’ ........................................ Error! Bookmark not defined.
SEC Rule 14e-3 ............................................................. Error! Bookmark not defined.
‘Misappropriation’ theory ............................................. Error! Bookmark not defined.
SEC Rule 10b-5(1) and Rule 10b-5(2) ......................... Error! Bookmark not defined.
Evaluation of the regulation of insider dealing in the USError! Bookmark not defined.
Is the US system pre-eminent in terms of enforcement?Error!
Bookmark
not
defined.
The regulation of financial markets in the UK.............. Error! Bookmark not defined.
The regulation of insider dealing in the UK.................. Error! Bookmark not defined.
Company Securities (Insider Dealing) Act 1985 .......... Error! Bookmark not defined.
Criminal Justice Act 1993 Part V.................................. Error! Bookmark not defined.
Financial Services and Markets Act 2000 ..................... Error! Bookmark not defined.
Evaluation of the current insider dealing regulation in the UKError! Bookmark not
defined.
Structure and regulation at the Dubai International Financial Centre (DIFC) ....... Error!
Bookmark not defined.
Structure of the DIFC .................................................... Error! Bookmark not defined.
The regulation of insider dealing in the Dubai International Financial Centre (DIFC)
....................................................................................... Error! Bookmark not defined.
Evaluation of the DIFC regulatory system.................... Error! Bookmark not defined.
A comparative perspective of the systems of the US, the UK and the DIFC in regulating
insider dealing ............................................................... Error! Bookmark not defined.
Regulatory system ......................................................... Error! Bookmark not defined.
Clarity of regulations..................................................... Error! Bookmark not defined.
Criminal/civil sanctions ................................................ Error! Bookmark not defined.
International standards .................................................. Error! Bookmark not defined.
The policy of regulation ................................................ Error! Bookmark not defined.
5
Chapter 5: functional comparison of the regulation of insider dealingError! Bookmark not
defined.
Introduction ................................................................... Error! Bookmark not defined.
Part 1 Insider ................................................................. Error! Bookmark not defined.
The definition of an ‘insider’ ........................................ Error! Bookmark not defined.
Widening the concept of ‘Insider’................................. Error! Bookmark not defined.
Primary insiders ............................................................ Error! Bookmark not defined.
Traditional insiders................................................ Error! Bookmark not defined.
Access insiders ...................................................... Error! Bookmark not defined.
Secondary insiders (tippees) ......................................... Error! Bookmark not defined.
Part 2 inside information ............................................... Error! Bookmark not defined.
The definition of ‘inside information’........................... Error! Bookmark not defined.
Material information ..................................................... Error! Bookmark not defined.
Specific or precise information ............................. Error! Bookmark not defined.
Related information ............................................... Error! Bookmark not defined.
Price sensitive information.................................... Error! Bookmark not defined.
Non-public information ................................................. Error! Bookmark not defined.
Market information ....................................................... Error! Bookmark not defined.
Part 3 related concepts .................................................. Error! Bookmark not defined.
Prohibited activities....................................................... Error! Bookmark not defined.
The scope of financial instruments covered by the regulation of insider dealing . Error!
Bookmark not defined.
Exemption of normal course of business and accepted market practices ............. Error!
Bookmark not defined.
Chinese Walls................................................................ Error! Bookmark not defined.
Part 4: the regulation of timely disclosure .................... Error! Bookmark not defined.
The relationship between the regulation of insider dealing and timely disclosure Error!
Bookmark not defined.
Timely disclosure of inside information ....................... Error! Bookmark not defined.
The regulation of the ‘disclosure and control of inside information’Error! Bookmark
not defined.
Legal uncertainty and providing examples ................... Error! Bookmark not defined.
Issuer’s responsibility of identifying inside informationError!
Bookmark
not
defined.
When to disclose inside information ............................. Error! Bookmark not defined.
Holding announcement ................................................. Error! Bookmark not defined.
Delaying disclosure of information ............................... Error! Bookmark not defined.
Selective disclosure ....................................................... Error! Bookmark not defined.
Control of inside information ........................................ Error! Bookmark not defined.
Conclusion..................................................................... Error! Bookmark not defined.
Chapter 6: recommendations............................................. Error! Bookmark not defined.
Introduction ................................................................... Error! Bookmark not defined.
Academic....................................................................... Error! Bookmark not defined.
Reforms to financial regulation in the UAE ................. Error! Bookmark not defined.
Reforms to the SCA in the UAE ................................... Error! Bookmark not defined.
Reforms to the regulation of insider dealing and timely disclosureError! Bookmark not
defined.
The regulation of insider dealing .................................. Error! Bookmark not defined.
6
The regulation of timely disclosure .............................. Error! Bookmark not defined.
Conclusion ........................................................................ Error! Bookmark not defined.
Appendices ........................................................................ Error! Bookmark not defined.
Appendix 1: original questionnaire (Arabic) ................ Error! Bookmark not defined.
Appendix 2: translation of the questionnaire (English) Error! Bookmark not defined.
Appendix 3: original letter of consent (Arabic) ............ Error! Bookmark not defined.
Appendix 4: translation of letter of consent (English) .. Error! Bookmark not defined.
Appendix 5: questionnaire numerical scores ................ Error! Bookmark not defined.
Appendix 6: interviews transcripts................................ Error! Bookmark not defined.
Appendix 7: A copy of part of (App2) of the DFSA Rulebook Offered Securities Rules
(OSR) ............................................................................ Error! Bookmark not defined.
Bibliography...................................................................... Error! Bookmark not defined.
Books............................................................................. Error! Bookmark not defined.
Articles .......................................................................... Error! Bookmark not defined.
Reports, committees and parliament discussions .......... Error! Bookmark not defined.
Lectures and Seminars .................................................. Error! Bookmark not defined.
Websites ........................................................................ Error! Bookmark not defined.
Arabic ............................................................................ Error! Bookmark not defined.
7
List of Abbreviations
ADSM
CBU
CFTC
CJA 1993
DFM
DFSA
DGCX
DIFC
DIFX
DMCC
DTG
DTR
FCL 8(1984)
FSA 1986
FSA
FSMA 2000
IOSCO
IPO
NASD
OSR
OTC
RFD
SCA
SEC
SIB
SROs
UAE
- Abu Dhabi Securities Market
- Central Bank of Union (UAE)
- Commodities Futures Trading Commission (US)
- Criminal Justice Act 1993 Part V (UK)
- Dubai Financial Market
- Dubai Financial Services Authority
- Dubai Gold and Commodities Exchange
- Dubai International Financial Centre
- Dubai International Financial Exchange
- Dubai Multi Commodities Centre
- Disclosure and Transparency Guide, FSA Handbook (UK)
- Disclosure and Transparency Rule, FSA Handbook (UK)
- Federal Company Law No. 8 of 1984 (UAE)
- Financial Services Act 1986 (UK)
- Financial Services Authority (UK)
- Financial Services and Markets Act 2000 (UK)
- International Organisation of Securities Commissions
- initial public offer
- The National Association of Securities Dealers (US)
- Offered Securities Rules (OSR) (DIFC)
- Over-the-counter
- Regulation Fair Disclosure, SEC (US)
- Securities and Commodities Authority (UAE)
- Securities and Exchange Commission (US)
- Securities Investment Board (UK)
- Self Regulatory Organisations
- The United Arab Emirates
8
List of Cases
US Cases
Basic v. Levinson, 485 U.S. 224 n.18 (1988).
Blau v. Lehman 368 UNITED STATES 403 (1962).
Chiarella v. United States, 445 UNITED STATES 222 (1980).
Diamond v. Oreamuno, 248 N.E.2d 910, 912 (N.Y. 1969).
Dirks v. SEC, 463 UNITED STATES 646 (1983).
Elkind v. Liggett & Myers Inc, 635 F 2d 156 (2d Cir 1980).
Freeman v. Decio, 584 F.2d 186, 194 (7th Cir. 1978).
Gallagher v. Abbott Laboratories, 269 F.3d 806. 809-811. (7th Cir. 2001).
In re Cady Roberts & Co. 40 SEC 907 (1961).
In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S.E.C. 933 (1968).
Laidlaw v. Organ, (1817) 15 US (2 Wheat) 178, 4 L Ed 214.
Rothberg v. Rosenbloom, 771 F.2d 818, 822 (3d Cir. 1985).
SEC v. Adler, 137 F.3d 1325, 1337 (11th Cir. 1998).
SEC v. Bausch and Lomb Inc 565 F 2d 8 (2d Cir 1977).
SEC v. Cherif, 933 F2d 403, 410 (7th Cir. 1991).
SEC v. Clark, 915 F.2d 439, 449-50 (9th Cir. 1990)
SEC v. Colello, 139 F.3d 674 (9th Cir. 1998).
SEC v. Materia, 745 F.2d 197 (2d Cir. 1984), cert. denied, 471 UNITED STATES 1053
(1985).
SEC v. Switzer, 590 F. Supp. 756, 766 (W.D. Okla. 1984).
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 UNITED
STATES 976 (1969).
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 444-450 (1970).
UNITED STATES v. Bryan, 58 F.3d 933, 944 (4th Cir. 1995).
UNITED STATES v. Carpenter, 791 F.2d 1024 (2d Cir. 1986), on appeal 484 UNITED
STATES 19 (1987).
UNITED STATES v. Chestman, 947 F.2d 551 (2d Cir. 1991) (en banc), cert. denied, 112
S.Ct. 1759 (1992).
UNITED STATES v. Newman, 664 F.2d 12 (2d Cir. 1981).
UNITED STATES v. O’Hagan, 92 F.3d 612 (8th Cir. 1996).
United STATES v. O'Hagan, 117 S.Ct. 2199, 2211 (1997).
UNITED STATES v. Smith, 155 F.3d 1051, 1069 (9th Cir. 1998), c d. denied, 119 S. Ct.
804 (1999).
Whiting v. Dow Chemical Co. 386 F. Supp. 1130(S.D.N.Y. 1974), aff’d, 523 F.2d 680 (2d
Cir. 1975).
UK Cases
Lord Advocate v. Mackie, High Court of Justiciary, Edinburgh, March 1993.
Percival v. Wright, [1902] 2 Ch. 421.
R v. Asif Nazir Butt 2006 WL 421849 (CA (Crim Div)), [2006] 2 Cr. App. R. (S.) 44,
[2006] EWCA Crim 137.
R v. Cross [1991] BCLC 125, [1990] BCC 237, (1990) 91 Cr App R 115, (CA).
R v. de Berenger (1814) 105 ER 536, [1814-23] All ER Rep 513, 3 M & S 67, (KB).
R v. Fisher (1988) 4 BCC 360.
R v. Goodman [1993] 2 All ER 789 (CA).
9
R v. Holyoak, Hill and Morl. Unreported case.
R v. Inwood (Roland Joseph) (1974) 60 Cr App R 70 (CA).
R v. Vivian [1979] 1 WLR 291, [1979] 1 All ER 48, (1978) 122 SJ 680, (CA).
Reading v. Att-Gen [1951] AC 507, [1951] 1All ER 617, [1951] 1 TLR 480, (HL).
Cases Under Financial Services Authority (UK)
Financial Services Authority, Final Notice, Arif Mohammed, 18 May 2005.
FINANCIAL SERVICES AUTHORITY, Final Notice, David Isaacs, 28 February 2005.
Financial Services Authority, Final Notice, Michael Thomas Davies, 28 July 2004.
FINANCIAL SERVICES AUTHORITY, Final Notice, Peter Bracken, 7 July 2004.
FINANCIAL SERVICES AUTHORITY, Final Notice, Philippe Jabre, 1 August 2006.
FINANCIAL SERVICES AUTHORITY, Final Notice, Robert Middlemiss, 10 February 2004.
FINANCIAL SERVICES AUTHORITY, Final Notice, Roberto Chiarion Casoni, 20th March
2007.
FINANCIAL SERVICES AUTHORITY, Final Notice, Robin Mark Hutchings, 13 December
2004.
Other
Coleman v. Myers [1977] 2 NZLR 225. New Zealand Case.
Ryan v.Triguboff [1976] 1 NSWLR 588. Australian Case.
10
List of Laws, Statutes, Regulations and other Official
Documents
The United Arab Emirates
Civil Transactions Law No. 5 of 1985.
Commercial Transactions Law No. 18 of 1993.
Decree No.14 of 2000, concerning the Establishment of the Dubai Financial market.
(Dubai, UAE).
Dubai Law No.9 of 2004, concerning the Dubai International Financial Centre. (Dubai,
UAE).
Federal Company Law No. 8 of 1984. (UAE).
Federal Law No.35 of 2004, concerning the Establishment of the Dubai International
Financial Center.
Federal Law No.4 of 2000, concerning the Emirates Securities and Commodities Authority
and Market.
Federal Law No.8 of 2004, concerning the Financial Free Zones in the United Arab
Emirates.
Law No. 3 of 2000, concerning the Establishment of Abu Dhabi Securities Market. (Abu
Dhabi, UAE).
EU Directives
Directive 89/592 of 13 November 1989 coordinating regulations on insider dealing, OJL
334/30 (1989).
Directive 2003/6/EC of 28 January 2003 on insider dealing and market manipulation
(market abuse) [2003] OJL 96/16.
The United Kingdom
Bank of England Act 1998.
Company Securities (Insider Dealing) Act 1985.
Criminal Justice Act 1993.
Financial Services Act 1986.
Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005.
Financial Services and Markets Act 2000 (Prescribed Markets and Qualifying Investments)
Order 2001.
Financial Services and Markets Act 2000.
The United States
Securities Act 1933.
Securities Exchange Act 1934.
11
List of Tables and Figures
Table 1 Ranking of five principles of market regulation. Total numerical scores
where the lowest total represents the most important priority in financial market
regulation, the highest total represents the least important priority in financial market
regulation, and so on. ............................................................ Error! Bookmark not defined.
Table 2 Number of prosecutions and convictions for insider dealing offences,
England and Wales, 1986-1997. ........................................... Error! Bookmark not defined.
Figure 1 Ranking of five principles of market regulation. .. Error! Bookmark not defined.
Figure 2 (Pie chart) Negative aspects of local financial markets in the UAE vs.
percentage of investors who think that such aspects are applicable to the local markets
in the UAE. ........................................................................... Error! Bookmark not defined.
Figure 3 (Column chart) Negative aspects of local financial markets in the UAE vs.
percentage of investors who think that such aspects are applicable to the local markets
in the UAE ............................................................................ Error! Bookmark not defined.
Figure 4 Do you think that insider dealing is unfair to other investors who do not
have access to inside information? ....................................... Error! Bookmark not defined.
Figure 5 Do you think that insider dealing has negative effects on transparency in
financial markets? ................................................................. Error! Bookmark not defined.
Figure 6 Do you think that insider dealing has negative effects on investor confidence
in financial markets? ............................................................. Error! Bookmark not defined.
Figure 7 Do you think that insider dealing has negative effects on the economic
efficiency of financial markets? ............................................ Error! Bookmark not defined.
Figure 8 Do you think that insider dealing has negative effects on the economy of the
country?................................................................................. Error! Bookmark not defined.
Figure 9 Do you think that insider dealing has negative effects on attracting liquidity
into the financial markets? .................................................... Error! Bookmark not defined.
Figure 10 Do you think that insider dealing has negative effects on attracting foreign
investment into the financial markets? ................................. Error! Bookmark not defined.
Figure 11 Do you think that insider dealing should be prohibited?Error! Bookmark not defined.
Figure 12 Do you think that the problem of insider dealing can be dealt with by
financial market regulation? ................................................. Error! Bookmark not defined.
Figure 13 Do you think that adopting international regulatory standards is necessary
to advance the transparency of the local financial markets in the UAE?Error! Bookmark not defined.
Figure 14 Do you think that insider dealing and other market abuse contributed to
market deterioration in the summer of 1998 in the UAE unofficial securities market?Error! Bookmark n
Figure 15 Do you think that insider dealing and other market abuse contributed to the
bubble in 2005 followed by the sharp correction in 2006 in the local financial markets
in the UAE?........................................................................... Error! Bookmark not defined.
Figure 16 Do you think that the current regulation is sufficient to avoid further
deterioration in the local financial markets in the UAE? ...... Error! Bookmark not defined.
Figure 17 Do you think that the investors’ rights are protected in the local financial
markets in the UAE? ............................................................. Error! Bookmark not defined.
Figure 18 Do you think that transparency and disclosure should be developed in the
local financial markets in the UAE? ..................................... Error! Bookmark not defined.
Figure 19 Do you think that the current law prohibiting insider dealing in the local
financial markets in the UAE is clear? ................................. Error! Bookmark not defined.
12
Figure 20 Do you think that the current law prohibiting insider dealing in the local
financial markets in the UAE is practically enforced by the authorities?Error! Bookmark not defined.
Figure 21 Do you think that insider dealing can be prevented by raising the level of
transparency and disclosure in the regulations?.................... Error! Bookmark not defined.
Figure 22 Do you think that a criminal trial and punishment is effective in deterring
insider dealing? ..................................................................... Error! Bookmark not defined.
Figure 23 Do you think that fines administered by the Securities and Commodities
Authority would be more of a deterrent to insider dealing than a criminal punishment?Error! Bookmark
13