Insider trading: Does it make you an outsider?
01 February 2013
By Asia Asset Management
Given CFA Institute’s intense interest in high professional standards of conduct in the investment profession, we are always disappointed by the never-ending stream of news about market participants that don’t behave according to the rules, writes Alexander Flatscher, director of CFA Institute codes and standards for the Asia-Pacific region. The market’s ability to sustain itself becomes questionable when participants don’t behave fairly. It’s only when everyone in the market acts within the framework of rules and regulations — when there is integrity in the market — that it makes sense to participate. Without integrity, the honest may lose and the dishonest may win.
The problem of ‘front-running’ in the Asia-Pacific region, which regulators in India in particular are now trying to solve, and the issue of insider trading are just two of the hot spots that are receiving increased media attention in the region.
Many readers will remember Japan’s insider information woes regarding new share issues, which ultimately involved even the largest of the country’s security firms and saw the unveiling of restricted information about listed companies including Tokyo Electric Power, INPEX and Nippon Sheet Glass. There are cases when analysing market price behaviour based on readily available trading data suggests the possibility that insider trading has taken place. Nicholas Smith, a strategist at CLSA Asia-Pacific Markets, who has written extensively on insider trading in Japan, estimated that share prices in 2011 typically fell for two weeks before a public issue, sharply lagging the rest of the stock market.
The Financial Services Agency (FSA), the main financial markets regulator in Japan, has not been passive about this development, and is in the process of improving rules related to insider dealings (read the report by the ‘Working Group on Insider Trading Regulations’ of the Financial System Council). In an effort to regain investor confidence in Japan’s financial markets, the FSA is strengthening penalties for insider trading significantly, as part of broader reform plans.
Front-running and insider trading are just two of the unethical behaviours that impact the integrity of the financial markets. Fortunately, regulators are actively tackling related issues. This is welcome given the results of CFA Institute’s recent Global Market Sentiment Survey 2013, which confirms that unethical behavior is a major concern for market participants.
Will improved regulations completely eliminate the practice of insider trading, front-running or other unethical behaviour in the future? The answer is probably not. But as my colleague Bob Dannhauser, CFA, highlighted in his recent blog post, to the extent that the formal regulatory and legal systems are not wholly adequate to govern the conduct of those in the capital markets, self-regulatory initiatives and voluntary standards of conduct will inevitably be a feature of the investment management marketplace.
Thus, in the interests of financial market sustainability, CFA Institute recommends that institutions abide by a set of ethical principles – such as the CFA Institute Asset Manager Code of Professional Conduct. As a welcome by-product of internal commitment to an ethical culture, compliance with the Asset Manager Code of Professional Conduct is an effective signal to a firm’s clients of a firm’s commitment to high ethical standards. So far, more than 820 asset management firms globally have made this commitment and recognised the benefits, including offering asset owners a single uniform globally accepted standard of conduct by which to appraise managers. Investment managers in the Asia Pacific should take the initiative in adopting global best practices – even before regulatory authorities demand it.
Alexander Flatscher is director of CFA Institute codes and standards for the Asia-Pacific region. He is responsible for promoting the ethical standards, policies, and positions of CFA Institute.
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