INSIDER TRADING IN THE NIGERIA'S CAPITAL MARKETS

INSIDER TRADING IN THE NIGERIA'S CAPITAL MARKETS: A CRUCIAL STEP TOWARDS MARKET INTEGRITY

Author: O. M. Atoyebi S.A.N FCIArb. (U.K.)., Contributor: Lilian Eku

September 5, 2023
4:45 pm

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Insider trading is when a person buys or sells stocks or securities based on non-public information that could affect the price of those stocks or securities. This act is considered illegal because it gives the person an unfair advantage over other investors and undermines the integrity of the market. This has led to regulatory bodies having rules and regulations in place to prevent and punish insider trading activities.

The enforcement of insider trading laws in the Nigerian capital market is carried out by regulatory bodies such as the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE). These organizations have established rules and regulations to prevent insider trading and ensure fair and transparent trading practices. They conduct investigations, monitor trading activities, and impose penalties on those found guilty of insider trading with the goal of maintaining market integrity and protecting the interests of investors. This article briefly discusses what Insider trading entails, how it has affected the Nigerian Capital Markets and the basic regulations/regulatory bodies accrued to it.

WHO IS AN INSIDER?

In providing clarity on who “an insider” is, Section 315 of the Investment and Securities Act (ISA) defines “an insider” as any person who is or connected with the company in one or more of the following: (a) a director of the company or a related company; (b) an officer of the company or a related company; (c) an employer of the company or a related company; (d) an employee of the company, involved in a professional or business relationship of the company; (e) any shareholder of the company who owns 5 percent or more of any class of securities or any person who is or can be deemed to have any relationship with the company or member; (f) members of the audit committee of a company.[1]

In providing further clarity in this regard, the Nigerian Stock Exchange (NSE) Rulebook Of 2015 defines ‘inside information” to mean information related to an Issuer or the Issuer’s Securities, directly or indirectly, which is not published and the disclosure of which may have a substantial effect on the price of its listed or traded securities or derivative instruments connected to those securities. The information is of a precise nature which is specific to the Issuer and is likely to have a significant effect on the price of the shares if it were generally available.[2]

In addition, the Securities & Exchange Commission (SEC) Rule 10b-5 prohibits corporate officers and directors or other insider employees from using confidential corporate information to reap a profit (or avoid a loss) by trading in the Company’s stock. This rule also prohibits “tipping”[3] of confidential corporate information to third parties.

PROHIBITION OF INSIDER TRADING UNDER THE INVESTMENT AND SECURITIES ACT[4]

The Investment and Securities Act is the principal legislation regulating insider trading in Nigeria.

Prohibited Acts

Trading when in Possession of Unpublished Price Sensitive Information[5]
Counseling or Procuring Dealings in Securities[6]
Communicating Price Sensitive Information[7]

Prohibited Persons

Insiders[8]
Persons Contemplating Take Over[9]
Public Officers[10]
Tippees

THE EFFECT OF INSIDER TRADING IN THE NIGERIAN CAPITAL MARKET.

Insider Trading in Nigeria can have a trivial impact on the stock market and investor confidence. It is considered illegal and unethical, as it gives certain individuals an unfair advantage in trading securities. Regulatory bodies like the Securities and Exchange Commission in Nigeria are actively working to combat insider trading and maintain a level playing field for all market participants.

Here are some notable effects of Insider trading in the Nigerian Capital Market:

Unfair Advantage: Insider trading gives certain individuals an unfair advantage over other investors by allowing them to profit from non-public information. This undermines the fairness of the market and erodes trust among investors.
Market manipulation: Insider trading can manipulate stock prices and distort market dynamics. When insiders trade based on privileged information, it can create artificial price movements that mislead other investors and disrupt the efficient allocation of capital.
Loss of investors’ confidence: Insider trading can cause a loss of confidence in the Nigerian capital market. Investors may become hesitant to participate or invest, fearing that they are at a disadvantage compared to insiders who have access to privileged information.
Reduced market efficiency: Insider trading hampers the efficiency of the capital market by distorting the flow of information. It discourages the release of accurate and timely information, making it difficult for investors to make informed decisions.
Negative impact on capital market development: Insider trading undermines the development and growth of the Nigerian capital market. It discourages both domestic and foreign investors from participating, which can hinder the market’s ability to attract capital and support economic growth.[11]

THE ENFORCEMENT OF INSIDER TRADING LAW IN THE NIGERIAN CAPITAL MARKET.

In Nigeria, insider trading is primarily regulated by the Investments and Securities Act (ISA) of 2007.[12] The Act prohibits insider trading and provides guidelines on disclosure of material non-public information, penalties for violations, and the role of regulatory bodies like the Securities and Exchange Commission (SEC) in enforcing the law.[13] The SEC, as the regulatory authority, plays a crucial role in enforcing insider trading laws. It monitors trading activities, investigates suspicious transactions, and takes appropriate actions against violators. The SEC conducts regular surveillance of the capital markets to detect any potential instances of insider trading.[14]

Here are some enforcement schemes carried out by the Securities and Exchange Commission (SEC) to make sure the stipulated laws by the Investment and Securities Act (ISA) are been adhered to, especially as it relates to insider dealings:

MARKET SURVEILLANCE:

To ensure effective enforcement, the SEC employs advanced market surveillance tools and technologies. These tools enable the identification of unusual trading patterns, abnormal price movements, and suspicious activities that may indicate insider trading. Through constant monitoring, the SEC can promptly detect and investigate potential violations.

COLLABORATION AND INFORMATION SHARING:

The SEC collaborates with other regulatory bodies, such as the Nigerian Stock Exchange (NSE), to enhance the enforcement of insider trading laws. Information sharing and cooperation between these entities facilitate the timely detection and investigation of insider trading cases.

PENALTIES AND DETERRENCE:

Insider trading can either be a civil or criminal offence depending on the gravity of actions taken. However, the Investment and Securities Act (ISA) imposes significant penalties for insider trading in Nigeria. Violators can face fines of up to 5 million Naira and imprisonment for a term of up to 5 years, or both. These strict penalties serve as a deterrent and send a strong message that insider trading will not be tolerated.[15]

INVESTOR EDUCATION AND AWARENESS:

The SEC places a strong emphasis on investor education and awareness to prevent insider trading. By educating investors about the risks and consequences of insider trading, the SEC aims to foster a culture of compliance and responsible investing.

CONCLUSION:

Enforcing insider trading laws in Nigeria’s capital markets is of utmost importance to maintain market integrity and protect investors’ interests. The legal framework, regulatory oversight, market surveillance, collaboration, and investor education efforts collectively contribute to deterring and combating insider trading. Continued vigilance and strict enforcement are necessary to ensure a level playing field and foster confidence in the fairness and transparency of Nigeria’s capital markets, thereby attracting both domestic and international investments for sustainable economic growth.

[1] Investment and Securities Act 2007.

[2] The Nigerian Stock Exchange Rule book 2015

[3] Section 111(2) of ISA

[4] ADUMA & UMENWEKE: The Scope Of Insider Trading Liability For Tippees Under The Nigeria’s Investment And Securities Act

[5] Section 111(1) of ISA

[6] Section 111(6) ISA

[7] Section 112 (3) (c) of ISA

[8] r section 315 ISA

[9] Section 111 (4) ISA

[10] Section 112(1) (a) of ISA

[11] Joseph Onele;Insider Dealing Under Nigerian Law: Any new lessons?

[12] S. 284 Investment & Securities Act 2007 (ISA)

[13] S. 115 Investment & Securities Act 2007 (ISA)

[14] Securities and Exchange Commission; Insider Trading policy.

[14] Securities and Exchange Commission; Insider Trading Policy.

INSIDER TRADING IN THE NIGERIA'S CAPITAL MARKETS: A CRUCIAL STEP TOWARDS MARKET INTEGRITY

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