Charges for insider dealing are ripe for news headlines – often involving covert arrangements between individuals and driven by greed and exploitation of positions of power. The criminal penalties of fines and imprisonment mean that those convicted can suffer very public and humiliating falls from grace.
In this article we consider some of the recent issues and trends in monitoring and enforcing insider dealing in Hong Kong.
Cooperation with the offshore regulators
Hong Kong’s Securities and Futures Commission (“SFC”), the regulator responsible for monitoring and enforcing Hong Kong’s insider dealing laws, signed multiple cooperation agreements with foreign regulators in 2017.
- a supervisory cooperation arrangement with the United States Securities and Exchange Commission (“SEC”);
- a Fintech cooperation agreement with the Australian Securities & Investments Commission (“ASIC”); and
- a Fintech cooperation agreement with the UK Financial Conduct Authority (“FCA”).
These are in addition to the numerous arrangements with foreign regulators under which the SFC may share information, as well as cooperate with and assist, offshore regulators.
These arrangements may have a big impact in shaping insider dealing enforcement in Hong Kong, as examined further below.
Role of big data
“Big data” and its ability to identify insider dealing, or at least patterns or conduct that suggest insider dealing, is a form of “regtech” or “suptech”. That is, regulators are able to use technology to monitor trading patterns and identify suspicious trading activity. Applying “regtech” to the masses of data held by regulators means that the heavy lifting of trawling through the data is undertaken by computers. The follow up work is then done by human investigation.
For example, earlier this year the SEC announced charges against a Hong Kong based individual for insider dealing. The SEC stated that:
“the SEC’s data analytic investigative tools enabled us to determine who was behind the suspicious trading.”
Having identified the individual, the SEC was then able to investigate further and take enforcement action.
Reliance on data for insider dealing detection and investigation is not new. The SEC has operated its Analysis and Detection Center of the Market Abuse Unit since 2010. The SFC and ASIC operate similar programs and uses similar tools in their efforts to tackle insider dealing.
However, increasingly sophisticated technology means that programs are becoming smarter and more effective at working with the masses of data that the financial markets produce on a daily basis. It appears that the data-based enforcement actions taken by the SEC have become more regular. Reuters also reports that the data that the SEC will hold and be able to mine is becoming more extensive.
What does this mean for Hong Kong?
Insider dealing cases are time consuming to investigate. This results in a protracted time between the relevant trading and the enforcement action.
The SFC has recently been unsuccessful in demonstrating insider dealing where the relevant evidence hasn’t been strong enough to prove its case.
Combining big data and engagement with offshore regulators has a big impact:
- regulators may share their expertise in leveraging big data, leading to a more sophisticated global approach to identifying insider dealing and, potentially, more successful and timely enforcement outcomes; and
- regulators may share the actual outcomes of their use of big data. That is, they may share information that has been identified in their data monitoring systems which may trigger or assist local enforcement action.
Recent Hong Kong case law has demonstrated that Hong Kong laws are broad enough to capture individuals engaging in insider dealing in offshore markets, if there is a relevant Hong Kong connection to the trading activity. This includes performing trading from Hong Kong.
It is therefore imaginable that:
- offshore regulators may have data indicating suspicious trading activity on their markets coming out of Hong Kong;
- that information may be shared with the SFC; and
- the SFC may then be able to pursue action against relevant individuals in Hong Kong – particularly where it may be difficult for the offshore regulator to do so in their own jurisdiction.