Project title: Insider Trading and Regulatory compliance Reporting

Statement of research Purpose: The purpose of research is to understand the mechanics of Insider trading and to compare the regulatory reporting and compliance of various nations to avoid frauds related to Insider trading.

Project Aims/ Research questions: The project aims at answering the below questions:

1. What are the statutory laws of various nations related to insider trading? 2. What are the differences in regulatory reporting between nations with

respect to insider trading? 3. How are these laws related to insider trading being enforced in various

nations?

Proposed methods : Qualitative and quantitative research will be adopted to accomplish the current research. Secondary data will be used to collect information regarding the Insider trading laws and the compliance reporting of various nations.

Please outline if your research raises any particular ethical issues and how you plan to address these issues: The research doesn’t raise any ethical issues as the analysis is done based on the secondary data which is publicly available.

Research ethics checklist: 1) No2) No3) No4) No5) No6) No7) No8) No9) No10)No11)No12) No13)Yes14)Yes

Introduction

Insider trading is the form of trading a public listed company's stock or other securities (such as bonds or stock options) by individuals with access to material, non-public information about the company. Insiders in a company typically include officers, directors, and employees. Insider trading can be illegal or legal depending on the timing of the trade made by the insider. It is illegal if the material information is still nonpublic. Trading with special knowledge (significant, confidential information related to the development of the company, a possible Merger or an acquisition, Financial results etc.) is not fair to other investors who don't have access to such knowledge. Illegal insider trading also includes “tipping”, which means providing information to others when you have any sort of nonpublic information.

Trading by employees is commonly permitted as long as it is within the rules and regulations of the company and if it does not rely on material information which is not available to the public. Many jurisdictions require such trading be reported so that these can be monitored. In the United States and several other countries any trading by the insiders must be immediately reported to the regulator or should be publicly disclosed, usually within a few business days of the trade. Inside trading need not necessarily be associated with the directors who are then convicted if found to be fraudulent. Brokers, lawyers and even family members can be guilty. Insider trading is legal once the material information has been made public, as there is no direct advantage over other investors. Legal trades by insiders are common, as employees of publicly traded corporations often have stock or stock options.

Trading based on insider information is illegal in various countries,. The United States of America was the first country to regulate insider trading by formally enacting a legislation. This decision had surprised many around the world at that time because Insider trading was considered as quite normal form of trading. The U.S. Securities and Exchange Commission(SEC) is the regulator that governs the securities market and also enforces them along with the Department of Justice. The SEC is the most active of all the world’s financial regulatory institutions at prosecuting insider trading and the laws. The insider trading prohibitions of the US are based on English and American common law prohibitions against fraud. Section 15 of the Securities Act of 1933 contained prohibitions of fraud in the sale of securities which were greatly strengthened by the Securities Exchange Act of 1934. The SEC, requires all trades by insiders are made public in the United States through Securities and Exchange Commission filings, mainly Form 4.

In the United States, Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six-month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm's shares. Under Section 10(b) of the 1934 Act, prohibits fraud related to securities trading. The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 place penalties for illegal

insider trading as high as three times profit gained or loss avoided from the illegal trading. Thus, the United States is generally viewed as having the strictest laws against illegal insider trading, and puts in place the resources to enforce them.

UK differs from US in the way the law is interpreted and applied with regard to insider trading. The London Stock Exchange is the fourth largest exchange in the world by market Capitalization. In the United Kingdom the Financial Services Authority (FSA) regulates securities trading. The FSA aims to ensure that the stock markets are orderly and fair. Insider trading was considered illegal in 1980, but the FSA was not as successful as US when it comes to enforcement. In the Financial Services and Markets Act of 2000, stricter and more specific guidelines were laid out by the FSA. In the UK, the relevant laws are the Criminal Justice Act 1993 and the Financial Services and Markets Act 2000, which defines an offence of market abuse. The principle is that it is illegal to trade on the basis of market-sensitive information that is not generally known.

When compared to the US and UK, countries like China, India and Japan are still lagging in the way Insider trading is regulated and controlled. By market capitalization, the Tokyo Stock Exchange is the third largest stock exchange in the world. In 1988, Japan passed its first insider trading law with the Financial Markets Abuse Act. The Financial Markets Abuse Act carries a maximum of three years in prison and a maximum fine of JPY 3 million ($37,800 as of 6/8/12) for insider trading convictions. The securities market in China is regulated by the China Securities Regulatory Commission (CSRC). China first made insider trading illegal in 1993 with the introduction of the Establishment of Securities Companies with Foreign Equity Participation Rules. Chinese economy is still catching up with the world in terms of insider trading regulation. Insider trading in China is considered to be so widespread that about 80 percent of all securities cases are connected with insider trading. India has two major stock exchanges: Bombay Stock Exchange and National Security Exchange of India. In 1992, India enacted the Securities and Exchange Board of India (SEBI) to regulate the market and enforce insider trading laws. In 2010, SEBI completed 10 insider trading cases, but there was not a criminal conviction. India has not made a criminal conviction of insider trading to date.

The first step for a country to regulate insider trading is developing federal laws and regulations. The next step is creating a federal organization to enforce the laws and to fight against the crime. US is far above other countries in terms of the number of cases reported under Insider trading. Also the country has invested huge amount of infrastructure in monitoring the insider trading activities in companies and controlling them. The surveillance system that they possess is far superior. The aftermath of the Recession in US has led to the investors around the world lose confidence in the stock market. In order to restore market confidence the global regulators see an increasing need to regulate the insider trading and to have laws for strict enforcement of the insider trading laws.