I move amendment No. 110:
In page 79, between lines 7 and 8, to insert the following definition:
"‘company', for the purposes of Part V of the Bill, means a public limited company whose shares are quoted on a recognised stock exchange".
SECTION 90.
Because this is a new Part dealing with a totally different topic I will give an introductory statement which might be of assistance to the members.
We now come to Part V of the Bill which contains proposals for tackling the abuse of insider dealing. I will not go into the policy issues underlying the provisions involved — the committee will no doubt be familiar with that aspect — other than to say that following the introduction of a number of new sections in the Seanad, Part V now comprises a two pronged approach and contains both civil and criminal provisions. Part V is structured in such a way that following some general definitions for the interpretation of the Part the practice of insider dealing is made unlawful in section 91. The Part then goes on to provide for the civil and criminal sanctions which can be applied and for other related issues.
To take civil remedies first, section 92 provides that a person who can show that he has suffered loss as a result of unlawful insider dealing can seek civil remedies against the party who engaged in the unlawful dealing. Likewise, a company whose securities have been the subject of an inside deal can also seek remedies. Both remedies would amount to the obtaining of compensation from the insider.
On the criminal side a number of sanctions are available against a person who engages in insider dealings with the necessary supporting enforcement provisions. These were introduced in the Seanad following a thorough re-examination of this Part arising from the almost universal criticism that, as originally presented, the proposals in Part V did not go far enough in tackling the abuses involved. In the first place unlawful dealing is made a criminal offence and persons convicted of engaging in this practice will be liable, on summary conviction, to a fine of £1,000 or imprisonment for not more than one year or both, or on conviction on indictment, to a fine of £200,000 or ten years imprisonment or both.
Where a person is convicted of unlawful dealing he will be further prohibited from any future Stock Exchange dealings for a period of 12 months. There is, however, a let out so that dealings commenced before the conviction can be completed provided that they are cleared by the Stock Exchange. To ensure the operation of the prohibition and recognising the expertise that already exists in the Stock Exchange, a kind of enforcement role is provided for the relevant authorities of a recognised Stock Exchange, which includes backup powers of investigation by authorised persons. At the same time, desirable and necessary safeguards are built into the procedures involved.
Thus the primary responsibility for overseeing the criminal provisions of the Part will rest with recognised stock exchanges. Where breaches of the Part are observed, the Stock Exchange will be under an obligation to furnish a report on the matter to the Director of Public Prosecutions. Residual powers to enable the Minister to request a recognised Stock Exchange to investigate suspected cases of unlawful dealings, where it appears no such investigations have taken place, are also provided for.
Section 96 proposes to create a new duty on those who are involved in share dealings, intermediaries, not to deal on behalf of clients if they have reasonable cause to believe, or ought to conclude, that the deal involved would be unlawful. Because of the innovative nature of many aspects of Part V, provision is made for the furnishing of annual reports to the Minister by recognised stock exchanges and the necessary powers are included to enable the Minister to prepare supplementary regulations to fine tune the operation of the Part if this is considered necessary in the light of experience gained in its operation.
Most of the amendments I have tabled to Part V of the Bill are designed to implement an EC Directive on insider dealing which has been agreed by the Council of Ministers. The Directive was formally adopted by the Council on 13 November 1989 and must now be implemented by the Member States. This Directive can be implemented with the minimum of amendment to Part V of the Bill.
As the Minister has outlined the provisions here are draconian. They apply only to public limited companies, to quoted companies on the Stock Exchange. Yet, as I understand it, the provisions of the Bill as drafted apply to private companies. It is not conceivable in practice that insider dealing could be a problem in private companies because their shares are not open for general purchase and, therefore, every-body is an insider and there is no outsider to be prejudiced in those circumstances. I wonder why we are bringing private companies into this at all.
The section prohibits dealing in securities. The definition of securities is quite clear in that it is related to public companies.
If Deputies look at the definition of "securities" in section 90 they will see that the term is defined in paragraph (a) as meaning "shares or debentures issued or proposed to be issued by a company and for which dealing facilities are, or are to be, provided by a recognised stock exchange" as well as "any right or option in respect of any such debentures or shares". As a result it only applies to listed companies. The amendment is not necessary because the point it is making is covered already.
Amendment, by leave, withdrawn.
Amendment No. 121 is consequential on amendment No. 111. Is it agreed to take those two amendments together? Agreed.
I move amendment No. 111:
In page 79, to delete line 40 and substitute the following:
"‘relevant authority', in relation to a recognised stock exchange, means—
(i) its board of directors, committee of management or other management body,
(ii) its manager, however described.".
This amendment and amendment No. 121 to which it is related are straight-forward. Part V provides in certain sections that a relevant authority must carry out certain activities. Section 90, which is the interpretation section for Part V, currently contains a sign post, that the meaning of "relevant authority" is to be found in section 98. Section 98 (8) gives the actual definition and specifies the sections where the term appears. It would make for much easier reading of these provisions if the definition of the term "relevant authority" were to be moved to the definitions section. That is all these amendments do.
Amendment agreed to.
We are circulating for the benefit of members the suggested groupings of amendments for discussion. Amendments Nos. 116, 117, 118 and amendments Nos. 1 and 2 to amendment No. 118, amendments Nos. 122, 125 and 126 are related. Amendment No. 119 is an alternative to amendment No. 118 and we will take them with amendment No. 112. If amendment No. 118 is agreed, amendment No. 119 cannot be moved.
Is it agreed to take amendments Nos. 112, 116, 117, 118, amendments 1 and 2 to amendments 118, 119, 122, 125 and 126 together? Agreed.
I move amendment No. 112:
In page 79, to delete lines 41 and 42, and in page 80, to delete lines 1 to 5, and substitute the following:
"‘securities' means—
(a) shares, debentures or other debt securities issued or proposed to be issued, whether in the State or otherwise, and for which dealing facilities are, or are to be, provided by a recognised stock exchange;
(b) any right, option or obligation in respect of any such shares, debentures or other debt securities referred to in paragraph (a);
(c) any right, option or obligation in respect of any index relating to any such shares, debentures or other debt securities referred to in paragraph (a); or
(d) such interests as may be prescribed;".
The first of this series of amendments, No. 112, would redefine securities in section 90 to reflect the text of the Directive. This is a different Directive to the one I referred to earlier. The definition of securities is widened in four ways. First, it includes debt securities other than debentures in paragraph (a) — the most obvious example of this would be Government stock. Second, it includes securities which may have been issued outside the State but which have a quotation of some kind on an Irish Stock Exchange — the most obvious example being a foreign company whose shares are quoted here. The third change in the definition of "securities" would involve obligations under paragraph (b). This is the technical term for future contracts in which a person acquires not an option to buy or sell shares but an obligation to do so. Finally, paragraph (c) of the amended definition would include the concept of "index contracts". This effectively refers to indices of share prices published regularly by various sources, for example, stockbrokers, newspapers, and so on. In such cases it is possible to, as it were, place a bet as to the level of a particular stock index on a specified future date. Such contracts were included in the Directive at the express request of certain Member States who felt that they were just as vulnerable to insider dealing as the underlying stocks and shares themselves.
Amendment No. 116 is also necessitated by the Directive. Article 2 of the Directive requires Member States to apply the prohibition on insider dealing to three categories of people; first, officers of the company, which section 91 (10) (a) of the Bill covers; second, any person who has inside information by virtue of his employment or profession — section 91 (10) (c) covers this aspect; and third, any person who has inside information by virtue of his "holding in the capital of the company". This last aspect is slightly wider than section 91 (10) (b) which is currently limited to persons who have a "substantial" holding in the company. Section 91 (11) defines "a substantial shareholder" in this context as someone who holds more than the notifiable percentage under Part IV of the Bill, in other words, more than 5 per cent of the company's vote carrying capital. It is, therefore, necessary to delete the word "substantial" from section 91 (10) (b) to reflect the slightly wider scope required by the directive.
Amendment No 117 extends the provisions to Government stock. The scope of the Directive extends, as I have already mentioned, not just to company shares and so on but in a limited way to Government stock as well. While dealings by or on behalf of the State itself are not affected, we are required to legislate for a situation where those who have inside information which would affect the price of Government securities would deal in such securities for their own benefit. Amendment No. 117, therefore, extends the general prohibitions in section 91 to such individuals.
Amendment No. 118 which would replace section 93 again arises from the Directive which requires us to narrow to a fairly slight extent the list of transactions under our Bill which will not be regarded as unlawful.
The basic reason the exemptions in section 93 have to be adjusted is that the actual prohibition in the Directive is on persons taking advantage of inside information to affect a transaction, whereas section 93 would exempt certain transactions regardless of the motives of the people concerned, in other words, the list of exemptions in section 93 is slightly wider than that allowed for by the Directive, and we have to cut back section 93 in a marginal way accordingly. I will come back to amendment No. 119 in the names of Deputies Barrett and Bruton in a moment.
Amendment No. 122 again arises from the EC Directive, article 10 of which requires a framework to be set up whereby the competent authorities in the various member states can co-operate with each other by exchanging information and so on. Most people recognise that while we must do the best we can within our own borders to penalise insider dealing, the increasingly international nature of the securities markets means that an unscrupulous investor with inside information might simply move offshore to deal in Irish securities and very little can be done to stop it. One of the biggest benefits of the Directive, therefore, is that it will enable us to set up a mechanism whereby our Stock Exchange authorities can co-operate with our counterparts in other Member States with the aim of tracking down and penalising insiders who deal across Community borders. That is the intention behind the proposed new section 99.
Amendment No. 125 also arises from the Directive and is, I think, fairly straightforward. The aim is simply to ensure that any information coming the way of the Stock Exchange authorities by virtue of the functions we are giving them here should not be disclosed except where this is required by law. At the same time it is necessary to make sure that this does not prevent the Exchange from communicating information either to the Minister or to any similar competent authority in another EC Member State where that State has asked for an exchange of information with our own. In such a case, of course, the authority asking for the information would itself be bound by the same obligations of secrecy.
The final amendment in this group of amendments arising from the EC Directive is amendment No. 126, and is a very technical type of provision. The 1979 Directive referred to in the proposed new section 101 sets out the conditions under which a company could have its shares admitted to the full official list on the Stock Exchange. One of these conditions in Schedule C, paragraph 5 (a) of the Council Directive requires a listed company to make public announcements as soon as possible regarding any major new developments in its sphere of activity which may have the effect of moving the share price. The aim of this, of course, is to prevent insider dealing occurring. Article 7 of the directive extends this obligation to companies which have any form of quotation on the Stock Exchange, be it the Unlisted Securities Market, the Smaller Companies Market or whatever. Amendment No. 126 simply gives effect to this aspect of the Directive and it ties in neatly with the scope of Part V of the Bill in any event.
Coming back to amendment No. 119 in the names of Deputies Barrett and Bruton, the provisions of section 93 of the Bill exempt certain transactions from the basic prohibitions in section 91. Unless they were specifically exempted these transactions would be caught by the various prohibitions in section 91. Subsection (3) (d) of the present text of section 93 was designed simply to enable two trustees to transfer the legal estate in securities from one to the other where this is necessary for the proper discharge of their functions. This would most commonly arise where an existing trustee wished to resign or retire or whatever. However, it seemed to me that the content of subsection (3) (d) was already covered by subsection (3) (a) which exempts transactions carried out in good faith by trustees so that it was unnecessary to repeat it. Having said that the amendment proposed by Deputies Bruton and Barrett seems to cover a different situation, in other words, where a trustee might wish to transfer the ownership from the trust itself to the beneficial owner of the securities. This could typically arise where a parent leaves an estate, including securities, to a child and the estate is administered by a trustee until the child comes of age. I agree that we should not prevent the necessary transfer taking place when the time is right.
However, I have already referred to section 93 (3) (a) which would become section 93 (2) (c) under amendment No. 118 which provides that where a trustee enters into any transaction in good faith in the performance of his functions, then he will be exempted from the prohibition in subsections (1), (2), (3) and (6) of section 91. This would include the transfer of the ownership of securities to the beneficial owner. In the circumstances amendment No. 119 is therefore not necessary.
I would in any event be concerned that accepting this amendment could have the effect of broadening the exemption provided in this section for dealings by trustees in such a way as to permit unscrupulous people to use trusts to over-come the prohibition on insider dealing contained in section 91. This would be a further reason for opposing it.
I realise that I have gone on at some length explaining the background and content of this group of amendment, but I would just repeat that our colleagues in the Community are as determined as we are to tackle this abuse of insider dealing and the adoption of a Directive in this field, is, I think, very timely. It also ties in rather neatly with the régime that was already contained in Part V of the Bill in any event.
I have a few queries about amendment No. 118. First, according to this amendment nothing in section 91, the basic section banning insider dealing, shall prevent a person from entering in good faith into a transaction to which subsection (2) applies. These subsections relate to obtaining a share qualification, acting in accordance with an underwriting agreement and a transaction by way of, or arising out of, a mortgage or charge of securities or a mortgage charge, pledge or lien of documents of title to securities.
I note that an underwriting agreement is not defined anywhere in the legislation and I wonder whether it ought to be. Given that people are going to be looking for loopholes very quickly to find ways out of the insider dealing provisions I ask whether the term "underwriting agreement" could be stretched to provide a loophole? The same question could be asked in regard to transactions arising by way of a mortgage or a charge of securities, and so on. I do not know how one would use these exemptions for that purpose, but it is obvious that this exemption section is going to be scrutinised with special care by people who want to put themselves in the position to enter into arrangements which would exempt them from the very draconian provisions of this Part of the Bill. Therefore, it behoves us to look at those exemptions fairly carefully to ensure that we know precisely what they mean.
Subsection (3) of amendment No. 118 states:
This Part shall not apply to transactions entered into in pursuit of monetary, exchange rate, national debt management or foreign exchange reserve policies by any Minister of the Government or the Central Bank, or by any person on their behalf.
It seems that nobody, including the Government, should be above the law. Unfortunately, there are plenty of cases in statute law where, for instance in regard to planning, the Government have set themselves above the law and said they do not have to apply for planning permission for anything they want to do. The Fianna Fáil Party in their 1987 election manifesto said they were going to change this and bring the Government within the Planning Acts, but that has not been done yet. This might be part of getting the country back on its feet but it is an example of something that has gone on for years under successive Governments where the Government have been exempt from proper planning control. I do not mention Fianna Fáil in order to annoy anyone; it was simply to put the thing in context. I take it back anyway.
(Interruptions.)
I have to ask the Deputy to be relevant.
I thought any reference to Deputy Roche in this context was bound to be relevant, but that is neither here or there.
If we believe that insider dealing is a bad thing I do not think the Government should be able to engage in insider dealing or be exempt from the law as far as insider dealing is concerned. I know the Government will claim that they are doing it all in the national interest, but when dealing in shares it may well be that more than one interest is involved — the Government's interest, the national interest and perhaps the interests of private shareholders or individual shareholders — and they should all be equal before the law. I do not think the Government should have any exempt status under subsection (3). As the committee members know I would be inclined in the amendment I have put down to delete subsection (3) and require the Government to be subject to the same rigour of the law as everyone else.
I now come to amendment No. 122 in the name of the Minister which is also being dealt with. This amendment refers to co-operation between Stock Exchanges and proposes to prevent people from going off-shore and breaching the insider dealing regulations by operating from an off-shore haven, if that off-shore haven happens to be within the European Community. As I pointed out to the Minister during the last session, none of this applies in the Isle of Man, which, other than the UK, is closer to this city than any EC country — in fact, it is even closer than Newry. I would ask the Minister whether the insider dealing provisions here can be circumvented by people locating their dealing company or themselves as the case may be in the Isle of Man. It is a question which might be answered in due time. Those are just a few points I wanted to make. Obviously the provisions of the sections will also have to be discussed.
On a general point, do the provisions of this Part really exclude for all practical purposes any director or employee of a public company from trading in the company shares? It is more than likely that a director as an employee would be in a position to have information in regard to the activities and the trading of the company which could suggest that the shares of the company may increase and so on. Are we saying here that if this legislation is passed all employees and directors of a plc will be excluded in future from purchasing the shares of that particular company? How will that affect the share options for employees in these companies in the future?
I want to take the latter point first. The definition of essentially what is insider dealing or what will be declared unlawful is provided for in section 91 (1). The information has to be such that it is not generally available, but if it is, it would not be likely materially to affect the price of those securities. There must be many periods within a year when no information is available to the directors or employees that is not already public that would be likely materially to affect the price of the securities. There will undoubtedly be occasions during a year when the directors and the employees cannot deal——
If you knew that the company were trading well, there were other activities going on, and that within six months——
That is if you were a former director or employee within the previous six months.
Section 91 (1) says ". . . a person who is, or at any time in the preceding six months has been, connected with a company. . .".
In other words, if he was employed by the company within the previous six months the rules apply to him still if they otherwise apply, but they do not automatically apply. It is only if he got possession of information which is not public within the previous six months, while he was employed, and that that was likely to materially affect the price of the securities. It would not mean that anything you knew during the previous six months would preclude you; it is only if it affects materially the price of securities, not by a penny or two but in some material way.
If a company gets a large contract and word gets around the factory that something new is happening, for argument sake, the chances are that that would be regarded as material affecting the situation. I know what we are trying to get at——
If it does, then those people should not deal. In other countries at the moment it is a criminal offence for them to deal and it will be here if and when this Bill is passed.
What about employee shareholdership schemes which are being promoted as something that is good? Are we going to get into trouble?
I do not think so because the relevant date is the date on which you acquire the option, not the date on which you exercise the option. I do not think they would be materially affected for that reason. The number of employees of a quoted plc who would have access to this kind of information would be very small; it would be only a small number, towards the top end clearly. The vast majority of employees would not know anything about matters that would be relevant to affecting the share price.
Let me deal with the point Deputy Bruton made in regard to amendment 118 that the Government should not be above the law. It would be impossible to operate the gilt market if the Government or those dealing on their behalf were not exempt because, by definition, they would have to know. If somebody in the Department of Finance decides to sell, say, £50 million worth of gilts on a particular morning that in itself would have an effect. Therefore he would be precluded on behalf of the Government from selling. Where he would be caught is if, knowing that on behalf of the Government he would be selling £50 million worth of gilts at 11 o'clock, he decided at a quarter to eleven to sell a couple of thousand of his own knowing the price was going to go down. That would be insider dealing. On the other hand, if they decided they are going to buy in a lot of gilts at a higher price than they had been paying, and they instruct the Government stockbroker to start buying them at a particular price at 11 o'clock, it would be insider dealing if somebody within the Government service, the Central Bank or the stockbroker concerned having got these instructions at 10 o'clock to start at 11 o'clock were to go out into the market and start buying at a quarter to eleven on his own account knowing the price was going to go up in a quarter of an hour. That would be insider dealing and he is caught. The law applies to him but it cannot apply to the people who are not buying or selling on their own account but rather those who are buying and selling on the account of the Government or the Exchequer.
The Directive recognises this clearly in Article 2, section 4, which says: "This Directive shall not apply to transactions carried out in pursuit of monetary exchange rate or public debt management policies by a sovereign State by its central bank or any other body designated to that effect by the State or by any person acting on their behalf." The system could not work if people in the public service, acting not on their own behalf but on behalf of the Government or the Exchequer, were to be bound by it. They are, of course, bound in so far as they might deal on their own behalf.
I propose that we adjourn the discussion until next week because we are not going to conclude this today.
I suggest we sit again on Tuesday, 16 January at 2.30 p.m.
I second that.
Progress reported; Committee to sit again.
The Committee adjourned at 5.30 p.m. until 2.30 p.m. on Tuesday, 16 January 1990.