Amendment No. 113 is in the names of Deputies Bruton and Barrett. No. 114 is related, so both those amendments may be taken together. Is that agreed? Agreed.
SECTION 91.
I move amendment No. 113:
In page 80, subsection (3), lines 29 and 30, to delete ", or ought reasonably to be aware,".
This relates to subparagraph (3) of section 91 which is the basic section in this Part which makes insider dealing illegal. It is, according to this section, illegal for somebody to deal in securities if he has received information directly or indirectly from another person and is aware of facts or circumstances by virtue of which that other person is himself precluded from dealing because he is an insider. That is fine also. Obviously if somebody who is an insider gives one information enabling one to deal, one is mixed into that and one is an accomplice in the insider dealing or is perhaps doing it for a backhander of some kind. The section goes further than this. It says that a person who acts on information received from somebody that he ought reasonably to be aware is an insider is committing an offence. A person who gets information and acts on it, not knowing that the person from whom he got the information was an insider, may find subsequently that the court will say he ought to have known the person from whom he got the information was an insider, even though he did not actually know. That is bringing the benefit of hindsight into legislation to a very substantial extent and there are risks in that. There is a difference between what a person might know and what he ought to know. For instance, what somebody who is dealing regularly in stocks, ought to know about somebody else's position or their informational capacity, is not the same as what another person might know. The court might say, for instance, that somebody who regularly deals in stocks and gets information from an insider and buys, ought reasonably to have been aware. A friend of his, however, somebody who does not normally deal in stocks but who gets the same information from the same person and buys, could be deemed by the court not necessarily to have known. He did not normally deal and therefore might not have known.
We are going to have a situation in which two people get the same information from the same people, do the same thing with it, and one of them will be deemed a criminal for doing that while the other will not be so deemed. I know the intention is good but I really wonder if this is what one might call enforceable legislation at all. This is the criticism I have been making of this Bill right through. It is going to mean that essentially we are handing over law making to the judges. We are going to have the judges deciding retrospectively about this type of situation.
Apart from the criterion mentioned by the Minister at the last meeting, the reasonable view of the man in the Clapham omnibus, we do not set down any criterion other than that as to what the judges should decide. They are supposed to place themselves mentally in the Clapham omnibus and make a decision as to whether this person should or should not have known. That is leaving the matter too wide open. The amendment in the names of Deputy Barrett and I simply takes out the reference to "ought reasonably to be aware" and it also removes it in another subsection where it is put the other way, i.e., where a person is giving information and is supposed to be in a position that he should have known that the other person would use it. I think the same considerations should apply to the second amendment. The statement here is that one is in possession of information which is not generally available but, if it were, would be likely to materially affect the price of securities. That is the criterion of insider information.
It seems to me that almost any advice about stock shareholding that is not given in a circular or a publication that is circularised to a number of people could come within that definition. Even getting a tip from somebody that one should buy X company, because they are doing well could arguably be interpreted as giving insider information unless the tip appears in the papers first. If somebody meets a director of a company and asks "Should I buy your shares"? and the other person says: "yes, I think you should", does that come within the meaning of subsection (5)? I know that public opinion and the fashionable view is that definitely we should clobber insider trading; if there was no penalty people would be competing with one another and suggesting even more heinous or more vigorous penalties for this. Nobody who is in their political right mind would want to get up and say that that is not a good idea but let us think about what we are doing. Are we going to create a situation, if this legislation is strictly enforced, where people will not be able to have discussions about shares at all without finding themselves possibly in this difficult situation? I hope the Minister will be able to answer that point. It is a point that needs to be clarified. I do not want a situation where people are using information, which is clearly secret, about somebody having made a deal which is not yet disclosed, which only directors know about and which will enhance the share value of the company. That certainly should not be allowed but how much further than that is the section going to apply? Is it going to apply to somebody asking a question and given an answer? Perhaps the Minister would clarify that issue.
In relation to the words "ought reasonably to know" if you apply express knowledge to the person to see whether he is guilty you are not going to find anyone guilty of insider dealing. That is the reason for bringing in an objective test in the first place. You are saying that only persons who say: they knew the information they were given materially affected securities will be penalised but nobody will go into a box and admit that, given the draconian penalties provided for here. What is being proposed in your amendment, in my view, is totally unenforcable because you will not get a conviction on it. Anywhere you seek to get express knowledge in fraudulent trading, or anything like that, you cannot get a conviction. The whole trend of the law is to take these matters out of the subjective area and apply an objective test.
May I add to what the Chairman has just said? On Sunday last there was an article in The Sunday Timesdealing with the situation in the UK where the legislation is substantially the same as that being proposed by the Minister. The article adverted to the great difficulties in securing convictions for insider trading even with the law as it stands. In relation to Deputy Bruton’s point about letting the judges make the law, the article in The Sunday Times went on to suggest that the law against insider trading is much more effective in the United States. The reason it is much more effective is that they prohibit insider trading — or wrongful dealing as they call it in the States— and let the judges make the law as they go along. It has proved to be much more effective in practice than the legislator trying to write down everything while people try to find loopholes. I forget the exact figures but since 1985 there have been only something like 20 successful prosecutions in the United Kingdom on the law as the Minister is proposing to make it now. I agree with the Chairman that if we bring in the criteria suggested by Deputy Bruton we might as well all go home.
I have listened to what the Chairman and Deputy O'Dea have said. We are not dealing here only with Irish law, we are dealing with a directive from the EC. My understanding is that the EC directive refers, in relation to secondary insiders, to persons who knowingly receive privileged information from a primary insider whether directly or indirectly. That is in keeping with what Deputy Bruton was speaking about earlier. Not alone are we bringing in our own legislation but we are following on the directive as agreed among the EC countries. I would like to know from the Minister if my wording, as I understand it in the directive, is as I have just said? Surely it is important that we are in keeping with other EC countries on this issue. Like Deputy Bruton, and indeed everybody else around this table, nobody wants to see what is basically fraud, that is, people with privileged information being able to gain vast profits. Nobody is in support of that but we are dealing in the real world and people have to operate and we should be in keeping with what other EC countries require.
The second point I would like to make to the Minister relates to the wording of section 91 (1) which effectively excludes or precludes directors or senior managers, or, indeed, in most cases senior employees or in some cases ordinary employees of a PLC from, at any time, buying or selling shares in that company. I know the Minister would have received representations from the accountancy bodies and I wonder if he has considered them in relation to what is known as the "window periods", in other words the period directly following a publication of the PLCs interim statements or its annual accounts. I understand that that is currently provided for under Stock Exchange rules and it also applies to UK legislation. Is there no out here in terms of not precluding directors or senior managers or employees at any time from purchasing shares in their own company? As I read it, section 91 (1) precludes these people from at any time purchasing shares because they are bound——
In order that we come to the point Deputy Barrett is making which is on sections 91 (1) and therefore relates to the section, not to an amendment, I would point out that the amendments we are discussing relate to sections 91 (3) and 91 (5). If we could dispose of these perhaps the Deputy could make the point he is making on the section.
We could proceed on that basis.
Perhaps the Minister would answer my question then in relation to the EC directive as it deals with secondary insiders.
On the question of these two amendments may I give a general statement on what section 91 (3) and (5) is attempting to tackle? Section 91 (5) prohibits a person who has inside information from passing on the information, if he knows or ought reasonably to know, that the other person to whom he passes it on would use that information to deal. Section 91 (3) prohibits what is called in the jargon of the trade the "tippee," the recipient of the information, from dealing in the shares involved if he is aware or ought reasonable to be aware that the person who passed the information to him was already prohibited from dealing in the shares in question: so the thing is caught both ways, the person giving and the person receiving the information if they should not have done so.
The Deputies' amendments raise the question as to whether a subjective or an objective test should be applied here. As drafted, the section will ensure that the court will apply an objective test when considering any case brought before it for breach of the prohibition in subsections (3) or (5) of the section. Taking subsection (5) first, if a subjective test is applied it would be necessary to prove on the balance of probability for the civil case, and beyond all reasonable doubt for the criminal case, and I am assuming the section applies to both, that a person actually knew that in giving information to another person, that other person would make use of the information by dealing himself or getting someone else to deal for him in the securities which were the subject of the information passed.
On the other hand, the objective test would mean that what the court would have to decide is that either the tipper actually knew that in giving the information the other party would deal on the strength of it, or alternatively that the tipper should have known that the other person would deal or get someone else to deal on his behalf. In other words, courts will be examining the matter in the context of how a prudent person would have communicated information of a sensitive nature and the likely outcome of that communication.
The same principles apply to subsection (3). If a subjective test is applied it would be necessary to prove on the balance of probability, and in a criminal case beyond all reasonable doubt, that the person who received the information actually knew that the person giving it to him was already prohibited from dealing. On the other hand, an objective test would turn on whether it was reasonable from all the evidence presented to conclude that the person ought reasonably to be aware that the parties giving the information were themselves prohibited from dealing.
In the kinds of circumstances that we are talking about here I think the objective test is the right one to be applied and including it here in this manner will ensure that the objective test is applied by the courts. In doing so the courts will have available to them evidence about all the circumstances surrounding the share dealings in question and under subsection (3) for example, will be able to decide if the tippee knew or ought reasonably to have known that the tipper was already prohibited from dealing because of his connection with the company concerned.
I should point out here that enforcing these provisions will be difficult enough as they stand already and that the court will have its work cut out in deciding any case brought under the section. If the Deputies' amendments were accepted it would make the task of successfully prosecuting a person considered to be in breach of these subsections a lot more difficult. To put it another way, it would enable unscrupulous people to circumvent the very restrictions we are so anxious to impose to eliminate the practice of insider dealings. If we are serious in our attempts to eliminate the practice of insider dealing, every conceivable avenue of circumvention must within reason be closed off. I am, therefore, satisfied that the provisions in the section as it stands are necessary and must be retained in the circumstances. I regret that I am unable to accept the amendments in the name of the Deputies.
In order that I could shorten the later discussion, I would like to refer to what Deputy Barrett said in regard to the article in the directive of November 1989. It is quite short, I will read it. If the Deputy listens carefully to it he will appreciate how vague it is and how absolutely impossible it would be to enforce it as it stands, if it were directly part of our law. We argued at the Council against the vagueness of it, but ultimately we had to accept the majority view on it. I think it is correct to say that the British also argued against the vagueness of it and said you could not enforce it, but of course, it is the British and ourselves who are to the forefront in trying to prevent insider dealing. Some of the other countries are not as advanced, shall we say, in their thinking in regard to it. Article 4 reads as follows:
"Each Member State shall also impose the prohibition provided for in Article 2 on any person other than those referred to in that Article who with full knowledge of the facts possesses inside information, the direct or indirect source of which could not be other than a person referred to in Article 2".
It is clear what they are getting at but if you were to use it as the basis either of criminal prosecution or of a civil suit I do not think you would ever prove it because it is too vague.
Deputy Bruton referred to judges having to make up their minds on what is right or wrong in this. First of all in the criminal cases, of course, it will not be a judge but a jury. I would imagine that anyone who is charged with this offence will want to go to a jury on indictment rather than have it disposed of summarily. It will not be as Deputy Bruton put it, and I think I quote him correctly when he said "that so far as one person is concerned, they are aware and you show that and they are convicted; in so far as another person is concerned they ought to be aware, you show that they ought to be aware and they are convicted."
There is a very important difference. He left out there the word "reasonably". Unless the prosecution can show that he ought reasonably to be aware in the type of instance that Deputy Bruton gave of talking to someone whom the recipient, the tippee, did not know the tipper's position vis-�-vis the company, then he could not reasonably be aware that the tipper was a person by whom dealings were prohibited. He could not reasonably know; therefore, he could not be convicted so I think that would cover that point.
Deputy O'Dea made the point that this is based directly on the English legislation, that they have only had 20 convictions in four years in England and that, therefore, perhaps it is not strong enough. That is not entirely correct. Quite a bit of this, as one might expect, is based on the British legislation but we have had the advantage now in formulating the amendments of the directive which the British did not have. The directive is not necessarily a great help to you; on this particular point it is not because it is so vague that it is much weaker than anything that is in Britain or is in the original proposal here but we also had the advantage of the Australian legislation where I understand the number of convictions is relatively higher. There are subtle differences between the Australian and British legislation and I am advised, not being an expert on Australian legislation, that this reflects some of the differences that are apparent in the Australian legislation and for that reason will, I think, be more workable or more manageable in this country. That is certainly my hope.
I might comment on the amendment in so far as it proposes to excise these particular words. I studied the law almost as long ago as Deputy Bruton studied it and it seems, as was referred to here the last day, that this proposal is well accepted as a basic precept of common law. If ever there was a case for applying the objective test it seems to be in the case of company law and specifically in the area of insider trading we are talking about. I cannot conceive of a situation, if these words were excised, as is also proposed in amendment No. 114, where in the event of a clear simple denial that it would be possible to make a conviction. I do not see how one could establish beyond reasonable doubt in a criminal case that in the case of a simple denial or on the balance of probability that a conviction was warranted. It would take a very courageous judge to draw that conclusion.
I have not seen the reference Deputy O'Dea mentioned about the performance of this legislation in Britain but I would be disposed towards accepting that it is difficult enough to successfully prosecute in this area in applying the objective test of what would be the view of the reasonable man in the street. To excise those words would render this section of the Bill virtually ineffective. I do not think one could reasonably reconcile the view that nobody wants insider trading to continue with impunity with the proposal to excise this particular clause.
I want to revert to what the chairman and Deputy Rabbitte said. I do not think it is correct to say that the legislation will not work if one is prepared to convict people only on the basis of the actual knowledge they have. We must remember that most of the people who are likely to be brought up on cases like this are going to be the employees of companies or members of the board of a company who will be present at meetings at which there will be documentation relating to, for instance, some business deal that might be made which will enhance the value of the shares. It will be obvious, on the basis of external facts which can be gleaned from the records of the company, that they had access to this information. This would, in fact, mean that in many cases the people have the information and you could stand your case up.
I confess that I am impressed by what Deputy O'Dea said about the trend of the legislation in other countries and the practical experience in actually getting convictions where one needs to apply the objective test. I do not accept the theoretical case made by those Deputies who said one could not get convictions, the information would not be available and one could not prove anything on the basis of actual knowledge — I do not think that is true — but I accept, of course, that it may be more difficult to do that.
The question, therefore, is the balance that has to be drawn between the convenience of the prosecutor on the one hand, the extent of the abuse on the other and how far one should go in conveniencing the prosecutor so that one can deal with the abuse and thereby deprive citizens of certain protection and liberties or otherwise that they have. It is a question of balance that has to be struck. I do not want to press this amendment. If practical experience elsewhere suggests that we need to go this far I am not going to make a big deal of it.
Deputy Bruton has, in theory, raised an important point. There is an analogy between a case that I was looking at recently in relation to criminal law in England — the notion that a person can be put into jail for a number of years for a conspiracy to carry out a crime — and the term "ought to have known." I understand the strong theoretical argument Deputy Bruton has put and I suppose the big question is: how can one establish that a person "ought to have known"? Many of us have criticised the fact that English law allows people to be put away, as happened in some famous cases, there people have been put away for many years for conspiracy to carry out a crime. There is an analogy there. However, as Deputy Bruton said, in practice it is a different matter and we are dealing with the area of insider trading. I support the Minister but Deputy Bruton raised a valid case, I think the Minister said we are not following exactly English law but we should be aware that there are strains of it in some of the amendments we are proposing.
Amendment No. 126b to section 101 which I have put down, and which may be perhaps acceptable to the committee, relates to a report on this subject. It might be no harm if a report was published on the extent to which the use of this term "ought reasonably to be aware" is actually necessary. I do not think we should provide for a situation where judges can infer certain knowledge to people they cannot prove those people had unless it can be shown in practice to be really necessary. I do not think the liberty of individuals should be taken from them unless it is really necessary. What I am proposing in amendment No. 126b, is somewhat related, is that the necessity of these provisions should be referred to in the annual report which is to be prepared under section 100.
I have listened to what the Minister said about the EC directive and the fact that it is more liberal, if that is the right word. Will we be caught if we introduce national legislation which has more stringent rules and be in danger of coming into conflict with the European Court if the rules are different in each member state?
No, because Article 6 of that directive states that each member state may adopt provisions more stringent than those laid down by the directive or additional provisions provided that such provisions are applied generally.
What does the term "applied generally" mean?
Not applied to an individual company or person but applied to everybody in general within the member state concerned.
In a member state——
The article goes on to say that, in particular, each member state may extend the scope of the prohibition laid down in Article 2 and impose on persons referred to in Article 4 the prohibitions laid down in Article 3 which is the article dealing with tippers.
Is there any danger that subsection (5) could find itself in conflict with that reference to "applicable" generally? Under subsection (5) a judge or jury might decide that in respect of the information a tipper gave to one person he ought not have been aware that he would use it, whereas in regard to another person, he ought to have been aware that this other party would use it on the basis that one of them was an habitual share dealer and the other was not. Under this section it will be possible for a different decision to be taken in respect of the same information given to two people. Is that general within the meaning of the directive?
General within the meaning of the directive, means that it will apply, as part of public law, to everybody in the State. The nature of this law is such that it may apply differently to different people because of the circumstances in which they stand vis-�-visa company, but nonetheless it is a law that will be of public and general application. There will be no question of section 91 or any of its subsections applying only to certain people, to certain companies or to people associated with certain companies. It potentially will apply to everybody and be a prohibition to everybody. I would like to remind Deputy Bruton that section 94 creates the criminal offence of insider dealing by defining it as a breach of section 91. Of course, it will not be a court, in the sense of a judge, which will make the decision whether it is appropriate or not; in practice, it will always be a jury.
That is precisely the point. What I am worried about, and this is the reason I put this amendment down, is that we may get to a situation where public opinion about a particular activity changes, even though what a jury might have decided at the time the offence was committed was reasonable. If the prosecution comes in later — perhaps three or four years later — it is possible that by that time people might have got all worked up about this sort of activity and they might apply a more severe test. There is nothing in the law that states clearly what the test should be, except this magic word "reasonable", but the meaning of "reasonable" can change with historical circumstances.
Case law is like driving a bus and looking out the back window — you do not know what case law is until well after the event. I am glad Deputy Kitt made this point. If we introduce into criminal law — and it is the criminal law we are talking about — principles which allow subjective reinterpretation, with the benefit of hindsight, of a construction that should be put on particular events, even though that may not necessarily be the construction put on them at the time, we run the risk of having the type of law we see being applied at the moment in some countries to our east, where the law has begun to be applied in a different way to people who, at the time, may have thought they were acting in the national interest, but now suddenly it is being deemed that what they did was something entirely different.
That happened at Nuremburg too.
To introduce a note of confusion now and to start drawing analogies with the law of conspiracy in Britain is not relevant. The test here is precedent. In the last 100 years it has not been possible to come up with a more objective test which should be applied than the view of the reasonable person. There will be a body of case law to which we can refer. It would be unreasonable if it were to be decided on the basis of the fashion of the moment only, even if a direction to a jury was required. If a better yardstick was being offered we could measure it, but the only alternative yardstick being offered is the subjective one of actual knowledge of insider trading, and for the life of me, I cannot understand how a judge or jury would be justified in drawing a conclusion, when actual knowledge is required, where the person before the court denies all knowledge.
I think we should discuss jurisprudential questions at some other committee and we should stick to the section without speculating about what public opinion might be on this in six years time. The idea that the Legislature can draft law to cover every conceivable situation when there would be no need for case law is a crazy one and is certainly alien to the common law system. The fact is that a judge with a subjective mind will apply himself to the law because we cannot have a computer on the bench. We have to have someone with a human intelligence to enunciate what the general principles are and to make a decision based on the evidence before him on each individual case. That is the case in every branch of the law. I am not prepared to allow any more discussion on this matter.
(Interruptions.)
There is no point compounding error with further error.
Yours, Chairman.
I have a certain level of competence in this area.
(Interruptions.)
The Minister referred to Nuremburg. The Chairman's attitude is pre-Nuremburg. The Chairman's function is to chair the meeting.
I am making a comment. I am sorry if I have upset the Deputy.
Let me be quite clear. As far as I and my party are concerned, we welcome the Chairman's interventions and his expertise, but we do not welcome any suggestion from him that he is going to curtail discussion just because he does not agree with what is being said.
There is no question of that.
The record will show what the Chairman said.
Deputy Bruton has been allowed to come in on this on seven or eight occasions and I have never precluded him from commenting. I made those comments with the purpose of bringing the discussion to an end because we have discussed the merits and demerits. The Deputy has agreed to withdraw the amendments, so let us stick to what is before us. Is Deputy Bruton withdrawing the amendments?
I have already said that I am not pressing them.
I am giving you the courtesy of allowing you to say it again.
(Interruptions.)
If we make brevity the rule we will have no problems.
Amendment, by leave, withdrawn.
Amendment No. 114 not moved.
I move amendment No. 115:
In page 81, subsection (7) (b), line 1, after "arrangements" to insert "in writing which had been communicated to all officers of the company".
This amendment would require the arrangements, concerning the so-called Chinese wall, that operate within a company to prevent information being transferred from one person to another when it could be used for insider dealing purposes, to be contained in written documentation. It would not be sufficient simply to say that such arrangements existed informally, or that people would not transfer information from one to the other. We propose in this amendment that it should be demonstrated to the court that the arrangements are in writing and have been communicated to all the relevant staff to which they apply. I think this is a reasonable amendment which would strengthen the legislation in that it would not be possible to plead, as a defence, the existence of such arrangements, unless it could be demonstrated they are in writing.
While I can see the merit of the Deputy's proposal — and I have no difficulty with the principle of it — at the same time its effect in some ways could limit a company as to how it should ensure the separation of functions between the different parts of the company. The term "arrangements" is left deliberately unqualified in section 91 (7) (b) so that each company will decide, in its own particular circumstances how to organise its own affairs. In any event, to be able to prove to a court that it had the necessary arrangements in place, more than likely a company would reduce its instructions in the matter to writing. At the same time I do not think they should be compelled to do so. In the circumstances, I would not be inclined to be favourably disposed to accepting this amendment. In particular, I have this difficulty about it: if one looks at section 91 (7) (b) one will see it relates to not giving information or not allowing information to come into the possession of what is called "that person". The normal arrangements for a Chinese wall — which is essentially what this is — is that it relates not just to "that person" but to all persons in the organisation other than the group who are dealing with a given transaction. If it were insisted that there be an arrangement in writing to preclude a particular person, the implication in that would be that anyone who was not named as the particular person within the organisation generally could have this information conveyed to him. That would be wrong. It would defeat the purpose of the Chinese wall.
Would it not be possible to achieve that objective by requiring that the written instructions would not necessarily name individual persons but that those "arrangements" would set down certain general principles for the conduct of staff in regard to the communication of this type of information to other officers of the company? It could be a generally phrased instruction which could be produced, with the appropriate date, as a defence to show that such arrangements were actually in place. Otherwise I would imagine that companies would say that such arrangements existed. Unless they were in writing and communicated to staff — to revert to the points being made by others against my last amendment — who is going to say that they are wrong unless they are in writing?
I agree that they should be in writing.
That is what the amendment proposes.
Yes, but I am a little bit doubtful whether they should be in writing relating only to specific people. It should be broader. There should be some kind of statutory underpinning of the Chinese wall idea, but the Deputy's amendment would not achieve that objective.
Why?
Because it would relate to specific transactions and specific people only.
Perhaps I misunderstand this. Would it not relate to the category of transaction contemplated in section 91(6) and (7) which can be described generally in the written communication which would be issued to the officers of the company?
No, that is the point, it would not relate to the category of operation or transaction. It would relate to a specific one. Section 91(7) states:
Subsection (6) does not preclude a company from entering into a transaction at any time by reason only of information in the possession of an officer of that company if—
(a) the decision to enter into the transaction was taken on its behalf by a person other than the officer;
(b) it had in operation at that time arrangements to ensure that the information was not communicated to that person . . .
"Arrangements" there, as I understand it, refers to standing arrangements. If it was an arrangement related to that particular transaction the phrase used in the legislation would be "an arrangement" but, by using the plural, "arrangements", it clearly indicates to me that what the drafters have in mind is a standing arrangement about a Chinese wall, not a wall that is put up for one day to prevent one particular piece of information being conveyed. The use of the plural term "arrangements" and the addition of the term——
Yes, but in the next line they use the phrase "to that person". If you have standing arrangements that apply generally and permanently in a stock brokers, a bank or whatever, you can hardly say that they simply apply "to that person". They would have to apply to persons generally.
They would apply to that person on a particular day in a particular instance. Then, on another day — if they are standing arrangements — they would apply to another person, again in another instance but both would be caught by section 91 (7) (b). The fact that one refers to "arrangements" plural indicates that it is something that would apply to a succession of situations and not one instance only. If I may say so, the Minister has drafted this legislation better than he thinks. All the Minister needs to do is insert "in writing" there to achieve my objective. If the Minister is unhappy——
I will compromise with the Deputy. Would he agree that we simply use the words "in writing" in his amendment and leave out the rest of it — to insert the words "arrangements in writing" in line 1 page 81?
That does not tie the Minister down specifically to writing only? I take it that, at present, it means all forms whether verbal or in writing, whereas if one specifically states "in writing"——
That is the point. The point is it is necessary to have it in writing so that people will not come along afterwards and say: "we had an arrangement". Unless it is in writing one will not know. The advantage of inserting "which had been communicated to all officers" means that if it specified only "in writing"— as the Minister is now suggesting — there might be this difficulty, that they would write it down and communicate it to nobody, whereas my amendment says "in writing which had been communicated to all officers of the company". I think the amendment is fine. Perhaps the Minister would like to look at it further and suggest alternative wording.
With regard to the point raised by Deputy Bruton that they might write it down and not communicate it to anybody, if instead of what the Minister has suggested as a compromise, the first line of subsection 7 (b) read "it had in operation at that time written arrangements to ensure...."
That is better and would overcome the difficulty to which Deputy Bruton refers. If the amendment could be withdrawn, an amendment simply to insert the word "written" could be substituted.
If the Minister is happy with that I will go along with it.
I move amendment No. 1 to amendment 115:
To delete all words from and including "after" to the end of the amendment and substitute "before ‘arrangements' to insert ‘written'.".
Is the amendment to amendment No. 115 to insert the word "written" in line one of page 81 agreed?
Agreed on the basis that we need to overcome the difficulty referred to recently when it was suggested that some Chinese walls, or many of them, are only knee high, or the alternative that no Chinese wall was yet built that did not have a grapevine hanging over it.
Amendment to amendment agreed to.
Amendment, as amended, agreed to.
I move amendment No. 116:
In page 81, subsection (10) (b), line 26, to delete "substantial".
Amendment agreed to.
I move amendment No. 117:
In page 81, between lines 41 and 42, to insert the following subsection:
"(12) The prohibitions in subsections (1), (3), (4) and (5) shall extend to dealings in securities issued by the State as if the references in subsections (1), (9) and (10) (other than paragraphs (a) and (b) of the last mentioned subsection) to a company were references to the State.".
Amendment agreed to.
Question proposed: "That section 91, as amended, stand part of the Bill."
Subsection (1), as I read it, in effect precludes directors or senior managers at any time buying or selling shares in the company. We should consider allowing some sort of dealing during what is known as the window period which I understand is directly following publication of the plc's interim statements or their annual accounts. I understand that is the current position under Stock Exchange rules and is equivalent to UK legislation. Can the Minister say how this affects share options for staff in companies? Will they be precluded from going ahead in the future? If staff wish to take up options can they be accused of having inside information? If so the scheme, which we should be promoting, would be wrecked.
To take the second point first, on the question of the share options for employees, Part V does not apply to the exercise of the option. In support of that I would make two references to section 90. Paragraph (b) of the definition of "securities" includes any right or option in respect of any such debentures or shares but it does not include the exercise of the option.
The other point is that "dealing" at the beginning of section 90 is defined as "in relation to any securities, means (whether as principal or agent) acquiring, disposing of, subscribing for or underwriting the securities. . ." That does not include the exercise of an option.
In relation to the point that specifically dealing should be allowed during a window period, such dealing is allowed by the Stock Exchange regulations to a director or similar person presumably because they regard it as less likely that insider information would exist at that time. The normal window period is the immediate aftermath of the publication of an annual report, I suppose for perhaps some months after that, but subject to this proviso, that if the directors have inside information they cannot be permitted to deal even if it were otherwise what might be regarded by the Stock Exchange as a window period. I would have to take the view and if this Part is accepted the committee will take the view that insider dealing will have to be prevented whether it takes place in what in Stock Exchange terms might be regarded as a window period or not. It is perfectly legitimate for a director or other person in that position to buy or sell if he is not relying on inside information. I do not think he has to be confined to the window period that has been defined by the Stock Exchange. It just happens that the usual period would be the weeks or months following the publication of the annual report.
Could I raise two questions about section 91? First, I do not understand subsection (8). It relates to something to do with officers of a company dealing in the shares of another company. I am not quite sure whether it opens up the way to getting around insider dealing by setting up a multiplicity of companies.
Second, subsection (5) states that there must be information conveyed. I take it that this is not a problem but just in case it is I will raise it.
The information that would materially affect the price of the shares might be, for instance, that a deal had been done which has not been published. If instead of the officer of the company saying to somebody who is going to buy or sell a share, "We did that deal so you can buy", he said something like "I think it is a good idea to buy now", both might know that that information was conveying non-verbally the fact that the deal had been done, but strictly speaking within the meaning of subsection (5) no information in the accepted sense of the term, in terms of hard information, had been conveyed, other than an expression of opinion ostensibly: "I think you should do the deal at that stage". Would that sort of thing be captured by subsection (5) ?
Subsection (8) the one the Deputy mentioned first, contains a further practical exemption from the general prohibition in subsection (6). That subsection prohibits a company from dealing if any of their officers would themselves be prohibited. The exception in this subsection has to do with a situation in which one company propose to buy shares in another company, for example, prior to a takeover bid or even simply as an investment. The very fact that the first company are investing or proposing to invest in the second could in a way be regarded as inside information. However, it would be absurd to prohibit such dealings which are part and parcel of everyday commercial life. This subsection makes it clear therefore, that where an officer of company X knows that they are investing or are about to invest in the shares of company Y, this knowledge of itself will not be regarded as inside information and the deal will not be prohibited. The same would apply if the company wished to sell their shares in the other company. In other words all that is being exempted is the single piece of information that company X propose to buy or sell the other company's stock.
I am sorry to digress but I think we have strayed a little from the point I was on. As subsection (1) is worded, anybody who is at senior management level or is a director or in certain positions in a plc by virtue of their normal day-to-day duties could have information in their possession which it would be very hard to prove whether it would be likely to alter the price of the security. It could go either way, it could go down, it could go up, but they still would be precluded from ever buying a share. In the day-to-day workings of a business one comes across possibilities. There may be a contract under negotiation and if one gets it, it might materially affect the price of the share. It could be that the share price would go down. There are all sorts of possibilities. From the advice I have got from different bodies this wording will effectively preclude a wide range of individuals from ever buying shares in their own company. I do not know how one could deal with this issue but I would ask that this point be considered on Report Stage. I do not have a readymade solution but I am sure a reasonable compromise could be reached. We do not want people working in a company who have information which leads them to think that if they buy shares at a certain time they are in for a killing. At the same time I do not see why a person working in a company should, because of their position, be precluded from buying a share. The wording will preclude them. The share prices can go either way. As I said, I do not have an immediate solution but I would ask that this be considered on Report Stage.
Certainly, I would be quite happy to do that but it should be borne in mind that what is prohibited is private knowledge that would, if publicly known, be likely materially to affect the price of the shares. I would like to emphasise the word "materially". The fact that it could cause a movement of a few pence one way or the other is not a material affect on the price. It is my guess, and I am offering a personal view, that a material affect on the price would be something that would cause it to go either up or down by 10 per cent. There are not many single instances that cause a movement in a share price to that extent. Unless there is some major outside force, a stock market crash or something of that kind, one would rarely see a movement on one day of 10 per cent in the price of a share. In the last resort it would be a matter for the court but my guess is that it would require a movement in the region of 10 per cent.
On that point, over what period would it be deemed to materially affect the share? If a share price increased a good few pence in six months could one say that the purchaser did not envisage a material change when buying the share but that now they see a material change?
It would be the effect of the information becoming public. If it is going to have an effect it will have an effect in one or two days and not over a period of months. If it took several months to percolate through from the time it became available it would not materially affect the price. Normally it would be fairly instantaneous.
The percentage could change. Some shares can go up by 50 per cent, from say, 6p to 9p, or they can go back down to 5p. One cannot work on percentages. I have been watching the oil shares recently and there have been some remarkable changes for no apparent reason. They have gone from 6p to 18p and back down to 12p, then to 8p and back up to 12p. That is a 150 per cent change. Therefore, one cannot interpret materially as a percentage. It depends on the particular share. That goes back to what Deputy Bruton said, that one judge may decide that 10 per cent is material and another may decide that 50 per cent is material. At the end of the day you have to tell staff working in a company whether you think the information you have will materially affect the price of the share. That is not good law. However, we could go on all day discussing this. We should try to find some clause that will keep the spirit of this section without posing a ridiculous situation that will prevent the genuine buying and selling of shares by an employee, a senior manager or even a director in some cases.
We should try to avoid in legislation such as this the creation of uncertainty as to the legality or otherwise of transactions. The discussion here as to what "materially" means illustrates the danger that exists. It is open to reasonable people to have very different views as to what material is in this context. Perhaps the Minister, Deputy Barrett and Deputy O'Dea think differently. If that is the case in this committee, what is it going to be like in the marketplace? We have a great tradition in this country of making fine-sounding legislation which nobody could say is bad but then we cannot enforce it. Apart from the Stock Exchange, is the Minister going to have the staff necessary to enforce this legislation?
Is the Garda Síochána Fraud Squad sufficiently well equipped to find out what information affects shares, who had it, when and what did they buy when they had it? If we do not have a means of enforcement available to do that, we are just passing legislation here which will mean that 1 per cent of those who commit the crimes will be caught, probably the relatively minor players who let their slip show at some stage, and the big players will continue on because there will not be an enforcement method available. I hope the Minister can convince me that that will not be the case, that there will be a means of enforcing this legislation because if it is not enforceable it is not worth the debate it is getting. I raised a question about subsection (5) which the Minister did not yet reply to but perhaps he will do so.
To take subsection (5) first, we have already prohibited an insider from directly or indirectly dealing himself, in subsections (1), (2) and (4). We have also prohibited a person who gets a tip from dealing directly or indirectly. That is in subsections (3) and (4). That leaves two aspects to be covered: the practice of tipping, that is giving information, and dealing by the company for whom the insider actually works. This subsection covers the first of those two situations and, to put it at its most basic, it simply prohibits tipping. However, it is not an absolute and outright prohibition. What it states is that it will be unlawful to pass on inside information if the insider knows or ought to know that the person getting the information will either actually deal in the securities or cause or procure yet another party to do the dealing. Because of the redefinition of securities in section 90, paragraph (a) of the subsection as originally published was deleted in the Seanad. To go back to the more general question of what is material and what is not——
That is not the point I am making. I asked about information. Would it have to be hard information?
Information does not have to be hard fact. It can be a more subtle thing than that. It can be gleaned from behaviour.
What about enforcement?
The enforcement will effectively be by the Stock Exchange and not by the Department. They will investigate these matters and if a prima faciecase appears to them to exist of insider dealing, they will give the report of their investigations to the DPP who will then consider whether or not to prosecute. The Minister in the Department will not be involved in it. It is done by the DTI in Britain as I understand it. Recently I saw references to the fact that they seem often to be reluctant to prosecute in case they do not get a conviction. That is not going to arise here. It will be a matter for the DPP to take the prosecution once it has been reported to him by the Stock Exchange committee or council. They seem eager and willing to investigate these matters in order to uphold the good name of the Stock Exchange.
It is a little bit of the private club situation, is it not, if one has people who are essentially invigilating themselves?
It is in their own best interests——
That is one way of looking at it. On the other hand one——
——to see that this practice does not happen.
It is in their best interests to ensure that the public do not think it is happening. That is a different thing from ensuring that it is not happening. The extent of the interest of the Stock Exchange in this matter is simply their own reputation. It may well be that if they are the ones who are deciding whether to pass cases on to the DPP, they will say, "if we pass on a particular case we may well find ourselves in a situation where that will open up a whole Pandora's box of all sorts of other cases that we should have to investigate, some of which may have occurred in the past; that we will not pass this one on because it could be a bit inconvenient for us because maybe all of us would be brought into this situation". There is a bit of a problem there, if the Minister does not have some inspectorial role. I am all for self-regulation and delegation of responsibility to the lowest level that can be responsibly charged with the job of actually doing it. I do not think, however, that it would be healthy to have a situation in which this thing is handed over to the Stock Exchange, period, if we are serious about the matter. Quite apart from justice being done, it has to be seen to be done.
The Irish Stock Exchange is a small place, the number involved being a relatively small number and every one of these people knowing one another and probably being personal friends. They are going to have to decide now that, despite having had dinner together yesterday, being in the same club and being good friends, etc., they are going to send a case off to the Director of Public Prosecutions. I have more than a slight doubt about the strain that is going to put on their friendship or, alternatively, to put it in a less humorous way, about the sort of potential conflict of interests. Very genuine conflict of interests could arise. I am all for self-regulation; but it does seem to me if this part of the legislation is to mean anything, that the Minister must have a means, to say the very least, of looking over the shoulder of the Stock Exchange very regularly, i.e., every two or three months, to see how they are exercising this, of having access to their files and information, and of being able, perhaps every year or two, to send in an inspector to do a more detailed job, where the inspector would be standing in the place of the Stock Exchange for a particular period or in respect of a particular set of transactions or something like that. Otherwise I would be afraid the thing will not work or, even if it does work, that people will suspect that it is not working.
Can I suggest that it seems, listening to this discussion, that it is not going to make a lot of difference what way one frames this particular section. It is not going to be possible to control in any way. One cannot legislate between people in the conduct of information where money matters are involved. There is no way one can legislate against that.
I do not, for one moment, share the pessimism of Deputy Bell. You may only catch 5 or 10 per cent of those who are involved——
We are only fooling ourselves.
——but if you catch and convict 5 or 10 per cent of them, it would put manners on the other 90 per cent.
Who is doing the catching?
The catching is being done primarily by the Stock Exchange. What I said in reply to the Deputy already — perhaps I should have expanded it more — is that they will be the primary enforcement agency but they will not be the sole enforcement agency. Under section 98 (5) the Minister, if he feels that the Stock Exchange are not doing their job, can intervene and ask them to refer certain matters to the Director of Public Prosecutions. That subsection was introduced in the Seanad when, I understand, Senator Ross suggested that insider dealing was not unknown on the Irish Stock Exchange. It was to meet that particular point. While the Stock Exchange will be the primary enforcement agency, they will not be the sole one. The Minister can intervene if he feels they are not doing the job properly.
Looking at section 98 (5) I do not, if I may say so, think that is adequate at all. That is only where a complaint from a relevant authority has been made.
To a relevant authority.
First of all, the Minister should have a general power to intervene, not one which is hemmed in as is this subsection. He should have a general responsibility to keep himself informed of what is happening as distinct from acting in a particular instance, which is all that this subsection is about.
I do not think so. If one could complain either to the Minister or to the Stock Exchange, everybody will complain to the Minister. That would really make his position, and that of the Department, very difficult. In the old days when Departments had not a lot to do and had plenty of people, that was fair enough. However, many Departments are seriously under-strength at the moment and there are a lot of difficulties involved. I could not envisage my Department, as at present constituted, being able to fulfil this role. It could not do it without quite a number of people for that specific purpose.
I accept that, and if that is the case it should not be inappropriate for a levy to be placed on all transactions in the Stock Exchange to finance an adequate enforcement unit within the Department. I would say that 0.001 per cent of the value of these transactions would be more than sufficient to supply the Minister with very large numbers of staff to enable him to do a good invigilating job. The Minister is the one who is responsible, and he is going to continue to be the one who is responsible, and if some scandal emerges it is not going to be the Stock Exchange that will have egg on their face, it will be the Minister of the day. I do not think the Minister here is equipping himself with the powers necessary to protect himself in such circumstances.
Can I remind the Deputy, since we draw analogies with Britain all the time, that precisely their problem in Britain is that they do the opposite to what we are proposing to do here. The Department of Trade and Industry are the enforcing agency. They have brought only a relatively small number of prosecutions out of the total number of complaints that have been made to them. The Stock Exchange in London, so far as I know, would much prefer to be the enforcement agency and a lot of people who were involved and were damaged by insider dealing would prefer if the Stock Exchange were involved so that they would get on with rooting out these people. The Department of Trade and Industry in London is alleged, or reputed in public comments that are made by some people at least about them, not to be assiduous in following up these things and only to be prepared to prosecute under the British legislation if they are pretty certain of getting a conviction. They seem to regard it as a failure on the part of the Department or a reflection on the Secretary of State if they were to bring a prosecution and fail to get a conviction. I think that is the wrong way to look at it but the position in Britain in so far as it is relevant to us — and it is certainly relevant up to a point — is that the very thing that Deputy Bruton is urging on me with some force now is not working in Britain and the British want to change it for that reason.
I have some powers of prosecution and inspection under the existing companies legislation and they seem to be pretty hopeless. We have not been able to make much use of them. The powers in this Bill are much better not just in relation to insider dealing but in relation to a whole lot of other things. I hope that when it is passed I will be able to get additional people who will police the other aspects of it but Part V, I understand, is going to be primarily but not exclusively enforced in the first instance by the Stock Exchange.
I want to let it be known publicly that if the position that Deputy Bruton envisages, which is that the Stock Exchange is a very small intimate little club and that they will not be prepared to act against one another because they are all pals, proves to be the case I will certainly change the legislation.
In addition to section 98 (5), I would draw the Deputy's attention also to section 100 which requires the Stock Exchange to give an annual report to the Minister. That report, among other things, must show the number of instances in which following the exercise of power by authorised persons under this Part reports were not made to the Director of Public Prosecutions, in other words, they will have to not alone report and let it be known the number of times they went to the Director of Public Prosecutions to take a prosecution but they will also have to disclose the number of times they did not go to the Director of Public Prosecutions on complaints that were made to them and which they investigated. The Minister will then, as a result of the provisions in section 100, be in a position, I think, to make up his mind as to whether they are fulfilling their enforcement duties satisfactorily. That is why it was put in there.
I might as well make it clear that if they do not do so satisfactorily— and obviously one will have to wait a while — and if I am still Minister in perhaps a few years' time and if I consider they have not fulfilled their functions satisfactorily I will bring in amending legislation to change it. My instinct is that they will fulfil their functions satisfactorily and that notwithstanding the smallness of the numbers that they will still want to do it because if the Irish Stock Exchange gets a bad name for insider dealing or for being soft on insider dealing particularly when they have been given all these powers now at long last, powers they have been looking for for a long time, then it does not do their own business or their own professional standing any good. I think, I hope and I expect that they will be assiduous in carrying out their enforcement functions.
It seems to me that the primary policeman here is the Stock Exchange but that it is open to anyone to bring complaints to the Minister who can either refer them back to the Stock Exchange for examination or else he can refer them to the Director of Public Prosecutions for investigation. Is that right?
No.
No, the complainant must complain to the Stock Exchange first but, if having done so and they have not acted, he can then go to the Minister and complain about that fact.
That was the point I made that if he was not getting satisfaction from the Stock Exchange he could go to the Minister and the Minister could go back to the Stock Exchange or to the Director of Public Prosecutions, whichever he decides, for whatever action is necessary.
Nothing I have said here is a reflection on the Stock Exchange as it is but in making legislation we have got to envisage every possible situation and recognise the dynamics of that situation. We have a small Stock Exchange here with a relatively small number of people and the situation could arise in the future where, because of the closeness of the relationship between them, it would be difficult for them, in every case, to interpret the law as perhaps the committee would wish it to be interpreted and that is why I want to correct the Minister on this point.
I have not suggested at any time in this debate that we should go over to the British system of having the Minister's Department responsible. What I am suggesting, on the other hand, is that there should be stronger powers with the Minister to have oversight on a continuing basis of how the Stock Exchange is doing its job so that the Minister will be able to satisfy himself, as somebody who is responsible to the Dáil for this legislation, which the Stock Exchange is not. The Stock Exchange is not answerable to the Dáil, the Minister is.
Perhaps we could have a look at section 98 (5) when we come to it.
I was going to make a suggestion.
This section deals only with what constitutes insider dealing. The enforcement section in relation to the duties of the Stock Exchange is section 98. I have allowed considerable discussion on the section and I will only allow any further discussion if it relates to the section. I will not allow any more discussion on what the enforcement measures of the Bill are, they are subsequent to this section. I am making that decision as a result of giving considerable latitude outside the section. The discussion must be on the basis of relevance to the section. That is the only further discussion I will permit.
On a point of order, Chairman, you have allowed discussion to continue on this basis for quite some time. I was in possession making a contribution which the Minister for a particular reason interrupted — which I do not object to — but I was about to make a suggestion as to how the problem which I had raised could be resolved and at that stage you came in, Sir, and said you were going to stop the whole thing. What is sauce for the goose should be sauce for the gander and if you have allowed the discussion to take place you might as well allow it to conclude.
Hoping it will come to a conclusion.
I want to make this suggestion. I will not make any further contribution on this subject. I think the Minister might consider, when he comes to it in section 101, adding a new subparagraph on the matters he makes regulations about to give him the necessary powers to have general oversight of the enforcement of this legislation and provision for the financing thereof, if necessary, to give him a general power to take powers that might be necessary for oversight so that the Minister would have that power in section 101 without having to come back and introduce further legislation as he said. That would satisfy me that the Minister had the residual powers necessary. I will not elaborate any further on that.
May I ask one question on this section. Section 91 (3) relates to the tippee and it states that the tippee will be liable or guilty, as the case may be, if he gets information directly or indirectly from an insider provided he knows or ought reasonably to be aware that that person is an insider. Take, for example, the managing director of a company who is obviously an insider. Surely there should be some provision there whereby a person can get information from the managing director of a company indirectly. The managing director of a company can communicate the information to a third party who in turn passes it on to the tippee. In those circumstances the tippee is getting information indirectly from an insider, whom he knows is an insider. He need not necessarily know that the information is coming from the insider. As I read the subsection, there seems to be strict liability in that case, but I know that is not what is intended.
He has to be aware or ought reasonably to be aware. If the fact that it emanated from the managing director is concealed from him, he is not aware that it has come from an insider nor I suggest in those circumstances ought he reasonably to be aware nor could the court come to the conclusion that he ought reasonably to be aware. I do not think a jury would convict him in those circumstances. If the managing director passes the information to X, who in turn passes it on to Y and if Y has no reason to believe that X was in touch with the managing director then I do not think that he is prohibited.
I agree with the Minister. A person should not be convicted in a case like that. If the section were to state that he received the information knowing that it was indirectly from an insider——
Yes. It is not enough to get the information directly or indirectly as well as doing that one must also either be aware or ought reasonably be aware where it came from and if one is not aware and could not reasonably be aware then one cannot be convicted or liable.
What the subsection states basically is that one must be aware or ought to be aware that the person from whom the information came, whether indirectly or directly, is an insider.
If X is the brother of the managing director and X did not tell that to Y, could Y reasonably have been aware that X could only have got the information from the brother who is the managing director?
If X did not tell Y he was a brother of the managing director, I suppose Y could not be expected to have had that information.
I am just raising the possibility that X did not tell Y where he got the information. Are you saying that he ought to be aware?
In such circumstances Y should tread warily on the grounds that he would be in the position of having received the information from an insider indirectly.
My amendment would clarify that.
Will you come back to the point I made in relation to subsection (1) on Report Stage?
I will. I have already said that.
Section 91, as amended, agreed to.
Section 92 agreed to.
NEW SECTION.
I move amendment No. 118.
In page 82, before section 93, to insert the following new section:
"93.—(1) Nothing in section 91 shall prevent a person from—
(a) acquiring securities under a will or on the intestacy of another person, or
(b) entering in good faith into a transaction to which subsection (2) applies.
(2) This subsection applies to the following kinds of transactions—
(a) the obtaining by a director of a share qualification under section 180 of the Principal Act;
(b) a transaction entered into by a person in accordance with his obligations under an underwriting agreement;
(c) a transaction entered into by a personal representative of a deceased person, a trustee, or liquidator, receiver or examiner in the performance of the functions of his office; or
(d) 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.
(3) 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.".
I will deal with Deputy Bruton's two amendments before we deal with amendment No. 118.
I move amendment No. 1 to amendment No. 118:
To delete subsection (1) (b).
Amendment put and declared lost.
I move amendment No. 2 to amendment No. 118:
To delete subsection (3).
Amendment to amendment, by leave, withdrawn.
The Minister is verbally proposing an amendment to subsection (2) (d) of amendment No. 118.
Subsection (2) (d) should read:
A transaction by way of, or arising out of, a mortgage of or charge on securities or a mortgage, charge, pledge or lien on documents of title to securities.
Is the committee agreed that we amend that paragraph? Agreed.
Question "That the new section, as amended, be there inserted" put and agreed to.
Section 93 deleted.
Amendment No. 119 not moved.
Section 94 agreed to.