Insider dealing and inside information in Hong Kong

Everyone thinks they understand insider dealing until they have to answer a question about it. The trouble is that the popular version is about fairness, and the statutory version is about four specific ingredients. A question that turns on the ingredients will defeat anyone relying on instinct.

What are the ingredients of insider dealing?

1. A connection with the corporation. Directors, employees and substantial shareholders are the obvious cases, and so is a person connected through a business or professional relationship, such as an adviser, auditor or banker.
2. Relevant information. Specific information about the corporation, its shareholders or officers, or its listed securities, that is not generally known to the market but which, if it were known, would be likely to materially affect the price.
3. Dealing, or counselling or procuring another to deal. Dealing yourself is one route; telling someone else to deal is another. So is passing the information on knowing the recipient will deal.
4. The absence of a defence. The Ordinance provides several, and they are narrow.

Miss an ingredient and the conduct is not insider dealing, however unattractive it looks. A person who trades on a rumour circulating widely in the market does not hold information that is not generally known. A person who holds price-sensitive information and does not deal, counsel or procure has not dealt.

What makes information "relevant"?

Two tests, both of which must be met. The information must not be generally known to the persons who deal or are likely to deal in the securities. And it must be information that, if generally known, would be likely to materially affect the price.

Materiality is judged by likely price effect, not by how interesting the information is. A change of office cleaner is confidential and immaterial. A pending profit warning is both confidential and material. The awkward middle ground, where reasonable people disagree, is where real cases are fought and where the exam rarely goes.

What about tipping?

Passing the information on is caught, and so is the recipient's dealing. The person who tells a friend about an unannounced takeover, expecting them to buy, has counselled or procured dealing. The friend who buys has dealt while in possession of relevant information, and being a step removed from the company does not save them if they knew the source.

This is the fact pattern the paper likes best, because it lets one stem test two people at once. Read carefully for who knew what, and from whom.

What defences are available?

Treat these as narrow. The general shape of the defences is examinable; the precise statutory wording is not, and we point you to e-Legislation for it rather than paraphrasing it into something slightly wrong.

How does the disclosure duty fit in?

It is a separate regime with a confusingly similar name. Listed corporations have a statutory duty to disclose inside information to the market as soon as reasonably practicable, subject to safe harbours, and that duty sits in its own Part of the Ordinance rather than inside the misconduct provisions. Breach is dealt with by the Market Misconduct Tribunal, which is where the two regimes touch.

The distinction to carry into the exam: insider dealing is about a person trading on unpublished information. The disclosure duty is about a company failing to publish it. Same information, different wrongdoer, different obligation. Our Topic 9 overview sets out how both slot into the wider enforcement structure.

What are the consequences?

Through the civil route, the Tribunal can make a disqualification order, a cold shoulder order and a cease and desist order, order disgorgement of any profit gained or loss avoided, award costs and refer the person for disciplinary action. It cannot fine or imprison. Through the criminal route, a court can impose a fine and a custodial sentence, and can make orders resembling the Tribunal's alongside them.

We do not print maximum penalties. They are not in our verified fact base, they change, and a wrong ceiling repeated confidently helps nobody. Read the current figures on e-Legislation if you want them.

A worked question

How to prepare this heading

Learn the four ingredients as a checklist and apply it to every scenario you meet. Connection, relevant information, dealing or counselling, defence. Four boxes, ticked in order, and the answer usually reveals itself before you reach the options.

One caution about our coverage, stated plainly because you are studying for a licence. The exact pairing of provisions between the civil and criminal Parts for insider dealing is not settled across our sources, so we cite by Part and by name and send you to the legislation for anything finer. Study notes that quote section numbers for this behaviour may be right, and may not be. The structure above is what the paper tests, and it is what we can stand behind. Practice it with Paper 1 questions.