Bermuda Adopts Insider Trading Legislation

Bermuda has intro­duced, with effect from 1 Novem­ber 2004, leg­is­la­tion to reg­u­late insider trad­ing and mar­ket manip­u­la­tion. The new mea­sures are con­tained in the Crim­i­nal Code Amend­ment Act 2004 (119 Kb PDF) and are referred to col­lec­tively as the “New Act”.

It is impor­tant to note that the New Act was not intro­duced as a result of any loss of investor con­fi­dence in the Bermuda mar­kets or great out­cry on the part of the pub­lic in Bermuda about per­ceived abuses by com­pany direc­tors or insid­ers. As the Min­is­ter of Finance acknowl­edged when announc­ing the mea­sures, there is very lit­tle anec­do­tal evi­dence of insider trad­ing or mar­ket manip­u­la­tion in the Bermuda market.

The New Act is a response to sev­eral fac­tors both inside and out­side Bermuda. Since its estab­lish­ment in 1992, the BSX has been an impor­tant dri­ver for the intro­duc­tion of laws to reg­u­late the secu­ri­ties mar­ket in gen­eral con­for­mity with IOSCO prin­ci­ples. In addi­tion, as the KPMG Report acknowl­edges, the BMA has long been con­scious that the absence of any crim­i­nal law relat­ing to insider trad­ing and other mar­ket abuses under­mined the efforts of Bermuda to present itself as a model of sen­si­ble off­shore regulation.

The KPMG Report in 2000 rec­om­mended that Bermuda adopt insider trad­ing and mar­ket manip­u­la­tion leg­is­la­tion, and this mild crit­i­cism appears to have pro­vided the nec­es­sary incen­tive for the Bermuda gov­ern­ment to intro­duce the new laws. Nev­er­the­less the heavy penal­ties in the New Act are per­haps some indi­ca­tion of Bermuda’s wish to show that it is fully onside in its efforts to fight finan­cial crime.

The three new pro­vi­sions are based squarely on Eng­lish leg­is­la­tion and can be sum­marised as follows.

The exist­ing offence of “mak­ing false state­ments to prospec­tive investors” has been replaced with a new offence of “mis­lead­ing state­ments and prac­tices” derived from sec­tion 397 FSMA. This offence car­ries a max­i­mum penalty on con­vic­tion on indict­ment of a fine of $100,000 or five years impris­on­ment or both. The offence can only be com­mit­ted in Bermuda.

The new offence of “mar­ket manip­u­la­tion” is con­tained in sec­tion 405A, which is loosely based on the con­cept of “mar­ket abuse” in sec­tion 118 FSMA, but there are some sig­nif­i­cant dif­fer­ences from the Eng­lish leg­is­la­tion. Most notably, the offence of mar­ket manip­u­la­tion can be com­mit­ted with­out any require­ment that the rel­e­vant “course of con­duct” involves the use of non-market infor­ma­tion, and there is no require­ment that the course of con­duct would give a reg­u­lar user of the mar­ket a false or mis­lead­ing impres­sion. The offence can only be com­mit­ted in Bermuda. The max­i­mum penal­ties are the same as for “mis­lead­ing state­ments and prac­tices” under Sec­tion 405.

The new offence of “insider trad­ing” is cre­ated by repli­cat­ing Part V of the CJA in Bermuda with minor mod­i­fi­ca­tions. The offence cre­ated by Sec­tion 405 B is the same as the offence cre­ated by Sec­tion 52 of the CJA, except that the Bermuda offence may only take place in the course of a trans­ac­tion on a recog­nised stock exchange, and does not extend to trans­ac­tions where one of the par­ties is deal­ing through a pro­fes­sional inter­me­di­ary or in the “over the counter mar­kets”. The max­i­mum penalty on con­vic­tion on indict­ment is a fine of $175,000 or seven years impris­on­ment or both. Curi­ously, the New Act does not repli­cate Sec­tion 62 of the CJA deal­ing with ter­ri­to­r­ial scope. Bermuda’s crim­i­nal law is ter­ri­to­r­ial in its extent and nor­mally no offence is com­mit­ted unless it is com­mit­ted within the juris­dic­tion. This leaves open the intrigu­ing pos­si­bil­ity that the ter­ri­to­r­ial reach of the Bermuda Act is more lim­ited than the Eng­lish Act.

These new pro­vi­sions are being docked along­side a some­what out of date investor pro­tec­tion regime. The Com­pa­nies Act does not reg­u­late com­pany insid­ers as such. Prior to the enact­ment of the New Act the Crim­i­nal Code did not con­tain offences deal­ing with mar­ket manip­u­la­tion or the cre­ation of a false mar­ket in secu­ri­ties. In this regard, it should be noted that one of the con­se­quences of the cod­i­fi­ca­tion of Bermuda’s crim­i­nal law has been that com­mon law offences are not avail­able to pros­e­cut­ing authorities.

The Invest­ment Busi­ness Act 2003 did not cre­ate any offences relat­ing to mar­ket abuse, although the code of con­duct made under the IBA pro­scribes “mar­ket manip­u­la­tion” and cer­tain unfair prac­tices such as “churn­ing” and “front run­ning”. Breach of the code of con­duct can have reg­u­la­tory con­se­quences for a licensed invest­ment provider, but does not con­sti­tute a crim­i­nal offence under the IBA.

The New Act demon­strates Bermuda’s con­tin­u­ing com­mit­ment to high stan­dards of secu­ri­ties reg­u­la­tion, and fills an impor­tant gap in the pow­ers of the reg­u­la­tory and pros­e­cut­ing author­i­ties. How­ever, given the size and nature of the Bermuda secu­ri­ties mar­ket, it seems unlikely that the New Act will result in many prosecutions.

The greater sig­nif­i­cance of the New Act lies else­where, in the field of reg­u­la­tory inter­na­tional coop­er­a­tion. The BMA has power to coop­er­ate with for­eign reg­u­la­tory author­i­ties and will now be bet­ter able to coop­er­ate in the inves­ti­ga­tion and pros­e­cu­tion of finan­cial crime.

There is another impor­tant con­se­quence. The crim­i­nal­i­sa­tion of mar­ket manip­u­la­tion and insider trad­ing cre­ates new offences which are “rel­e­vant offences” for the pur­poses of the Pro­ceeds of Crime Act, and brings them within the scope of Bermuda’s anti-money laun­der­ing efforts.