The Dubai International Financial Centre (DIFC) will adopt a tougher and stricter insider dealing regime effective from this Sunday.
This will be a result of the blanket ban imposed on dealings based on insider information, as per amendments made by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, to the DIFC Law No 1 of 2010.
At present, persons are allowed to deal on the basis of insider information if they are not connected by way of "special relationship" to the person who divulged the information. Under the new law, the concept of special relationship is removed, scrapping any grey areas or ambiguity in the law, lawyers speaking to Emirates Business said.
The current law says a reporting entity or person in a special relationship with a reporting entity shall not – in the DIFC or elsewhere – deal in investments of, or relating to, the reporting entity, if the person possesses material information that is not generally available in the market and has not been disclosed to the market in accordance with the law.
The new law has repealed and replaced this with an article that has wider scope. Article 42 of DIFC Markets Law now reads: "A person who is an insider shall not, in the DIFC or elsewhere, directly or indirectly, deal, or attempt to deal, in an investment of a reporting entity, or in a related investment, on the basis of inside information."
The article said an insider shall not, other than in the necessary course of business, disclose inside information to another person. The insider shall also not procure another person to deal in the investments or related investments in which the insider has inside information.
The provisions have been widened to capture actual and attempted, direct and indirect, insider dealing in securities that fall under the regulation of the Dubai Financial Services Authority (DFSA), Husam Hourani, Managing Partner, Head of Banking and Finance at Al Tamimi, said.
The amendments to the provisions on insider dealing redraft the earlier provisions to clarify the various components of the prohibition in an attempt to remove ambiguity, he said.
"Any attempts to clarify what insider dealing means and, therefore, those activities that are in fact prohibited, in addition to widening the scope of the prohibition, can only have a positive impact on corporate governance in the DIFC, provided steps are taken by the DFSA and companies to educate the individuals who may fall within the scope of these regulations."
Alan Wood, Partner and Head of Pinsent Masons Corporate Finance Group in Dubai, said the changes will bring the DFSA's rules in line with the European Union's Market Abuse Directive.
"These changes will make everyone more cautious of the tighter set of rules and tougher legislative framework. At a time when the market needs to show levels of governance and control consistent with those of the established global financial centres, these proposed changes represent a positive step," he pointed out.
The move should set a precedent for other regulators to take similar steps, said Ashley Painter, Banking and Finance Partner at Clyde & Co. "Hopefully, there will be fewer cases of insider dealing/trading and I think Esca (Emirates Securities and Commodities Authority) ought to do it as well," he said. "This has to do with reaction to some activities that occurred before, like the Shuaa Capital case. I think they've drawn lessons from there." Shuaa Capital, the UAE's largest investment bank by market value, was fined nearly Dh3.5 million in 2008 for manipulating the price of DP World's shares and then obstructing an investigation into the case.
The DFSA has been constantly strengthening its regulatory framework through its various consultation papers. The DIFC Law No 1 of 2010, for one, is the result of the consultation paper No 63 issued last year.
The regulator has commenced nine investigations in 2009 – five of them are completed, while the other four are ongoing. This ranges from alleged misconduct, including insider trading, market manipulation and breaches by directors in their duties to companies and shareholders.
A UNIFIED OFFICIAL LIST OF SECURITIES LIKELY
The new law has the potential to create a unified official list of securities, observers said.
Due to the amendments to the Dubai International Financial Centre (DIFC) Markets Law, the role of the Dubai Financial Services Authority (DFSA) has also been expanded to allow it to oversee official lists of securities maintained by authorised market institutions such as NASDAQ Dubai. The new law will thus allow other exchanges to serve as an authorised market institution, such as the Dubai Financial Market in DIFC.
"I think this is in preparation to allowing DFM as another authorised market institution and this will help the creation of a common platform through the ability to use the same settlement and procedures," said Ashley Painter, Banking and Finance Partner at Clyde & Co.
According to Husam Hourani, Managing Partner, Head of Banking and Finance at Al Tamimi, the regulator is also given the power to maintain its own official list of securities if an authorised market institution does not want to maintain such a list or is not granted an endorsement to maintain such a list, or has had its endorsement for such a list suspended or withdrawn by the DFSA.
"This change has the potential for a single unified official list of securities maintained by the DFSA in the DIFC, if and when more authorised market institutions operate there, rather than having multiple official lists that would have been the outcome under the previous version of the law," he said.