Implementation of the Insider Dealing Directive in the United Kingdom and Germany

Date01 April 1996
Pages105-116
DOIhttps://doi.org/10.1108/eb025765
Published date01 April 1996
AuthorIliana Duderstadt
Subject MatterAccounting & finance
Journal of Financial Crime Vol. 4 No. 2 Analysis
ANALYSIS
Implementation of the Insider Dealing Directive in
the United Kingdom and Germany
lliana Duderstadt
INTRODUCTION
This article examines the implementation of the
Insider Dealing Directive, the aim of which is
European harmonisation in the UK and in Ger-
many, two European countries with completely
different backgrounds on this issue.
INSIDER DEALING IN THE UK AND
GERMANY (HISTORICAL)
In the early 1970s, the idea of an insider trading
prohibition gained momentum. It has been said
that this was in part a phenomenon of fashion and,
also,
a race for excellence.1 In the United Kingdom
the initial approach towards insider dealing was to
rely on disclosure requirements, in particular those
requiring disclosure by directors of their interests
in the shares of their companies,2 together with a
limited prohibition on dealing by a director in
options in the listed securities of
his
company.3
The Department of Trade and Industry was
responsible for, first, the appointment of inspectors
who examined share dealings by company direc-
tors and, secondly, for the licensing of brokers and
dealers in securities under the Prevention of Fraud
(Investments) Act 1958. The 'City' was left to
pursue a policy of self-control. In effect, the City,
through the Bank of England, the Stock Exchange
and the City Panel on Takeovers and Mergers
regulated the securities market. The rules of the
Stock Exchange and the Panel quite frequently
went beyond the provisions of the 1958 Act.
Impetus for change came from the Jenkins
Committee, the Stock Exchange and Takeover
Panel, a Justice report and several White Papers.
The provisions of the resulting Companies Act
1980 were eventually replaced by the Company
Securities (Insider Dealing) Act 1985, as amended
by the Financial Services Act 1986. This law was
widely criticised as very difficult to enforce. The
offence of insider dealing contained many separate
elements, all of which had to be proved, thus
maximising the possibility of prosecutions foun-
dering on technical rules of evidence.
In Germany, on the other hand, voluntary
Insider Trading Guidelines came into force in
1972.
These were implemented following the
recommendations of the Stock Exchange Expert
Commission
(Boersensachwerstaendigenkommission)4
in
1970 and were revised in 1976 and 1988.5
Their legal status is well known: they were
neither the legal norm nor commercial practice
and applied only if there was some contractual
recognition. The Guidelines were nearly unani-
mously criticised by legal literature as insufficient.6
Nevertheless, resistance to legal regulation of
insider dealing and especially to making it a penal
offence was particularly stiff in Germany. It later
became obvious that the Directive could not be
transformed by the mere voluntary adherence of
business.7
Although a self-imposed system of voluntary
supervision no longer fits into the international
landscape, all EC states having chosen statutory
regulation with criminal sanctions, a voluntary
system should not be condemned altogether. Its
principles and rules are interpreted by the spirit
and not by the letter. Rulings can be made
speedily.
Discussion of the merits and demerits of solu-
tions to the insider problem based on self-regula-
tion or on statute has now become moot. The
legislators' decision for statutory prohibition of
insider dealing is to be respected. The self-regula-
tory City Code, used as a complement to the exist-
ing criminal prohibition, is, however, to be
commended. As was the case with the German
Guidelines, the rules are probably applied to a
much larger extent than is known to the public,
Page 105

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