Theoretical aspects of insider trading regulation in Zimbabwe
| DOI | https://doi.org/10.1108/JFC-02-2021-0028 |
| Published date | 07 June 2021 |
| Date | 07 June 2021 |
| Pages | 389-405 |
| Author | Howard Chitimira |
Theoretical aspects of insider
trading regulation in Zimbabwe
Howard Chitimira
Research Professor and Professor of Securities and Financial Law, Faculty of Law,
North-West University, Potchefstroom, South Africa
Abstract
Purpose –Insider tradingis treated as a punishable offence in many jurisdictions andcountries. In relation
to this, various theories were developed to justify and enhance the regulation of insider trading in such
jurisdictionsand countries. For instance, regulatory bodiesand the relevant courts in jurisdictions suchas the
Commonwealth and the European Union as well as in countries such as the USA and the UK have to date
developed and consistently applied theoriessuch as the classical theory, misappropriation theory, fiduciary
theory, unified theory and equal access theory in their quest to detect, prevent and combat insider trading
activities. For the purposes of this article, the aforesaid theories are discussed so as to recommend possible
measures that could be adopted by the policy makers to effectively curb insider trading activities in the
Zimbabwean financial markets. It is against this background that some theoretical aspects of the insider
trading regulation as adoptedby the Zimbabwean policymakers, regulatory bodies and the relevant courts
are scrutinised in this paper. This is doneto, inter alia, investigate possible flaws and the rationale for such
direct and indirect application of certain insider trading theorem in Zimbabwe. Thereafter, some
recommendationsin respect thereof are provided.
Design/methodology/approach –A qualitativeresearch methodology is used in the entire paper.
Findings –It is hoped that the recommendationsin the paper will be used by the relevant policymakers to
enhancethe curbing of insider trading in Zimbabwe.
Research limitations/implications –The paper doesnot use an empirical research.
Practical implications –It is hoped that the recommendationsin this paper will be used by the relevant
policymakersto enhance the curbing of insider trading in Zimbabwe.
Social implications –It is hoped that the recommendations in this paper will be used by the relevant
policymakersto enhance the curbing of insider trading in Zimbabwe.
Originality/value –This paper is original researchon the theoretical aspects of the regulation of insider
tradingin Zimbabwe.
Keywords Theories, Flaws, Insider trading, Offences, Financial markets
Paper type Research paper
1. Introductory remarks
Insider trading usually occurs when an insider that has price-sensitive non-public
information concludes illegal transactions in listed securities to which that information
relates to the detriment of other ignorant and unwitting investors and/or related persons
(Osode, 2004). Insider trading is treated as a punishable offence in many jurisdictions and
This article was supported in part by the National Research Foundation of South Africa (NRF), Grant
Number: 112115. Consequently, the author wishes to thank the NRF for its support. I am also very
grateful to Dr Pontsho Mokone (Trainee Investigator, Office of the Public Protector, South Africa), for
her valuable and insightful comments on the initial drafts of this article. Dr Mokone’s comments were
influenced in part by her Doctor of Laws (LLD) Thesis entitled: The Regulation of Insider Trading in
Zimbabwe: Proposals for Reform, pp. 53-73.
Insider trading
regulation
389
Journalof Financial Crime
Vol.29 No. 1, 2022
pp. 389-405
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-02-2021-0028
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
countries. In relation to this, various theories were developed to justify and enhance the
regulation of insider trading in such jurisdictions and countries [1]. For instance,
the relevant courts and regulatory bodies in jurisdictions such as the Commonwealth and
the European Union (EU) as well as in countries such as the USA and the UK have to date
developed and consistently applied theories such as the classical theory, misappropriation
theory, fiduciary theory, unified theory and equal access theory in their quest to detect,
prevent and combat insider trading activities in their respective financial markets (Nagy,
1998;Fisch, 1991;Loke, 2006). The USA courts have to date applied different theories to
determine the liability of an insider in various insider trading cases [2]. These theories are
mostly applied by the USA courts to interpret and enforceRule 10b-5 [3], which was adopted
by the United States Securities and ExchangeCommission (SEC) in a bid to comply with the
anti-fraud and related insider trading provisionsof section 10(b) of the Securities Exchange
Act of 1934 (Exchange Act) [4]. These theories are also directly and indirectly applied to
curb insider trading activities in the Zimbabwean financial markets. Notably, insider
trading activities are statutorilyprohibited in Zimbabwe under the Securities Act 17 of 2004
(Chapter 24:25) as amended (Securities Act) [5]. It is against this background that some
theoretical aspects of the insider trading regulation as adopted by the Zimbabwean
policymakers, regulatory bodies and the relevant courts are scrutinised in this paper
(Saungweme et al., 2013). This is done to, inter alia, investigate possible flaws and the
rationale for the direct and indirect application of certain insider trading theorem in
Zimbabwe. The approach is further used to expose the gaps and shortcomings associated
with the current anti-insider trading prohibition in the Zimbabwean financial markets.
Thus, certain insider trading theories are discussed to unpack how they may have
influenced the regulation of insider trading in the Zimbabwean financial markets.
Thereafter, some recommendations in respect thereof are provided. In this regard, it is
submitted that the policymakers should seriously consider enacting adequate insider
trading laws that are robustlyenforced by the relevant enforcement authorities to effectively
combat insider tradingactivities in the Zimbabwean financial markets.
2. Selected theories and their influence on insider trading regulation in
Zimbabwe
2.1 Classical theory
Classical theory providesthat corporate insiders such as directors, officers and employees of
a company are prohibited from trading (buying or selling) in securities of that company on
the basis of any material non-public price-sensitive information which they obtained in
connection with their employment positions and/or duties in the company (Nagy, 1998).
Notably, under the classical theory, corporate insiders are also known as primary insiders
and they are prohibited from violating their fiduciary duties to company shareholders by
committing insider trading (Georgakopoulos, 1990). Thus, the tipping and/or disclosure of
non-public price-sensitive information relating to a company’s securities to another person
by corporate insiders amounts to insider trading under the classical theory. This suggests
that classical theory is only applicable to corporate (primary) insiders that breach their
fiduciary duties through insider trading (Salbu, 1992a). Accordingly, tippees and other
persons (secondary and fortuitous insiders) that are not primary insiders are not directly
liable for insider trading under the classical theory. It appears that this notion is wrongly
premised on the fact thatoutsiders (secondary and fortuitous outsiders) cannotbe held liable
for insider trading, as they do not owe fiduciary duties to the shareholders of the affected
company as indicated in SEC v Obus [6].The classical theory wrongly limitsinsider trading
liability to instances where only a corporateinsider has breached his or her fiduciary duties
JFC
29,1
390
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