Combating insider trading in securities markets: a review of Kenya’s legal framework

Abstract

The idea of a fair market is dependent on all parties to a transaction possessing similar information when executing a transaction or trade. However, because of unfair market practices such as insider trading, this is rarely the case. Insider trading is a form of market abuse where one party deals in the securities of a public company while in possession of material non-public information. Often, a person practicing insider trading gains an advantage because of the information they possess over the other party. Today, insider trading is one of the most condemned corporate vices. As a result of its adverse effects on the market, insider trading has been prohibited by many countries in the world. In Kenya, insider trading is contemplated as an offence that attracts criminal sanctions under the Capital Markets Act 2013. However, as jurisprudence witnesses, it is difficult to sustain a conviction on a charge of insider trading in Kenya. As a result, the practice of insider trading often goes unpunished. The purpose of this paper is to examine the effectiveness of criminal sanctions in prohibiting the practice of insider trading in Kenya. The researcher also assessed the feasibility of employing alternative sanctions, that is, administrative and civil sanctions, in place of criminal sanctions in an effort to curb the practice of insider trading in Kenya. This paper argues that non-criminal sanctions are a more effective deterrent to insider trading than criminal sanctions. The study, therefore, suggests that the Capital Markets Authority should put emphasis on the use of noncriminal sanctions in the prohibition of insider trading rather than criminal sanctions.