LORDS AMENDMENT TO COMMONS AMENDMENT No. 215 (Hansard, 27 March 1980)

§ Lord ROBERTSON of OAKRIDGE

My Lords, I beg to move, as an amendment to Commons Amendment No. 215, Amendment No. 215D. I wish also to speak to Amendments Nos. 215E and 215F.

I wish first to declare an interest as a partner in a firm of stockbrokers. As a stockbroker, I in general welcome the proposed rules on insider dealing. I doubt whether, in fact, they will make it easier to catch people who try to act unfairly, but the deterrent will be there. On the whole, they reflect current practice, 1131 but I believe that it will enhance public confidence in the securities market to move from self-regulation to regulation by means of the criminal law. Such a move is bound to produce problems in certain areas; and may I confess to a certain element of unease that the revising work of your Lordships' Chamber has had to be compressed into this one evening.

However, I am grateful to note that those responsible for framing the new rules have been at pains not to damage the market, by creating conditions that might lead to the frustration of legitimate business or to disorderly markets. To this end, the other place in considering the Bill gave special recognition to the position of jobbers and also to that of dealers in international bonds. The amendment in my name seeks to remove difficulties that are foreseen in another area; that of stockbrokers who act in the capacity of broker to a listed company and therefore fall under subsection (1)(a).

The amendment proposes that such a broker should not be precluded from accepting unsolicited orders to deal in the securities of a company, on account of his being in possession of price-sensitive information on a capital issue, a takeover or a large market transaction affecting the company. When capital issues or takeovers arise, there comes a stage—perhaps seven or 10 days beforehand—when the corporate finance side of the firm has to pass through what I believe is always a green baize door, to consult and inform certain other partners who are in daily contact with institutional clients: partners who have the requisite knowledge of the requirements of those clients. Those partners advise on the size and terms on which the operation can be successfully carried out and they construct the list of proposed underwriters and participants in the operation.

The tasks involving these partners might include, first the underwriting or placing of issues of shares or debentures in the market; secondly, the underwriting or placing of large lines of existing securities—and one has only to cast one's mind back to last October to think of the sizeable sale by the Bank of England of shares in BP; thirdly, the preliminary 1132 arrangements for a share or cash offer for the whole or part of another company's share capital and, lastly, the underwriting of cash alternatives to such share offers.

The amendment also covers a situation where the broker to a company has information about a substantial market transaction in the company's shares. Depending on the size of the transaction, and of course the circumstances, such a transaction may very well be highly price-sensitive from the time at which it is decided upon to the moment, not later than five days after completion, when it has to be publicly disclosed. The kind of problem that is foreseen is that brokers, in any of the situations that I have described, might well feel that under the legislation now proposed it would be imprudent for them to deal in the shares of the company concerned, even to carry out unsolicited orders from other clients. If brokers felt this way in situations of this kind, it could lead to a number of undesirable results. First, they would have to turn away legitimate business. Secondly, what reason would they give to their clients for so doing—that they were in possession of price-sensitive information? That would certainly set the tongues wagging and would lead to unruly markets. Thirdly, the job of broker to a company, now much sought after, might become unwanted. Lastly, the raising of capital by industry might be made that much more difficult.

It may be asked: Why should a broker have these fears? Does not the defence in paragraph (a) of Commons Amendment No. 215 give adequate protection? May I, however, read it out, starting at (8): The provisions of this section shall not prohibit an individual by reason of his having any information from—(a) doing any particular thing otherwise than with a view to the making of a profit or the avoidance of a loss (whether for himself or another person) by the use of that information;". Whatever one thinks of the wording of this subsection—and it must certainly have been difficult to draft—the advice I have been given is that it would be a difficult defence upon which to rely.

By the very nature of his business, a broker is almost always trying to make a profit or to minimise a loss for his client, so the broker might well find himself in the position of having to establish his own innocence by proving that although he was 1133 in possession of price-sensitive information, he did not allow it to colour his actions. Like other people, brokers do sometimes have to have split personalities, but certainly they would rather not have to prove it.

I shall await with interest the comments of the noble Viscount on the question of this defence in subsection (8)(a), particularly following his remarks when we considered the last block of amendments on the question of burden of proof. However, I should like to remind your Lordships that if this kind of case came before the courts they would have to disregard what was said in your Lordships' Chamber. The only thing that would matter, so I understand, is how the court interpreted the wording of the law.

May I stress that the amendment concerns only compliance with an unsolicited order. It would of course be quite wrong for a broker to give to a client advice that was based on privileged information. Such action is already naturally prohibited under Stock Exchange practice. I think it is relevant to state that the City code on takeovers and mergers prohibits brokers to companies involved in a takeover from dealing in the shares of either company when in possession of price-sensitive information, yet the takeover panel has never regarded the bona,fide execution of an unsolicited order as a breach of their rules.

Your Lordships will therefore realise that my amendment is designed to ensure that a broker to a listed company will feel free to act in accordance with current practice as now recognised under the new law and that the market should continue to fulfil its role both in the primary and the secondary capital markets without unnecessary hindrance. My Lords, I beg to move.

§ Viscount TRENCHARD

My Lords, the noble Lord, Lord Robertson of Oak-ridge, was kind enough to give us advance warning of these amendments and to explain the worries that he and his colleagues on the Stock Exchange have about the effect of this Commons Amendment 1134 on the cases which he has so very clearly described. In the interests of saving time, I shall not go over the details of the cases he has already described to the House. I found myself wondering when first we discussed this suggested amendment just how possible it was to have a totally unsolicited order, but I am assured by people who know and work on the Stock Exchange that this does happen. Therefore, I must accept it. I know that, as the noble Lord said, the advice and the rules of the Stock Exchange cover the point or making sure that a partner in such circumstances, put in this situation, does not give advice or any counsel.

This leads me to feel that it must be—and indeed from a little experience as a client I know that it is so—that in quite a large number of cases a particular partner of a broker firm (not cases such as the noble Lord has raised, but cases generally) refuses to advise and passes the client on to a partner. Therefore, I think that the remarks he made about not wanting to start speculation (which I can understand is a case in point) should be taken against the background that there is an established practice, I understand, of brokers passing on business from one partner to another. The Whole of this part of the Bill deals with the position of the individual.

There are two protections for brokers in this position which the noble Lord has mentioned. One has to look at all the clauses in the Bill but in particular I think one should say that it is essential, if the charge is to be raised, or prosecuted at all, for Amendment No. 215, subsection 1(b) to be met. I will just read that to the House again: it would be reasonable to expect a person so connected and in the position by virtue of which he is so connected not to disclose except for the proper performance of the functions attaching to that position". All those elements in that sentence taken together seem to us to present a situation where, in the case of the second client coming on with an unsolicited order, and the broker's information had come not from the company concerned but from the fact that there had been a previous order, the function would be one of loyalty to the client who gave an unsolicited order. So we suggest that taking those three elements together the charge would not stand up in most of the circumstances to which the noble Lord has referred.

1135 He himself further referred to the defence which is found in Amendment No. 215, subsection 8(a), and since he has read it to the House, I shall not repeat it. But we also believe that this is a strong and general defence and there would be problems in putting in any particular specific defence, including the ones that are suggested in the noble Lord's amendments, in terms of the possible weakening in law of the general defence, which is covered by those terms.

The Government really have given a lot of consideration to these amendments and the thoughts behind them. I am perfectly prepared to continue the dialogue with the noble Lord, but I do not believe that the defences that he suggests will make the position of brokers in the circumstances which he outlines any stronger than they are under the two parts of this Part of the Bill which I have quoted. Therefore, I would say to the noble Lord that I believe these circumstances are covered as things are written at the moment and the Government must resist this amendment.