Basic aims of revision
Criminal law
Supervisory law
Mandatory disclosure requirements and public takeover bids
In January 2010 the Federal Council issued a preliminary draft of its proposal to reform the system regarding stock market offences and market abuse regulation. Taking into consideration the comments filed by interested parties, on August 31 2011 the Federal Council submitted a dispatch on amending the Federal Act on Stock Exchanges and Securities Trading to Parliament. The amendments are expected to enter into force on January 1 2013, at the earliest.
The proposals seek to overcome several shortcomings and loopholes under the existing market abuse regulation and are aimed at aligning Swiss legislation to international rules, thereby strengthening the integrity and competitiveness of Switzerland as an international financial centre.
Similar to the recent proposals by the European Commission, the Federal Council dispatch proposes to enhance the combat against market abuse at two levels: Penal Code level and supervisory law level.
At Penal Code level, the dispatch proposes to expand and define the present criminal offences of insider trading and market price manipulation as major violations of market abuse. Even more substantial changes are planned at the supervisory law level: the amendments propose a new ban on insider trading and market manipulation under supervisory law for all market participants, thereby providing the Financial Markets Supervisory Authority (FINMA) with supervisory instruments within the framework of the newly established general market supervision also in relation to non-regulated institutions.
Under the existing Penal Code, the crime of insider trading is restricted to a group of offenders consisting mainly of the members of the executive body of the undertaking in question and its agents. The dispatch proposes to expand the group of offenders of insider trading to all private individuals, including shareholders in particular. Also, the criminal offence of insider trading is proposed to apply in future to all securities that are admitted for trading on a stock exchange or an institution similar to the stock exchange and to their derivative financial instruments, including in particular over-the-counter products.
In contrast, the criminal offence of market price manipulation is not subject to radical changes. In particular, the dispatch proposes to close the existing loophole whereby manipulations with real transactions are covered by the criminal offence of market price manipulation not at penal code level, but rather at supervisory law level.
The criminal offences of insider trading and price manipulation apply only if the offender acts wilfully and for financial gain. As such subjective elements are not presupposed by the newly established rules under supervisory law prohibiting insider trading and price manipulation, these criteria will most likely serve to distinguish the offences at penal code and supervisory law level.
Further, qualified offences have been established in respect of the criminal offences of insider trading and price manipulation where the attained pecuniary advantage exceeds Sfr1 million. Such qualified cases will be conceived as felonies and will serve as predicative offences for money laundering. This will allow Switzerland to ratify the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism of May 16 2005.
The criminal offences of insider trading and price manipulation are to be moved from the Penal Code into the act. Also, the responsibility for prosecution of both criminal offences will be transferred from the cantonal penal authorities to the Federal Office of the Attorney General and the cases will be heard by the Federal Criminal Court as court of first instance.
The dispatch proposes to enact core principles of FINMA's existing regulations regarding market conduct rules (see FINMA Circular 08/38) within the Act on Stock Exchanges and Securities Trading within a new ordinance to be promulgated by the Federal Council. The comprehensive ban on insider trading and market price manipulation at the supervisory law level will apply to all market participants and not only to institutions regulated by FINMA as under the existing laws. By that, the revision proposes to establish 'general market supervision of FINMA' in respect of market conduct rules in relation to all market players.
Meeting the concerns of interested parties regarding the vagueness of this concept and in order to limit FINMA's market supervision competence, the dispatch entitles the Federal Council to specify circumstances under which insider trading and market manipulation is admissible (ie, a 'safe harbour'). Such circumstances include price nursing and stabilisation, market making as well as redemption programmes.
Penalties with respect to the above-mentioned offences include publication of declaratory rulings (ie, so-called 'naming and shaming') and confiscation of possible pecuniary advantages. Additionally, FINMA may prohibit persons from practising a profession or occupying a function that under the financial market acts require licensing, recognition or registration.
Mandatory disclosure requirements and public takeover bids
In light of the well-known Vekselberg case, the legislative proposal was amended in terms of mandatory disclosure requirements and public takeover bids. The maximum penalty fee for breach of mandatory disclosure requirements has been raised from Sfr500,000 to Sfr10 million. Additionally, the dispatch introduces a penalty fee up to Sfr10 million for breach of a legally binding duty to make a public offer.
In order to overcome another shortcoming of the existing regulations, the dispatch proposes for the provisions on mandatory disclosure requirements and public takeover bids to apply in future also to companies with statutory registered offices outside Switzerland, provided that the equities of such companies are mainly listed either fully or partially in Switzerland.
In case of violation of the mandatory disclosure requirements, FINMA will be given the authority, as a provisional measure, to suspend voting rights of the offending shareholder as well as to issue a ban on further share purchases of the respective company.
In respect of mandatory takeover bids, the existing legislation allows the payment of a control premium. As it was argued that this is contrary to the principle of equal treatment of shareholders, the opportunity to pay a control premium to certain shareholders is abolished under the new rules. Further, the Takeover Board is also to be given the authority to suspend voting rights and ban additional purchases of the offending shareholder in cases where the obligation to make a public offer is not observed.
For further information on this topic please contact Mark-Oliver Baumgarten or Andreas Bättig at Staiger, Schwald & Partner by telephone (+41 58 387 80 00), fax (+41 58 387 80 99) or email ([email protected] or [email protected]). The Staiger, Schwald & Partner website can be accessed at www.ssplaw.ch.