The new Federal Law (No 224-FZ dated 27 July 2010) on Counteraction Against Illegal Use of Insider Information and Manipulation of Market and on Amending Separate Legislative Acts of the Russian Federation (the Law) has entered into force (in the majority of its provisions) as of 27 January 2011.
The law mainly applies to the financial market sphere and regulates relations connected with financial instruments, foreign currencies and/or goods which are admitted (or have been filed for admission) for transactions in organised markets in the territory of the Russian Federation, as well as the derivatives of the aforesaid financial instruments, currency and goods.
For the first time in Russian legislation, the Law stipulates the provisions regulating the usage of insider information, as well as makes a distinction between the official use information and insider information in the sphere of financial market related transactions. Therefore, the Law has now defined insider information as : (a) precise and concrete, (b) of sufficient impact on the price of financial instruments, foreign currencies and/or goods, and (c) included in the list of insider information as to be adopted by a relevant legislative act by the Federal Service for Financial Markets (the FSFR). So far, the list of insider information has not been approved, and it most likely means that before it is adopted, any information falling under the two former criteria could be qualified as insider information.
Insider information can constitute a commercial, official, bank, communication or any other legally protected secret.
The Law determines the type of information not to be considered as insider information. Such shall be information which has become accessible to an unlimited number of recipients, including as a result of its dissemination; as a result of research, assessment and evaluation of financial instruments, foreign currencies and/or goods; the recommendations and/or offers on operating with financial instruments, foreign currencies and/or goods based on public information.
Apart from specifying insider information, the Law determines a number of related concepts, including:
- the range of the insiders – persons possessing such information;
- prohibitions on use of such information in transactions through making recommendations based on it, including transactions via third parties;
- demands for disclosing such information;
- the requirement of maintaining records on insiders and providing information on transactions made by them, being necessary in order to detect and prevent violations of the Law in this sphere;
- powers of the FSFR for detecting and preventing violations of law regulating the use of insider information.
According to the Law, issuers of securities, management companies, operators of organised markets and other persons are obliged to adopt rules regulating the access to insider information to protect its confidentiality and are also obliged to appoint an official representative responsible for such protection. In addition, the Law prescribes criminal, administrative and civil liability for breach of the Law, thus introducing new provisions to the Criminal Code and the Administrative Liability Code.
An exhaustive list of insiders (i.e. persons possessing insider information) is set forth by the Law. Potentially, this may cause certain frustrations in applying the Law in practice, given that the range of insiders could be much wider. Currently, the Law provides that only the individuals or entities linked with the bearer of insider information through valid legal arrangements may be classified as insiders in the sense of the Law. At the same time, under certain circumstances insider information may in fact become accessible to individuals, legal entities, as well as state and local authorities not engaged in any legal arrangement with the information bearer (e.g. in case a respective employment agreement or service contract were deemed as invalid by court resolution).
The Law divides insiders into three groups: primary insiders, secondary insiders and individual insiders.
Primary insiders are:
- issuers of securities, management companies;
- legal entities predominating on the markets for certain types of goods in the Russian Federation;
- organisers of auctions, clearing companies, depositaries and credit organisations effecting payments for transactions effected through organisers of auctions;
- professional participants of the securities market and other persons operating with financial instruments, foreign currencies and/or goods on behalf of the clients;
- federal executive authorities, executive authorities of constituent entities of the Russian Federation, local government authorities, other bodies or entities effecting functions of the mentioned authorities, governing bodies of state non-budgetary funds which have the legal right to invest temporarily free assets into financial instruments, and the Central Bank of the Russian Federation.
Secondary insiders are also listed in the Law. Those included in the list have access to insider information because they belong to governing bodies of a primary insider, or own the primary insider or have an agreement concluded with such an insider.
There is a separate group of individual insiders, who are natural persons who have access to insider information of primary and secondary insiders (except public authorities) on the basis of employment and/or civil agreements.
Primary and secondary insiders are obliged to maintain a list of insiders. They are also obliged to:
1) develop and adopt the procedure of access to insider information, rules for the protection of its confidentiality and regulations on supervisory measures to ensure compliance with the Law and other relevant legislation;
2) create (appoint) a department (or an official representative) responsible for supervising legal compliance and reporting to the board of directors (supervisory board), or to the executive management body of the company;
3) ensure smooth and efficient functioning conditions for the said department (or official representative).
The Law significantly extends the powers of the FSFR. In particular, these authorities become entitled to conduct inspections of the proper execution of the Law, request the provision of any information (including information for internal use) that may be relevant in connection with ensuring the execution of Law, issue instructions and directives to legal entities and individuals in respect to rectifying violations, suspend or annul licenses issued for conducting operations on the financial markets or other types of related activities, and others. It is worth mentioning that the Law contains as many as seven references to the additional legal documents to be developed and adopted by the FSFR in facilitating the execution of the provisions of the Law.
The Law lists the actions to be deemed as market manipulation prohibited by the Law, and such actions shall entail criminal and administrative liability.
As regards the criminal violations in the related sphere, these may be acknowledged in the event that significant damage has been caused to citizens, organisations, or the state through the unlawful use of insider information and subject to the person abusing insider information deriving excessive revenue or avoiding extensive losses. An amount in excess of RUB 2.5 million roubles (approximately EUR 62,500) of unlawful profit or loss shall be deemed as significant and will qualify as a criminal violation of the Law.
Administrative liability shall apply in cases of unlawful use of insider information, market manipulation and violation of requirements of legislation concerning the prevention of the aforesaid violations, unless the guilty party’s actions can be qualified as a crime. The minimum administrative penalty for legal entities shall be equal to RUB 700,000 (approximately EUR 17,500), while the upper limit for the penalty shall be defined by the amount of excessive profit or loss generated through unlawful use of insider information. It should be mentioned that certain difficulties may be anticipated in calculating the amount of such penalties, because the relevant methodology has not been adopted by the FSFR yet.
It is important to note that, from the perspective of civil liability for breaching the provisions of legislation on insider information and/or market manipulation, the suffered party shall be entitled to claim recovery of damages from the breaching party. In calculating these amounts, what is mentioned above shall equally apply.
Quite importantly, the Law provides that the conclusion of operations followed by unlawful use of insider information and/or market manipulation shall not serve as a basis for recognising such operations as invalid on civil law grounds.