Federal law No. 224-FZ “On Prevention of Illegitimate Use of Insider Information and Market Manipulation and on Amendments to Certain Laws of the Russian Federation” (the Law on Insider Information) entered into force on 27 January 2011 (with the exception of certain provisions, which are due to come into force by 30 July 2013).
The Law on Insider Information creates an express prohibition on insider trading in Russian financial and commodities markets, thereby plugging a gap in the existing legal regime. By bringing Russian regulation more in line with European and US standards of regulation, it is hoped that the Law on Insider Information will strengthen the protection of investors’ interests and solidify public confidence in Russian markets.
The adoption of the Law on Insider Information may also encourage Russia to become a full signatory to the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and Exchange of Information (the MMoU) of the International Organization of Securities Commissions (IOSCO). Signing the MMoU shows a statement of commitment at the state level with regard to mutual assistance and the exchange of information for the purpose of enforcing and securing compliance with the laws and regulations of the relevant signatories and increase the investment attractiveness of Russia.
The Law on Insider Information establishes definitions of “insider information” and ”insider.” The definition of “insider information” replaces the previous definition, which, set out in the Code of Corporate Conduct, was of a purely advisory (nonmandatory) nature.
“Insider information” is defined as accurate and precise information (including any commercial, official, bank, postal or other secrets protected by law), which have not been disclosed and if disclosed could materially affect the price of financial instruments, foreign currency and/or commodities, and which relates to the category(ies) of insider information mentioned in the law, in the list of insider information to be adopted by the Russian Federal Service for Financial Markets (the FSFM) or by relevant insiders, as specified in the Law on Insider Information.
The Law on Insider Information also provides a broad definition of “insiders,” which captures the following categories of persons:
- Issuers and management companies
- Legal entities holding a dominant position in any particular market
- Exchanges, clearing companies, depositories and credit institutions which effect settlements of transactions performed on exchanges
- Professional participants in the securities market, (together with those listed in items (1)–(3) above, the Insider Parties)
- Persons having access to insider information of any Insider Party pursuant to any agreement concluded with them (including auditors, appraisers, professional participants of the securities market, banks and insurance companies)
- Persons entitled to cast 25 percent or more of the total votes in the supreme governing body of any Insider Party
- Persons who, through the ownership of stock or participation interests in the stock capital of any Insider Party, have access to insider information pursuant to a foundation document of such Insider Party or any corporate law
- Members of the boards of directors, management boards, CEOs (management company, manager or temporary CEO) and members of audit commissions of companies falling within items (1)–(7), (9), (11) and (12) herein
- Persons having access to information concerning voluntary, mandatory or competitive offers for the acquisition of shares in a joint stock company made in accordance with Russian legislation
- Federal and local governmental bodies, local administrations and other bodies or organizations that perform similar functions, managing bodies of State off-budget funds in certain cases and the Central Bank of Russia
- Information agencies providing information disclosure services to Insider Parties or persons falling within item (10)
- Ratings agencies providing ratings services to any Insider Party
- Employees and/or contractors of entities falling with items (1)–(12) and certain officials falling with item (9) who have access to insider information
The Law on Insider Information also introduces a new definition of “market manipulation” which will replace the current definition of “price manipulation” set out in the Securities Market Law.
The Law on Insider Information prohibits the use of insider information:
- For carrying out operations with financial instruments, foreign currency and/or commodities which such insider information relates to
- By way of its transfer to third parties
- For recommending, obliging or motivating third parties to acquire or dispose of financial instruments, foreign currency and/or commodities
In cases described above, the law provides for certain exceptions where the use of insider information is allowed.
Any person who illegally uses insider information and/or carries out market manipulation bears liability in accordance with Russian law.
The FSFM will be the main competent authority responsible for the regulation of insider trading and market manipulation. The persons falling within items (1)–(12) above must maintain a list of insiders. The insiders must also disclose insider information in a manner to be stipulated by the FSFM.
The Law on Insider Information provides for the right of a person to claim damages for any loss, if such loss was caused by the illegal use of insider information and/or market manipulation. However, illegal use of insider information and/or market manipulation while carrying out operations cannot be grounds for the challenge.
The Law on Insider Information also amends the Code on Administrative Offences and the Criminal Code of the Russian Federation in order to introduce administrative and criminal liability for insider trading, and amends and clarifies administrative and criminal liability for market manipulation. In particular, the administrative liability for illegal use of insider information or market manipulation is (i) a fine of up to RUB5,000 (approximately US$176) for individuals; (ii) either a fine of up to RUB50,000 (approximately US$1,760) or disqualification for up to two years for officers and (iii) a fine of up to RUB700,000 (approximately US$24,600) for legal entities. The criminal liability for the mentioned offenses may be in the form of a fine or imprisonment and certain forms of ancillary punishment. The relevant amendments creating criminal liability for insider trading will enter into force in 2013.
Amendments to the Securities Market Law, which came into force in 2010, introduces new definitions of the terms “financial instrument” and “derivative instrument” and amends the definition of “repo transaction.”
The Definitions. A “financial instrument” is defined as a security or a “derivative instrument.” A “derivative instrument,” in turn, is defined as an agreement providing for: (i) an obligation of a party or parties to make a single payment or periodic payments (including upon request of the other party) that is/are dependent on changes in prices for commodities, securities, FX or interest rates, level of inflation, statistical and environmental data, failure to perform an obligation by a legal entity, state or municipality as well as on any other facts as specified in a federal law or a regulation of the FSFM, the occurrence or non-occurrence of which is not known, or on a combination of any of the above — i.e., swap transactions; (ii) an obligation to sell or purchase, upon request of the other party, securities, currency or commodities or to enter into a derivative (i.e., physically-settled options) — i.e., option transactions and (iii) an obligation to deliver securities, currency or commodities on a longer than T+3 settlement basis provided that the agreement specifies that it shall constitute a derivative instrument — i.e., forward transactions.
A new definition of “repo transaction” replaces the previous definition set out in the Tax Code. Currently, repo transactions are specifically excluded from the definition of a “derivative.” The new definition of “repo transaction” should reduce the risk of transaction re-characterisation which existed prior to 2010; however, it is not entirely clear how the courts will apply the new definition to repo transactions, the terms of which are materially different from the definition.
Foreign Financial Instruments. The amended Securities Market Law does not clearly define the term “foreign financial instrument” and does not explicitly state whether the new definition of “financial instrument” captures all, or only domestic, financial instruments. It is therefore unclear which foreign instruments would fall within the scope of the law. The current market consensus, however, seems to be that any derivative offered by a foreign institution shall constitute a “foreign financial instrument.”
“Foreign financial instruments” can only be offered to qualified investors (each, a QI). Currently, the Securities Market Law provides for two types of QI: (a) persons or entities that are QIs as a result of the operation of law, including Russian licensed brokers, dealers and managers; Russian “credit organizations;” joint stock investment funds; private pension funds; managers of investment funds, mutual funds; insurance companies; the Central Bank of Russia and certain other state agencies and international financial organizations (a QI by Operation of Law); and (b) persons or entities, other than a person or entity that is a QI by Operation of Law, that satisfy certain eligibility criteria and are recognized as QIs by a licensed broker, an investment company of a mutual fund or other authorised entity (a QI by Recognition). A QI by Operation of Law can trade in foreign financial instruments directly, whereas a QI by Recognition, by contrast, can only enter into transactions involving a foreign financial instrument through a broker (although it is not clear whether only the QI by Recognition, or all other parties to the transaction need to act through a broker). However, exceptions to this restriction may be granted by the FSFM.
Disclosure and Distribution of Information. Amendments were also made to the provisions relating to disclosure and distribution of information (which enter into force in April 2011, with certain limited exceptions). The amendments significantly expand the scope of information that must be disclosed by issuers that have registered prospectuses, including through: (i) the quarterly reports of the issuer of securities; (ii) the consolidated financial statements of the issuer and (iii) notices of any material facts. The recent amendments provide for an expanded list of material facts that should be disclosed and have expanded the definition of ‘material fact’ itself to include information that in the case of disclosure could “materially affect the price or quotations of the issuer’s securities.”
The amended Securities Market Law establishes that persons that sign the quarterly reports of an issuer and auditors that prepare auditors’ reports for an issuer included in the quarterly report of the latter can be held to be secondarily liable for losses of investors and/or shareholders suffered as a result of any quarterly report of an issuer being incomplete, misleading or misrepresenting information.
Article 30.1 of the Securities Market Law (which entered into force on 1 January 2011) establishes certain exemptions from the mandatory disclosure requirements otherwise applicable to issuers under the Securities Market Law. In order to qualify for the exemption, the issuer’s shareholders must pass a resolution to send an application for exemption from disclosure to the FSFM. The FSFM will only grant an exemption if the issuer complies with certain conditions stipulated by law, including a condition that the issuer has no more than 500 shareholders and its securities are not listed on a stock exchange.