The PRC securities market has for years been haunted by a large number of insider trading and other irregularities. Diverse investors and transaction methods, coupled with the debut of a stock futures index, have only created more difficulties for Chinese regulators. At the same time, the government’s move to cool down an overheated real estate market and ever-rising inflation have propped up the securities market, as Chinese investors view the securities market as probably the last meaningful destination for their funds.
In the PRC, the legal authority for prohibiting insider trading stems mainly from the criminal and security laws. The Criminal Law of the People’s Republic of China, 1979 as amended (Criminal Law) defines inside trading in Article 180 as occurring whenever:
“whoever has inside information on securities or futures transactions or illegally obtains inside information on securities or futures transactions, and prior to the release of the information that involves the issuance of securities or securities or futures transactions or other information that has a material effect on the transaction price of securities or futures, buys or sells the said securities, engages in the futures transaction related to the inside information, leaks the said information, or explicitly or implicitly advises others to engage in the aforesaid transaction activities……” (emphasis added).
“Inside information” is defined at length in Article 75 of the People’s Republic of China Securities Law, 2006 (Securities Law) as “information that concerns the business or finance of a company or may have a major effect on the market price of the securities thereof and that has not been disclosed in securities trading.”
Under Article 180 of the Criminal Law, individuals who are found guilty of insider trading are penalized with prison terms ranging from one to five years and monetary fines up to five times the illegal gains. On May 18, 2010, the Supreme People’s Procuratorate and the Ministry of Public Security jointly issued a criminal prosecution threshold against insider trading offenders: trading volume exceeding RMB500,000, illegal gain/loss-aversion exceeding RMB150,000, or repeatedly using or leaking inside information. The penalty may go up to five to ten years only in “extremely serious cases.” Individuals found responsible for corporate violations are penalized with no more than five years in prison. In addition, the seventh amendment to the Criminal Law provides for criminal sanctions against securities personnel, mutual fund managers, or regulatory agency staff who take advantage of their access to non-disclosed information for personal profits.
Starting from the second half of 2010, PRC securities regulators have initiated a new round of law enforcement efforts and prosecuted a number of insider trading cases. At the same time, after conducting surveys among practitioners and talking to regulators at different levels and agencies, Chinese securities regulators have declared that they need to establish clearer rules and practice standards to stem the rise of insider trading crimes through a more robust regulatory oversight and publicity campaign. A milestone document was issued on November 18, 2010, when the PRC State Council distributed an opinion drafted by the China Securities Regulatory Commission (CSRC) and four other regulatory agencies on “Opinions on Cracking Down, Preventing and Controlling Insider-Trading in Accordance with Law” (Forwarding Opinions on Cracking Down, Preventing and Controlling Insider-Trading in Accordance with Law from Securities Regulation Commission, the Ministry of Public Security, the Ministry of Supervision, the State-owned Assets Supervision and Administration Commission, and the National Bureau of Corruption Prevention, State Council General Office, November 16, 2010 (GUOBANFA No. 55 )) (Opinions).
According to a press release published on its website on November 18, 2010 the CSRC will implement the Opinions in the following five ways:
- The CSRC will accelerate rule making and standards setting to strengthen regulatory oversight and corporate internal control to stem insider trading. Specifically, the CSRC announces that it will:
- Promulgate a new regulation titled “Regulation on Supervision and Management of Public Companies;”
- Revise and improve the administration of criminal laws against irregularities and crimes in securities and futures trading, and explore a system of rewarding whistle-blowers of insider trading; and
- Further develop and strengthen corporate internal control, information disclosure, suspension, and resumption of trading. Encourage public companies to improve their procedures of internal review to ensure that disclosures are timely, accurate, and complete to prevent insider trading through use of inside information.
- The CSRC will encourage public companies to establish safeguard mechanisms to prevent insider trading. This will be accomplished by encouraging companies to:
- Establish a security mechanism for inside information;
- Register persons who have access to inside information;
- Periodically check to ensure compliance; and
- Increase awareness by all parties involved on the importance of preventing insider-trading.
- Launch a more vigorous public campaign against insider trading and increase awareness among public company directors, supervisors, executives, and securities traders of the harm created by insider trading. The CSRC hopes that will create a moral shield against insider trading.
- Step up law enforcement efforts and continue the war on insider trading. By conducting a number of high-profile investigations and prosecutions, the CSRC hopes to have a chilling effect on insider trading.
- Lastly, the CSRC will seek collaboration with other regulatory agencies and local provinces to coordinate their efforts on preventing and cracking down on insider trading perpetration.
Although the conviction rate and the penalties imposed on insider trading offenders are still dwarfed by the number of violations, it is clear that the CSRC is trying to send a strong message. There have already been three investigations into alleged violations by mutual fund managers in 2010, which ultimately led to one fund manager being imprisoned. The CSRC is also strengthening its administrative enforcement mechanism by announcing on October 26, 2010, that it will establish three commissions in Shanghai, Shenzhen, and Guangdong to investigate violations of the Securities Law and to impose administrative penalties or recommend criminal prosecutions. During the first 10 months of 2010, CSRC has conducted 42 investigations on insider trading; representing 37 percent of the leads it received. Among these 42 cases, CSRC passed incriminating evidences to the PRC prosecutors to open 15 criminal investigations, some of which already led to criminal convictions.