On July 30, 2010, the Federal law No.224-FZ "On Counteracting the Illegitimate Use of Insider Information and Market Manipulation and on Amendments to Certain Laws of the Russian Federation," dated July 27, 2010 (the "Law") was published.
Prior to the Law, the use of non-public information in any securities transaction was prohibited only in respect of "official information."1 The Law, which is a compilation of western legislations, including the E.U. directives and the U.S. Securities and Exchange Commission rules and regulations, introduces the long-anticipated provisions establishing comprehensive regulation on the use of insider information and market manipulation when trading in financial instruments, foreign currencies and/or commodities in regulated markets. The Law will come into effect on January 27, 2011, however, certain provisions of the Law set a framework for future action and rulemaking by the Federal Service for Financial Markets (the "FSFM") and certain other regulatory bodies.
The Law aims at boosting investor confidence in the Russian financial market by enhancing transparency, increasing investor protection and promoting market efficiency and integrity.
- The Law establishes, among other provisions, the following:
- definitions of "insider information" and "insider";
- prohibited use of insider information;
- disclosure and reporting requirements;
- actions constituting market manipulation; and
- liability for non-compliance with the Law.
In addition, the Law grants the FSFM broad authority to, among others, impose enhanced disclosure and reporting requirements, oversee the compliance such requirements, carry out investigations, and revoke or suspend licenses of market participants for non-compliance with the Law.
The Law specifically excludes from its provisions certain actions taken by the Central Bank of Russia, Russian government and other officials related to, among other actions, preservation of a stability of the Russian rouble and management of the state and municipal authority debt.2 .
Insider Information The Law defines the term "insider information" as "any precise and specific non-public information the disclosure of which may significantly affect the price of a particular financial instrument, foreign currency and/or commodity." 3 In addition, "insider information" includes any information that is included in the list of insider information yet to be implemented by the FSMF.4
The term "insider information" does not include any information which becomes public through required or permitted disclosures, research, forecasts and other analytical reports based on public information, and recommendations or proposals on transactions involving financial instruments, foreign currencies and/or commodities.5
The Law provides two categories of "insiders": "primary insider" and "secondary insider."6 A primary insider is considered to be any of the following persons:
- issuer of securities;
- asset management company;
- company having a dominant market position and included in the state register, as is maintained by the Russian Federal Antimonopoly Services;
- broker and other professional participant in the securities market;
- stock exchange, clearing organization, depositary or credit organization that conduct settlement of transactions on the stock exchange;
- shareholder controlling at least 25% of the governing body of any entity listed in (1)-(5) above;
- director, executive officer and auditor of any person listed in items (1)-(6) above; and
- information and rating agencies.
A secondary insider is deemed to be a person who obtained the insider information:
- from a primary insider or other persons;
- accidentally, but as a result of lawful actions by such secondary insider; or
- as a result of any breach of law.
Although, the list of insiders is deem to be exhaustive, it is extensive and applicable not only to individuals and legal entities, but also to governmental and municipal authorities.
Prohibited Use of Insider Information
The Law prohibits any person from entering into, or recommending or inducing a third party to enter into, a transaction involving financial instruments, foreign currencies and/or commodities; provided that such person received the insider information prior to entering into, or recommending or inducing a third party to enter into, such transaction.
Disclosure and Reporting Obligations
The Law requires issuers, asset management companies and certain other market participants to disclose insider information,7 subject to limited exceptions. The Federal law "On Securities Market" already requires issuers to disclose such information by reporting on 'key events'.8 The Law authorizes the FSFM to promulgate the rules and procedures for such disclosure by asset management companies and other market participants.
The Law requires issuers, asset management companies and certain market participants to maintain and, upon request, submit to the FSFM the list of individuals possessing the insider information.9
In addition, the Law obliges the insider included in the list of insiders to notify the relevant issuer or asset management company and the FSFM about all transactions such insider participated in involving the securities of such issuer or asset management company.10
The Law provides a detailed list of actions constituting "market manipulation,"11 as a result of which a 'substantial deviation' in price, supply, demand or volume of trading in the relevant financial instruments occurs. The market manipulation activities include, among other activities, the following:
- deliberate distribution of false information via a publicly available source, including electronic mass media and the Internet;
- entering into a transaction where the ultimate beneficiary on both sides of such transaction is the same person;
- submission of buy and sell orders for, or on behalf of, the same person where the price of the buy order is equal to or greater than the price of the sell order; and
- performing multiple transactions within one trading day on the account of, or for the benefit of, the same person with the purpose of misleading other market participants about the price of a financial instrument, foreign currency and/or commodity.
In August 2009, the FSFM published the draft order12 setting out criteria and formulas for establishing the 'substantial deviation' in price with respect to various securities. Such formulas are mainly based on the number of transactions in the securities, number of traders involved, total value of such transactions, and volatility of those securities.
The Law entitles the FSFM to promulgate further regulations setting out the permissible actions to support prices of financial instruments, foreign currencies or commodities.
Any person engaging in illegal use of insider information or market manipulation or violation of legislation on the use of insider information and market manipulation is subject to administrative, civil and criminal liabilities.
The administrative liability for non-compliance with the Law is either a fine of up to 700,000 roubles (approximately US$23,000) or disqualification for up to two years for officers.13
The civil liability for non-compliance with the Law is damages; however, the execution of a transaction involving unlawful use of insider information or market manipulation is not a basis to avoid such transaction.
The criminal liability for non-compliance with the Law is either a fine of up to 1,000,000 roubles (approximately US$33,000) or imprisonment for up to seven years, depending on the gravity of the crime.14