Impact of revised Securities Law on compliance and insider trading

Author:Lianjun Du, Zhilin Chu

Insights

The newly revised Securities Law entered into effect on 1 March 2020. This is the fourth revision, comprehensively revising and improving it in terms of the securities offering system, registration system reform for stock offerings, greatly increasing the cost of securities law violations, enhancing investor protections, and strengthening information disclosure.

Change in recognition of acts

(1) Expansion and improvement of the scope of those in the know. The revised Securities Law expands the seven types of insiders specified in the former article 74 to the nine types in the current article 51, and additionally makes revisions to some of them.

The revised Securities Law expands the recognition scope that has the shareholders and working personnel of a listed company at its core. Article 51 of the revised Securities Law adds: (i) the issuer; (ii) persons who have access to insider information by virtue of their business dealings with the company; and (iii) the acquirer of a listed company or a party involved in a material asset transaction with it and its controlling shareholder, actual controller, directors, supervisors and senior executives, thereby expanding the scope of insiders to the issuer itself and the counterparty in a material transaction.

Furthermore, the revised Securities Law clarifies certain ambiguities that previously existed with respect to insiders. For example, it expressly states that companies controlled by the issuer include companies in which the issuer is the actual controller, closing an existing legal loophole; and it clarifies that the previous “other persons charged with the administration of the offering and trading of securities by virtue of their statutory duties” are “the working personnel of the relevant competent authority or regulator that is charged with the administration of listed companies, the acquisition thereof and the material asset transactions thereof”, for example, the working personnel of such an authority as the State-Owned Assets Supervision and Administration Commission of the State Council, which oversees state-owned holding companies.

 (2) Change in the system of content types. Article 52 of the revised Securities Law changes the definition of “insider information” to read “non-public information on the issuer’s operations or financial affairs, or that could have a material impact on the market price of the issuer’s securities, is insider information”.

From this it can be seen that, compared to the previous phrasing that made “the company” the subject of insider information, the revised definition of insider information stresses the connection with the “issuer”, making it clearer.

The system of types of insider information before the revision of the Securities Law was as follows: Material events that could have a relatively large impact on the stock trading price that a listed company was required to issue interim reports on, or announce as specified in the second paragraph of article 67, and other insider information as specified in the second paragraph of article 75.

After the revision, the types of insider information are made uniform with the types of information that an issuer is statutorily required to disclose, specifying that material events that could have a relatively large impact on stock or bond trading prices are insider information, while taking into account the respective particular characteristics of stock and bond trading now embodied in the second paragraph of article 80, and the second paragraph of article 81 of the current Securities Law. Additionally, portions of the circumstances specified in the second paragraph of article 75 of the previous Securities Law are revised or removed.

Criminal compliance key points

Pursuant to article 180 of the Criminal Law and articles 6 and 7 of the Interpretations of Several Issues Concerning the Specific Application of the Law in the Handling of Criminal Cases of Insider Trading and Disclosure of Insider Information, jointly formulated by the Supreme People’s Court and the Supreme People’s Procuratorate, “where the amount of a securities transaction is at least RMB500,000”, “where a futures transaction accounts for at least RMB300,000 of the margin”, “where the amount earned or the loss avoided is at least RMB150,000”, or insider trading is engaged in “at least three times”, the same constitutes a serious crime of insider trading as specified in article 180 of the Criminal Law, and can result in a sentence of up to five years in prison, or penal servitude and/or a fine of not less than one time and not more than five times the illegal income.

“Where the amount of a securities transaction is at least RMB2.5 million”, “where a futures transaction accounts for at least RMB1.5 million of the margin”, or “where the amount earned or the loss avoided is at least RMB750,000”, the same constitutes a particularly serious circumstance, and can result in a sentence of not less than five years and not more than 10 years in prison, and a fine of not less than one time and not more than five times the illegal income. From this it can be seen that criminal penalties for insider trading in China are quite severe.

With the strengthening of oversight over insider trading by the revised Securities Law, the severity and frequency with which the judicial authorities penalize insider trading with criminal means in securities market, acquisitions and restructurings by listed companies, etc., are set to increase.

Each of the Supreme People’s Court and the Supreme People’s Procuratorate has frequently signalled in its work reports and at its meetings that it will severely crack down on crimes that seriously disrupt the order of the financial markets, like insider trading.

To respond to the law enforcement trend of severely cracking down on insider trading crimes following the revision of the Securities Law, it is necessary to carry out directed criminal compliance by: (1) enhancing the insider trading prevention and control awareness of the various parties involved in material transactions; (2) providing regular compliance training to relevant persons so as to ensure that transaction decision makers and executors are familiar with the features of insider trading criminal risks and the severity of the punishments; and (3) conducting necessary compliance investigations and carrying out early risk assessment and response.

In judicial practice, when a person being investigated is unable to show reasonable grounds for the opening of an account, the flow of specific funds, etc., during the insider information sensitivity period, such person will face the attendant criminal risks. Accordingly, compliance training should be provided in advance, compliance investigations of specific transactions should be conducted, and relevant evidence for high-risk transactions should be collected and consolidated so as to be able to respond to anticipated investigations.


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