Draft Law on Insider Information and Market Manipulation
September 2009
The State Duma approved the first reading of the draft law “On Counteracting the Unlawful Use of Insider Information and Market Manipulation” (the “Draft Insider Information Law”).
Russia continues to pursue adoption of a new law to battle insider trading on the securities markets. The latest Draft Insider Information Law was introduced by the Russian government at the end of 2008, replacing the previous draft which was first proposed almost ten years ago and has now been finally rejected. The new Draft Insider Information Law aims to establish comprehensive regulation of the use of insider information and market manipulation in “organized markets” – meaning any forum in which trades are performed using an exchange or other licensed trading platform.
The key provisions of the Draft Insider Information Law are summarized below.
Scope of Application
The scope of application of the Draft Insider Information Law is quite broad. It applies to all transactions with financial instruments (including but not limited to “emission securities” such as newly issued shares) and commodities:
(i) Which are traded on “organized markets” in Russia, or in respect of which an application for such trading has been submitted; or
(ii) Whose price is linked to the prices of the financial instruments and commodities referred to in paragraph (i).
However, the Draft Insider Information Law expressly excludes from its scope actions taken to implement state financial policies, protection of the Russian ruble, management of state debt and municipal securities trading, to the extent exercised by the Bank of Russia (i.e., the Central Bank), the Russian government or certain other officials and bodies referred to in the Draft Insider Information Law.
Who are “Insiders”?
As part of the introduction of certain basic concepts and definitions, the Draft Insider Information Law defines the circle of persons considered to be “primary insiders.” These are set out in Article 5 of the Draft Insider Information Law (the “List”). The List is broadly drafted and includes, among others:
(i) Issuers of securities (“issuers”);
(ii) Commodities manufacturers included in the register of persons having a market share above 35 percent, as maintained by the FAS (“commodities producers”);
(iii) Asset management companies, brokers, and other professional participants in the securities market;
(iv) Directors, CEOs, management board members and employees of persons listed in items (i)-(iii) above;
(v) Auditors of persons listed in items (i)-(iii) above; and
(vi) Information and rating agencies.
It is possible that this List will be made somewhat narrower in the final text of the law.
Importantly, in addition to the persons considered to be primary insiders by virtue of being on the List, the Draft Insider Information Law also introduces a concept of “secondary insiders.” Secondary insiders are persons who obtained insider information:
(i) From primary insiders or other persons; or
(ii) Accidentally (that is, without a primary insider intentionally communicating), as a result of actions by secondary insiders that do not breach the law; or
(iii) As a result of any breach of law.
Insider Information
The Draft Insider Information Law defines “insider information” as, in effect, any accurate non-public information of a particular issuer, asset management company or commodities producer or on a particular financial instrument or commodity, or which may significantly affect prices of particular financial instruments or commodities once disclosed (in other words, such information which a bona fide investor would take into account while deciding on investing in securities or commodities).
Any information which becomes public (through required or permitted disclosure or otherwise), research and analyst reports on trades at exchanges based on public information, and recommendations or proposals on transactions with financial instruments (e.g., securities) or commodities are not insider information.
Disclosure Requirements
As a general principle, the Draft Insider Information Law requires issuers, asset management companies, commodities producers and rating agencies to disclose insider information. Certain limited circumstances (e.g., the need to preserve confidentiality during negotiations conducted as part of measures to prevent bankruptcy) may serve as a ground for delaying such disclosure (provided certain conditions are met).
Such disclosure by issuers is made pursuant to the existing rules under the Securities Market Law, by reporting on “key events.” The rules for disclosure by asset management companies and other professional participants of the securities market should be set forth by the FFMS.
Further, the Draft Insider Information Law requires issuers and asset management companies, as well as certain professional participants in the securities market and financial organizations to maintain lists of persons qualifying as insiders, and to submit these lists to the Russian financial market regulator (the “Financial Regulator”), currently the FFMS, at its request.
Market Manipulation
The Draft Insider Information Law also sets out a detailed list of actions which may constitute prohibited “market manipulation” (with some limited exceptions), provided that such actions produce a particular result as specified in the Draft Insider Information Law. As currently drafted, in a number of instances the list applies relatively subjective criteria, such as transactions causing “significant deviation” from the current price or transactions that do not make “evident economic sense.” Further, such transactions may constitute market manipulation if they result in any increase or decrease in prices, or artificially maintain the existing price. Such concepts are new in Russia, and it may be left to the Financial Regulator or the courts to clarify the standards for a finding of market manipulation.
The FFMS has recently published on its website a draft of such standards. This document establishes rules for defining current prices for “anti-manipulation” purposes and sets out formulas for calculation of “significant price deviation” with respect to each type of securities. The formulas are based on the number of transactions with the respective type of securities, total value of such transactions, number of traders involved, and volatility of those securities and of the security market in general.
Consequence of Prohibited Activities
Persons subject to the Draft Insider Information Law are prohibited from entering into transactions involving the unlawful use of insider information, or engaging in market manipulation. All resulting transactions will be deemed invalid. In addition, any amounts earned or saved as a result of the unlawful transaction may be recovered from the offender for the benefit of the state. The Draft Insider Information Law also provides other consequences for breach, including possible loss of securities licenses. It is also expected that criminal penalties may be enacted.
Powers of the Financial Regulator
To enhance enforcement, the Draft Insider Information Law grants the Financial Regulator broad powers to oversee compliance with the Draft Insider Information Law and related regulations, including powers:
(i) To carry out investigations and request documents and information from all relevant persons, including banks;
(ii) To issue mandatory orders to rectify any breaches of law relating to use of insider information;
(iii) To suspend the licenses of professional participants in the securities market for failure to comply with the provisions of the Draft Insider Information Law and related regulations; and
(iv) To seek invalidation of transactions entered into in breach of the Draft Insider Information Law, through court proceedings.
This article is intended only as a general discussion of these issues. It is not considered to be legal advice.
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