The Insider Trading Law
Jennifer Handz, Julia Romanova and Daria Litvinova
Chadbourne & Parke
Moscow
Jennifer Handz (Bio)
Julia Romanova (Bio)
Daria Litvinova (Bio)
This article provides a general overview of Federal Law No. 224-FZ dated July 27 2010 'On Prevention of Illegal Use of Insider Information and Manipulation in the Market and Amendments to Certain Legislative Acts of the Russian Federation' (the Law).
The Law came into force at the end of January 2011. However, certain provisions of the Law will only come into force in July 2011 (for instance, provisions requiring insiders to maintain a list of insider information, to maintain control over operations with financial instruments, foreign currency, etc). Further, a number of provisions setting forth the liability for violations of the Law will only come into effect only at the end of July 2013.
The aim of the Law is to develop a legal mechanism for preventing, detecting and discontinuing misconduct in trading that involves the illegal use of insider information and/or market manipulation. The Law regulates activity concerning, among other things, financial instruments, foreign currency and/or goods admitted for trading on stock markets in the Russian Federation, and/or financial instruments, foreign currency and/or goods for which a request is made for admission to trade on such stock markets.
The Law defines insider, insider information and legal requirements for dealing with insider information and preventing manipulations in the market through the illegal use of insider information. The Law also provides for amendments to certain federal laws of the Russian Federation, setting forth, among others, administrative and criminal liability for offences related to insider trading.
Insiders
Under the Law, insiders are: issuers; managing companies of investment funds; unit funds and non-governmental pension funds; members of a board of directors; a collective executive body; a person performing the functions of a sole executive body (including a management company; a manager or temporary executive body); members of an audit committee of (among others) issuers and management companies; business entities holding a dominant position on the market; market-makers; clearing houses; depositories and credit organisations making settlements as a result of transactions entered into through market-makers; and professional participants of a securities market.
Insider information
According to Article 2 of the Law, insider information is specific information that has not been disclosed or provided, including information containing commercial, official, banking secrets, secrets of communication (in terms of data relating to postal transfers of funds) and other secrets protected under law, provided that: (i) disclosure or provision of such information may substantially affect the price of financial instruments, foreign currency and (or) commodities, and (ii) such information represents information included in the relevant list of insider information determined by the Law.
The Law sets forth only a general concept of what information may be considered insider information, stating that a specific list of insider information for particular types of insiders has to be established by the Federal Service on Security Markets (the FSFM).
The draft currently available at the official FSFM website contains a broad list of insider information, which does not appear to be exhaustive.
For instance, the draft covers the following information: (i) convocation of a General Shareholders Meeting and decisions thereof; (ii) meetings of the Board of Directors, the agenda thereof and certain decisions (e.g., issuance of securities, appointment of the executive body, recommendations on dividends, etc.); (iii) appearance of a controlling entity or entity under control and/or termination of such control; (iv) pertaining to reorganisation, liquidation, bankruptcy; and (v) pertaining to the issuance of securities, etc. It should be further noted that such information shall be deemed to be protected under the Law prior to it being officially made public.
The current draft list of FSFM applies only to issuers whose shares are admitted for public trading or who have applied for admission for trading. Therefore, the list states that private companies whose shares are not publicly traded shall not be affected by the requirements of the Law.
Insider trading restrictions
The Law provides for a set of limitations for dealing with insider information including, inter alia, the following:
- insider information may not be transferred to any person (not necessarily an insider), other than a person included in the list of insiders in connection with the performance of obligations arising out of federal laws, performance of labour duties and performance of an agreement;
- insider information may not be used in the performance of transactions with financial instruments, foreign currency and (or) commodities being subject to insider information, at the account of a person performing such transaction or a third party, with the exception of transactions aimed at the performance of a matured obligation related to the purchase or sale of a financial instrument, foreign currency and (or) commodities, provided that such obligation arose as a result of a transaction performed prior to the person becoming aware of the insider information;
- insider information may not be used in recommendations to or compelling or obliging third parties to purchase or sell financial instruments, foreign currency and (or) commodities.
The Law also prohibits manipulations in the market, setting forth a broad list of operations (transactions) representing such manipulations.
Liability
Under the Law, any person that illegally uses insider information and/or attempted market manipulation shall be liable in accordance with the Law (administrative or criminal liability).
Persons who suffer losses as a result of the illegal use of insider information and/or market manipulation are entitled to demand reimbursement of such losses by the persons whose actions have caused such losses.
The Law amends the Code of Administrative Offences, the Criminal Code, the Law on Banks and Banking Activities, and the Securities Market Law.
Conclusion
The enactment of the Law is a positive development in the protection of information in financial markets, specifically information pertaining to public trades. However, implementation of the Law depends on the development of lower-level legal acts by the Government of the Russian Federation and the FSFM.
As the provisions of the Law setting forth the requirements for maintaining the list of insider information will come into effect in less than one month and there is still no final clarity as to what particular information may be deemed insider information for issuers, it is likely that issuers and their insiders may face certain difficulties in implementation of the Law.
In view of the fact that the Law provides for extensive liability for violations, we would recommend that all insiders be extremely cautious in handling information that may potentially fall under the definition of insider information until such time as clarifying legislation has been enacted and court practice has developed as to the application of the clarifying legislation.