Illegal use of insider information
On 30 June 2010, the Law “On counteracting the illegal use of insider information and manipulating the market and on amending separate Russian legislative acts” (the “Law”) was signed by the Russian President and published. It comes into force 180 days after being officially published.
The idea behind adopting this Law is not new to Russia. The draft of the law has been under discussion for almost ten years. It is notable that during the discussion process, there were several changes of senior personnel in the Federal Service for Financial Markets (“FSFM”) and the Federal Securities Commission (“FSC”). In this connection, it is logical to ask why the Law should have been brought into force at this particular time and not earlier, when the stock market was actively growing rather than being shaken by the effects of the economic crisis.
First and foremost, the Law aims to establish rules for the Russian stock market by which the world’s developed countries have been playing for more than just a single decade.
The aim of the Law is to “ensure that financial instruments, foreign currency and/or goods are fairly priced, that investors are treated equally and their trust is strengthened, and also putting a stop to abuse in organised trades of the illegal use of insider information and/or the manipulation of the market”.
Insider information is understood as meaning, “precise and definite information which was not distributed or supplied (including evidence constituting a commercial, official or banking secret, a communications secret (in connection with mail orders of funds), and other matters that are secret by virtue of the law), the distribution or supply of which could have a substantive effect on the prices of financial instruments, foreign currency and/or trades and which relates to information included in the corresponding list of insider information”.
The Law defines “insider” in a very wide sense. This is possibly the reason for placing on the FSFM the obligation to define the list of information which will be considered to be “insider”. The list of insider information must be developed independently and confirmed by several insiders. In real terms, without this list being confirmed by the FSFM, the law will effectively not have come into force and it will be impossible, practically, to apply it. When the list of insider information will appear is impossible to predict. However, as FSFM practice shows (for instance, after the amendments to the Law “On the securities market” were adopted in terms of allowing the circulation of foreign issuers’ securities on the Russian stock market), it will take some time for this list to be developed.
In addition to the above, the Law contains many reference rules, and in particular the FSFM is also obliged to prepare a document confirming the procedure and time periods for insider information to be revealed etc.
The Law sets out an exhaustive list of the persons who may be recognised as insiders. They can be formally divided into two basic categories:
1. Legal entities which are issuers, managing companies, economic operators and other companies which occupy a dominant position in the market, clearing companies and also other companies directly connected with the securities market, including persons who are part of their management bodies or who have access to insider information on the basis of civil law agreements (valuers and auditors);
2. State and local government institutions and their managers.
We note that the Law does not extend to the Russian State Prosecutor’s Office.
To stop abuses in organised trades arising fr om the illegal use of insider information and/or the manipulation of the market, the Law cites a list of actions which may be recognised as manipulation of the market. For instance, if clearly false information is spread intentionally using the mass media (including the Internet), resulting the price of a financial instrument deviating as compared to the level at which it would have been had the false information not been circulated, then the mass media outlets which distributed such information must inform the FSFM about the insider who revealed it to them. The requirement to give information about the insider extends both to media outlets and to their chief editors and journalists.
The initial wording of the Law envisaged that mass media outlets and persons connected with this profession would also be liable for spreading insider information. However, in the course of the lengthy discussion and agreement of the Law with the journalistic community, they succeeded in mollifying its provisions. Now media outlets, chief editors and journalists will not be liable if the publication is based on verbatim quotations or other publications. Such persons will be liable only wh ere a benefit was received or if details of the source spreading the false information were not supplied to the FSFM.
It is no secret that Russian business comes under great pressure from all manner of supervisory bodies. By establishing yet another compulsory reporting requirement, the Law is no exception to this tradition. In particular, the entities to which the Law extends must produce a list of insiders and must notify the FSFM whenever it changes. Equally, an obligation is imposed on the insiders themselves to notify the FSFM of operations with securities involving defined issuers etc. The breach of these requirements may result in the imposition of severe administrative penalties.
As noted above, state and local government authorities and also their managers may additionally fall into the category of insiders. Meanwhile, it is unclear from the Law whether high-ranking officials will be held liable for their pronouncements which have brought about a change in the price of issuers’ securities, as has happened more than once.
The Law makes a series of amendments to the Russian Code of Administrative Offences (which come into force at the same time as the Law does) and to the Russian Criminal Code (which come into force three years after the Law comes into force).
The maximum administrative penalty for a breach of the Law is a fine of 1,000,000 roubles. The criminal penalty is more severe: up to seven years’ imprisonment. We hope that, before the amendments to the Criminal Code come into effect, the practice for the application of the Law will already have developed and that it will not be another instrument to put pressure on business.
The issue of transactions being invalid is not entirely clear. On the one hand, holding that transactions consummated in breach of this Law should be regarded as invalid could bring about the collapse of the market. On the other hand, payment of a fine could give carte blanche to break the law. When compared to the amount of money circulating on the stock market, this price tag is insignificant.
As well as developing rules for the introduction and control of liability for breach, the Law removes the last barrier which is preventing signature of the multilateral memorandum with the International Organisation of Securities Commissions (“IOSCO”) and the subsequent development of Russian cooperation with the group of international regulators. Russia’s membership of IOSCO would allow many solutions on the financial market to be implemented promptly. Moreover, direct participation in this international organisation will allow Russia in the future to influence the development of international rules for financial markets taking account of its national interests.