Law “On Inside Information and Market Manipulation” To Raise Confidence in Russia’s Financial Market
Inside information is relevant information unavailable to the public about a company, which becomes known to a certain person by virtue of the job position, management status or other special relations with a company. Insider trading is perceived as a harmful practice in all developed markets and legislators and regulators struggle against it worldwide. Such trading contradicts the principles of good-faith competition among market participants, inflicts damage to other investors and undermines corporate business reputation and confidence in the entire national stock market. As a result, most developed countries introduced penalties such as substantial fines and even imprisonment for insider trading.
Meanwhile, there are no penalties for insider trading in Russia now, though every market participant can recall striking examples of such trading. The existing legislation does not define “insider” and “inside information.” The law “On Securities Markets” contains a definition of “office information” and prohibits trading based on it. This notion, however, is limited and fines for using such information are insufficient. Moreover, the Federal Service for Financial Markets hardly has any powers to disclose such violations. This situation does not correlate with the world practices.
Price manipulation by large or proactive market participants is another example of bad-faith trading. It leads to inadequate stock offer or demand on the market, destroys fair pricing and eventually causes losses to investors.
For the Russian securities market to function effectively, the country needs to adopt laws regulating insider trading and price manipulation, to increase the confidence of domestic and foreign investors, and to secure fair competition. Drafting the law “On Inside Information and Market Manipulation” is a top priority on the FSFM’s legislative agenda.
According to the FSFM, insider trading and price manipulation are closely connected in many cases, though insider trading is possible without price manipulation and visa verse. Regulatory tools and approaches used to disclose and stop these bad-faith practices are very similar to those penalties applied to the infringers. It makes sense to tackle these problems with one law.
The law should primarily define “inside information.” The definition should be clear, but not limited. Holding inside information is not a crime: it is illegal to make trades of stock using this information as well as passing it to third parties to make such trades. The law should identify a more exact list of illegal actions with inside information.
The law should also define “insider.” This notion should include, first of all, issuers; directors and management officers of these companies, employees that have access to relevant information unavailable to the public about the company and large shareholders; public officers of state agencies that have important information inaccessible to market participants; auditors, evaluators, consultants, underwriters and other professional market participants contracted by the company and, therefore, having more knowledge than the general public, as well as the staff of these entities. The law should identify rights and obligations of such entities with regard to inside information; for example, issuers will be obliged to disclose such information.
Another area to work on concerns the powers of the regulator. The FSFM is clearly aware of how dangerous it is to have excessively strict market regulation and considers it necessary to determine the scope of its powers concerning the right to check insiders, obtain explanations from them and demand documentation. On the other hand, along with disclosing and stopping violations, efforts must be taken to prevent insider trading.
As for price manipulation, it is partially regulated by the existing law “On Securities Markets.” This regulation is inadequate, however. The definition is very limited, the powers of the FSFM on disclosing and proving cases of manipulation are insufficient, and liability for such violations is limited to suspending or canceling licenses of professional market participants. There are no administrative fines let alone the mention of criminal liability.
It is necessary to widen the definition of price manipulation as well as list of its characteristics. Examples of price manipulation are as follows: a bidder both buys and sells at the same time at the same price (or the buying price is higher that the selling price); a trader regularly has buying bids with maximum price and selling bids at minimum price which leads to considerable growth (or respectively, drop) of price, etc. The law should define the list of entities that have the right to manipulate prices and powers of the regulator to disclose and stop this practice.
Finally, the legislation should set a system of liability for bad-faith actions. As criminal and administrative sanctions are set by the Codes, along with adopting the law “On Inside Information and Market Manipulation,” amendments should also be introduced to the RF Code on Administrative Violations and the RF Criminal Code.
Source: Federal Financial Markets Service
