China announces new rules against ‘insider trading’
A 2017 research study pointed to insider trading as a pervasive practice among the most successful investors in China. Only time will tell if the new rules will make a dent in their gains.
The China Securities Regulatory Commission (CSRC) has announced new rules to prevent insider trading for listed companies, stock exchanges, and intermediaries.
The regulator now defines ‘inside information’ as information that has not been made public, involves the operation and finance of listed companies, and can have a significant impact on securities prices – including ‘major events’ as defined in the Securities Law.
Under the new rules, listed companies are required to establish a system for the registration of individuals who possess inside information. The ‘insider registration management system’ includes a file for every insider, containing detailed records of the inside information they possess. Insiders are required to confirm the records.
The board of directors of each company falling under the scope of the inside trading rules must then ensure these files are submitted to the stock exchange.
The CSRC also requires listed companies, exchanges, and intermediaries, to submit updated insider files when major changes occur, such as acquisitions, asset reorganizations, new securities issuances, mergers, spin-offs, and shares repurchases. The memoranda must include a list of the individuals who were involved in planning and decision-making.
Securities companies, law firms, and securities service firms must assist in the submission of insiders files and related memoranda. Serious breaches to compliance may be penalized with orders barring responsible personnel or prohibiting access to markets, while criminal matters will be referred for prosecution.
These new rules aim to tackle insider trading in China which has been pervasive throughout the years. Unlike the US – where investing based on tips of private information about a company can be construed as illegal insider trading – China has indirectly allowed this form of trading to happen quite freely. The tipster could be prosecuted, but whoever trades on the information technically doesn’t commit a crime.
A 2017 study conducted by Chinese researchers scanned a million brokerage accounts and found the wealthy trade ahead of market-moving news.
The research concluded that the most successful investors were best at buying shares of Chinese companies just ahead of the firms’ announcements of large stock dividend payments, which appears to be a direct result of insider trading. The portfolios of these investors weren’t diversified at all and were focused on stocks of local companies.
If the new insider trading regulation will make a dent in these investors’ gains, only time will tell.