How to prevent insider trading in securities markets? It’s certainly a challenge and Vietnam is no exception. This article discusses the rules that define insider trading.
The Law on Securities (“Law”) prohibits a person from:
- using inside information in order to purchase or sell securities for one’s self or for a third party;
- disclosing or giving inside information to another person; and
- advising another person to purchase or sell securities on the basis of inside information.
For these purposes the Law defines “inside information” to include:
“information about a public company, a listed organization, an organization registered for trading, a public fund, or a public securities investment company which information has not yet been disclosed to the public and which, if disclosed, could have an impact on the price of the securities issued by such organization.”
Elements of the Prohibition
Protected information is information that, if misused, would affect the price of securities issued by a public company, a listed organization, an organization registered for trading, a public fund, or a public securities investment company.
By making a general reference to “securities,” the prohibition against insider trading appears to cover all types of securities contemplated under the Law. They include:
- Stocks, bonds, and investment fund units;
- Warrants, covered warrants, pre-emptive rights, depositary receipts;
- Derivatives; and
- Other types of securities as prescribed by the Government
The prohibition is broad enough to cover both listed securities that are traded on the stock exchange, as well as unlisted securities that are traded on the OTC market. What it does not cover is shares and capital in private, unlisted entities.
Public company is:
- A company whose paid-in charter capital is at least VND 30 billion and at least 10% of its voting shares are held by 100 or more non-major shareholders; or
- A company which has registered and successfully conducted an initial public share offering with the State Securities Commission.
Listed organization is one whose securities are listed on the securities trading system in Vietnam.
Organization registered for trading means one whose securities are registered for trading on the securities trading system in Vietnam.
A public fund is one that has offered its shares to the public. The term “offering shares to the public” means to offer shares by: (i) sale to at least one hundred investors, excluding professional investors; (ii) sale through mass media communications; or (iii) sale to unspecified investors.
Public securities investment company is one which invests in securities and has completed its initial public offering.
The use of undisclosed information for trading is not prohibited simply because such information has not yet been published. There is also a requirement that the information, if disclosed, could affect the price of the securities of the issuer.
The broad reference of the Law to “information about a public company, a listed organization, an organization registered for trading, a public fund, or a public securities investment company” does not specify whether the inside information must specifically relate to the issuer whose securities are the subject of the insider trading (eg, information about an upcoming share offer to existing shareholders at a discounted price). Or whether it can be more general information related to the issuer’s market or industry (eg, information about a change in the government’s policy that will affect the whole real estate sector in which Company A is operating). It seems that both types of information are subject to the prohibition.
A trade is prohibited if the investor has access to inside information, irrespective of the identity of the investor or the source of the information. Strictly, the law requires that the insider information involved was actually used. Of course, it would be a matter of proof whether inside information was used. But once it is established that the investor has access to the inside information and has entered into a transaction relating to that information, it may be hard to argue that the investor did not use the inside information in the transaction.
Disclosure to the public
The Law contains strict rules on disclosure of information that relates to the issuer itself. The rules list out an inexhaustive list of information that must be disclosed such as corporate affairs, financial issues, business operation, litigation, etc. and then set out when, how and by whom such information can be disclosed. Not all information must be disclosed to the public. Much inside information is of a competitive nature and is purposefully not disclosed. The offense arises when any of the undisclosed inside information is used in the manner discussed.
The Law regulates the means by which an issuer must disclose inside information to the public. Only the legal representative or a duly authorized person of an issuer can disclose information. Such information must be disclosed in particular ways: on the website of the issuer, the Stock Exchange, Vietnam Securities Depository and Clearing Corporation, on the information disclosure system of the State Securities Commission, in the mass media, or in a way that follows the Stock Exchange Rules. These provisions suggest that information is effectively communicated to the market if it is sent using these means.
When disclosing information, the issuer must report the disclosed information to the State Securities Commission and the organization where such securities are listed or registered for trading.
Sanctions against misuse of inside information are provided in Decree 156/2020/ND-CP of the Government dated 31 December 2020. A person who has access to inside information and who purchases or sells securities based on such information, discloses such information, or suggests that another person purchase or sell securities based on such information, is subject to an administrative penalty in the form of a monetary fine, a suspension of operations and confiscation of illegally gained income. The monetary fine is 10 times the illegally gained income, but no less than VND 1.5 billion if the offender is an individual, and VND 3 billion if an entity. The securities practice certificate of an individual offender (if he has one) may be suspended for 18-24 months. An entity offender may have its securities business operation suspended for 1-3 months. Sanctions may apply for mere disclosure of the information; it is not necessary to prove that the information was used or even that a transaction occurred.
The offender may also be subject to criminal prosecution under the Penal Code if the offence is serious. An individual offender may be fined up to VND 5.2 billion, sentenced up to 7 years and banned from certain employment for up to 5 years. An entity offender may be fined up to VND 10 billion, banned from certain business lines, and banned from raising capital for up to 3 years.
The key step to impose sanctions is to identify the situation in which inside information has been misused and insider trading has occurred. However, there are no unified/codified procedures for inspection and examination of insider trading. The nature of the inspection is at the discretion of the administrative or criminal investigator involved. The lack of methodical procedures creates opportunities to avoid the rules. According to a report by the Ministry of Finance, during 2014-2019, among violations in the securities sector which were subject to administrative penalty, only one case involved insider trading.