PROBLEMSOF TRADING STOCKSIN CHINAA concise introduction ofviolations in an emerging stock market

OVERVIEW

LAWS

TYPES OF VIOLATIONS

KEY STATISTICS

SUMMARY

PROPOSED SOLUTIONS

LAWS/AT A GLANCE

AUDIT L

AW O

F THE P

EOPLE'S

REPUBLIC O

F CHIN

A

SHANGHAI STOCK E

XCHANGE

TRADING R

ULES

SECURITIE

S DEPOSIT

ORY AND

CLEARING R

ULES

PROVISIO

NAL ADM

INIS

TRATION M

EASURES

FOR STOCK E

XCHANGE RIS

K FUND

LAW O

F THE P

EOPLE'S R

EPUBLIC O

F CHIN

A

ON SECURIT

IES

CRIMIN

AL LAW

OF T

HE PEOPLE'S

REPUBLIC O

F CHIN

A

SHENZHEN STOCK E

XCHANGE

TRADING R

ULES

ACCOUNTING L

AW O

F THE P

EOPLE'S

REPUBLIC O

F CHIN

A

LAW O

F THE P

EOPLE'S R

EPUBLIC O

F CHIN

A ON F

UNDS FOR

INVESTM

ENT IN S

ECURITIE

S

RULES ON S

UPERVISIO

N OVER

SECURITIE

S COM

PANIES

CIRCULAR O

N ISSUES C

ONCERNING B

ANK DEPOSIT

INVESTM

ENT BY M

ONEY MARKET F

UNDS

INTERIM

MEASURES F

OR THE A

DMIN

ISTRATIO

N

OF FIX

ED ASSET L

OANS

INTERIM

MEASURES F

OR THE S

UPERVISIO

N AND A

DMIN

ISTRATIO

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INTEGRIT

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HE SECURIT

IES A

ND FUTURES M

ARKETS

COMPANIE

S LAW

OF T

HE PEOPLE’S

REPUBLIC

OF C

HINA

APPROVAL REPLY

BY T

HE STA

TE COUNCIL

TO T

HE RELEVANT IS

SUES

ABOUT SECURIT

IES IN

VESTMENT F

UND MANAGEM

ENT COM

PANIES

AUDIT L

AW O

F THE P

EOPLE'S

REPUBLIC O

F CHIN

A

SHANGHAI STOCK E

XCHANGE

TRADING R

ULES

SECURITIE

S DEPOSIT

ORY AND

CLEARING R

ULES

PROVISIO

NAL ADM

INIS

TRATION M

EASURES

FOR STOCK E

XCHANGE RIS

K FUND

LAW O

F THE P

EOPLE'S R

EPUBLIC O

F CHIN

A

ON SECURIT

IES

CRIMIN

AL LAW

OF T

HE PEOPLE'S

REPUBLIC O

F CHIN

A

SHENZHEN STOCK E

XCHANGE

TRADING R

ULES

ACCOUNTING L

AW O

F THE P

EOPLE'S

REPUBLIC O

F CHIN

A

LAW O

F THE P

EOPLE'S R

EPUBLIC O

F CHIN

A ON F

UNDS FOR

INVESTM

ENT IN S

ECURITIE

S

RULES ON S

UPERVISIO

N OVER

SECURITIE

S COM

PANIES

CIRCULAR O

N ISSUES C

ONCERNING B

ANK DEPOSIT

INVESTM

ENT BY M

ONEY MARKET F

UNDS

INTERIM

MEASURES F

OR THE A

DMIN

ISTRATIO

N

OF FIX

ED ASSET L

OANS

INTERIM

MEASURES F

OR THE S

UPERVISIO

N AND A

DMIN

ISTRATIO

N OF

INTEGRIT

Y IN T

HE SECURIT

IES A

ND FUTURES M

ARKETS

COMPANIE

S LAW

OF T

HE PEOPLE’S

REPUBLIC

OF C

HINA

APPROVAL REPLY

BY T

HE STA

TE COUNCIL

TO T

HE RELEVANT IS

SUES

ABOUT SECURIT

IES IN

VESTMENT F

UND MANAGEM

ENT COM

PANIES

LAWS/AT A GLANCE

SECURITIES LAW

• First drafted in 1992.

• Adopted on December 29, 1998 ;Applied on July 1, 1999.

• Late revised on October 27, 2005;Went into effect on January 1, 2006.

“This law is enacted for the purpose of regulating the issuing and trading of securities, protecting the lawful rights and interests of investors...”

TYPES OF VIOLATIONS

Accounting Fraud

- False records- Major omissions- Improper disclosure- Misrepresentations

Market Manipulation

- Action-Based- Information-Based

Insider Trading

- Short-swing trading- Rat trading

Others

- Bank credit funds- Naked short selling- Embezzle public fund- No statutory qualification- Exceed jurisdiction

Article 71:

“Nobody may use any of the following measures to acquire illegitimate interests, or pass risks onto others...”

(The first edition implemented in 1999)

New Revision

Institutional investors

LITIGANT

MANIPULATION

- Action-Based- Information-Based

AIM

- Trend creation- Induce investors to make error judgements

MARKET MANIPULATION

HOW TO CATCH THEM ?

PROPOSED SOLUTIONS/Market Manipulation

- Strengthen the supervisions and controls of stock trading, especially in large accounts

- Turnover rate

LAWS & REGULATIONS ? - “Firewall”Internal business department isolation and practice avoidance

- NASD Rule 2711Restrictions on compensation to associated persons

INSIDER TRADING

WHO IS AN INSIDER ? - Legal insider- Obtain information illegally

New Revision

Article 76:

“Persons possessing inside information relating to securities trading and persons obtaining inside information unlawfully shall not, prior to the publication of such inside information, purchase or sell the securities of the company concerned, or disclose such information, or suggest other persons trade in such securities.”

(The new edition implemented in 2005)

PLEADING STANDARDS - Whether to use the insider information or not without option for “abstain or disclose” like USA

STATISTICS/Insider Trading

POSITIONS OF LITIGANTS

TYPES OF INFORMATION

AMOUNTS OF PROFIT

PUNISHMENT AMOUNT

Types of information Amount Proportion Great losses of the corporate 1 4%

Mergers & acquisitions 5 20% Significant investments 9 36%

Annual report & corporate performance 2 8% Assets restructuring 1 4%

Debt relief 5 20% Dividend policy 2 8%

Total 25 -

Table 1

Statistics of types of information used for insider trading over the past 3 years, 2009-2011

Source: Data compiled from the Commercial Accounting, July, 2012

STATISTICS/Insider Trading

POSITIONS OF LITIGANTS

TYPES OF INFORMATION

AMOUNTS OF PROFIT

PUNISHMENT AMOUNT

Positions of litigants Amount Proportion Directors & Executives of the issuers 10 40% Controlling shareholders, Directors &

Executives of the corporate 1 4%

Be exposed to insider information 8 32% Staff of the securities service agency 1 4%

Relatives 5 20% Total 25 -

Table 2

Statistics of positions of litigants in insider trading over the past 3 years, 2009-2011

Source: Data compiled from the Commercial Accounting, July, 2012

STATISTICS/Insider Trading

POSITIONS OF LITIGANTS

TYPES OF INFORMATION

AMOUNTS OF PROFIT

PUNISHMENT AMOUNT

Amounts of profit (RMB) Amount Proportion No more than 50,000 10 40%

More than 50,000 & no more than 100,000

3 12%

More than 100,000 & no more than 200,000

3 12%

Unknown 2 8% No direct profit 4 16%

Loss 3 12% Total 25 -

Table 3

Statistics of amounts of profit in insider trading over the past 3 years, 2009-2011

Source: Data compiled from the Commercial Accounting, July, 2012

STATISTICS/Insider Trading

POSITIONS OF LITIGANTS

TYPES OF INFORMATION

AMOUNTS OF PROFIT

PUNISHMENT AMOUNT

Punishment amount Amount Proportion No more than 50,000 16 70%

More than 50,000 & no more than 100,000

4 17%

More than 100,000 & no more than 200,000

2 23%

Total 23 -

Table 4

Statistics of punishment amount in insider trading over the past 3 years, 2009-2011

Source: Data compiled from the Commercial Accounting, July, 2012

CHARACTERISTICS

SHORT-SWING TRADING/Insider Trading

New Revision

Article 47:

“Where a director, supervisor or senior manager of a listed company, or a shareholder who holds 5% or more of the shares of a listed company sells the shares of the company within six months of purchasing such shares, or repurchases the shares within six months of selling such shares, the gains therefrom, if any, shall belong to the company, and the board of directors of the company shall recover such gains. ..”

(The new edition implemented in 2005)

- Strict insider- Transaction frequency - Whether to use the insider information or not

Act as the protection against insider trading

- Fund Managers- Fund Trustees

RAT TRADING/Insider Trading

PROCEDURE

LITIGANT

HOW TO CATCH THEM ?

PROPOSED SOLUTIONS/Insider Trading

- Pay attention to the abnormal changes of the stock prices

- Check out board members’ families and relatives

LAWS & REGULATIONS ? - Suspension and resumption of trading

- Reverse the burden of proof

- Insider trader shall be held civil liable for compensation pursuant to law

- Increase punishment

SECURITIES MARGIN TRADING

USA

- Securities Exchange Act of 1934- Rule T, U, G, X- NSMIA

PROTECTION

Naked short selling is not allowed.

NAKED SHORT SELLING/Others

China Banking Regulatory Commission (CBRC)

REGULATION

AIM

- Avoid stock market bubble- Support real economy- Reduce credit exposure

APPROACH

BANK CREDIT FUNDS/Others

STATISTICS

Proportion of different types of violations over the year, 2011.6-2012-6

Based on the CSRC administrative sanction decision

DATA

Figure 1 Proportion of different types of violations over the year, 2011.6-2012-6 Source: Data compiled from China Securities Regulatory Commission, www.csrc.gov.cn

Accounting Fraud53%

Market manipulation

25%

Insider trading21%

Others1%

Accounting Fraud

Market manipulation

Insider trading

Others

STATISTICS

Historical data of amount of violations over the past 11 years, 2001-2011

Based on the CSRC administrative sanction decision

DATA

Figure 3 Historical data of amount of violation over the past 11 years, 2001-2011 Source: Data compiled from China Securities Regulatory Commission, www.csrc.gov.cn

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Insider tradingMarket ManipulationAccounting FraudOthersTotal

SUMMARY

• The new “Securities Law”• 3 major types of violations

⁻ Accounting fraud⁻ Market manipulation⁻ Insider trading

• Proposed solutions• Statistics

THANK YOU

KrisKristenten

DoDominminicic

SuSusiesie

ClyClydede