Russia adopts anti-insider law

Dmitry Chernyy

Muranov, Chernyakov & Partners

+7 495 783-74-50

Legislation against insider dealing and, most importantly, its systematic and effective enforcement (including the legal prosecution of offenders) is an integral part of any civilized financial market, not least a market that claims to be international. Mass investors are prepared to work on the market only when they are protected against fraud (insider trading is simply a kind of cheating, and is considered as such in many countries), unequal access to information and losses caused by this inequality.

So far Russia has had no anti-insider legislation. Although inside dealing was criticized in the Code of Conduct approved by the Federal Financial Markets Service (FFMS), and article 15.21 of the Code of Administrative Offences established liability for trading on the basis of insider information, there were no effective legal means to identify insiders and bring offenders to justice. According to FFMS, market-makers expose hundreds of suspicious transactions every year - but there are no known Russian cases of insiders being prosecuted.

The draft law takes into account international experience in the legal regulation of insiders, including the provisions of relevant EU directives and US laws. The bill established multi-level control over insider transactions, which involves not only the state but also market-makers, issuers, and employers.

The disclosure requirements have been tightened; insiders, including state agencies, have been given new responsibilities (maintenance of lists of insiders, notification about transactions). FFMS obtained broad supervisory powers, including the right of investigation, the right to demand documents, issue mandatory regulations, and, together with licensing authorities, have initiated the revocation of violators’ licenses. Finally, criminal liability for insider dealing has been introduced (in accordance with the draft of a new article 185.6 of the Criminal Code the illegal use of insider information, combined with the extraction of income of than 2.5 million roubles, may be punished by four years imprisonment together with the prohibition of being able to hold certain positions for up to three years; for the illegal transfer of insider information - up to six years' imprisonment) and new non-criminal offences. Over a long period, while the draft law was in Parliament, the definition of insider information was clarified, which is very important when it comes to criminal liability.

The effectiveness of all these provisions will depend primarily on whether the FFMS will be willing to implement these new functions. The practice should lead to speedier identification of ways in which the law might be improved and lawmakers will be quick to respond.