The law establishing criminal liability for the unlawful use of insider information was adopted in Russia two years ago. Law No. 224-FZ has conferred heightened responsibility on the courts and has given broader powers to the Federal Service for Financial Markets (FSFM). Insiders may be held criminally liable as of 2013, although how well the law will work remains to be seen.
The law defines insiders as entities with commercial secrets and establishes several categories of individuals, including company employees, board members and officials and information agencies. Insider information has been defined as specific data that was previously unknown, the disclosure of which could materially affect the value of financial instruments, currency or goods.
Its rapid application was prompted by economic need.
FSFM head Vladimir Milovidov said that the “reaction of international organizations and regulators to the introduction of such a law in Russia shows that our hopes (for increased foreign investments) are not groundless.”
The correct application of the law could foster confidence in the Russian financial markets. Indeed, poor investor rights protection is a major reason why the International Organization of Securities Commissions has referred to the country's markets as “developing” and “unregulated.”
The main issue is that in 2010, legislators delayed the law's enactment until 2013.
Regulator in no hurry
Meanwhile, insiders enjoy endless possibilities, which can be attributed more to the regulator's passivity than to any gaps in the law.
In recent years, the regulator has initiated as few as two-dozen cases on securities issuance abuse and willful non-disclosure to investors or controlling authorities.
Meanwhile, the Svyazinvest Telecommunications Group case has remained practically uninvestigated, despite the fact that the mysteries of its reorganization have piqued the interests of both experts and market players for years. Some experts and journalists have nicknamed Svyazinvest CEO Evegeny Yurchenko as “Russia’s chief insider.”
It could be assumed that the regulator's passivity stems from overly complicated procedures.
For instance, the U.S. Securities and Exchange Commission (SEC) independently initiates investigations, obtains evidence and refers cases to the courts. By way of special technical means, it has inter alia access to computers, hard discs and phone calls.
The Russian regulator is also entitled to perform audits, request audits from financial institutions and withdraw licenses. However, a thorough investigation is only possible with the assistance of law enforcement authorities. This means that ordinary police officers have to gather evidence against officials or the major shareholders of financial groups with an annual turnover of possibly billions or trillions of rubles. FSFM's powers seem to be quite limited as the regulator depends on participation of law enforcement agencies.
Further, the professional community questions the competence of judges in financial market matters. So far, they have proven unable to grasp the particulars of broker-client relations. Meanwhile, when the law is enacted in half a year, they could very well hold the fate of high-ranking officials and businessmen in their hands. Perhaps a high-profile judicial precedent will be the only way out of the situation.
Liability for officials
According to experts, top-ranking officials fill the ranks of Russia’s major insiders, not financiers or stock traders.
BCF Bank Analytic Department head Maxim Osadchy told New Times magazine that officials, “hold key positions on major companies’ boards of directors in an official capacity and control all the meaningful cash flow in the country unofficially.”
Some market analysts believe that insider dealings are the core business of officials. They claim that evidence of this can be found in the ambiguous wording of Article 4, which categorizes “insiders.” Lawyers disagree as to whether this applies to all executive bodies, or only to those bodies that are entitled to invest in financial instruments.
This ambiguity implies that the law was formulated in such a way as to render it unenforceable, or only selectively enforceable against “unwanted” market players.
It is worth mentioning that only the use of “undue” insider information is deemed illegal. Such a proviso could create a loophole for officials and top managers.
Moreover, legislators have declared not the use, but rather the provision of insider information to third parties to be an aggravating circumstance.
Time will tell how the law will be applied in practice, whether or not its wording will provide for a meaningful application, and if it is aimed at selective abuse.