Q & A on Formulating “SSE Guidelines for Listed Companies Declaring Insiders with Inside Information”
Q1: Can you brief us on the main background and rationale for making the rules?
A: For a long time, preventing and cracking down on insider trading has been the focus of regulation and law enforcement for the capital market. The declaration of insiders with inside information is not only an intrinsic requirement of the listed companies for internal control and information disclosure management, but also an important institutional arrangement for preventing and cracking down on insider trading. Earlier, the State Council, the China Securities Regulatory Commission (CSRC) and the Exchange issued rules on preventing and managing insider trading and declaring insiders with inside information. They have played an important role in guarding against and combating insider trading, maintaining market order, and purifying market environment.
In recent years, with the implementation and deepening of various measures for market reform, higher requirements have been made for preventing and combating insider trading. At the same time, the newly amended "Securities Law" improves the provisions of legal prohibition on insider trading, and refines and broadens the scope of inside information and insiders with inside information. The newly formulated “Guidelines of the Shanghai Stock Exchange for the Listed Companies Declaring the Insiders with Inside Information” (the “Guidelines” for short) is mainly designed to further regulate the behaviors of declaring insiders with inside information as required by the new “Securities Law” on the basis of the earlier achievements in regulation, so as to adapt to developments of prevention and control of insider trading and market changes. Overall, the formulation is mainly based on the following considerations.
The first consideration is to carry through the idea of staged disclosure and achieve better alignment with trading suspension, trading resumption and other systems. With the development and improvement of the capital market, especially since the reform of the system of stock trading suspension and resumption in November 2018, the listed companies have no more suspended trading at will or for a long time when planning major events such as reorganizations, share issuance and acquisitions that have significant impact on the stock price. Over a period of time, the principles of prudent suspension of trading and staged disclosure have gradually been recognized by the market. Meanwhile, higher requirements have been made for the prevention and control of insider trading in planning major events. In response, the "Guidelines" further tightens the prevention and control of insider trading while aligning with the requirements of the reform in trading suspension and resumption system. The "Guidelines" mainly stipulates that when a listed company plans matters such as major asset reorganizations, shares repurchasing, high proportions of bonus shares or capitalized shares, tender offers and securities issuance, it shall submit the information of the insiders with inside information in a timely manner; in the event of major changes in the major asset restructuring plan or disclosure of important factors, the additional files of the insiders with inside information shall also be submitted. In addition, it is stipulated that if a listed company has other issues that may have a significant impact on the stock price, the SSE may require the company to declare the insiders with the inside information in accordance with the “Guidelines”.
The second consideration is to improve the relevant requirements for declaring the insiders with inside information, and to refine the arrangements for practical operations. The focus is on clearly defining the situations and scope of declaring insiders with inside information. In terms of the situations of declaring, on the basis of the newly amended “Securities Law”, the “Provisions on the Listed Companies Establishing the System of Registration and Management of Insiders with Inside Information” issued by the CSRC and other related requirements, it is mainly stipulated that when disclosing the seven kinds of situations such as major assets restructuring, high proportions of bonus shares or capitalized shares and shares repurchase, the listed companies shall submit the list of the insiders with inside information; when the listed companies disclose other situations that may have a significant impact on the stock price, the SSE may also require the companies to submit the list. With regard to the scope of declaration, the listed companies are required to conduct the declaration on the basis of the provisions of the “Securities Law” on the scope of the insiders with inside information as well as the actual dissemination of the inside information, and in the abovementioned seven situations, the scope is specified for the insiders with inside information who are required to be declared, including the scope of the insiders with inside information involved in acquisitions or reorganizations, which is newly added in the “Securities Law”. In addition, the "Guidelines" also details the arrangements for the operations in declaring time and channels, progress requirements, files of insiders with inside information, the contents of the memorandums of major issues, and other aspects, so as to bring convenience to the companies.
The third consideration is to further regulate the submission and improve the quality of the submitted information. In practice, quite a few clues about the violations such as insider trading and market manipulation were directly reported by the insiders with inside information, and related violations have been promptly and effectively investigated and dealt with. However, it was also found that in practice, some listed companies failed to submit the lists of insiders in an authentic, complete or timely manner, which may affect the back-end verification of insider trading and investigation and punishment of violations. In order to improve the quality of the submitted information about the insiders with inside information and other factors, according to the relevant requirements of the CSRC, the “Guidelines” further highlights the responsibilities of listed companies and intermediaries, and provides that the board of directors of a company is the primary entity responsible for the submission of inside information, and the securities institutions shall vigorously urge and provide assistance for the listed companies and related entities to fulfill their obligation of information submission according to the law. At the same time, the "Guidelines" also provides for disciplinary actions against the failure of submitting information according to requirements and rules.
Q2: Can you brief us on what the listed companies should pay attention to when reporting the insiders?
A: First of all, the specific circumstances and scope for submitting the files of the insiders have been defined. With regard to circumstances of submission, the “Guidelines” provides that for the following seven kinds of major events (including major asset reorganizations, high-ratio bonus issue and stock dividend distribution, equity changes that result in change of the de facto controller or the largest shareholder, tender offers, issuance of securities, mergers, split and share repurchases), the insiders shall be reported, and if a company discloses an event that is likely to have a significant impact on the stock price, the SSE may also require it to report the insiders. Regarding the scope of the report, the “Guidelines” requires the listed companies to carry out the report in accordance with the provisions of the Securities Law on the scope of the insiders as well as the actual spread of the inside information. In addition, if the aforementioned seven kinds of major events occur, the “Guidelines” also provides the scope of the insiders with inside information who should be reported at least, in terms of the listed company itself, the major shareholders and actual controllers, the counterparties and intermediaries, etc.
Secondly, the companies should pay attention to time limits and specific requirements for reporting the insiders. The "Guidelines" provides that listed companies should submit the profiles of the insiders within five trading days after the inside information is disclosed for the first time in accordance with the law. If the scope of the insiders with inside information changes after the first declaration, the listed company shall make the supplementary report in a timely manner. In addition, when a listed company has the major issues such as acquisitions, major asset reorganizations, issuance of securities, mergers, split and repurchase of shares, it shall also submit the memorandums of the progress in the major issue at the same time. Moreover, the "Guidelines" further highlights the "time of accessing the inside information", "way of accessing the inside information", "stage of inside information" and other related contents, which may also better guide the listed companies in accurately preparing and reporting the profile information of the insiders.
Thirdly, the companies should pay attention to the special requirements for reporting the insiders in major asset restructuring. According to the requirements of the “Q&A on Tightening Prevention and Control of Insider Trading in Mergers and Acquisitions and Reorganizations of Listed Companies” issued by the CSRC, the “Guidelines” also makes specific provisions accordingly. It mainly includes ensuring the time limits and the timeliness for the submission, which means the listed company should submit the profiles of the insiders to the SSE immediately when the reorganization is disclosed for the first time. With major changes taking place in the reorganization plan or important factors to be disclosed after the first disclosure of the reorganization, the listed company shall supplement the profiles of the insiders. If abnormal fluctuations are found in stock trading after a listed company discloses the reorganization for the first time, the SSE may also require the listed company to update the profiles of the insiders as appropriate.
Q3: Can you brief us on what the SSE pays special attention to in terms of supervision and disciplinary measures on the reporting of the insiders?
A: The companies and related parties should note that the "Guidelines"provides the persons responsible for the inside information and the relevant disciplinary mechanism. Regarding the definition of the responsibilities of the relevant parties for submitting inside information, the “Guidelines” specifies that the insiders should first fill in their information truthfully, accurately and completely, and then submit the information to the listed company in a timely manner. The board of directors of a listed company is the first and foremost entity responsible for ensuring the truthful, accurate and complete filling and timely submission of the information, with the chairperson of the company as the principal person responsible. The securities service institutions shall urge and help the companies and other obliged parties to complete the submission in strict accordance with the requirements of the “Guidelines”. With regard to the disciplinary mechanism, the “Guidelines” provides that if the listed companies or related entities fail to complete the submission in a timely manner as required, or there are false records, major omissions, or serious errors in the information submitted, or the relevant entities refuse to support the listed company in the submission, the SSE will take supervisory or disciplinary measures against the responsible parties on the basis of the circumstances and severity of the consequences.
The SSE will, in accordance with the requirements of the “Guidelines”, guide the listed companies and related parties in submitting the information of the insiders and other factors in a truthful, accurate, complete and timely manner, intensify the verification on insider trading and maintain the market order. For those who fail to submit the information as required, or deliberately conceal or omit the information, the SSE will stringently investigate the responsibility in accordance with the relevant requirements. At the same time, during the epidemic prevention and control period, the SSE will continue to maintain a high-pressure crackdown on insider trading, so as to effectively protect the interests of small and medium-sized investors and improve the market environment.