Originally published in the Journal of International Banking Law and Regulation
Preventing insider trading is a challenge in many securities markets – particularly, perhaps, in new markets. Vietnam is no exception. There is already some evidence of insider trading, although the extent is not yet known. It is important in the early development of the market for there to be a firm government policy against insider trading and a clear willingness to intervene in case it is suspected.
This article discusses the rules that define insider trading in Vietnam and the way the law addresses the offence.
Article 9 of the Law on Securities (the "Law") prohibits a person from:
- using inside information in order to purchase or sell securities for that person him/herself 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 purposes of the provisions of Article 9, the Law defines "inside information" to include1:
This definition provides several elements that must be considered to determine if there is a violation of the Article 9 prohibition.
Elements Of The Prohibition
As stated above, the protected information is information that, if misused, would affect the price of securities issued by an issuer that is a public company or a public fund.
A public company or a public fund is defined in the Law to include:
- A company or a fund that has offered its shares to the public. The term "offering shares to the public" means an offer of shares to the public by any of the following methods: (i) sale of a tranche of shares to at least one hundred investors, excluding professional investors and excluding the then shareholders of the company; (ii) sale of a tranche of shares through means of mass media communication, including the Internet; or (iii) sale of shares to an indefinite number of investors;
- A company whose shares have been listed on the Stock Exchange or the Securities Trading Centre; or
- A company whose shares are held by at least one hundred investors, exclusive of professional investors, and that has a paid-in charter capital of at least VND 10 billion.
The prohibition on the use of inside information obviously does not include information about a private company. A private company is virtually everything other than what is described above.
By referring to securities issued by a public company/public fund, 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.
In addition, by making a general reference to "securities," the prohibition against insider trading appears to cover all types of securities as contemplated under the Law. They include:
- stocks, bonds, and investment fund units; and
- pre-emptive rights, warrants, call options, put options, future contracts, pool of securities, and securities indices.
Impact of the information
The definition of "inside information" provided in the Law suggests that liability does not arise simply because the information on which a trade is based has not yet been publicized. There is also a requirement that the information on which the trade is based must affect the price of the securities belonging to the particular issuer whose information has been misused, rather than the price of securities in the general market.
Type of information
The broad reference of the Law to "information about a public company or a public fund" does not specify what type of information is subject to insider trading restrictions. This reference, by itself, does not suggest whether the inside information must specifically relate to the issuer whose securities are the subject of the insider trading, or whether it can be more general information related to the issuer's market or industry. However, the Law contains strict rules on disclosure of information that relates to the issuer itself, such as corporate affairs, financial issues, business operation, litigation, etc. The rules set out when, how and by whom such information can be disclosed. The lack of similar rules on disclosure of other types of information that does not relate specifically to the issuer suggests that such other types of information are not subject to the protection as inside information.
Person who has access to inside information
Another element is identifying the person who has access to inside information of a public company or a public fund. The Law provides a non-comprehensive list of persons who qualify as insiders:
- Members of the Board of Management and Compliance Committee, Director or General Director (i.e. the Chief Executive Officer), and the Deputy Director or Deputy General Director of that public company; or members of the Committee of Representatives of that public fund;
- Major shareholders2 of that public company/public fund;
- Auditors of the financial statements of that public company/public fund;
- Other persons with access to inside information of a public company/public fund;
- Securities companies, securities investment fund management companies, and securities practitioners of such companies;
- Organizations or individuals with a business co-operation relationship, contractors or employees of that public company/ public fund; and
- Persons who directly or indirectly obtain inside information from the foregoing persons.
There is no requirement that an insider have a connection with the concerned issuer. The last category is broad enough to cover any person who can access inside information by any means. Therefore, a trade is prohibited if the investor has access to inside information, irrespective of the source of the information.
Disclosure to the public
The Law regulates the means by which an issuer may disclose information to the public. Only the General Director (i.e. the Chief Executive Officer) or a duly authorized person of an issuer can disclose information. Such information must be disclosed in particular ways: through mass media, on an issuer's own materials, or via information channels operated by the Stock Exchange or the Securities Trading Centre. These provisions suggest that information is effectively communicated to the market if:
- it is disclosed by the General Director or Director of an issuer, or a person who is duly authorized to disclose the information; and
- it is disclosed by means of mass media, the issuer's own materials or via information channels of the Stock Exchange or the Securities Trading Centre.
For example, information is considered to be disclosed to the public if it appears on the company's website. In contrast, information exposed in a research report of an investment bank or a subscription service may not be information on which trades may legitimately be based, since one cannot be certain if that information has been disclosed by the issuer to the public.
Sanctions against misuse of inside information are provided in Decree 36/2007/ND-CP of the Government, dated 8 March, 2007. 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, is subject to an administrative penalty in the form of monetary fine and confiscation of illegally gained income. The monetary fine runs from VND 30 million to VND 50 million if the violator is an individual, and from VND 50 million to VND 70 million for an entity. The 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 violator may even be subject to criminal prosecution under the Law if the offence is serious. The Criminal Code, however, does not contain any offence of insider trading.
The key step to imposing sanctions is to identify the situation in which inside information has been misused and insider trading has occurred. The lack of procedures permitting inspection and examination of insider trading creates opportunities to avoid obeying the rules. We anticipate that the State Securities Commission will issues rules which set out procedures to inspect and examine transactions suspected to be the result of misuse of inside information.
1. Article 6.32 of the Law on Securities 2. A major shareholder is defined as a shareholder that holds, directly or indirectly, at least five percent of the voting shares of an issuer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.