The amendments to the Stock Exchange Act that entered into force on 1 May 2013 result primarily in a comprehensive revision of the regulation against market abuse. The outcome is a major tightening of the prohibitions against insider trading and market or price manipulation.
1.1 Initial Position
The previously valid regulations in Switzerland for the abatement of abusive practices in the financial markets have increasingly proven to be incomplete and no longer current. The recent revision of the Federal Act on Stock Exchanges and Securities Trading ("Stock Exchange Act" or "SESTA") shall restore the Swiss capital market criminal law to international standards. Further, such revision shall strengthen the integrity and competitiveness of the Swiss financial centre.
1.2 Overview of the Revision of the Stock Exchange Act
On 1 May 2013, revised provisions for the abatement of abusive market behaviour came into effect. The revisions extend essentially to the following two levels:
- the criminal offenses of the use of insider information and market manipulation have been clarified, extended and transferred from the Swiss Penal Code to the Stock Exchange Act. In particular, the category of potential offenders capable of committing insider trading has expanded considerably;
- at the regulatory level of financial market surveyance, the Swiss Financial Market Supervisory Authority FINMA has received wide-ranging powers for regulatory sanctioning of improper market conduct by both regulated and non-regulated persons.
Further, the new law brings various adjustments in the area of public takeover bids (cf. our new website, www. takeoverpractice.ch) and the disclosure of shareholdings. Therefore, the disclosure law - in particular the supervisory instruments of the FINMA - becomes significantly expanded. The most significant change in takeover law is the prohibition to pay so-called control premiums in advance of public takeover bids.
At the end of March 2013, FINMA opened a consultation procedure lasting until 13 May 2013 regarding the total revision of the Circular "Market Conduct Rules". This Circular shall replace Circular 08/38 and is expected to enter into force on 1 August 2013. Besides the adaptation of the new Circular to the new rules of SESTA and the Swiss Stock Exchange Ordinance ("SESTO"), certain provisions of the Circular have been adapted in light of the experience gained in recent years and according to international standards. This means, for example, that the organizational obligations set forth in the Circular shall no longer apply exclusively to securities dealers but to all entities subject to prudential supervision, in accordance with their respective specific business activity, size and structure.
The following information is limited to the significant changes regarding the abatement of the abuse of insider information. We do not further elaborate on the parallel changes made to the regulations against market and price manipulation, nor on the new provisions in the areas of takeover law and disclosure of shareholdings (for the latter see Schellenberg Wittmer Newsletter of September 2012, available at www.swlegal.ch).
2 INSIDER TRADING AS A CRIMINAL Offense
2.1 Expansion of potential offenders
One of the main points of the new insider criminal law is the expansion of the potential offenders: Previously, only decision-makers (e.g. members of the board of directors or management) or other persons in a special position of trust (e.g. auditors, legal or tax advisors) could be held criminally liable. Now all natural persons who have knowledge of insider information for any reason are included within the category of potential offenders.
Depending on why someone is in possession of insider information, a distinction must be made between the primary, secondary and accidental insider, each of whom is subject to different criminal offenses and sanctions:
- primary insiders (article 40 para. 1 SESTA) are persons who, as a corporate body or as a member of the management or supervisory body (e.g. members of the board of directors) of an issuer (or a company controlling the issuer, or being controlled by the issuer), or because of their stake in the company (i.e. shareholders or associates) or activities (e.g. employees in research and development or in the finance department, or mandated third parties), have designated direct access to confidential price-sensitive information;
- secondary insiders (article 40 para. 3 SESTA) are persons who obtained insider information by a self-committed crime or offense (e.g. theft of relevant documents) or from a primary insider (e.g. as a potential buyer in a due diligence review);
- accidental insiders (article 40 para. 4 SESTA) are all persons who are not primary or secondary insiders and who possess insider information. This new offender category primarily involves people who have accidentally received insider information, such as the recipient of an erroneously misdirected e-mail, cleaning staff emptying the recycle bin, or a passenger on the train overhearing a confidential conversation.
Legal entities still may not directly be insiders under the new criminal law regulations. But they can - at least theoretically - still indirectly be held criminally liable if an insider crime is committed within the undertaking and cannot be attributed to a natural person due to inadequate organization (article 102 para. 1 Swiss Penal Code).
2.2 Object of crime
The object of the crime is the confidential information which by its disclosure may substantially influence the market price of securities of Swiss resident as well as newly foreign companies listed or admitted for trading on a stock exchange or similar institution in Switzerland (so called "insider information"). This definition remains unchanged compared to the previous legislation. It is still not conclusively established if the criminal law concept of insider information is congruent with the notion of price sensitive facts under the applicable ad hoc publicity rules.
2.3 Action of crime
It is prohibited for any insider to exploit insider information by purchasing or selling securities which are admitted for trading on a stock exchange or a similar institution in Switzerland or by using financial instruments derived from such securities. In this context it does not matter whether or not the transaction in question is made on or outside the regulated market.
In addition, the disclosure of insider information by the primary insider to another person (so-called "tipping"), and now also the primary insider's recommendation, based upon insider information, to another person to buy or sell securities or to put in place financial instruments derived therefrom, are prohibited.
"The new insider regulations also apply to people who receive insider information by accident."
"Securities" shall mean standardized certificates which are suitable for mass trading, rights not represented by a certificate with similar functions (book-entry securities) and derivatives. Therefore, foreign exchange and commodity transactions as such are still not covered by the current prohibitions of insider trading. However, the exploitation of confidential information related thereto for the purchase or sale of securities of foreign exchange or commodities trading companies, for example, may constitute a criminal offense under the new insider rules. Also now clearly included within the insider trading prohibition are transactions involving non-standardized derivative financial instruments (so-called "OTC products"), provided that such instruments refer to securities admitted for trading in Switzerland. Under the previous law, this last point was controversial.
In case of a violation of the prohibition against insider dealing, primary insiders may be punished with imprisonment of up to three years or a fine. In case of realization of a financial advantage exceeding CHF 1 million, imprisonment of up to five years may be imposed. As a consequence, an insider offense may constitute a preceding offense to a money-laundering offense according to article 305 of the Swiss Penal Code. Secondary insiders may be sanctioned with imprisonment of up to one year or a fine. Accidental insiders must expect a fine.
The criminal law enforcement authorities may also order a confiscation of the profits derived from an insider trading, according to article 70 para. 1 Swiss Penal Code. Under certain conditions, an exemption from punishment remains possible by paying a lump reparation sum (article 53 Swiss Penal Code).
3 REGULATORY PROHIBITION OF INSIDER TRADING
In order to align with internationally agreed standards, the new law implies a regulatory insider regime. Its enforcement is incumbent upon the FINMA (Art. 33e SESTA). Under the new law, FINMA is able to sanction regulated and nonregulated market participants for insider dealings. In the area of supervisory regulations, a legal entity can - in contrast to the area of criminal law - directly qualify as an offender.
"Under the new law, FINMA may also sanction non-regulated market participants for insider dealings."
3.2 Object of crime
The object of crime of the insider prohibition in the regulatory field corresponds widely with the criminal provision on insider trading. In the area of supervisory regulations, neither pecuniary advantage, criminal intent of personal financial gain, nor subjective fault are conditions of the offense. Rather, it is sufficient that the offender, by applying the normal attention of an average market participant, should have been aware that the information in question was insider information.
3.3 Action of offense and sanctions
The actions of offense covered by the regulatory prohibition on insider trading are largely identical to the actions of crime covered by the criminal insider prohibition. Pursuant to the explanatory statements of the Federal Council, the following behaviors in particular shall be covered by the regulatory (and likely also the criminal) provisions on insider dealing and, accordingly, are now prohibited equally for all market participants:
- exploiting knowledge of clients' orders to implement one's own transactions in advance of, concurrently with or immediately following clients' transactions ("frontrunning", "parallel-running" or "after-running");
- public recommendations to buy or sell securities without publicly disclosing the fact that one possesses, or is holding short positions in, the securities in question or financial instruments derived therefrom, respectively ("scalping").
Because of the specific history of the new insider regulations, it is particularly controversial whether front-running and parallel-running activities shall be covered by the new insider provisions and thus be sanctioned under supervisory law for all (and not only regulated) market participants. In case of violations of the regulatory prohibition of insider trading, FINMA does have at its disposal various catalogs of sanctions, depending on whether a FINMA-supervised person or a non-supervised person is concerned:
- in case of supervised persons, FINMA can impose different measures in accordance with the Financial Market Supervision Act ("FINMASA"), such as a ban on professional practice, revocation of permits, publication of rulings and disgorgement of profit. Beyond that, FINMA may impose a temporary or permanent ban on performing securities trading activities according to Art. 35a SESTA;
- for non-supervised persons, FINMA may namely impose a duty of disclosure, a publication of decisions, the disgorgement of profit, or issue declaratory orders (art. 34 SESTA in conjunction with art. 29 et seq. FINMASA).
4 PERMITTED USE / DISCLOSURE OF INSIDER INFORMATION
Based on article 33e para. 2 SESTA, the Federal Council specified in Article 55a - f SESTO various situations in which the use and/or disclosure of insider information is permitted and which, from both a criminal and regulatory perspective, leads to no sanctions. These include inter alia:
- buyback of one's own securities within a public buyback offer (under the conditions of article 55b SESTO);
- prior acquisition of securities in the target company by the potential bidder in preparation of the launch of a public takeover offer, provided that the decision for the latter was not based on insider information (article 55f lit. a SESTO);
- disclosure of insider information to persons who are reliant on the knowledge of insider information in order to fulfil their legal and contractual responsibilities.
5 CORNERSTONES OF CRIMINAL LAW AND SUPERVISORY PROCEDURES
5.1 Responsible authorities
The competence for criminal assessment and sanctioning of insider violations no longer belongs to the cantonal prosecuting authorities but to the Office of the Attorney General of Switzerland and to the Federal Criminal Court. The FINMA remains responsible in the field of supervision.
5.2 Coordination of proceedings
In cases where both the FINMA (supervisory proceedings) and the Office of the Attorney General of Switzerland (criminal investigations) initiate simultaneous proceedings, particular attention shall be paid to the coordination of such proceedings. The FINMA and the Office of the Attorney General are required and empowered to coordinate such proceedings (article 38 para. 2 FINMASA). Thereby, parallel proceedings shall be avoided as far as possible. Since the primary purpose of the supervisory procedure is to eliminate abuses and to restore the condition of order, the supervisory proceedings may often be conducted first. This may, however, be problematic, taking into consideration that within the supervisory proceedings there is a duty to cooperate, while within the criminal proceedings a duty to self-incriminate is not permitted. Therefore, in case of parallel proceedings, the rights of defense must be ensured by taking appropriate protection measures.
Due to the comprehensive extension of the insider regulation in respect of content and proceedings, Swiss as well as foreign companies whose securities are listed or admitted for trading on a stock exchange or a similar institution in Switzerland, are advised to check and adjust their insider regulations. Thereby, special attention should be given to the broadening of potential offenders under the new insider rules.
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.