Feds Limit Market's Freedom of Speech
The Federal Financial Markets Service has completed the draft of a law “On Unfair Practices on Financial Markets,” which is to limit the use if insider information. It defines “insider” and “insider information,” refines the definition of price manipulation and makes the use of insider information illegal, regardless of how it was obtained. The 1996 law “On the Stock Market” prescribes practices to prevent price manipulation and the use of proprietary information, but the new law significantly expands the list of those who will be prohibited to use such information in their dealings until it is officially published. The new law will not only apply to investment companies, but to members of the press, government employees, ratings services and all those receive information that originated with an “insider.” The law will also apply to the commodities market.
Federal Financial Markets Service representatives say that all state agencies concerned have studied the draft law. The disagreements between them will be conciliated and the draft will be submitted to the government. It is expected to be discussed in the State Duma at the beginning of next year. The Federal Securities Commission (predecessor to the Federal Financial Markets Service) drafted a law “On Insider Information and Price Manipulation” in 2000. That law was buried in problems with conciliation, corrections, additions and so on. In November 2005, the Security Council's interagency commission on economic security recommended that that draft law be written anew. The new law is a response to that recommendation. Russian stock markets have developed their own rules on insider trading based on current legislation, but traders say that signs of abuse remain.
The most notable case of suspected insider trading was the spurt in prices of Russian euro-denominated securities an hour before Moody's raised Russia's credit rating to the sovereign level in October 2003. The most recent case was last week, when the price of stock in the Pyaterochka grocery store chain rose all week before the price of its acquisition of the Merkado chain was announced on Friday. Suspected insider trading is widespread and there are practically no court cases in which the norms of insider information use have been applied. Other examples occurred on June 6 of this year, when stock in Rosbank increased in price by 12 percent. On the next day, it was announced that that Societe Generale would buy 10 percent of the stock in the Russian bank. In the middle of last month, Polyus Zoloto stock rose by 5.7 percent just before the company announced a $1-billion stock buyback. Suspicious operations with RAO UES of Russia have also been noted as discussions of reforms of the electricity monopoly have proceeded.
The new law would give the Federal Financial Markets Service the authority to “demand from legal entities and individual entrepreneurs the presentation of data corresponding to the internal documentation of the corresponding organization of telephone conversations and information exchanges necessary to uncover and intercept violations of requirements.” Now persons exposing insider trading are eligible for a reward of 10-percent of the fine imposed for those deals. No reward is envisaged in the new version of the law. The Federal Financial Markets Service operates through the Interior Ministry to enforce trading rules.
Olga Kocheva, Sergey Tyagay, Irina Granik, Dmitry Butrin
All the Article in Russian as of Oct. 16, 2006
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