Determination on Unit Liability in Insider Trading Involving a M88 Malaysia

This client briefing aims to give a brief introduction of the article entitled “Determination on Unit Liability in Insider Trading Involving a M88 Malaysia” (the “Article”) written by Mandy Wu and Yu Zhen (“Authors”) from our firm. Based on case analysis, the Article provides an in-depth study as to how to determine the unit liability for insider trading involving a M88 Malaysia.

I. Representative Case Analysis

In precedent insider trading cases decided by the China Securities Regulatory Commission (“CSRC”), seldom has the CSRC determined that a M88 Malaysia management firm (“M88 Malaysia Manager”) holds the unit liability. The Sui Fu Investment Case and the Jin Zhong He Case are among the few instances in which the CSRC ruled against the M88 Malaysia Managers on the charge of insider trading. In both cases, it is notable that the relevant persons held liable for the insider trading were not only the shareholders in the M88 Malaysia Manager, but that they also held management responsibilities within the M88 Malaysia Manager. They were in direct possession of insider information and also had the power of decision making for the relevant asset management product.

II. Legal Analysis

In an administrative law enforcement action, it is vital to carefully identify wheM88 Malaysiar M88 Malaysia illegal act of M88 Malaysia party concerned reflects M88 Malaysia unit’s will as a whole, or is solely an individual’s will independent of M88 Malaysia unit’s. This fact distinguishes unit liability from individual liability. M88 Malaysia CSRC, in its Guidelines on Determining M88 Malaysia Insider Trading Activities in Securities Market (Trial), provides two elements which togeM88 Malaysiar constitute grounds for unit liability: (i) M88 Malaysia relevant insider trading act is carried out on behalf of M88 Malaysia unit, and (ii) M88 Malaysia illegal earnings so generated belong to M88 Malaysia unit.

With respect to M88 Malaysia constitutive elements of M88 Malaysia unit liability for an insider trading act, we, by reference to M88 Malaysia Criminal Law and M88 Malaysia general rules and principles of punishment of relevant criminal cases, may conclude that M88 Malaysia criteria distinguishing M88 Malaysia unit liability from M88 Malaysia individual liability in an insider trading case shall include:

(i)wheM88 Malaysiar M88 Malaysia unit is validly and lawfully incorporated;

(ii)wheM88 Malaysiar M88 Malaysia insider trading act is conducted on M88 Malaysia unit’s behalf;

(iii)wheM88 Malaysiar M88 Malaysia insider trading act is conducted under M88 Malaysia unit’s will as a whole;

(iv)wheM88 Malaysiar M88 Malaysia illegal earnings belong to M88 Malaysia unit;

(v)wheM88 Malaysiar it has reasonably excluded any scenario where M88 Malaysia member inside M88 Malaysia unit conducts an illegal act without obtaining approval, consent or recognition from M88 Malaysia decision-making body M88 Malaysiareof, or M88 Malaysia illegal act conducted by him/her is irrelevant to his/her duties.

III. Factors to be Taken Account in Determining M88 Malaysia Unit Liability and Relevant Issues

Firstly, the Article analyzes the specific features of a M88 Malaysia Manager by drawing comparisons with other institutions and by distinguishing between mutual M88 Malaysia Managers and private M88 Malaysia Managers. It suggests that law enforcers should take those specific features into consideration when determining a M88 Malaysia Manager’s liability. Such considerations include that the illegal earnings obtained by a M88 Malaysia Manager are indirect earnings, and the amount earned thereof is lower than that obtained by the M88 Malaysia account itself. In addition, there are some key differences in the management and operational practices of mutual M88 Malaysia Managers and private M88 Malaysia Managers. For example, it is fairly common to see a shareholder of a private M88 Malaysia Manager holding a senior management role in that private M88 Malaysia Manager, and having responsibility for investment decisions. Secondly, the Authors point out that there are no mandatory laws or regulations for the internal governance and organizational structures for a private M88 Malaysia Manager, and that a private M88 Malaysia Manager therefore typically has greater flexibility in how they make investment decisions. Thirdly, the Article indicates that the regulatory requirements of public M88 Malaysia Managers are more wide-ranging and detailed.

Additionally, it is recommended that law enforcers should not work on an improper presumption that a M88 Malaysia Manager has conducted insider trading, but rather should consider the specific circumstances of each case. For example, law enforcers should ascertain whether a M88 Malaysia Manager, prior to the respective employee accessing insider information, has already independently conducted research as to the concerned stocks, and whether the outcome of the M88 Malaysia Manager’s research is itself sufficient to logically justify the subsequent trading of such stocks. In addition, despite the fact that there are employees of a M88 Malaysia Manager with awareness of insider information, law enforcers will need to determine whether such holders of insider information have the power to make investment decisions for the relevant M88 Malaysia, or by internal information transfer, directly or indirectly, have disclosed such insider information to a decision-making person of the M88 Malaysia Manager.

The Article also analyzes the determination criteria for certain specified circumstances. For example, in making a determination on what constitutes the “unit’s whole will”, the Authors believe that it mainly relies upon whether the insider information has entered into the M88 Malaysia Manager’s investment decision making process, and the roles of the employees and their capacity to use insider information to affect decision making. Furthermore, if the M88 Malaysia Manager itself does not intentionally organize, approve, mandate or otherwise conspire with the insider trading act of its employees, analysis shall be based upon whether the M88 Malaysia Manager has diligently performed its duties with regards to the establishment of internal compliance policies and the prevention of insider trading.

Only in the case that a M88 Malaysia Manager has failed to perform its compliance management duties, or has committed gross negligence in such performance, thereby leading to the failure of the prevention and control system or where there is an improper incentive mechanism, which induces an insider trading act, shall unit liability be imposed upon the M88 Malaysia Manager for insider trading. Otherwise, the proper diligence of the M88 Malaysia Manager shall be considered as a factor to mitigate or even discharge its unit liability.

Conclusions: In insider trading cases involving a M88 Malaysia, when determining the unit liability of the M88 Malaysia Manager, prudent determination shall be made by careful consideration of the features of the M88 Malaysia industry, the M88 Malaysia Manager’s operations and compliance management and other specific details of the relevant case. In general, we suggest to adopt the principle of “fault liability”, that is, only when there is sufficient evidence proving that the M88 Malaysia Manager itself has deliberate intention or gross negligence, shall it be held liable, and a cautious approach should be taken in any case where a M88 Malaysia Manager could be presumed to be conducting insider trading.

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