Introduction
Insider trading
Market manipulation
Federal jurisdiction
Comment
Introduction
In September 2012 Parliament passed a bill amending the Stock Exchange and Securities Trading Act, which redefined the offences of insider trading and market manipulation and introduced a new administrative enforcement regime to combat such conduct more effectively. The amendments came into force on May 1 2013.
The revision of the act is aimed at fostering the integrity and competitiveness of the Swiss financial markets and at ensuring compliance with international standards (in particular, the recommendations of the Financial Action Task Force), in order to allow Switzerland eventually to ratify the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of Proceeds from Crime and on the Financing of Terrorism (May 16 2005).
The amendment to the provisions on insider trading is significant, particularly in view of the personal scope of application. While insider trading could previously be committed only by so-called 'primary insiders' (ie, persons who have access to relevant non-public information due to their privileged position as directors, managers or auditors), revised Article 40 not only expands the definitions of 'primary insiders' and 'secondary insiders', but also introduces a new offence that can be committed by so-called 'accidental insiders':
- Primary insiders are newly deemed all persons who, due to their shareholding in a company or their professional activity, have access to confidential information of a listed company. Accordingly, in addition to board members and executives, shareholders and any other persons who – by consequence of their involvement with the affairs of a company – have access to relevant confidential information (eg, subordinate members of an M&A team, legal department officers or outside counsel) are newly considered to qualify as primary insiders.
- Secondary insiders are persons who receive relevant confidential information (directly or indirectly) from a primary insider (eg, a journalist who is informed about a planned transaction by a company manager), as well as individuals who access such information through a criminal act (eg, by way of espionage).
- Accidental insiders are persons who are not primary or secondary insiders, but accidentally acquire inside information and use it with a view to realising a financial advantage.
Criminal liability arises for insiders in all three categories if they realise a financial profit by taking advantage of the acquired confidential information through the purchase or sale of securities listed on a Swiss securities exchange or a similar institution, or through the use of financial instruments derived from Swiss securities (including over-the-counter derivatives).
In addition, primary insiders are subject to punishment if they realise a financial profit by disclosing confidential information to another person or by making a recommendation – based on confidential information – to another person to purchase or sell Swiss securities.
The criminal penalties for violating insider trading provisions vary as follows:
- Insider trading carried out by a primary insider is subject to a fine of up to Sfr1.08 million or imprisonment for up to three years. If a primary insider realises a financial advantage of more than Sfr1 million as a result of his or her unlawful conduct, the criminal penalties may be either a fine of up to Sfr1.08 million or imprisonment for up to five years.
- A secondary insider may be liable to a fine of up to Sfr1.08 million or imprisonment for up to one year. In contrast to primary insiders, the law provides no aggravated penalties if a secondary insider realises a profit of more than Sfr1 million.
- Accidental insiders may be punished with a fine of up to Sfr10,000.
The severe penalties that apply where a primary insider realises a profit in excess of Sfr1 million were introduced in order to establish the requisite basis in Swiss domestic law for ratification of the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of Proceeds from Crime and on the Financing of Terrorism. The convention imposes an obligation on acceding states to recognise aggravated insider trading as a predicate offence to money laundering.
While Swiss law previously considered insider trading as a mere misdemeanour, with the consequence that proceeds from such conduct technically could not be the object of a money-laundering offence in Switzerland, the new provisions define the abuse of confidential information by a primary insider – provided that the profit realised thereby exceeds Sfr1 million – as a serious crime qualifying as a predicate offence to money laundering in the sense of the Penal Code.
Besides revising the criminal provisions regarding insider trading, the amendments introduce a new regulatory regime against abusive practices in connection with insider information. Under the new regime, 'inside information' is defined more broadly and includes any confidential information whose disclosure is likely to influence the price of Swiss securities significantly (Article 33e). Unlike criminal provisions, the regulatory regime does not distinguish between primary, secondary or accidental insiders; nor is it a prerequisite to sanctioning that the offender be seeking to gain a financial profit by taking advantage of confidential information.
Rather, any regulated or non-regulated market participant which takes advantage of confidential information in order to trade Swiss securities or to provide recommendations as to the acquisition or disposal of Swiss securities, or communicates such confidential information to another person, commits insider trading pursuant to Article 33e. Accordingly, Article 33e confers authority on the Financial Markets Authority (FINMA) to enforce these rules against any offender, regardless of whether he or she is a regulated financial services provider. Possible penalties range from 'naming and shaming' in a published FINMA decision to confiscation of proceeds made through unlawful activities. However, FINMA cannot impose fines or other monetary penalties.
In contrast to insider trading, the criminal provisions on market manipulation remain largely unchanged. The amendments are confined to editorial changes. Accordingly, 'market manipulation' continues to be defined as any behaviour that is intended to exert significant influence on the price of securities in order to realise an unlawful financial gain for the offender itself or another party by:
- wilfully disseminating misleading information; or
- purchasing and selling securities traded on a Swiss securities exchange or a similar institution, whereby the purchase and sale are entered into, directly or indirectly, for the account of the same party or a group of persons which have teamed up for such purpose.
Market manipulation is generally penalised by a fine of up to Sfr1.08 million or imprisonment for up to three years. However, if the illicit profit exceeds Sfr1 million, the offender is subject to a fine of up to Sfr1.08 million or imprisonment for up to five years. Similar to insider trading, aggravated market manipulation now meets the criteria of a serious crime and thus constitutes a predicate offence to money laundering.
The new rules on insider trading and market manipulation confer jurisdiction to federal authorities. While these offences were formerly prosecuted on a cantonal level and were subject to the jurisdiction of cantonal courts, the amended act now designates the Office of the Federal Attorney General as the body that is competent to investigate and prosecute suspected offences. The court of first instance to adjudicate cases of insider trading and market manipulation is henceforth the Federal Criminal Court.
The new provisions on insider trading and market manipulation introduce significant changes to Swiss financial markets law. In particular, the definitions of 'aggravated insider trading' and 'market manipulation' (offences resulting in an illicit profit in excess of Sfr1 million) as a predicate offence to money laundering clearly increase the exposure of financial services providers to regulatory and criminal liability risks. In the event of indications of possibly unlawful conduct by customers, financial services providers will henceforth be required to exercise enhanced diligence duties in accordance with money-laundering prevention rules, including investigating the background of the transaction at issue and possibly notifying the Federal Money Laundering Reporting Office.
Furthermore, bankers and other financial intermediaries may become subject to criminal penalties themselves if they allow customers to deposit or transact funds which they knew, or ought to have known in the circumstances, originated from insider trading or market manipulation.
For further information on this topic please contact Bernhard Loetscher or Alain Friedrich at CMS von Erlach Henrici Ltd by telephone (+41 44 285 11 11), fax (+41 44 285 11 22) or email ([email protected] or [email protected]).
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