- Trading of securities on the basis of material nonpublic information
- Trading of securities intended to facilitate market manipulation
- Trading of securities employing deception
- Market abuses
Unfair trading covers a wide range of illegal buying and selling of securities in the market. Although unfair trading is not expressly defined in the law, it is broadly classified into three general types under the FSCMA: (i) trading on the basis of material nonpublic information; (ii) trading intended to facilitate market manipulation; and (iii) trading employing deception. In addition, new rules aimed at market abuses whose degrees of illegality are not as serious as those of previously recognized unfair trading activities under the FSCMA also took effect in July 2015.
Trading of securities on the basis of material nonpublic information
The FSCMA strictly prohibits insider trading or the buying and selling of a publicly traded company's securities by insiders using material nonpublic information. Using undisclosed information to buy or sell the securities of a company set to become a publicly traded company within six months is also prohibited.
The prohibition on the use of material nonpublic information covers not only insiders, but also quasi-insiders and tippees who may become privy to material nonpublic information. Such persons include:
- Company's directors, officers, employees, and agents;
- Company's major shareholders and their agents and other related information users;
- Persons with legally granted regulatory or licensing authority over the company and their agents;
- Company's contractors and their agents and employees;
- Directors, officers, employees, and major shareholders of the company's affiliate or subsidiary; and
- Persons or insiders of a company currently in negotiation with company.
Corporate Insiders Covered under Prohibition on Use of Material Nonpublic Information
The directors and officers and major shareholders of a listed company are corporate insiders who are specifically covered under the prohibition on the use of material nonpublic information.
Directors refer to directors (including outside directors) and the auditor elected by the company's shareholders at the general shareholders' meeting. As provided under article 401-2(1) of the Commercial Act, company offers include: (i) persons who effectively control the company and routinely order company directors to carry out specific activities; (ii) persons who can act on behalf of the company; and (iii) persons who are not directors but perform executive duties and functions assuming such titles as honorary president, president, chief executive officer, executive director, director, or other titles indicative of decision-making position or authority. A person is deemed a company officer if the person performs corporate duties assuming such job titles as honorary president, president, chief executive officer, executive director, or director.
A major shareholder is a person who holds at least 10 percent of the company's total voting equity securities issued, including depositary receipts that have been issued for such securities (irrespective of whether the voting equity securities are held in the name of the shareholder or not). A shareholder who holds less than 10 percent of the total voting equity securities issued, but nevertheless effectively controls the company, is also deemed a major shareholder.
Prohibition on Use of Information Pertaining to Large Share Purchase and Sale
The FSCMA prohibits the use of information stemming from or pertaining to a large share purchase or sale to buy or sell securities to protect investors. A share purchase or sale is deemed large if it is deemed sufficient to materially affect the company's management control. Persons subject to the prohibition on the use of information pertaining to large share purchase and sale include:
- A company (including its affiliates) that engages in the purchase or sale, and the company's officers, employees, agents, and others who come to possess knowledge of the transaction;
- Major shareholders of the company engaging in the purchase or sale and others who become privy to the transaction; and
- Persons who exercise legally granted regulatory or licensing authority over the company and who come to possess knowledge of the transaction.
Trading of securities intended to facilitate market manipulation
Market manipulation-generally defined as a deliberate attempt to alter the prevailing share price and to profit from the artificially raised or reduced share price-is a violation of the securities law. Market manipulation includes orchestrated purchase and sale of securities in the spot and in the futures markets and covers trades involving listed and unlisted securities (including derivatives) through either the exchange or the OTC markets.
Market manipulation through disguised trading such as matched orders and wash sale that involve the purchase and sale of a company's shares by a person or an organized group of persons to create an impression of significant trading is a violation of the law. Specifically, it is a violation of the law to conspire with others to buy and sell a prearranged number of securities at a prearranged price with each other or to engage in fictitious buying or selling without transferring the legal ownership of the securities. Another common market manipulation is the creation of false trading impression. Manipulating a market price by creating a misleading or false trading impression on others is also a violation of the law. Such manipulation usually involves individuals who engage in prearranged buying and selling to create a false or misleading impression of significant trading.
Trading of securities employing deception
The FSCMA comprehensively prohibits trading of securities aimed at generating pecuniary or other financial gains through: (i) the use of an unfair means, scheme, or technique; or (ii) misrepresentation or omission of material information. Disseminating a rumor, employing deception, or using violence or threat to facilitate buying or selling of securities or manipulate the market price is prohibited as unfair trading under the FSCMA.
Under the newly amended FSCMA, market abuses are broadly grouped into abuses involving the use of insider and outsider information and abuses involving market manipulation.
Market abuse involving the use of insider and outsider information
Prior to the market abuse amendments that took effect on July 1, 2015, provisions in the FSCMA prohibiting the use of material nonpublic information (article 174) did not extend to insider information received second-hand or more remotely, or privileged information generated or held by outsiders such as material nonpublic information pertaining to a significant market activity or a major government action or policy decision. After the market abuse amendments took effect, making use of nonpublic information received second-hand or more remotely, privileged information generated or held by outsiders, or information obtained through hacking or other unlawful means is strictly prohibited.
Market abuse involving market manipulation
Prior to the market abuse amendments to the FSCMA, provisions barring trading of securities aimed at market manipulation (article 176) and other unlawful trading activities (article 178) were difficult to enforce in the absence of an intent to induce others to trade in a certain way or an objective to achieve unlawful financial gains. After the market abuse provisions took effect in July 2015, enforcement action in the form of a punitive fine can be taken against a person when that person is judged to distort or hold the potential to distort the market price by placing a large buy/sell order without any intent to execute, engaging in wash sales, placing a matched order, or disseminating a false rumor.