Short Swing Profit Rules in the Asset Management Industry
作者 植德金融部
1.Legislation on Short Swing Profit Rules
(1)Rules
According to Article 44 of the Securities Law of the People’s Republic of China (the "Securities Law"), where a shareholder holding 5% or more shares or securities with equity nature ("major shareholder") of a Stock Exchange listed company or a company listed on the National Equities Exchange and Quotations (known as the New Third Board) may not sell (or purchase) such securities in no more than 6 months after purchase (or sale) of the same; otherwise, the short swing profit shall be vested in the listed company.
(2)Legislative Intent
According to the interpretation on the official website of the National People's Congress of the People's Republic of China, the major shareholders have more voting rights in deciding major issues of a company and are insiders with access to inside information as defined in the Securities Law.
In order to prevent them from taking advantage of their dominant position of holding a large percentage of shares and influencing the price of such shares through frequent trading of the company's shares to damage other small and medium shareholders’ interests, the Securities Law has made such restrictive rules.
(3)Consequences of Violation
According to Article 189 of the Securities Law, the major shareholders trade in shares or securities with equity nature in violation of Article 44 of the Securities Law shall be given a warning and concurrently fined between RMB100,000 and RMB1,000,000.
2.Exemption in the Asset Management Sector
(1)Legal Ground for the Exemption
The China Securities Regulatory Commission ("CSRC") has been authorized by Article 44 of the Securities Law to grant exemptions under specific circumstances, in spite of the above restrictive provisions.
(2)Rules on the Exemption
(a)Exemption to Public Funds
According to regulatory rules by CSRC on disclosure of interest ("DOI") and short swing profit rules with respect to public funds, CSRC has granted an exemption from such requirement to domestic public funds of public fund management companies ("FMCs").
However, for one public fund of an FMC holding an aggregate of 5% or more shares or securities with equity nature of a listed company, there is no such exemption.
(b)Exemption to National Social Security Fund
Pursuant to regulatory rules by CSRC, in the event that the National Social Security Fund holds 5% or more shares or securities with equity nature of a listed company, if the investment decisions made by the National Council for Social Security Fund ("NCSSF") and each investment manager are independent of each other, then it is not subject to the short swing profit rules; otherwise, the rules will apply.
In addition, if a single investment manager entrusted by the National Social Security Fund holds more than 5%, it shall strictly follow the short swing profit rules.
(3)Asset Managers without Exemption
CSRC has not applied the above exemption policy to (i) private asset management products issued by FMCs, securities companies, futures companies and their subsidiaries, (ii) private funds, (iii) trust schemes, wealth management products and insurance asset management products.
3.Exemptions for Foreign Investors?
(1)Classic Cases
In the case of Nanning Sugar (a listed company) v. Martin Currie Investment Management Ltd., (QFII), where the QFII was sued for its violation of short swing profit rules, the parties finally entered into a settlement agreement after more than two years.
Pursuant to the settlement agreement, Martin Currie agreed to pay Nanning Sugar a lump sum of RMB40 million in U.S. dollar equivalent as settlement payment, but the parties agreed that the execution of the settlement agreement does not constitute an admission by Martin Curie that it has violated short swing profit rules, nor does it constitute an admission by Nanning Sugar that Martin Currie has not violated such rules.
(2)Current Regulation
Such exemption by CSRC is currently not available to foreign mutual funds or other retail funds that invest in A shares through either QFII/RQFII or Stock Connect schemes.
(3)Legislative Development
On October 16th 2022, with respect to short swing profit rules (and perhaps DOI rules together, as anticipated), it was reported that CSRC is considering granting a special exemption to foreign mutual funds and other retail funds, by reference to the exemption to domestic public funds.
4.Some Notes on Short Swing Profit Rules
For compliance with short swing profit rules, risks tend to come from ignoring details. In practice, the issues that need attention are far more than the above-mentioned general provisions, including but not limited to:
Identification of a major shareholder (on an actual controlling basis?)
Buying and selling (negotiated shares transfer and purchase of private placement shares included?)
The scope of securities with equity nature (DR and CB included?)
Other exemption or non-exemption (triggering short swing profit rules passively exempted?)
Commencement of the six-month period (starting from the last selling or buying?)
Calculation of the profit (the lowest-in highest-out rule?)
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*本文由植德金融部邹野律师撰写
植德金融部
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