PROBLEMS OF TRADING STOCKS IN CHINA A concise introduction of violations in an emerging stock market

OVERVIEW LAWS TYPES OF VIOLATIONS KEY STATISTICS SUMMARY PROPOSED SOLUTIONS

LAWS /AT A GLANCE AUDIT LAW OF THE PEOPLE'S REPUBLIC OF CHINA SHANGHAI STOCK EXCHANGE TRADING RULES SECURITIES DEPOSITORY AND CLEARING RULES PROVISIONAL ADMINISTRATION MEASURES FOR STOCK EXCHANGE RISK FUND LAW OF THE PEOPLE'S REPUBLIC OF CHINA ON SECURITIES CRIMINAL LAW OF THE PEOPLE'S REPUBLIC OF CHINA SHENZHEN STOCK EXCHANGE TRADING RULES ACCOUNTING LAW OF THE PEOPLE'S REPUBLIC OF CHINA LAW OF THE PEOPLE'S REPUBLIC OF CHINA ON FUNDS FOR INVESTMENT IN SECURITIES RULES ON SUPERVISION OVER SECURITIES COMPANIES CIRCULAR ON ISSUES CONCERNING BANK DEPOSIT INVESTMENT BY MONEY MARKET FUNDS INTERIM MEASURES FOR THE ADMINISTRATION OF FIXED ASSET LOANS INTERIM MEASURES FOR THE SUPERVISION AND ADMINISTRATION OF INTEGRITY IN THE SECURITIES AND FUTURES MARKETS COMPANIES LAW OF THE PEOPLE’S REPUBLIC OF CHINA APPROVAL REPLY BY THE STATE COUNCIL TO THE RELEVANT ISSUES ABOUT SECURITIES INVESTMENT FUND MANAGEMENT COMPANIES

AUDIT LAW OF THE PEOPLE'S REPUBLIC OF CHINA SHANGHAI STOCK EXCHANGE TRADING RULES SECURITIES DEPOSITORY AND CLEARING RULES PROVISIONAL ADMINISTRATION MEASURES FOR STOCK EXCHANGE RISK FUND LAW OF THE PEOPLE'S REPUBLIC OF CHINA ON SECURITIES CRIMINAL LAW OF THE PEOPLE'S REPUBLIC OF CHINA SHENZHEN STOCK EXCHANGE TRADING RULES ACCOUNTING LAW OF THE PEOPLE'S REPUBLIC OF CHINA LAW OF THE PEOPLE'S REPUBLIC OF CHINA ON FUNDS FOR INVESTMENT IN SECURITIES RULES ON SUPERVISION OVER SECURITIES COMPANIES CIRCULAR ON ISSUES CONCERNING BANK DEPOSIT INVESTMENT BY MONEY MARKET FUNDS INTERIM MEASURES FOR THE ADMINISTRATION OF FIXED ASSET LOANS INTERIM MEASURES FOR THE SUPERVISION AND ADMINISTRATION OF INTEGRITY IN THE SECURITIES AND FUTURES MARKETS COMPANIES LAW OF THE PEOPLE’S REPUBLIC OF CHINA APPROVAL REPLY BY THE STATE COUNCIL TO THE RELEVANT ISSUES ABOUT SECURITIES INVESTMENT FUND MANAGEMENT COMPANIES LAWS /AT A GLANCE

SECURITIES LAW First drafted in Adopted on December 29, 1998 ; Applied on July 1, Late revised on October 27, 2005; Went into effect on January 1, “This law is enacted for the purpose of regulating the issuing and trading of securities, protecting the lawful rights and interests of investors...”

TYPES OF VIOLATIONS Accounting Fraud - False records - Major omissions - Improper disclosure - Misrepresentations Market Manipulation - Action-Based - Information-Based Insider Trading - Short-swing trading - Rat trading Others - Bank credit funds - Naked short selling - Embezzle public fund - No statutory qualification - Exceed jurisdiction

Article 71: “Nobody may use any of the following measures to acquire illegitimate interests, or pass risks onto others...” (The first edition implemented in 1999) New Revision Institutional investors LITIGANT MANIPULATION - Action-Based - Information-Based AIM - Trend creation - Induce investors to make error judgements MARKET MANIPULATION

HOW TO CATCH THEM ? PROPOSED SOLUTIONS /Market Manipulation -Strengthen the supervisions and controls of stock trading, especially in large accounts -Turnover rate LAWS & REGULATIONS ? -“Firewall” Internal business department isolation and practice avoidance -NASD Rule 2711 Restrictions on compensation to associated persons

INSIDER TRADING WHO IS AN INSIDER ? -Legal insider -Obtain information illegally New Revision Article 76: “Persons possessing inside information relating to securities trading and persons obtaining inside information unlawfully shall not, prior to the publication of such inside information, purchase or sell the securities of the company concerned, or disclose such information, or suggest other persons trade in such securities.” (The new edition implemented in 2005) PLEADING STANDARDS -Whether to use the insider information or not without option for “abstain or disclose” like USA

STATISTICS /Insider Trading POSITIONS OF LITIGANTS TYPES OF INFORMATION AMOUNTS OF PROFIT PUNISHMENT AMOUNT

STATISTICS /Insider Trading POSITIONS OF LITIGANTS TYPES OF INFORMATION AMOUNTS OF PROFIT PUNISHMENT AMOUNT

STATISTICS /Insider Trading POSITIONS OF LITIGANTS TYPES OF INFORMATION AMOUNTS OF PROFIT PUNISHMENT AMOUNT

STATISTICS /Insider Trading POSITIONS OF LITIGANTS TYPES OF INFORMATION AMOUNTS OF PROFIT PUNISHMENT AMOUNT

CHARACTERISTICS SHORT-SWING TRADING /Insider Trading New Revision Article 47: “Where a director, supervisor or senior manager of a listed company, or a shareholder who holds 5% or more of the shares of a listed company sells the shares of the company within six months of purchasing such shares, or repurchases the shares within six months of selling such shares, the gains therefrom, if any, shall belong to the company, and the board of directors of the company shall recover such gains...” (The new edition implemented in 2005) -Strict insider -Transaction frequency -Whether to use the insider information or not Act as the protection against insider trading

- Fund Managers - Fund Trustees Use personal funds in the low- priced stocks to open a position Raise funds and pulled the stock Sell the high- priced stock for a profit RAT TRADING /Insider Trading PROCEDURE LITIGANT

HOW TO CATCH THEM ? PROPOSED SOLUTIONS /Insider Trading -Pay attention to the abnormal changes of the stock prices -Check out board members’ families and relatives LAWS & REGULATIONS ? -Suspension and resumption of trading -Reverse the burden of proof -Insider trader shall be held civil liable for compensation pursuant to law -Increase punishment

SECURITIES MARGIN TRADING USA - Securities Exchange Act of Rule T, U, G, X - NSMIA PROTECTION Naked short selling is not allowed. NAKED SHORT SELLING /Others

China Banking Regulatory Commission (CBRC) REGULATION AIM - Avoid stock market bubble - Support real economy - Reduce credit exposure APPROACH Corporate Directly & indirectly By means of other accounts Bank acceptance bills discount Individual Consumer loans Security Company Interbank borrowing BANK CREDIT FUNDS /Others

STATISTICS Proportion of different types of violations over the year, Based on the CSRC administrative sanction decision DATA

STATISTICS Historical data of amount of violations over the past 11 years, Based on the CSRC administrative sanction decision DATA

SUMMARY The new “Securities Law” 3 major types of violations ⁻Accounting fraud ⁻Market manipulation ⁻Insider trading Proposed solutions Statistics

THANK YOU Kristen Dominic Susie Clyde