Insider trading Recent developments and some lessons from the EU experience Paulo Câmara, Director CMVM Moscow, Russian Corporate Governance Roundtable, 3 October 2003

Page 2 Insider trading and corporate governance Insider trading has many governance implications, affecting: the organization of companies; the duties of directors of managing boards and supervisory boards and other corporate insiders; the permitted flow of information within companies; the disclosure duties imposed to companies. Also, the main problem in insider trading is conflict of interests and the misuse of power – although in this case it relates to the power over privileged information. Therefore, there is a strong connection between corporate governance and insider trading.

Page 3 Recent regulatory developments in Europe New Market Abuse Directive 2003/6/EU, 28 January 2003 Market abuse covers both market manipulation and insider trading. This Directive replaces: –Former insider trading directive (Directive 89/592/EEC) –EU regime on disclosure of price sensitive-information This Directive has yet to face the test of its application; but it was approved under the new Lamfalussy system, with many public consultation rounds. Thus it already provides some important lessons on how to regulate this area.

Page 4 Abstain and disclose New Directive unifies treatment given to price-sensitive information and to privileged information, concepts that were previously subject to different EU texts. The same concept applies either to: information to be provided by companies; and to information not to be misused by insiders. Beforehand, companies were told to disclose or abstain (to misuse information) – rather focusing on the prohibitive side of insider trading. Now the Directive indicates companies should abstain and disclose..

Page 5 A focus on timely disclosure It is shown a greater concern with disclosure duties regarding privileged information. That is why companies must inform the public as soon as possible of inside information which directly concern them. Internet facilitates quick and cost-effective communication of price- sensitive information to the public. Directive imposes duty to disclose such information on the company’s website.

Page 6 A preventive approach Eliminating selective disclosure implies also reducing the risk of insider trading. The same reasoning is behind IOSCO Principles for Ongoing Disclosure and Material Development Reporting by Listed Companies (2002). This reflects a preventive approach. The link between governance and insider trading has become even more evident as the new Directive adopts a clear preventive approach.

Page 7 Clarity of the fundamental concept The definition of privileged information is more straightforward: “information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments”. Same concept applies to every type of financial instrument. A clearer definition of privileged information helps companies to know what has to be publicly disclosed and therefore prevents risk of insider trading.

Page 8 Insiders: duty to provide lists Lists of corporate insiders must also be provided. Companies must elaborate and regularly update such lists and send it to the competent authority upon request. Companies must co-operate actively to prevent trading on the basis of privileged information.

Page 9 Insiders: duty to report on transactions The new EU text imposes a duty to report on transactions by insiders. Corporate insiders shall, at least, notify to the competent authority the existence of transactions conducted on their own account relating to shares of the said issuer, or to derivatives or other financial instruments linked to them. Public access to information concerning such transactions will be ensured, on at least an individual basis, as soon as possible. Disclosure of transactions by insiders is also an important preventive tool.

Page 10 Disclosure of conflict of interests Helps investigation of possible insider cases and provides useful information regarding possible conflict of interests. Persons who produce or disseminate research concerning financial instruments or issuers of financial instruments and persons who produce or disseminate other information recommending or suggesting investment strategy, intended for distribution channels or for the public, take reasonable care to ensure that such information is fairly presented and disclose their interests or indicate conflicts of interest concerning the financial instruments to which that information relates.

Page 11 Conclusion Based on the European experience, it is possible to conclude that the modern approach towards insider trading is: Broader - considering e.g. types of securities concerned; More ambitious - given the range of professionals involved (not only insiders); More connected with governance issues; Eminently preventive and more focused on clear and effective guidance regarding timely disclosure of price-sensitive information.