In recent years, the China Securities Regulatory Commission (CSRC) has been intensifying its crackdown on securities professionals engaging in illegal stock trading. Between 2019 and 2023, the CSRC investigated 67 cases involving securities professionals’ illegal stock trading, resulting in administrative penalties for 139 individuals. On February 9, 2024, the CSRC published an administrative penalty decision on its official website, penalizing 63 securities professionals from China Merchants Securities for illegal stock trading, with one individual facing a lifetime ban from the securities market. The total amount of fines and confiscations imposed on these 63 individuals reached 81.73 million YUAN. The handling of this case has sparked widespread discussion within the securities industry and fueled public discourse on the need for stricter regulatory oversight in the sector.

This article will analyze the regulations regarding the prohibition of securities professionals from trading stocks, aiming to raise awareness among industry practitioners.

I. Controversy over the Revision of the Securities Law: Should Securities Professionals Be Absolutely Prohibited from Trading Stocks?

Article 43 of the Securities Law of the People's Republic of China, as amended in 2014 (hereinafter referred to as the "old Securities Law"), stipulates that "employees of securities exchanges, securities companies, and securities registration and settlement institutions, staff of securities regulatory authorities, and other individuals prohibited by laws and administrative regulations from engaging in stock trading, shall not directly or indirectly hold or trade stocks in their own name or under an alias or someone else's name during their term or legal limit. They shall also not accept stocks as gifts from others." This absolute prohibition on securities professionals trading stocks has been a subject of ongoing debate in legal circles, particularly after the introduction of the Fund Law, which permits fund professionals to trade stocks after reporting such activities. Many have argued that securities professionals should be allowed to trade stocks after reporting.

A draft revision published on April 20, 2015, attempted to amend the original prohibitive clause, proposing that "employees of securities business institutions, securities exchanges, and securities registration and settlement institutions, staff of the State Council’s securities regulatory authority, and other securities professionals, must declare their securities accounts, including those of their spouses, to their respective institutions in advance and report their securities trading activities within three days after the transaction is completed, the transaction shall not conflict with their official duties or responsibilities."

However, concerns over securities professionals using inside information to trade stocks have persisted. Particularly in cases where evidence and identification of insider trading are difficult, allowing securities professionals to engage in stock trading could have unpredictable consequences. Therefore, in order to ensure the fairness of the market and prevent harm to investors' interests caused by information asymmetry, the revised Securities Law of the People's Republic of China (2019 amendment) (hereinafter referred to as the "new Securities Law") continues to impose an absolute prohibition on the trading of stocks by securities professionals. The scope of this prohibition was also expanded, covering "stocks or other securities with equity attributes."

II. Entities Prohibited from Participating in Stock Trading

Article 40, Paragraph 1 of the new Securities Law stipulates, "Employees of securities exchanges, securities companies, and securities registration and settlement institutions, staff of securities regulatory authorities, and other individuals prohibited by laws and administrative regulations from participating in stock trading, shall not directly or indirectly hold or trade stocks or other securities with equity attributes in their own name, under an alias, or someone else's name during their term or legal limit. They shall also not accept stocks or other securities with equity attributes as gifts from others."

Regarding the entities prohibited from participating in stock trading, the following points should be noted:

(i)Expansion of the Definition of "Securities Trading Venue"

Compared to the old Securities Law's reference to "securities exchanges," the new Securities Law broadens the scope of "securities trading venues." Securities trading venues now include not only securities exchanges but also other nationwide securities trading venues approved by the State Council, such as the National Equities Exchange and Quotations (NEEQ), regional equity markets, and the Beijing Stock Exchange.

In contrast to the provisions in the "Measures for the Administration of Futures Companies," which explicitly prohibit the spouses of futures professionals from engaging in futures trading, the new Securities Law does not impose such strict restrictions on the individuals prohibited from participating in stock trading.

(ii)Does "Employees" Include Back-office and Middle-office Staff?

The new Securities Law does not provide a specific definition of "employees." According to the "Rules for the Administration of Directors, Supervisors, Senior Management, and Employees of Securities Companies" issued by the China Securities Association, as well as responses in press briefings, "employees" refers to individuals involved in securities business and related management work. This includes those engaged in securities brokerage, securities investment consulting, financial advisory services related to securities trading and investment activities, securities underwriting and sponsorship, margin financing, proprietary trading, market-making activities, securities asset management, and the distribution of financial products, securities investment funds, and custodial services. It also includes compliance, risk management, financial management, auditing, information technology, settlement, and other middle-office and back-office staff involved in securities operations. Company chairpersons, directors, supervisors, and senior management personnel involved in business management are also considered employees.

However, in practice, the CSRC has expanded the scope of "employees" to include all staff working for securities companies. In the CSRC's Administrative Penalty Decision No. 116 (2019), the CSRC clarified: "The employees of a securities company, as referred to in Article 43 of the new Securities Law, not only include professional personnel engaged in securities business but also encompass staff engaged in party work, auxiliary support services, and comprehensive management within the securities company. The recognition of employees in a securities company does not depend on the possession of professional qualifications or certification."

III. The New Securities Law's Prohibition on Securities Professionals' Stock Trading Extend to Other Securities with Equity Attributes

(i)Definition of "Stocks or Other Securities with Equity Attributes"

According to Article 2 of the new Securities Law, securities include stocks, corporate bonds, depository receipts, government bonds listed for trading, securities investment fund shares listed for trading, and other securities recognized by the State Council in accordance with the law. However, the law does not provide a specific definition of what constitutes "other securities with equity attributes." It can only be interpreted literally as "securities that confer full or partial shareholder rights to the holder."

In conjunction with the China Securities Regulatory Commission's (CSRC) release of the "Several Provisions on Improving the Regulation of Specific Short-Term Trading (Consultation Draft)" in July 2023, it is clear that instruments such as depository receipts and convertible bonds (including convertible corporate bonds and exchangeable bonds), which can be converted into company stocks at a future point, are considered "other securities with equity attributes."

From the implementation of the new Securities Law, it appears that the main focus of "other securities with equity attributes" is on "convertible bonds." For example, on August 11, 2022, the Qingdao Securities Regulatory Bureau imposed a penalty on Ms. Chen, an investment advisor at a securities firm, for violating regulations on stock and convertible bond trading. It was found that during her employment, she illegally traded stocks and convertible bonds using her mother's securities account. The total transaction amount was 23,159,684.08 YUAN, and the total profit was 209,394,67 YUAN (after deducting commissions and taxes). The Qingdao Securities Regulatory Bureau ordered Ms. Chen to dispose of the illegally held stocks and other securities with equity attributes, confiscated the illegal gains of 209,394.67 YUAN, and imposed a fine of 200,000 YUAN.

Similarly, in an Administrative Penalty Decision issued by the Guizhou Securities Regulatory Bureau on August 4, 2023, Mr. Chen, a securities broker at a securities firm, was penalized for engaging in illegal stock and convertible bond trading. The investigation revealed that Mr. Chen used another person's account to trade stocks and convertible bonds, with a total transaction amount of 5,387,657 YUAN, resulting in an overall trading loss. The Guizhou Securities Regulatory Bureau ordered Mr. Chen to dispose of the illegally held stocks and imposed a fine of 50,000 YUAN.

(ii)Can Securities Professionals Trade Unlisted Company Equity?

According to Article 28 of the China Securities Regulatory Commission's (CSRC) 2022 Measures for the Supervision and Management of Directors, Supervisors, Senior Management, and Employees of Securities and Fund Management Institutions, "Directors, supervisors, senior management, and employees of securities and fund management institutions shall not engage in securities, fund, or unlisted company equity investments in violation of laws, regulations, and the provisions of the CSRC." Although this provision mentions that securities professionals are prohibited from engaging in unlisted company equity investment, the term "relevant provisions" here must be linked to specific legal texts. The applicable regulations for securities professionals are still outlined in Article 40 of the new Securities Law.

Based on the scope of securities defined by the new Securities Law, equity in unlisted companies does not fall under the category of securities and is therefore outside the regulatory scope of the new Securities Law. The authors believe that securities professionals trading unlisted company equity would not be subject to the restrictions in Article 40 of the new Securities Law. However, for investment banking professionals in securities firms and those working for securities firms with state-owned components, in addition to the constraints imposed by the new Securities Law, they are also subject to the Integrity in Professional Conduct provisions in Article 12 regarding the transfer of benefits, as well as restrictions placed on leaders of state-owned enterprises (including internal party and government regulations). Consequently, many compliance departments within securities firms require their employees to disclose internally any investments in unlisted company equity.

(iii)Can Securities Professionals Trade Stock Index Futures?

Under the new Securities Law and the Futures and Derivatives Law, stock index futures are classified as futures products, not "securities with equity attributes." As such, they do not fall under the trading restrictions imposed on securities professionals by the new Securities Law.

Moreover, according to Article 53 of the Futures and Derivatives Law, "Employees of futures trading institutions, futures exchanges, and futures clearing agencies, staff of the State Council’s futures regulatory authority and futures industry associations, as well as other individuals prohibited by laws, administrative regulations, or the State Council’s futures regulatory authority from participating in futures trading, are not permitted to engage in futures trading."

The Regulations on the Administration of Futures Trading (2017 Revision), in Article 25, specifies that the following entities and individuals are prohibited from engaging in futures trading, and futures companies are not allowed to accept their orders to trade futures:

● Government agencies and public institutions;

● Employees of the State Council’s futures regulatory authority, futures exchanges, futures margin custodians, and futures industry associations;

● Individuals prohibited from entering the securities and futures markets;

● ntities and individuals unable to provide account-opening documentation;

● Other entities and individuals prohibited from futures trading by the State Council’s futures regulatory authority.

Therefore, if securities professionals are not prohibited from the market, they are allowed to buy and sell stock index futures.

IV. Distinguishing Between Borrowing Accounts and Managing Client Assets

Securities professionals engaged in illegal stock trading typically do so by directly or using an alias, or by borrowing others' names to hold or trade stocks or other securities with equity attributes, or by accepting stocks or securities as gifts. Based on regulatory enforcement cases, it is common for securities professionals to use others' names for trading stocks. It is important to distinguish between borrowing another person's account to trade stocks and managing client assets, as these two behaviors are treated differently under the law, with varying legal responsibilities (especially in terms of determining illegal gains).

If a securities professional borrows someone else's account to trade for personal benefit, it constitutes a violation of Article 40 of the new Securities Law. The penalty for this behavior is outlined in Article 187:

"Persons prohibited by laws and administrative regulations from participating in stock trading who violate Article 40 of this Law, by directly or using an alias, or by borrowing another person’s name to hold or trade stocks or other securities with equity attributes, shall be ordered to deal with the illegal holding of such stocks or securities according to the law, have their illegal gains confiscated, and be fined an amount equal to or less than the value of the securities traded; if the violator is a government employee, further disciplinary action shall be taken according to the law."

On the other hand, if a securities professional controls a client’s account for asset management purposes, they violate Article 136 of the new Securities Law, which states, “Securities company employees shall not privately accept clients’ commissions to trade securities.” The penalty for this is detailed in Article 210:

"Securities company employees who privately accept clients' commissions to trade securities in violation of Article 136 shall be ordered to correct the issue, be given a warning, have their illegal gains confiscated, and be fined between one and ten times the amount of their illegal gains; if no illegal gains exist, a fine of up to 500,000 YUAN may be imposed."

In judicial practice, distinguishing between borrowing an account to trade stocks and managing client assets often depends on the source of the funds. Some believe that if the funds originate from the securities professional, it constitutes "using an alias or borrowing another person's name to hold or trade stocks," whereas if the funds come from others, it falls under asset management. A review of similar cases from the China Securities Regulatory Commission (CSRC) indeed suggests that fund sources are a key factor in this distinction. However, the author believe that the source of the funds is merely one aspect. The Beijing High People's Court, in an administrative lawsuit, stated that the determination of "using an alias or borrowing another person's name to hold or trade stocks" does not depend on whether the person prohibited from trading owns the stocks or funds. "Regardless of the source of the funds or whether they are owned by the person, as long as the person can actually control and use the funds to hold or trade stocks, it meets the criteria for penalty under this provision."

V. Legal Consequences of Illegal Stock Trading and Accountability Timeline

(i)Should the Fine Be Based on Illegal Gains or Securities Transaction Amount?

When securities professionals are caught illegally trading stocks, the penalties are typically based on Article 187 of the new Securities Law:

"Persons prohibited from participating in stock trading by laws or administrative regulations who violate Article 40 of this Law by directly or through an alias, or using someone else's name to hold or trade stocks or other securities with equity attributes, shall be ordered to handle the illegal possession of stocks or other securities with equity attributes in accordance with the law, and the illegal gains shall be confiscated. A fine not exceeding the equivalent of the securities traded shall also be imposed. If the violator is a state employee, disciplinary actions shall also be taken in accordance with the law."

This article uses the transaction amount as the standard for the maximum fine. However, since this provision only sets an upper limit for the fine and given that securities are highly liquid, which allows multiple transactions in a short time, the total transaction amount can quickly accumulate. Thus, calculating fines based on transaction volume may deviate from the reality of the case. As a result, in practice, the China Securities Regulatory Commission (CSRC) typically uses illegal gains as the basis for determining the fine amount.

Based on recent penalty cases handled by the CSRC and local regulatory bodies (the authors reviewed cases of securities professionals illegally trading stocks from 2021 to 2023), penalties for such violations have not been calculated based on the accumulated transaction amount. Instead, the fines are typically as follows:

●The violator is ordered to handle the illegal possession of stocks or other securities with equity attributes according to the law.

●Any illegal gains are confiscated.

●A fine is imposed roughly equivalent to the amount of illegal gains.

●If there are no illegal gains, fines ranging from 300,000 to 400,000 YUAN are applied, depending on the circumstances.

Here are some summarized cases of securities professionals being penalized for illegal stock trading, for reference:

(ii)Statute of Limitations for Accountability

According to the Administrative Penalty Law of the People's Republic of China and the Administrative Penalty Measures for Securities and Futures Violations, the general statute of limitations for penalties imposed by the securities regulatory authorities is two years. If no violation is discovered within this period, no administrative penalty shall be imposed. However, if the violation involves financial security and has harmful consequences, the statute of limitations extends to five years.

The time limit for penalties is calculated from the date the violation occurred. If the violation is ongoing or continuous, the time limit is calculated from the end of the wrongful act. For example, in Shanghai Regulatory Bureau's Administrative Penalty Decision No. Hu [2022] 3, Liu's actions from September 24, 2013, to June 3, 2020—involving the use of five different securities accounts, including Qin's account, for trading stocks—constituted a continuous violation. The Shanghai Regulatory Bureau initiated an investigation into the case in August 2020, which was within the statute of limitations. 

Finally, we remind securities professionals to strictly adhere to the red lines of the Securities Law. It is especially important to strengthen the management of personal identification documents, registered phone numbers, internet-enabled devices, and other related assets. Securities professionals should not lend their accounts to others for login purposes, nor should they use the securities accounts of family members, friends, or clients to trade stocks or manage securities business.