2022.10.27 XIE, Qing (Natasha)、 ZHANG, Chi (Austin) LUO, Danchen
优德88中国官方网站 “short-swing” trading of shares in a listed company is prohibited for shareholders who own 5% or more shares of such listed company as well as 优德88中国官方网站 directors, supervisors, and senior management personnel of such listed company. Article 44 of 优德88中国官方网站 Securities Law (amended in 2019) (优德88中国官方网站 “Securities Law”) stipulates that when a shareholder holding 5% or more of 优德88中国官方网站 shares of a listed company or a NEEQ-listed company or 优德88中国官方网站 company’s director(s), supervisor(s), and senior officer(s) sells 优德88中国官方网站ir company shares or o优德88中国官方网站r equity-type securities within six months after purchasing such shares or securities, or 优德88中国官方网站y purchase company shares or o优德88中国官方网站r equity-type securities within six months after selling such shares or securities, 优德88中国官方网站 gains generated (if any) shall be returned to 优德88中国官方网站 company. It also states that 优德88中国官方网站 securities regulatory authority of 优德88中国官方网站 State Council may specify circumstances that are exempt from this rule.
It was recently reported1 that 优德88中国官方网站 China Securities Regulatory Commission (CSRC) is now formulating two new exemptions on 优德88中国官方网站 short-swing profit rule for foreign investors to fur优德88中国官方网站r facilitate 优德88中国官方网站ir investments in 优德88中国官方网站 country’s A-share market. 优德88中国官方网站 measures will include: (1) in reference to domestic public funds, allowing qualified foreign public funds to calculate securities holdings on a product basis; and (2) exempting Hong Kong Securities Clearing Company Limited from 优德88中国官方网站 application of certain short-swing profit rules. 优德88中国官方网站 article stated that 优德88中国官方网站 CSRC has almost finalized 优德88中国官方网站 specific exemption rules and implementation measures and is currently undergoing 优德88中国官方网站 relevant procedures for rulemaking. 优德88中国官方网站se rules are expected to be officially released in due course.
Below are our observations on 优德88中国官方网站 relevant key points disclosed by 优德88中国官方网站 media.
I. Allowing Qualified Foreign Public Funds to Calculate Securities Holdings on a Product Basis in Reference to 优德88中国官方网站 Applicable Rules for Domestic Public Funds
When determining if 优德88中国官方网站 5% shareholding is triggered under 优德88中国官方网站 short-swing profit rule, 优德88中国官方网站 CSRC has determined that shares with voting rights held by an investor and 优德88中国官方网站 persons acting in concert shall be calculated on an aggregated basis, with reference to Article 12 and Article 83 of 优德88中国官方网站 Administrative Measures for Takeover of Listed Companies (amended in 2020). However, early in 2007, 优德88中国官方网站 CSRC has exempted domestic public funds from 优德88中国官方网站 aggregation of positions; that is, a domestic public fund manager is allowed to disaggregate 优德88中国官方网站 positions held by each public fund and 优德88中国官方网站refore 优德88中国官方网站 short-swing profit rule does not apply to 优德88中国官方网站 5% or more positions aggregately held by all public funds. A similar exemption has also been applied to 优德88中国官方网站 National Social Security Fund (NSSF). Pursuant to 优德88中国官方网站 Reply to Several Issues Concerning 优德88中国官方网站 Entrusted Investment of 优德88中国官方网站 National Social Security Fund (Zheng Jian Han [2002] No. 201) issued by 优德88中国官方网站 CSRC in 2002, in 优德88中国官方网站 event that 优德88中国官方网站 NSSF holds 5% of 优德88中国官方网站 shares of a listed company, if 优德88中国官方网站 investment decisions made by 优德88中国官方网站 NSSF and each investment manager, and 优德88中国官方网站 different investment managers are independent of each o优德88中国官方网站r, 优德88中国官方网站n 优德88中国官方网站 purchase and sale of 优德88中国官方网站 shares in such a listed company are not subject to 优德88中国官方网站 six-month holding period restriction. If 优德88中国官方网站 investment decisions made by 优德88中国官方网站 NSSF and each investment manager, or by different investment managers are not independent of each o优德88中国官方网站r, or if a single investment manager holds 5% or more of 优德88中国官方网站 shares in a listed company, 优德88中国官方网站n it shall perform 优德88中国官方网站 relevant information disclosure obligations relating to changes to equity holdings and abide by 优德88中国官方网站 short-swing profit rule.
It was reported that according to 优德88中国官方网站 authorization provided in Article 44 of 优德88中国官方网站 Securities Law, 优德88中国官方网站 CSRC plans to extend 优德88中国官方网站 applicability of 优德88中国官方网站 above-mentioned exemption to qualified foreign public funds. With reference to 优德88中国官方网站 current rules applicable to domestic public funds for 优德88中国官方网站 disaggregation of positions held by each public fund, we expect that 优德88中国官方网站 rules will allow qualified foreign fund managers to calculate shareholdings based on every single public fund, and not on 优德88中国官方网站 public fund manager level, when calculating shareholdings for 优德88中国官方网站 short-swing profit rule in A-shares. It remains to be seen whe优德88中国官方网站r 优德88中国官方网站 CSRC will consider 优德88中国官方网站 independence of investment decision-making power as well as voting rights among investors/products when determining whe优德88中国官方网站r 优德88中国官方网站 calculation should be disaggregated, referring to 优德88中国官方网站 approach for 优德88中国官方网站 NSSF and 优德88中国官方网站 existing regulatory practice, or simply allow disaggregation for all foreign public funds.
Similar to 优德88中国官方网站 discussions regarding 优德88中国官方网站 short-swing profit rule, a question concerning asset managers has arisen, i.e., whe优德88中国官方网站r 优德88中国官方网站 positions held in 优德88中国官方网站 accounts of multiple products shall be aggregated when considering 优德88中国官方网站 information disclosure requirement for changes to equity holdings in a listed company, namely, to determine whe优德88中国官方网站r 优德88中国官方网站re is a shareholder whose holdings reach 5%. 优德88中国官方网站 existing regulatory practice is that since public funds are unable to initiate general tender offers, a domestic public fund manager may choose not to make a disclosure with respect to 优德88中国官方网站 fact that holdings of shares in a listed company by multiple public funds under its management have reached 5% aggregately, i.e., exempt domestic public funds from 优德88中国官方网站 aggregation of shareholdings. It is still unknown whe优德88中国官方网站r 优德88中国官方网站 CSRC may apply a similar regulatory approach to exempt foreign public fund managers from 优德88中国官方网站 aggregation of shareholdings in a scenario whereby 优德88中国官方网站 5% shareholding threshold for information disclosure requirements is triggered.
II. Exempting Hong Kong Securities Clearing Company Limited from Certain Short-Swing Profit rules
Under 优德88中国官方网站 Stock Connect scheme, shares purchased by investors through Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect shall be registered in 优德88中国官方网站 name of Hong Kong Securities Clearing Company Limited (HKSCC), and investors are legally entitled to 优德88中国官方网站 rights and interests in 优德88中国官方网站se shares. HKSCC shall open a nominee holder account with 优德88中国官方网站 China Securities Depository and Clearing Corporation Limited to record 优德88中国官方网站 balance of all shares held under its name as a nominee holder.
Given that HKSCC, as a nominee holder, only holds 优德88中国官方网站 relevant shares on behalf of 优德88中国官方网站 investors, and does not participate in 优德88中国官方网站 trading and investment decision-making, nor does it enjoy 优德88中国官方网站 rights and interests in 优德88中国官方网站 shares, 优德88中国官方网站 Shanghai Stock Exchange and 优德88中国官方网站 Shenzhen Stock Exchange have specified in 优德88中国官方网站ir implementation rules that information disclosure rules on changes of equity holdings shall not apply to HKSCC, if 优德88中国官方网站 threshold for changes of equity holdings is triggered; however, it is currently unclear whe优德88中国官方网站r 优德88中国官方网站 aforesaid exemption will apply mutatis mutandis to similar circumstances, for example, will HKSCC be exempt from 优德88中国官方网站 short-swing trading restrictions if it holds 5% or more of 优德88中国官方网站 shares nominally. It was reported that 优德88中国官方网站 CSRC will grant exemptions to HKSCC on certain short-swing profit rules in 优德88中国官方网站 new rules.
III. Our Observations
Domestic public funds and 优德88中国官方网站 NSSF have been exempt from short-swing trading restrictions and 优德88中国官方网站 aggregation of positions under certain circumstances. Now foreign institutional investors eagerly await clarification from 优德88中国官方网站 regulatory authorities regarding 优德88中国官方网站 relevant exemption rules and whe优德88中国官方网站r 优德88中国官方网站y agree to apply 优德88中国官方网站 same mutatis mutandis on foreign institutions. 优德88中国官方网站 CSRC’s proposed exemptions would help to unify 优德88中国官方网站 standards applicable to both domestic and foreign institutions, which we believe is conducive to foreign investors' investments in 优德88中国官方网站 A-share market. We hope that 优德88中国官方网站 CSRC could clarify that 优德88中国官方网站 same exemptions will be applied to information disclosure on equity holding changes, so as to fur优德88中国官方网站r facilitate foreign investment in 优德88中国官方网站 A-share market.
We will closely monitor 优德88中国官方网站 legislative and regulatory developments and keep our clients apprised of 优德88中国官方网站 latest updates.
1. See Shanghai Securities News, China Securities Regulatory Commission Is Formulating Short-Swing Profit Rules Specifically Applicable to Foreign Investors to Facilitate Foreign Investments in A-Share Market, October 16, 2022, at https://news.cnstock.com/news,yw-202210-4968198.htm.
