Taiwan Stock Exchange Corporation

What is insider trading?

Paragraph1, Article 157-1 of the Securities and Exchange Act stipulates that "upon actually knowing of any information that will have a material impact on the price of the securities of the issuing company, after the information is precise, and prior to the public disclosure of such information or within 18 hours after its public disclosure, the person holding such information shall not purchase or sell, in the person's own name or in the name of another ,shares of the company which are listed on an exchange or an over-the-counter market, or any other equity-type security of the company."

Paragraph2, Article 157-1 of the Securities and Exchange Act stipulates that "upon actually knowing of any information that will have a material impact on the ability of the issuing company to pay principal or interest, after the information is precise, and prior to the public disclosure of such information or within 18 hours after its public disclosure, the person holding such information shall not sell, in the person's own name or in the name of another, the non-equity-type corporate bonds of such company that are listed on an exchange or an over-the-counter market."

What constitutes insider trading?

Insider trading consists of the following 5 elements:
1. Subjects
2. Undisclosed material information
3. Actually know
4. Date and time of trading
5. Securities traded

Article 157-1 of the Securities and Exchange Act stipulates that the following persons are subject to the restriction on insider trading: A. Insiders:
1) A director, supervisor, and/or managerial officer of the company, and/or a person designated to exercise powers as representative (subparagraph 1) 2) Shareholders holding more than ten percent of the shares of the company (subparagraph 2) B. Defacto insiders:
1) Any person who has learned the information by reason of occupational or controlling relationship with the company. (subparagraph 3). 2) A person who, though no longer among those listed in (one of) the preceding subparagraphs, has only lost such status within the last six months (subparagraph 4). C. Tippees:
Any person who has learned the information from any of the persons named in the preceding subparagraphs.

The phrase “material information” shall mean:
1) Information relating to the finances or businesses of the company, or the supply and demand of such securities on the market, or any tender offers of such securities, which will have a material impact on the price of the securities. It also refers to any other information which will have a material impact on any investment decisions of a reasonably prudent investor.
2) Information that will have a material impact on the ability of the company to pay principal or interest. In order to more clearly define the material information, the governing authority promulgated "Regulations Governing the Scope of Material Information and the Means of its Public Disclosure Under Article 157-1, Paragraph 5 and 6, of the Securities and Exchange Act" on Dec. 22, 2010. The Regulations outline 30 types of material information, for example: The company carries out any material transaction of public offering and issuance or private placement of equity-type securities, reverse stock split, corporate merger, acquisition, or split, share exchange, conversion, or transfer of shares from others, direct or indirect investment project; Occurrence of a significant event of internal control-related malpractice, non arms-length transaction, or misappropriation of company assets; An error or omission in a financial report prepared by the company, and require a correction to and further a restatement of the financial report; The company's securities traded on the centralized securities exchange market or the OTC securities market are subject to an event of bidding, auctioning, major default in settlement, change of the original method of trading, or suspension, restriction, or termination of trading, or any other circumstance that may lead to any such event.

For example, Mr. A is the director of the issuing company, he attended the board meeting therefore he actually knew the information of operation-suspended resolution passed by the board meeting which will have a material impact on the price of the securities of the issuing company.

Upon actually knowing of the undisclosed material information, Mr. A shall not trade prior to or within 18 hours of the public disclosure of the information

1) Shares of the company that are listed on an exchange or an over-the-counter market, or any other equity-type security such as convertible bond.
2) The non-equity-type corporate bonds of such company that are listed on an exchange or an over-the-counter market.

What are the penalties for insider trading?

Legal responsibilities for a person charged with insider trading are as follows:

Criminal liabilities
1. A sentence of imprisonment for not less than three years and not more than ten years is imposed.
2. A fine of not less than NT$10 million and not more than NT$200 million may be imposed.
3. Where the amount gained by the commission of an offense is NT$100 million or more, a sentence of imprisonment for not less than seven years is imposed, and in addition a fine of not less than NT$25 million and not more than NT$500 million may be imposed.

Civil compensation liabilities

1. Persons in violation of the regulations regarding insider trading as outlined above are held liable to trading counterparts who on the day of the violation undertook the opposite-side trade with bona fide intent, for damages to the amount of the difference between the buy or sell prices and the average closing price for ten business days after the date of public disclosure.
2. The court may also, upon the request of the counterpart trading in good faith, treble the damages payable by violators if the violation is of a severe nature. The court may reduce the damages where the violation is minor.

What measures does TWSE take to detect and deter insider trading?

TWSE has in place 3 measures to detect and deter insider trading:
1. Continuous disclosure
2. Analysis of suspicious trading
3. Public education campaigns

1. Continuous disclosure
In order to encourage the openness of information flow in the securities market so as to prevent insider trading, TWSE requires listed companies to disclose their financial and operational information periodically or irregularly. TWSE also requires listed companies to announce material information through the Market Observation Post System (MOPS) within a certain time after events occur, or after events are reported in the media. To provide investors with more convenient and timely information, TWSE has created a simplified version of MOPS.

2. Analysis of suspicious trading
TWSE analyzes insiders' as well as major investors' trades and their connections once the announcement of material information affected the share prices and trading volume. If there is reasonable doubt, TWSE acts in accordance with the "Taiwan Stock Exchange Corporation Rules Governing Implementation of the Stock Market Surveillance System".

3. Public education campaigns
With the aim of improving the public's understanding of insider trading issues, TWSE regularly carries out education programs for employees of listed companies and securities firms, investors, students and the general public through the media, advertising posters and pamphlets.