Title

Misappropriation Theory: How the World’s Two Largest Economies Regulate Insider Trading

Document Type

Article

Publication Date

Spring 4-1-2021

Abstract

Prior to the government adopting policies of economic reform in the late 1970s, the People’s Republic of China (“the PRC” or “China”) did not have a formal securities market or an accompanying regulatory scheme. For the most part, it was not operationally feasible for a market to develop and flourish in China because the PRC had a centrally planned economy with state-owned enterprises as the primary form of business ownership. However, economic reform brokered conditions where stock trades casually began in markets located in Shanghai, Shenzhen, Chengdu and several other cities in the early 1980s. This informal trading persisted until the formal establishment of modern stock exchanges in Shanghai and Shenzhen in December 1990.

Historically, the securities market in China has been prone to fraud and corruption. In fact, there have been occasions where Chinese officials have been openly involved in the fraud and corruption that has taken place. To address these issues in its securities market, Chinese regulators sought assistance from abroad. Specifically, in April of 1994, China’s securities regulatory authority, the China Securities Regulatory Commission (“CSRC”), signed a Memorandum of Understanding with the United States Securities and Exchange Commission (“SEC”) in a move designed to obtain access to technical and enforcement assistance from its American counterpart. Pursuant to the guidance it received under the Memorandum of Understanding (“1994 MOU”), China implemented many of the policies used by the SEC in its securities regulation efforts. One example of such implementation was China’s revamping of its regulatory configuration from two independent levels (the CSRC and the Securities Commission of the State Council or “SCSC”) to a single-level structure in which the CSRC is subordinate to the SCSC. Another example is the Securities Law of the People’s Republic of China (“1998 Securities Law”), which implements many securities laws that are also used in America.

China is the world’s second-largest economy in terms of nominal gross domestic product (GDP) and has the fourth-largest stock exchange in the world in terms of market capitalization. The United States is the largest economy in the world in terms of nominal GDP with the two largest stock exchanges in the world in terms of market capitalization. Because of these facts and China’s obtainment of significant technical and enforcement assistance from the United States in the area of securities law, this paper will address the issue of misappropriation of inside information from a comparative perspective by discussing the issue under both Chinese and American securities laws. After a general introduction to insider trading theories in Part I of this paper, Part II will discuss the American approach to regulating misappropriation and Part III will discuss China’s basic approach to the issue. Part IV will consider and answer the question of whether a breach of fiduciary duty requirement is the proper approach for regulating misappropriation or whether applying misappropriation liability without a fiduciary duty requirement is the better approach. Part V will provide suggested solutions for addressing the problems with both the American and Chinese approaches to regulating misappropriation.

Publication Title

Dartmouth Law Journal

First Page

6

Last Page

31

Comments

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