Enforcement without Foundation?—Insider Trading and China's Administrative Law Crisis

Abstract

China's securities regulator enforces insider trading prohibitions pursuant to non-legal and non-regulatory internal “guidance.” Reported agency decisions indicate that enforcement against insider trading is often possible only pursuant to this guidance, as the behavior identified is far outside of the scope of insider trading liability provided for in statute or regulation. I argue that the agency guidance is itself unlawful and unenforceable, because: (i) the guidance is not the regulatory norm required by the statutory delegation of power; and (ii) the guidance is ultra vires because (a) it addresses something substantively different from what is authorized under the statutory delegation, and (b) because the guidance radically transforms the underlying basis for the breach of insider trading under Chinese law—from a modified "classical"/ fiduciary duty plus misappropriation theory to an extremely robust "equal access"/ mere possession of inside information theory. I then outline potential Chinese law challenges to the norms and their enforcement, and analyze why there is such marked tolerance to plainly illegal rule-making and enforcement by what is commonly understood to be one of China's best administrative agencies. The infirmity underlying the basis for well-governed and investor-attracting capital markets identified here has implications not only for China's securities regulation regime and healthy market development, but also for the entirety of China's legal and administrative law system in the reform era.

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