Legal Nature Of Front Running And Regulations On It

Front running discussed here refers to front running in funds industry which emerges with the fast development of the funds industry. Front running happens in situations where funds managers purchase securities for themselves before the funds purchasing the securities. There are usually two sorts of front running. The first sort of front running refers to the illegal activities of entering securities transactions due to non-public information rather than insider information; the second sort of front running refers to the illegal activities of taking advantage of funding managed by funds managers who have breached their duties.The basic reason why front running exists is that interest conflicts exist between funds managers and the funds. In China, besides the reason stated above, reasons include that funds managers have no way to invest securities for themselves; the operation of front running is very covert; funds management companies decline to recognize front running in their funds so as to keep their reputation; and regulations on front running are still inadequate. Front running harms not only the interests of investors but also the development of the funds industry. Based upon the activities of the administrative authority and the legislature in recent years, it can be concluded that the administrative authority and the legislature consider front running as a sort of activity breaching fiduciary duty rather than insider trading. However, the author does not agree with this opinion. According to Article 73 of China's Securities Law, funds managers who conduct front running are supposed to be insiders; according to Article 75 of China's Securities Law, the investment information of funds which are taken advantage of by funds managers is supposed to be insider information. Therefore, the legal nature of front running is supposed to be insider trading. As to the relationship between front running and activities of breaching fiduciary duty, it is the author's opinion that it is funds management companies rather than funds managers who owe a duty of trustee to the beneficiaries. Therefore, front running conducted by funds managers can not be regarded as activities of breaching fiduciary duty.After analyzing the legal nature of front running, the author suggests several measures to regulate front running including loosening restrictions on investment of funds managers; strengthening regulations on personal transactions by funds managers and perfecting laws related.This article includes three parts apart from the introduction:The first part discusses the concept, origin and harms of front running; the second part discusses the legal nature of front running and considers front running as insider trading; and the third part discusses measures to regulate front running.