Reflections On Short-swing Trading Profits Disgorgement

Since the stock market has emerged, it is always accompanied by insider trading. One of the main purposes of securities legislation is to curb it. As a prevention of insider trading, the short-swing trading disgorgement comes into being. It originated in the United States, absorbed by China “Securities Act”, the provisions of this act appears to be simple and easy to operate. But there are still many problems. The system is given high expectation to prevent insider trading, but the actual operating effect is not ideal. Considering those problems will be able to find out the deficiencies and improve it.This paper attempts to probe the short-swing trading disgorgement from the following aspects:The first part focuses on the subjects of the system. It mainly discusses two issues. The first one is the range of subjects is too narrow. And the second is there are no recognized standards for short-swing trading insider. To identify the identifications of the directors, supervisors and senior management should consider both their titles and executive duties. Besides, their close relatives need to be regulated because such subjects may use their close relatives to avoid legal punishment. As the identification of the major shareholder, to deal with the problem that shareholding in the name of other persons, the “actual holding” standard should be used to calculate all stock shares held by the shareholders. Because the major shareholders often use the name of their spouses, minor children and other close relatives to hold shares in judicial practices.The second part focuses on the subjects’ transactions. Firstly, to clarify the connotation of "sale". It’s not only confined to the traditional centralized auction trading, but also includes "unorthodox transaction". Secondly, to ensure the fairness of the system, those transactions which are impossible to use insider information should be exempted in the “unorthodox transaction”. To discuss the conditions of the exemption, this part introduce the "Kern Rules". So far, China "Securities Act" has provided only one exemption. To ease the strong mechanical characteristics of the system, it should moderately increase exemptions.The third part discusses the exercising subjects of short—swing trading disgorgement. "Securities Act" has not yet provided that the Board of Supervisors has the right exercise disgorgement. Overhead the board of supervisors is not conducive to protect the interests of the issuing company. Because the board of directors may become the short-term traders and won’t exercise their rights, meanwhile, the shareholders do not want to sue due to lack of incentives. China “Securities Act" gives shareholders the right to bring proceedings and set up no barriers in time and proportion of shares. It provides a guarantee to achieve disgorgement.The forth part is about the nature and exercise duration of the short-term disgorgement. Legal gaps leave room for controversial theory. There exist many different academic perspectives about the nature of disgorgement and its duration. This paper will analyze these perspectives one by one. In my opinion, the short-term disgorgement is a right of claims and its duration is limitation of Actions.The fifth part is to discuss the defects of right exercise procedure. The defects of ways and pre-procedure to achieve right set up barriers for shareholder derivative litigation. Lack of incentives makes shareholder have no intrinsic motivation to file a derivative litigation.The contents of the sixth part are short-term trading and insider trading coexistence issues. On the one hand, short-term trading disgorgement and investors’ claims for compensation may be competing. From the perspective of investor protection, investors’ claims for compensation should be given priority in disgorgement. On the other hand, from the perspective of maximizing the protection of interests of the company, while the company’s disgorgement competing with its claims for compensation, the “overlay mode” should be used.The last part is some recommendations for improving short-term trading disgorgement. Based on the analysis of the defects about this system, I try to make some suggestions, hoping these suggestions will help to improve it.