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The China Securities Regulatory Commission (CSRC) has imposed several administrative penalties for short-term trading violations. Directors, supervisors and senior executives of multiple listed companies have received warnings and fines, with the highest penalty reaching RMB600,000 (USD83,500). This article examines the forms and liabilities associated with short-term trading and offers practical guidance for responding to administrative penalty hearings.

Short-term trading

Determination. Short-term trading may be identified if, within six months from the date of the last transaction in one direction (i.e. the final purchase in a series of purchases or the final sale in a series of sales), a reverse transaction occurs (i.e. the first sale following continuous purchases, or the first purchase following continuous sales). Ways of trading include centralised bidding, block trades, negotiated transfers, public or private placements, convertible bond transactions and ETF subscriptions or redemptions.

Under article 6 of the CSRC¡¯s Provisions on Improving the Regulation of Specific Short-term Trading (Exposure Draft), exempted scenarios cover judicial enforcement actions, securities lending and redemption, repurchase of restricted shares, and buybacks under unmet equity incentive schemes.

Types of securities. Under the Securities Law, short-term trading applies to shares and other equity-like securities, including but not limited to shares, depository receipts, exchangeable corporate bonds and convertible corporate bonds. Previous regulations were unclear on whether convertible bonds qualified as equity securities, with some arguing that equity status only applied post-conversion eligibility.

The current Convertible Bonds Management Measures now clearly define convertible bonds as equity securities. As such, all convertible bond transactions are subject to short-term trading rules, regardless of whether they have entered the conversion period, while conversions, redemptions and repurchases are exempted.

Liabilities

Administrative penalties. Under article 189 of the Securities Law, parties engaged in short-term trading face formal warnings and financial penalties ranging from RMB100,000 to RMB1 million. The exact fine amount is determined through comprehensive assessment of both the transaction volume and the offender¡¯s culpability level. In one illustrative case, regulators imposed a RMB600,000 penalty where the short-term trading volume exceeded RMB14 million, reflecting the substantial scale of the violation.

Disgorgement right in civil liability. The legal basis for profit disgorgement exists, but it is strictly limited to boards of directors as the entitled claimants, while regulatory authorities do not impose mandatory requirements in this regard.

In the Supreme People¡¯s Court retrial case of Jiulongshan International Tourism v CSCR (2015) on the administrative penalty decision, the CSRC explicitly directed Shanghai Jiulongshan¡¯s board of directors in its penalty decision to recover short-term trading profits from Jiulongshan International Tourism and two other companies, while specifying the exact profit amounts.

The SPC ruled that such regulatory guidance exceeded the CSRC¡¯s statutory authority, therefore not binding or constituting an administrative penalty. The SPC further held that this guidance should not carry preclusive effect in subsequent civil proceedings. The SPC instructed relevant courts to accurately determine the actual short-term trading profits based on the transaction details and parties¡¯ arguments, and to adjudicate accordingly under the law.

Disputes over profit disgorgement fall under the category of civil disputes, where corporate boards are entitled to demand that offending parties return illicit short-term trading gains to the company ¨C failing which, responsible directors may face joint liability.

Legal research reveals only two recorded cases involving boards reclaiming short-term trading profits, namely, HNA Properties v Jiulongshan International Tourism (2013), and Huaxia Jiantong v Yan Lin (2009).

In the first case, the court supported disgorgement as the defendant¡¯s conduct constituted short-term trading and the CSRC¡¯s prior administrative penalty decision carried preclusive effect. The second case involved a defendant who acquired restricted shares through judicial auction and subsequently sold portions of the holdings within six months after lock-up expiration. The court ruled the defendant did not qualify as a short-term trader.

The second case was adjudicated under the 2005 Securities Law, when courts maintained that buyers lacking qualifying status at acquisition were exempt from short-term restrictions. Current regulatory practice now recognises this interpretation¡¯s limitations ¨C under prevailing standards, such transactions would constitute reportable short-term dealings.

Hearing defence

The short-term trading regulatory regime serves as a preventive and deterrent mechanism against potential insider dealing. Under this framework, the legal test for establishing a violation does not require proof that the trader intended to exploit control or informational advantages for profit. Instead, it adopts a simplified objective standard based on strict liability.

Consequently, the elements of short-term trading are limited to: (1) qualifying insider status; (2) the six-month statutory timeframe; and (3) reverse transaction. No demonstration of intent to use inside information or subjective bad faith is required.

In administrative penalty cases, defences based on whether the party possessed inside information or acted with subjective fault will not be upheld. Arguments regarding whether the conduct constitutes short-term trading or whether the penalty is appropriate should focus on: (1) whether the party qualifies as a regulated entity; (2) whether the transaction is within the regulated timeframe; (3) whether the trading object falls under the regulated type of securities; and (4) any mitigating or exempting circumstances.

The regulatory scope of short-term trading provisions has expanded to cover innovative securities such as convertible bonds and ETFs, prompting heightened surveillance requirements for listed companies and their officers. Directors, supervisors, senior management and major shareholders must now rigorously monitor transactions in their own and related accounts to ensure a minimum six-month interval between reverse transactions, with particular vigilance required when executing counter-transactions following the last same-direction trade.

Market participants should pay special attention to the unique regulatory parameters governing derivative instruments like convertible bonds to avoid inadvertent breaches.

Guan Zhaoyang is an associate and Jeffery Quan is a senior partner at ETR Law Firm