Madeleine Wackernagel
Two years and much diplomatic negotiation later, the new legislation on insider trading is ready. Mervyn King, who chaired the commission, says it was one of the hardest job he’s ever done.
By their very nature, such commissions have to reflect a range of opinions: in this case, there were many interests, vested and otherwise, to be considered. But now the report is out of his hands, sitting with the policy board for financial regulation, which meets this month. That board will make its recommendation to the Minister of Finance, Trevor Manuel, and if all goes according to plan, the law will be tabled in Parliament early next year. So, anybody tempted to trade on inside information, watch out.
The biggest problem with previous legislation was that wrongdoing had to be proved beyond a reasonable doubt; there was no civil remedy. Trying to prove that a tip here, or telephone call there, was made with intent “beyond a reasonable doubt”, is very difficult, says King.
He cites as an example a company director who contacts a friend, who in turn buys shares, which later shoot up in price after publication of sensitive information. The phone call can be proved, but proving what was said on the phone beyond a reasonable doubt is another story altogether. On a balance of probabilities, the tip can be proved and hence the importance of a civil remedy.
Under the old rules, each exchange was governed by its own regulator; now they all fall under the Financial Services Board. In addition, the Chinese walls that existed between the stock, futures, bond and over- the-counter exchanges prevented the free flow of information, to the benefit of market efficiency but to the detriment of investigators.
Under one surveillance power, that would no longer pertain. King quickly dismisses any question of the ability or capacity of the board to implement the new regulations.
“The board is an autonomous body, with very able and skilled staff. Under the new legislation, they will no longer have to wait for the attorney general before going ahead with an investigation but can institute civil proceedings.
“There has never been a single prosecution for insider trading in this country, because proving the abuse of information in a criminal court is onerous.
“Britain has the same problem. Internationally, the trend is to find a civil solution to the problem.”
With the re-integration of South Africa into the world economy, the regulation of the financial markets must also fall into line. That was just one of the reasons why the former finance minister, Chris Liebenberg, appointed the King Commission to review the existing legislation. Others included the growth and variety of financial instruments, such as derivatives and index futures, not covered by prevailing laws.
The recommendations made by the King Commission have defined insider trading to include dealing, encouraging, discouraging and tipping; and widened the ambit, to cover all three markets – equities, bonds and gilts; and all financial instruments.
As King sees it, any affected person will now have legal redress through the board, without the expense and complication of instituting action. Hopefully, the threat of tougher laws should be enough.