Some Aspects of Insider Trading – Has the Securities Services Act 36 of 2004 Gone too Far?

• Jurisdiction: South Africa
• Published date: 16 August 2019
• Pages: 44-70
• Citation: (2007) 19 SA Merc LJ 44
• Date: 16 August 2019
• Author: Rehana Cassim

Some Aspects of Insider Trading – Has the

Securities Services Act 36 of 2004

Gone too Far?

REHANA CASSIM*

University of the Witwatersrand, Johannesburg

1 Introduction

The Securities Services Act 36 of 2004 (the ‘SSA’) came into effect on 1

February 2005. It repealed the Stock Exchanges Control Act 1 of 1985, the

Financial Markets Control Act 55 of 1989, the Custody and Administration of

Securities Act 85 of 1992, and the Insider TradingAct 135 of 1998 (the ‘ITA’)

and consolidated them into one measure. However, it is more than a

consolidation as the Act also amends the repealed laws in many important

respects in order to correct and improve some of their provisions. In so doing

it adds a significan number of new provisions to the previous measures.

1

Amongst other things, the object of the SSA is to enhance confidenc in

South African financia markets by contributing to the maintenance of a stable

financia market environment and by promoting the international competitive-

ness of securities services

2

in South Africa.

3

This article will examine the

prohibition of insider trading, which is to be found in Chapter VIII of the

SSA,

4

a chapter that regulates the broader offence of market abuse.

5

In

particular, this article will compare the insider-trading prohibitions which

existed in the repealed ITA with those of the SSA and will consider whether

perplexities that had existed in the ITA have been rectifie in the SSA.

It will be submitted that although the SSA is an improvement on the ITA, it

has sadly failed to address some of the uncertainties of the ITA, and, to

compound this failure, it has perhaps unwittingly introduced additional

uncertainties into our law on insider trading. This article will conclude that, in

its aim to increase confidenc in the South African financia markets and to

promote the international competitiveness of securities services in South

Africa, the SSA has considerably tightened the regulation of insider trading in

* BA LLB (Witwatersrand), Lecturer, School of Law, University of the Witwatersrand,

Johannesburg. Attorney of the High Court of SouthAfrica.

1

See the Memorandum on the Objects of the Securities Services Bill, 2004, published as GN 1746 in

GG 26684 of 18 Aug 2004.

2

In terms of s 1, securities services are services provided in terms of the SSA in respect of –

(a) the buying and selling of securities;

(b) the custody and administration of securities;

(c) the management of securities by an authorised user;

(d) the clearing of transactions in listed securities; and

(e) the settlement of transactions in listed securities.

3

See ss 2(a)(ii) and 2(d) of the SSA.

4

Specificall , in s 73 of the SSA.

5

In addition to the offence of insider trading, two other offences constitute market abuse, viz,

engaging in a prohibited trading practice, and the making or publishing of false, misleading or deceptive

statements, promises and forecasts.

44

(2007) 19 SA Merc LJ 44

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South Africa, but may in so doing have gone too far in regulating the offence

of insider trading. It will also be considered whether the regulation of insider

trading in South Africa may be made more effective.

2 The Extension of the Insider Trading Legislation to ‘Persons’

The ITA had in s 1 define an ‘insider’ as an ‘individual who has inside

information’. The SSA now define an ‘insider’ in s 72 as a ‘person who has

inside information’.

6

‘Person’ is then define to include apartnership and a

trust.

7

Section 2 of the Interpretation Act 33 of 1957 define ‘person’ as

including

‘(a) anydivisional council, municipal council, village management board, or like authority;

(b) any company incorporated or registered as such under any law; and

(c) any body of persons corporate or unincorporate.’

It seems, therefore, that the SSA has indeed extended the scope of the

insider-trading prohibition to include not only natural persons but also juristic

persons, which would include companies incorporated outside of South

Africa,

8

as well as partnerships and trusts. Prior to the promulgation of the

ITA, s 440F

9

of the Companies Act 61 of 1973 had extended the application of

the insider trading prohibition to any ‘person’, which meant that it applied to

natural and juristic persons. The ITAsubsequently restricted the application of

the insider trading prohibition to individuals. No explanation for this

limitation was provided in the Memorandum on the Objects of The Insider

Trading Bill, 1998.

10

But the Final Report by the King Task Group into

Insider Trading Legislation (the ‘Final King Report’)

11

upon whose

recommendations the ITA was largely based, recommended that liability for

insider trading should be limited to individuals due to doubts concerning the

effectiveness of Chinese Walls. The Final King Report stated as follows:

‘In view of the lack of development in our law of the jurisprudence concerning the efficacyof

the Chinese Wall, theTask Group decided that both the criminal offence of insider trading and

the civil remedy set out in the proposed legislation should be limited to conduct by an

individual.’

12

6

More fully, s 72 of the SSA define an ‘insider’as meaning ‘a person who has inside information –

(a) through –

(i) being a director, employee or shareholder of an issuer of securities listed on a regulated

market to which the inside information relates; or

(ii) having access to such information by virtue of employment, officeor profession; or

(b) where such person knows that the direct or indirect source of the information was a person

contemplated in paragraph (a)’.

7

Section 72 of the SSA.

8

See part (b)of the definitio of ‘person’ in s 2 of the Interpretation Act which define ‘person’ as

including any company incorporated or registered as such under ‘any law.’

9

Section 440F was repealed by s 17 of the ITAwith effect from 17 Jan 1999.

10

B134-98.

11

The King Task Group was requested to conduct an investigation into insider trading in South

Africa and to make recommendations that would enhance public and international confidenc in the

South African statutory and regulatory measures to prevent insider trading practices. The Final King

Report was published on 21 Oct 1997.

12

The Final King Report in par 3.1.2.

ASPECTS OF INSIDER TRADING 45

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