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Insider Trading. Discussion document [2000] NZAHGovDP 5 (1 September 2000)

Last Updated: 12 July 2020





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INSIDER TRADING

DISCUSSION DOCUMENT







SEPTEMBER 2000

DISCUSSION PAPER INSIDER TRADING LAW

CONTENTS











































ISBN no. 0-478-24200-X

PROCESS

This discussion paper has been prepared by the Ministry of Economic Development following consultation with other government officials and agencies. Written submissions on the issues raised in this paper are invited from all interested parties. The closing date for submissions is Friday, 13 October 2000. After receipt of submissions they will be evaluated and further comments sought as required before the Ministry develops recommendations for the Government to consider.

Submissions should be sent to:

Insider Trading Review
Ministry of Economic Development P O Box 1473
Wellington
Attention: Lisa Barrett Tel: (04) 470 2319
Fax: (04) 471 2658
Email: lisa.barrett@med.govt.nz

OFFICIAL INFORMATION AND PRIVACY ACT REQUIREMENTS

Please note that the contents of submissions provided to the Ministry in response to this discussion paper will be subject to the Official Information Act 1982 and the Privacy Act 1993. If the Ministry receives a request for information contained in a submission, it would be required to consider release of the submission, in whole or in part, in terms of the criteria set out in these Acts.

In providing your submission, please advise if you have any objections to the release of any information contained in your submission, and, if you do object, the parts of your submission you would wish withheld, and the grounds for withholding.

DISCLAIMER

Please note that any statements made or views expressed in this discussion paper are those of the Ministry of Economic Development and do not reflect official government policy.

Readers are advised to seek specific advice from a qualified professional before undertaking any action in reliance on the contents of this discussion paper. While every effort has been taken to ensure that the information set out in this paper is accurate, the Crown does not accept any responsibility whether in contract, tort, equity or otherwise for any action taken, or reliance placed on, any part, or all, of the information in this paper or for any error in or omission from this paper.

DEFINITIONS USED IN THIS DISCUSSION PAPER



ASIC Australian Securities and Investment Commission ASX Australian Stock Exchange
Commission New Zealand Securities Commission

Issuer company or other entity that has issued securities NZSE New Zealand Stock Exchange
Public issuer issuer that is listed on a stock exchange

SA Act Part 1 of the Securities Amendment Act 1988 SEC USA Securities and Exchange Commission

1 INTRODUCTION

possibility of introducing criminal penalties. Effectively dealing with the issues of prevention, detection and enforcement is a fundamental step to ensuring the efficacy of our insider trading regime and could pre-empt the need for any further change. Once there is effective detection and enforcement of our insider trading regime, cases have been brought and the legislation tested in Court, it is believed we will be in a better position to know if the provisions of the SA Act are appropriate and workable.

Insider Trading Definitions

Prevention of breach

Detection

Enforcement

Criminal offences

Co-ordination with Australian law

2 DESCRIPTION OF NEW ZEALAND’S INSIDER TRADING LAW

Part 1 of Securities Amendment Act 1988


“Public issuer” means a company or other entity that is or was listed on a New Zealand stock exchange;

“Inside information” means information that is not publicly available but would be likely to affect materially the price of securities of a public issuer if it were publicly available;

“Insider” means, in relation to a public issuer, -

Insider dealing

Tipping

penalty is not to exceed the greater of the consideration for the securities, or three times the amount of the gain made or loss avoided).

Lawyer’s opinion

Proceedings by shareholders

Distribution of amount recovered by public issuer from insider

3 INSIDER TRADING DEFINITIONS – SECURITIES AMENDMENT ACT 1988

Introduction

General Issues

Definition of Insider



1 In addition to these suggested amendments, a number of other amendments of a relatively minor nature are already included in the Business Law Reform Bill which is currently before Select Committee.

an instance where both parties are informed and aware of the confidential information, there is arguably no detriment to either party.

Limitation to “public issuers”

Application to entities listed outside New Zealand

Proposed Technical Amendments

Definition of Insider

For the purposes of Part I of this Act, “insider”, in relation to a public issuer, means –

  1. the public issuer;
  2. a person who, by reason of being a principal officer, or an employee, or a company secretary of, or substantial security holder in, the public issuer or a related company of the public issuer, has inside information about the public issuer or another public issuer;

No action shall be brought under section 7 of this Act against a director, or company secretary, or employee of a public issuer or of a related company of a public issuer if ...

Clarify references to spouse or child of insider

The securities are sold or purchased in the name or on behalf of:

(i) that person; or

(ii) that person’s spouse or child; and ...

Extend exception from liability for takeover offers

Chinese Walls exception

Remove automatic prohibition on managing companies

Neill Limited [1994] 2 NZLR 152 that liability under Part 1 of the SA Act is strict and is not dependent on fault. Section 382(1)(c) could be revoked without affecting the Court’s discretion to disqualify any person against whom a judgment has been obtained under Part I from directing or managing a company. This is provided for in section 383 of the Companies Act.

Lawyers appointed under section 17

17(3A) The barrister or solicitor may –

(a) receive from the Commission the books or papers of any person which may be material to the preparation of the opinion,

(b) consult the Commission in the preparation of the opinion,

(c) provide such reports to the Commission as the barrister or solicitor thinks fit from time to time in the course of preparation of the opinion.

Share buy-backs

should be taken outside the ambit of the insider trading provisions of the SA Act.

Statutory exception for certain transactions

liability should lie under Part I of the SA Act in respect of the following transactions:

(a) The selling or buying of securities of a public issuer under –

(b) The selling of securities of a public issuer where –

(c) The selling of securities of a public issuer as the result of the acceptance of an offer to buy the securities made by means of an announcement through a stock exchange in any country on which the securities are listed, being an offer that –

Empower court to direct any person to reimburse the costs of the public issuer in obtaining a legal opinion under section 17

judgment against an insider under the SA Act. This proposal would allow costs to fall on a culpable party (usually, the insider) at the discretion of the court.

Questions for submissions





4 PREVENTION OF INSIDER TRADING BY INCREASED DISCLOSURE

Introduction

Option 1: Statutory continuous disclosure;


Option 2: Reporting of securities purchases and sales by company officers.

Option 1: Statutory continuous disclosure

Introduction

Present New Zealand requirements






2 Section 37A(1)(b) Securities Act.




3 Section 37 Securities Act.

4 Section 37A(1)(a) Securities Act.

Australian law

and –

Comment

of the market by helping to counter insider trading, the creation of false markets, and the distortion of markets through rumours.

Option 2: Reporting of securities purchases and sales by company officers

Introduction

Present New Zealand requirements

Australian law

USA law

Comment

penalties set out in the Companies Act 1993. This range is a fine of $5,000, a fine of $10,000, a fine of $50,000 or two years’ imprisonment, and a fine of $200,000 or five years’ imprisonment. The current penalty for failing to disclose interested transactions between directors and the company under section 140 of the Companies Act is a fine of $10,000.

Questions for submissions






4.1 Do you agree that the present requirements on issuers and company officers to disclose information should be strengthened? If so, why?
4.2. Should either or both of the options identified in this Part be adopted? If so, why? Can you identify any other option or options that may be effective in preventing insider trading by increasing disclosure?

5 DETECTION OF INSIDER TRADING

Introduction

Present New Zealand practice

(a) The NZSE’s market control staff monitor price movements and trading volumes. If unusual price movement or trading volume is detected the market control staff will usually seek the advice of a designated panel of brokers in relation to any unusual trading activity identified.

(b) After taking the advice of the broker panel the market control staff may refer the matter to the secretary of the Market Surveillance Panel, who can make a price inquiry of the public issuer concerned.

(c) If there has been significant trading prior to an announcement by a public issuer the Market Surveillance Panel will usually refer the matter to the Commission. The NZSE will not usually play a further role in the investigation.




  1. In addition, the High Court has recently granted leave for several shareholders of Fletcher Challenge Ltd to take insider trading proceedings in the company’s name against a former chairman of directors of that company.

(d) The referral from the Panel to the Commission will describe the unusual trading or price movement and any relevant announcement, and will be accompanied by a printout of trades taken from the NZSE’s trading system.

(e) On receipt of this referral the Commission staff will examine the trades. Commission staff will seek details of trades from certain brokers. The initial responses from brokers are in the form of printouts from the brokers’ trading system. These will display trades completed, current names, price, and the date of each trade.

(f) After reviewing the initial responses the Commission may seek further details of certain individual clients or trades from brokers. The Commission may also require production of brokers’ trading records, including audio tapes of telephone calls.

(g) Where this review highlights the trading of particular persons the Commission may then require explanations from these persons of their trading. At this stage the Commission might formally institute an inquiry and may take evidence from persons involved in trading.

Australian practice

USA practice6



  1. The following information largely comes from “The Enforcement Dilemma in Australian Securities Regulation” by Dr V.R. Goldwasser, Australian Business Law Review, Vol 27 Dec 1999.
operated by the National Association of Securities Dealers, that flag down a stock when trading exceeds certain parameters in the absence of material public information. The SEC’s own Securities Compliance Examiners conduct routine oversight examinations of all broker dealers. The SEC also conducts cause examinations, for example when a broker is sacked in order to determine the “cause” of the dismissal.

Hong Kong practice7


There is close liaison between the SFC and the SEHK on a daily basis.





  1. The following information largely comes from a speech given by a member of the Hong Kong Securities and Futures Commission in December 1999.

Options


Option 1: Introduce a sophisticated electronic detection system;

Option 2: Make the relationship between the NZSE and the Commission more formal.

Option 1: Introduce a sophisticated electronic detection system

Introduction

The feasibility and costs of each of these possibilities would need to be examined.

Comment

Option 2: Make the relationship between the NZSE and the Commission more formal

Introduction

Comment

possible that the statutory obligation could include provision for the NZSE to be fined for failure to comply with the obligation.

Questions for submissions





6 ENFORCEMENT OF THE EXISTING LAW

Introduction


Option 1: Improve the private enforcement regime provided for under the SA Act;

Option 2: Enable the Commission to undertake insider trading enforcement actions under the SA Act.

Option 1: Improve the private enforcement regime

Introduction

Class actions





  1. A recent example was the recent Auckland power crisis which resulted in threats of legal actions against Mercury Energy.

These two aspects of USA law significantly reduce the financial risks of claimants in legal proceedings.

  1. Maintenance occurs where a person, without lawful justification, assists a party to a civil action to bring or to defend the action, thereby causing damage to the other party. Champerty is that form of maintenance in which the person giving the assistance does so in consideration of his or her receiving a share of anything that may be gained as a result of the proceedings.
right to recover a share of the costs from other members of the class represented, unless those members have individually agreed to indemnify him or her.
Furthermore, contingency fees are prohibited in New Zealand (although this does not prevent lawyers agreeing to undertake a case for no fee or for a fee lower than normal). Accordingly, a person who takes a representative action in New Zealand is exposed to greater financial risk than someone taking a class action in the USA.

Court approved settlements

Applicant for leave under section 18 not to be liable for court costs

Option 2: Enable the Commission to undertake civil enforcement actions

Introduction

Comment

(a) At present where a public issuer’s right of action against an alleged insider is exercised by a shareholder, the public issuer must pay the costs of the action. This could be extended to actions brought by the Commission.

(b) The SA Act could provide for the Commission’s costs to be paid first from any compensation or penalties recovered. This would have the attraction that the insider would pay the costs. However it may also mean that there would be less money available for distribution among the public issuer and its shareholders (or to charities). The possibility of the Commission receiving a preferential reward for proceedings undertaken by it may also raise questions of there being an inappropriate incentive for the Commission to commence proceedings. This concern could be alleviated by making the consent of the person in whose name the proceedings are taken a pre- requisite, and by limiting the costs that could be recovered by the Commission to expenses incurred by it solely for the purposes of the proceedings.

(c) The Commission could simply rely on the discretion of the courts to award costs in appropriate cases, and seek extra funding from the Government to cover the likelihood that the Commission would not be able to recover all of its costs. In other words, the Government would need to provide the Commission with a “fighting fund”.

Questions for submissions





7 CRIMINAL OFFENCES

Introduction

Should there be criminal penalties for insider trading?

difficult. However, this objection does not apply if civil remedies are retained in addition to criminal penalties.

Should criminal penalties replace, or be added to, the existing civil remedies?

Is knowledge by the insider a pre-requisite?

Who would conduct prosecutions?

What penalties should be imposed?

Should a criminal offence be a summary or indictable one?

Questions for submissions





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