New Securities Law

for: Investment Advisers

and: Market Participants

2007 brings new law for securities markets

Boardroom, February 2007

New securities trading law will come into effect around the middle of 2007. This follows the passing of the Securities Legislation Bill in October 2006 which amended the Securities Act and the Securities Markets Act.

There changes to the law relating to insider trading, market manipulation, substantial security holder and investment adviser disclosure. Until regulations are passed the final detail of the law is not known. This article explains the insider trading and market manipulation changes in broad terms.

Insider trading

The new insider trading regime focuses on the threat that insider trading poses to the integrity and confidence of the market, rather than on the duty owed by officers or agents of a company to that company. Liability for insider trading is not limited to those who are connected or related to the issuer. A person becomes an insider by possessing inside information, rather than by being connected to the company to which the inside information relates.

An information insider is someone who has material information about a public issuer that is not generally available to the market, where the person knows or should know that the information is material and is not generally available. Material information is information that would be expected to materially affect the issuer's share price if it were generally known.

Information insiders must not trade in securities, disclose the information to others to trade on, or advise or encourage anyone else to trade or hold securities.

Anyone who breaches the new insider trading law will be liable for substantial civil penalties. The maximum penalty in any case will be the greater of:

the consideration paid for the shares;
three times any profit made or loss avoided; or
$1 million.

Knowingly breaching this law will be a criminal offence. Anyone convicted could face up to five years imprisonment or a fine of up to $300,000 for an individual and $1 million for a body corporate.

There will be a number of exceptions and defences to liability, designed to encourage legitimate trading activity. These include:

independent research or analysis;
where both parties to a transaction have equal information;
trading in accordance with a fixed trading plan;
where trading or disclosure is required by law;
underwriting agreements;
knowledge of a person's own intentions or activities;
agents and advisers acting on instructions;
certain takeover-related activity; and
trading where information is protected by Chinese Walls.

The safe harbour under the current law for company directors and employees who trade in shares of the company under an approved procedure will not be available under the new law.

The removal of this safe harbour is consistent with the focus of the new law, which views insider trading as harmful to the market as a whole rather than mainly to the company involved.

Directors and employees will still be able to hold shares in their companies. They will not have such a broad immunity from insider trading law, but there will be a defence from liability if they trade securities under a trading plan.

To qualify for this defence the person must have entered into the trading plan at a time when he or she did not have inside information. The trading plan must be for a fixed period during which the investor has no right of withdrawal and no input to trading decisions.

Market manipulation and general dealing misconduct laws

Market manipulation is behaviour or practices likely to give a false or misleading impression about the supply, demand, price or value of securities traded on a registered exchange.

The new market manipulation law prohibits:

making false or misleading statements or spreading information which is likely to induce a person to trade or which might affect the price of the securities; and
creating a false or misleading appearance of securities trading.

Any trade that does not result in a change of beneficial ownership will be presumed to give a misleading appearance of trading activity unless it can be shown that the transaction took place for a legitimate reason. This also applies where a person places matching buy and sell orders for a security.

Penalties for breaching the market manipulation laws will be similar to those for insider trading and include criminal offence provisions.

There is also a broad-ranging prohibition against any conduct related to any dealings in securities that is likely to mislead or deceive. This is similar to the prohibition in the Fair Trading Act 1986 for misleading or deceptive conduct.

Anyone who engages in misleading or deceptive conduct can be subject to orders made by the Securities Commission and can be liable to pay compensation to anyone who suffers loss as a result of the conduct.

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