New Securities Law

for: Investment Advisers

and: Market Participants

Share market trading law to change this year

The Headliner, 15 February 2007

Brokers, company directors and other market participants need to be aware of changes to securities law that will come into force around the middle of the year.

"Important changes are to the law on insider trading and disclosure by people who have substantial holdings of securities," Securities Commission general counsel Liam Mason says. "New law on market manipulation will also take effect this year."

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," Liam Mason says.

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.

"Another change is that 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," Liam Mason says.

"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 into trading decisions.

The law changes also affect substantial security holders, that is, individuals or entities which hold 5% or more of the shares of a listed company.

"The aim of substantial security holder disclosure is to promote an informed market, and deter insider conduct, market manipulation, and secret dealing in potential takeover bids, by ensuring that all market participants have information about trading by persons who control or influence significant voting rights in a public issuer," Liam Mason says.

The basic features of this law remain the same. Disclosure must be made when a person becomes a substantial security holder (at the 5% threshold), whenever a holding changes by 1%, and when a person ceases to be a substantial security holder.

However, there have been some important changes. These include:

a person becomes a substantial security holder by having a relevant interest in 5% of the listed securities in any class (rather than 5% of the total number of voting securities of an issuer); and
disclosure applies to listed voting securities only, not to unlisted securities; but
the Securities Commission can require any person to disclose the nature and extent of any relevant interests in securities of a public issuer, including in unlisted and non-voting securities.

Failure to comply with substantial security holder obligations will be a criminal offence, subject to a fine of up to $30,000. Civil penalties of up to $1 million can be imposed by the Court, which can also make a range of orders relating to any holding of securities, including orders to forfeit or dispose of securities.

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.

The new law result from the passing of the Securities Legislation Bill in October 2006. The Bill amended both the Securities Markets Act 1988 and the Securities Act 1978.

"We are now waiting for regulations to be passed to bring the law into effect," Liam Mason says. "Cabinet has agreed to the policy for regulations under the new law, and these are now being drafted."

The Securities Commission will publish a guide to the new law when the regulations are settled. People can order a copy of the guide from www.newsecuritieslaw.govt.nz.

... ends ...

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