A committee broadly representative of the securities industry under the chairmanship of Mr Mervyn King ("the Task Group") was appointed in 1995 at the instance of the Minister of Finance to investigate the adequacy of our law on insider trading (which appeared, essentially, in section 440F of the Companies Act, 1973). The Task Group reported finally in October 1997 and its recommendations formed the basis for the enactment of the Insider Trading Act, 1998 ("the Act") which came into force on 17 January 1999.
The Act covers trading in every kind of security or financial instrument. It is, however, limited to those securities and financial instruments that are dealt in on a regulated market. The market might be a domestic or a foreign one and it does not matter that the actual dealing might take place over the counter.
The regulatory authority is the Financial Services Board. The Financial Services Board is, however, assisted in its new role by a committee ("the Insider Trading Directorate") created for the purpose and on which the securities industry is well represented.
The Financial Services Board has been given wide investigative powers and access to surveillance information, as well as the right to prosecute for offences under the Act where the State declines to prosecute.
In terms of section 2 of the Act, any individual who knows that he or she has inside information and who deals for his or her own account in the securities or financial instruments "to which such information relates or which are likely to be affected by it" commits an offence.
The inside information must be "obtained or learned as an insider", such that "if it were made public it would be likely to have a material effect on the price or value of any securities or financial instrument", "specific or precise", and "not [have] been made public".
The related activities of those who have inside information dealing for another person, encouraging or discouraging another person to or from dealing, and disclosing the information to another person are also proscribed activities.
There are three categories of insider. An insider is "an individual who has inside information", either through "being a director, employee or shareholder of an issuer of securities or financial instruments to which the inside information relates", or through "having access to such information by virtue of his or her employment, office or profession", or who simply "knows that the direct or indirect source of the information was a person", who falls into one of the first two categories.
Accordingly, the regulation of insider trading is limited to an "individual". However, a corporate body may still incur civil liability under the Act. This is because section 6(11) of the Act provides that the common law principles of vicarious liability apply to the civil liability established under the Act.
Information made public
Section 3 of the Act provides for certain, not exhaustive, circumstances when information is considered to be made public: if it "is published in accordance with the rules of the relevant regulated market for the purpose of informing investors and their professional advisers", "is contained in records maintained by the relevant statutory regulator which by virtue of any enactment are open to inspection by the public", "can be readily acquired by those likely to deal in any securities or financial instruments" to which "the information relates" or "of an issuer to which the information relates", or "is derived from information which has been made public".
Furthermore, information may be treated as having been made public even though it "can be acquired only by persons exercising diligence, or expertise or by observation", "is communicated to a section of the public and not to the public at large", "is communicated only on payment of a fee", or "is only published outside the Republic". This approach favours certainty at the cost possibly of giving some leeway to a sophisticated insider trader.
For both criminal and civil liability it is required that the individual "knows that he has inside information" (sections 2 and 6 of the Act). In criminal and civil cases, the onus of proving that the individual has the knowledge required will be on the prosecution and the plaintiff respectively. It is not necessary to prove that the individual dealt on the basis of inside information, only that he or she had it.
Section 4 of the Act provides for various special defences (which are specifically stated not to be exhaustive). The defences to a charge of dealing or encouraging or causing another person to deal or discouraging or stopping another person from dealing are that the individual concerned:
- was acting on specific instructions from a client and the inside information was not disclosed to him or her by that client;
- would have acted in the same manner even without the insider information;
- was acting on behalf of a public sector body in pursuit of monetary policy, policies in respect of exchange rates, the management of public debt or foreign exchange reserves; or
- was acting in pursuit of the completion or implementation of a take-over merger.
Defences to a charge of disclosing inside information to another person are that the individual concerned:
- believed, on reasonable grounds, that no person would deal in the securities or financial instruments as a result of such disclosure; or
- disclosed the inside information in the proper performance of the function of his or her employment, office or profession and at the same time disclosed that the information was inside information.
For civil liability, the onus of proving one of these defences is explicitly placed on the defence. In criminal cases, the onus of proving one of the defences is placed on the accused.
Civil liability provisions are contained in section 6 of the Act. Without prejudice to any common law liability which might lie, the regulatory authority (in the form here of the Insider Trading Directorate) is given a derivative civil action. In terms of this derivative remedy, the Directorate is given the right to sue for "the amount by which the individual … profited or the loss which he or she avoided as a result of such dealing" plus "a penalty, for compensatory or punitive purposes, in a sum determined in the discretion of the court but not exceeding three times the amount of the profit gained or the loss avoided as a result of such dealing" plus interest and costs of suit.
The court is also given the discretion to determine the amount of the profit gained or loss avoided. In exercising this discretion, it is enjoined to "have regard to factors such as the consideration for the dealing …, the time between the relevant dealing and the publication of the inside information and any other relevant factors".
In assessing the amount of the civil award to be made, the court is required to take into account any penalty imposed as a result of a conviction for the offence of insider trading which arises from the same cause of action.
Any amount recovered by the Directorate, less certain deductions, is then available to be claimed by those who were "affected by the dealings" in question and who:
- in the case where the inside information was made public within a week of the wrongful dealing, dealt in the same securities or financial instruments at any time after the wrongful dealing and before the inside information was made public; and
- in every other case, dealt in the same securities or financial instruments on the same day.
The amount of the claim will be "equal to the difference between the price at which the claimant dealt and the profit gained or loss avoided as determined [by the court]" or a pro rata portion of the total amount available to be claimed, whichever is the lesser.
In order for civil liability to attach to an individual with inside information who dealt for his or her own account ("the main defendant"), the making of a profit or the avoiding of a loss is required. Those with inside information who disclose it, encourage or discourage another to or from dealing, or deal for another, are jointly and severally liable for the same amount as the main defendant (save for the amount of the penalty).
An individual convicted of insider trading is, in terms of section 5 of the Act, liable to a fine not exceeding two million Rand or to imprisonment for a period not exceeding ten years, or to both such fine and such imprisonment. In assessing the penalty to be imposed, the court is required to take into account any award made under the civil liability provisions which arises from the same cause of action.
Confidentiality and information sharing
Section 14 of the Act generally prohibits the disclosure of information acquired by a person in the performance of his or her functions under the Act. The institutions which have nominated persons to the Insider Trading Directorate, the Securities Regulation Panel and the South African Reserve Bank are, however, entitled to share information concerning insider trading, market practices and abuses with each other and with the persons (whether inside the Republic or elsewhere) responsible for prosecuting such abuses.
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Webber Wentzel Bowens
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