Introduction
Context of the Review
1. The government has identified as one of its key objectives promoting confidence in the New Zealand sharemarket. This objective involves increasing the certainty for market participants in relation to the integrity of the market, and the mechanisms for implementing the law. A number of factors can influence the level of confidence both domestic and international investors have in the New Zealand market.
2. The government is in the process of implementing a number of reforms designed to improve confidence in the market. This process includes reforms designed to improve the enforcement, prevention and detection of insider trading in New Zealand. These reforms are contained in the Securities Markets and Institutions Bill that is currently before the Finance and Expenditure Committee and due for report back on 4 June 2002.
3. The Securities Markets and Institutions Bill also includes provisions designed to improve the investigative and enforcement functions of the Securities Commission and Takeovers Panel. The legislation will ensure, among other things, that the bodies have sufficient powers to adequately enforce the law, and will provide a Securities Commission capable of enforcing insider trading, continuous disclosure and potentially market manipulation law.
4. This discussion document, which considers whether more substantive market manipulation law should be implemented in New Zealand, is one of three documents being released for comment at this time; the others being a "first principles" review of insider trading legislation, and a document that considers the implementation of criminal penalties and improvements to civil remedies for securities law. It is envisaged that a further discussion document, which considers possible improvements to the substantial security holder disclosure regime, will also be released later this year.
5. Insider trading and market manipulation issues are closely linked. Both market manipulation and insider trading are considered by some commentators to be forms of market abuse that can damage the efficiency and transparency of markets and affect market integrity and public confidence in securities trading. The procedures for detection and investigation will also be similar for both types of offences.
6. It has been argued that market manipulation harms the integrity of securities and derivatives markets by distorting prices and creating an artificial appearance of market activity. By doing this it undermines public confidence in these markets.
7. At present in New Zealand there is no substantive body of law specifically targeted at addressing market manipulation. Sections of the Crimes Act 1961, Securities Act 1978 and the Fair Trading Act 1986 as well as common law provisions concerning fraud and deceit may address some forms of market manipulation. This review considers whether the current provisions are sufficient or whether further market manipulation law is required.
8. Developments in information and communications technology need to be taken into account in looking at whether further market manipulation law is required. The Internet has increased the opportunities for manipulating securities markets. It has provided an easy and inexpensive method to disseminate information to vast numbers of people instantaneously. It provides an unparalleled opportunity to disseminate information about a particular security with the intention of moving its price.
9. The relationship between the New Zealand regime and those of other countries is also important. Given that other countries have market manipulation regimes, the document considers whether international developments provide an impetus for New Zealand to develop a policy which is consistent with those of other countries. New Zealand must be able to satisfy international investors that our market has integrity and meets international standards. The Ministry will give particular attention to the Australian law, in view of our Memorandum of Understanding on Co-ordination of Business Law with Australia and the obvious advantages of co-ordinating New Zealand and Australian securities law.
10. The increasing prevalence of electronic commerce means that a global approach to business law issues is important. The existence of globalised markets, cross border trading and multiple listings also increase the opportunities for market manipulation, as well as the difficulty in detecting and investigating market manipulation. This impacts on the enforcement of securities law.
11. Taking these factors into account, the document considers the content of a possible market manipulation law regime in New Zealand and invites comment on what provisions, if any, should be adopted.
Inter-Relationship with the Insider Trading and Penalties, Remedies and Application of Securities Trading Law Discussion Documents
12. Market manipulation and insider trading may both affect the efficient operation of securities markets. They both involve a person having some prior knowledge of the likely effect of the information they have acquired and whether using this information may allow them to make money on the transaction.
13. Sometimes there is a fine line between disclosure based market manipulation and insider trading. The difference may be depend on whether the information concerned is accurate or misleading and on the use to which the information is put. Insider trading involves a person trading on confidential information which, if publicly known, would affect the price of the relevant securities. Disclosure based market manipulation generally involves a person releasing false or misleading information to the market which materially affects the price of securities.
14. The additional costs of enforcing any market manipulation law that is introduced will be minimised if the systems and procedures developed for the detection and prevention of insider trading activity are able to be utilised. Similar skills would be required to detect and investigate market manipulation and insider trading.
15. Penalties that are significantly high and easy to enforce play an important part in deterring people from engaging in illegal behaviour. Therefore, it is vital that as well as establishing clear and workable laws for market manipulation and insider trading, appropriate and effective penalties are implemented. For this reason the third discussion document considers criminal and civil penalties for continuous disclosure, insider trading, substantial security holders, takeovers and market manipulation.
16. The Takeovers Act 1993 has been enacted for 8 years and Part I of the Securities Amendment Act 1998 has been in force now for 13 years. During this time there have been sophisticated developments in financial products. Further, the way in which these products, issuers of these products and markets are defined and treated by regulators has also developed and changed. For these reasons it is also appropriate to consider which financial products and entities Part I of the Securities Amendment Act 1998 and the Takeovers Act 1993 should apply to.
17. The overall goal in the release of the three discussion documents is to seek the views of the public and market participants on how to minimise market abuse in New Zealand and improve confidence in our market for both New Zealand and international investors.
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