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• May 2002 Discussion Documents
• Vol. 2: Market Manipulation
• Part IV

• Financial Sector Policy

• Securities Law, Securities Markets Law and Settlement Systems

• Review of Securities Legislation

• Discussion Documents

• Misleading or Deceptive Conduct
• Price Manipulation
• Fictitious Transactions
• False or Misleading Statements
• Short Selling
• Arguments for and against Regulating Short Selling
• Enforcement of Market Manipulation Law
• The Role of the Securities Commission
• Application of the Law

109. This part of the document is based on the assumption that market manipulation is, to some greater or lesser degree, undesirable and that regulation can serve to reduce the associated detriment.

110. There are three main approaches which can be followed when formulating a regime to regulate market manipulation:

• A general prohibition on manipulative conduct;
• Prohibitions on specific practices; or
• A hybrid of the two, with prohibitions on specific practices and a general catch-all to deal with novel variations which do not fit within the specific prohibitions.

111. The main areas regulated by market manipulation law in overseas jurisdictions are each discussed below, comparing the current New Zealand provisions where applicable. Comment is sought on whether provisions dealing with these areas should be adopted in a New Zealand regime.

Misleading or Deceptive Conduct

112. Some jurisdictions include a general prohibition on misleading or deceptive conduct in relation to dealings in securities.

113. In Australia, the Corporations Act 2001¹⁵ includes a broad provision prohibiting conduct that is misleading or deceptive or is likely to mislead or deceive in relation to a financial product or financial service.¹⁶ Unlike the other Australian market manipulation provisions this results in a civil liability only.¹⁷ A copy of the sections of the Corporations Act 2001 relating to market manipulation is attached as Appendix I.

114. Under United States law, Section 10(b) of the Securities Exchange Act of 1934, regulates the use of manipulative and deceptive devices or contrivances. This is a broad catch-all provision and it empowers the SEC to make rules and regulations prohibiting the use of manipulative and deceptive devices or contrivances in the trade of securities. The SEC has used this statutory authority to promulgate a number of rules proscribing manipulative conduct. This has been the most widely used provision in the SEC's enforcement of market manipulation regulation.¹⁸

115. In the United Kingdom, the Financial Services and Markets Act 2000 introduced a new regime to tackle market abuse, replacing the Financial Services Act 1986. The provisions in the Act are generally expressed in broad terms. However, section 119 of the Act requires the Financial Services Authority (FSA) to issue a Code of Market Conduct to give guidance to those determining whether or not behaviour amounts to market abuse.

116. The Code specifies that the prohibition on behaviour likely to give a regular user of the market a false or misleading impression as to the supply of, or demand for, or as to the price or value of, investments includes within the description of behaviour engaging in a course of conduct which will give or is likely to give a false impression.

117. The Code is a lengthy document which has been the subject of much consultation by the FSA. It aims to give guidance but not to be exhaustive as the FSA has said that it "must retain some flexibility to deal with the emergence of novel forms of abuse, which may not be explicitly addressed in the Code."¹⁹

118. At present under New Zealand law, such conduct would likely be dealt with under the Fair Trading Act 1986. The aim of the Fair Trading Act is to protect the consumer. It is designed to ensure that consumers receive accurate information in order to make rational choices in the marketplace.

119. The Fair Trading Act applies to goods and services. Whether section 9 of the Act applies to conduct relating to securities depends on whether securities come within the definitions of goods or services in the Act, and on whether the conduct takes place in trade.

120. The word "trade" is defined in section 2(1) as:

"any trade, business, industry, profession, occupation, activity of commerce, or undertaking relating to the supply or acquisition of goods or services or to the disposition or acquisition of any interest in land."

121. There is uncertainty in relation to both of these issues for the following reasons:

• It might be argued that sending mass e-mail messages, as occurs in hype and dump schemes is not conduct taking place in trade;
• While there have been cases under the Fair Trading Act which have involved shares, and views have been expressed that shares can be regarded as goods, this question has not been finally determined. Goods are generally considered to be tangible property; and
• A breach of Section 9 of the Fair Trading Act results in a civil liability. An individual who considered that he had suffered loss from a manipulative practice would have to bring civil proceedings. Taking into account the complex nature of manipulative practices and the costs involved in taking civil action, the provision is not likely to be a deterrent to market manipulation.

122. The appropriateness of the Fair Trading Act applying to securities is an important issue. The legislation in Australia equivalent to the Fair Trading Act is Part V of the Trade Practices Act 1974. In 1996-1997, there was a major review of the Australian financial system.²⁰ Under the new regime, which came into effect from 1 July 1998, policy making for financial services moved to the Commonwealth Department of Treasury, APRA became the new prudential supervisory body and assumed responsibility for policy implementation while ASIC (formerly the Australian Securities Commission) assumed new consumer protection responsibilities for financial services.

123. The Trade Practices Act was consequently amended to exclude conduct in relation to financial services. While the provisions for financial products and services mirror the provisions for other goods and services found in the Trade Practices Act, they are enforced by ASIC rather than by the ACCC, the body otherwise responsible for consumer protection issues. Hence conduct in relation to takeovers and issuing and dealing in securities is governed by the Corporations Act and not by general consumer protection legislation.

124. As discussed above, the Securities Act 1978 contains provisions dealing with misleading conduct in relation to offers of securities to the public for subscription. It has been suggested that the fact that such misleading conduct may fall under the provisions of the Securities Act and also the Fair Trading Act leads to confusion and a lack of clarity as to the appropriate body to deal with a breach of this nature. The Commerce Commission is the body charged with enforcement of the Fair Trading Act, but the Securities Commission is the body with expert knowledge of securities markets.

125. Misleading conduct relating to securities has the effect of undermining market integrity. One of the principal functions of the Securities Commission is to promote market integrity. Accordingly it may be argued that the appropriate body to enforce a breach would be the Securities Commission.

Price Manipulation

126. Price manipulation is a general term for trading activities which have the effect of increasing or reducing the price of securities. The types of conduct which come under this heading include marking the close, pumping and dumping, cornering. Overseas jurisdictions often have prohibitions against specific practices of price manipulation.

127. There is no legislation in New Zealand which deals specifically with this conduct.

128. To be caught by section 257 of the Crimes Act 1961, which was discussed earlier, the conduct must involve a conspiracy between at least two people and involve deceit, falsehood or other fraudulent means. This means that any fraudulent conduct carried out by an individual is not an offence under this section. Hence the types of conduct mentioned above, which are generally unilateral activities, would not be an offence under this section.

129. The Australian Corporations Act 2001 prohibits the carrying out of transactions which have, or are likely to have, the effect of creating an artificial price for trading in financial products or maintaining a price at an artificial level.²¹ This may be compared with the former provision of the Corporations Act²² (repealed by the Financial Services Reform Act 2001) which prohibited the carrying out of transactions with the effect of increasing, reducing, or stabilising the price of those securities on a stock market, with the intention of inducing other people to buy or sell those or related securities. The provision was designed to prohibit people from causing an artificial price, with the intention of inducing trading. The causing of the artificial price was not sufficient, an intention to induce the relevant conduct was also required. The key concept now is whether a price is artificial.

130. The previous Australian market manipulation law provisions were criticised for being too complex and creating problems of proof.²³ Commentators described section 997 of the Corporations Act in particular as a difficult section to prove. One reason for this was that section 997 required proof of intention to induce other persons to sell, buy or subscribe for securities. "It is usually impossible to ascertain with certainty what motivates a particular trade."²⁴ This section applied only where there were two or more transactions, hence it did not cover individual manipulative transactions. The equivalent new provision in the Corporations Act 2001 applies to individual transactions and focuses on the effect of the conduct rather than the intent of the trader.

131. Although some significant changes appear to have been made by the Financial Services Reform Act, the explanatory memorandum states that no substantial change in approach to the regulation of market manipulation was intended.

132. Commentators have been critical of the fact that the financial services reforms being implemented by the Australian government are not based on a fundamental review of the market manipulation provisions. Instead they are a blend of the former provisions relating to securities and to futures.

133. Section 118 of the Financial Services and Markets Act 2000 in the United Kingdom defines three broad types of behaviour which may amount to market abuse:

• the misuse of information that is not generally available to users of the market;
• the dissemination of false or misleading information; and
• market distortion.

Of these types of behaviour, market distortion includes conduct involving price manipulation.

134. Section 118 defines market distortion as behaviour which:

"...a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would, or would be likely to, distort the market in investments of the kind in question; and

which is likely to be regarded by a regular user of that market who is aware of the behaviour as a failure on the part of the person or persons concerned to observe the standard of behaviour reasonably expected of a person in his or their position in relation to the market."

135. A regular user is defined in Section 118(10) of the Act as "in relation to a particular market, a reasonable person who regularly deals on that market in investments of the kind in question."

136. Behaviour will amount to market abuse if the behaviour engaged in interferes with the proper operation of market forces with the purpose of positioning prices at a distorted level. This need not be the sole purpose of entering into the transaction, but must be an actuating purpose. An actuating purpose is defined as a purpose which motivates or incites a person to act.

137. The United Kingdom Code gives examples of behaviour amounting to market abuse:

"The following is an example of price positioning at a distorted level: A trader simultaneously buys and sells the same investment (that is, trades with himself) to give the appearance of a legitimate transfer of title or risk (or both) at a price outside the normal trading range for the investment .The price of the investment is relevant to the calculation of the settlement value of an option. He does this while holding a position in the option. His purpose is to position the price of the investment at a distorted level, making him a profit or avoiding a loss;" and

"The following is an example of an abusive squeeze. A trader with a long position in bond futures buys or borrows a large amount of the cheapest to deliver bonds and either refuses to re-lend these bonds or will only lend them to parties he believes will not re-lend to the market. His purpose is to position the price at which those with short positions have to deliver to satisfy their obligations at a materially higher level, making him a profit."

Hence the United Kingdom prohibition requires proof of the purpose of the person in entering into the transaction.

138. Under the Criminal Code of Canada "every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretense within the meaning of this Act, with intent to defraud, affects the public market price of stocks, shares, merchandise or anything that is offered for sale to the public is guilty of an indictable offense..."²⁵

139. In Hong Kong, there is a prohibition on the creation of a false market on the Hong Kong Stock Exchange in which the market price of a particular security is raised or depressed or pegged or stabilised by means of:

• Sales and purchases transacted by persons acting in collaboration with each other for the purpose of securing a market price for a particular security that is not justified by the fundamentals of the company;
• Any act which has the effect of preventing or inhibiting the free negotiation of market prices for the purchase or sale of the security.

140. The main provisions in the United States are:

• Section 17(a) of the Securities Act of 1933, which prohibits manipulative conduct in the offer and sale of securities.
• Section 9(a) of the Securities Exchange Act of 1934 , which contains prohibitions against manipulation of securities prices.

141. For the purposes of these provisions, manipulation is intentional interference with the free forces of supply and demand for a security, often designed to deceive or defraud investors through controlling or artificially affecting the price of securities or market activity.

142. Section 9(a)(2) of the Securities Exchange Act states that it is unlawful for any person to effect, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange ...raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others. This section is the equivalent of former section 997 in the Australian Corporations Act 2001.

143. The issue of proving the purpose of inducing other investors into purchasing or selling securities has been a major issue in most of the litigation under this section. In fact the difficulty in proving "the intention to produce the forbidden result" has been a recurring theme in all the literature on the subject of market manipulation.²⁶ The requirement to prove purpose or intention remains in the United States and United Kingdom, but is not found in the new Australian provision nor in the European Council's proposed directive. The explanatory memorandum to the proposed directive states that the "definition of `Market Manipulation' relies on the behaviour of its authors, and not on their intention or aim".

144. The ways of dealing with price manipulation illustrate an important trade-off. The use of an effect based test may deter desirable conduct whereas the use of a purpose based test may not provide a sufficient deterrent to undesirable conduct. Some jurisdictions have attempted to take account of this through penalty regimes, by providing for both civil and criminal penalties. This issue is discussed in Part II of the document entitled Reform of Securities Trading Law: Volume Three: Penalties, Remedies and the Application of Securities Trading Law .

Fictitious Transactions

145. Although the details vary, a common feature of market manipulation law in most jurisdictions is a prohibition on fictitious transactions. These fictitious transactions may be distinguished from the actual trading practices which come under the heading of price manipulation. They would include practices such as wash sales and matched orders.

146. The relevant prohibitions in the Australian Corporations Act 2001 are:

• creation of a false or misleading appearance of active trading in financial products;²⁷
• carrying out fictitious transactions which have the effect of maintaining, inflating or depressing the price of financial products.²⁸

147. Without limiting the general prohibition, false or misleading appearance is deemed to have been created in circumstances where there is no change in beneficial ownership or where there are matched sales.²⁹

148. The corresponding United Kingdom provision prohibits behaviour where the behaviour is likely to give a regular user of the market a false or misleading impression as to the supply of, or demand for, or as to the price or value of, investments of the kind in question.

149. The United Kingdom Code of Market Conduct provides:

"A transaction which creates a false or misleading impression will not normally be considered to have a legitimate commercial rationale where the purpose behind the transaction was to induce others to trade in, or to position or move the price of, a qualifying investment or relevant product. This need not be the sole purpose for entering into the transaction or transactions, but must be an actuating purpose. Equally, transactions will not automatically be considered to have a legitimate commercial rationale simply because the purpose behind the transaction was to make a profit or avoid a loss (whether directly or indirectly)."

150. The Code includes the following examples of behaviour which might give rise to a false or misleading impression:

"(1) arrangements for the sale or purchase of a qualifying investment or relevant product (other than on repo or on stock lending or borrowing terms) whereby there is no change in beneficial interests or market risk, or the transfer of beneficial interest or market risk is only between persons who are acting in concert or collusion;

(2) a transaction or series of transactions that are designed to conceal the ownership of a qualifying investment or relevant product ,so that disclosure requirements are circumvented by the holding of the qualifying investment in the name of a colluding party, such that disclosures are misleading in respect of the true underlying holding of the security . These transactions are often structured so that market risk remains with the seller. This does not include nominee holdings;

(3) a fictitious transaction."

151. In Hong Kong, the law prohibits the creation of a false market on the Hong Kong Stock Exchange in which the market price of a particular security is raised or depressed or pegged or stabilised by means of the employment of any fictitious transaction or devices or any other form of deception or contrivance. It also includes a specific prohibition on any purchase or sale of a particular security which involves no change in the beneficial ownership of that security and which is conducted with the intention of depressing, raising or causing fluctuations in the market prices of that security.

152. Section 382 of the Criminal Code of Canada expressly prohibits wash trading and match trading, when done with the intent to create a false or misleading appearance with respect to public trading or market price.

153. In the United States, section 9(a)(1) of the Securities and Exchange Act 1934 is the relevant provision. This provision states that it is unlawful for any person:

"For the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or a false or misleading appearance with respect to the market for any such security,

A. to effect any transaction in such security which involves no change in the beneficial ownership thereof, or

B. to enter an order or orders for the purchase of such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or

C. to enter any order or orders for the sale of any such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the purchase of such security, has been or will be entered by or for the same or different parties."

154. The European proposal for a directive on market abuse prohibits transactions or orders to trade which give or are likely to give false or misleading signals as to the supply, demand, or price of financial instruments or which employ fictitious devices or any other form of deception or contrivance.

155. There generally appears to be a prohibition on specific practices, as well as the general prohibition on fictitious transactions. Alternatively some jurisdictions give examples or guidance as to types of conduct prohibited.

False or Misleading Statements

156. Most jurisdictions specifically prohibit the making of false or misleading statements in relation to securities, that is disclosure based manipulation.

157. In New Zealand, this is covered by the provisions in the Securities Act 1978, described in Part II, which apply to offers of securities to the public for subscription. They are intended to prohibit disclosure based manipulations at the time of offer. However, there are no comparable provisions applying to subsequent transactions between parties for the sale or purchase of securities.

158. Based on the current experience in the United States, the predominant type of disclosure based manipulation is likely to be in secondary markets through dissemination of inaccurate information via the Internet: using websites, bulletin boards, chat rooms and e-mail. It is possible that these practices could be dealt with under the Fair Trading Act 1986 or the Crimes Act 1961.

159. In the Australian Corporations 2001 there is a prohibition on making a statement or disseminating information that is false or misleading in a material particular, and which is likely to induce other persons to deal in financial products or to affect the price of financial products.³⁰

160. The United Kingdom provisions on market abuse prohibit behaviour where the behaviour is likely to give a regular user of the market a false or misleading impression as to the supply of, or demand for, or as to the price or value of, investments.

161. The United Kingdom prohibition on behaviour giving rise to a false or misleading impression includes artificial transactions (as discussed above) and disseminating false or misleading information, as well as the dissemination of information through an accepted channel. An actuating purpose of disseminating the information must be to create a false or misleading impression.

162. The prohibition applies when the person knows, or could reasonably be expected to know, that the information disseminated is false or misleading.

163. The United Kingdom Code of Market Conduct includes as an example of behaviour which would be prohibited:

"The following is an example of disseminating false or misleading information. A person posts information on an Internet bulletin board or chat room which contains false or misleading statements about the takeover of a company whose shares are qualifying investments. The person knows that the information is false or misleading and he has posted the information in order to create a false or misleading impression."

164. The provision relating to the dissemination of information through an accepted channel imposes an obligation on providers of information to take reasonable care to ensure that information is not inaccurate or misleading.

165. The Code also focuses on the channels for dissemination of information.

"The FSA recognises the importance of information disseminated through accepted channels for the dissemination of information. Users of such information should be able to rely on the accuracy and integrity of information carried through these channels. It is, therefore, appropriate that those who disseminate information through them, for example, the company itself, its financial advisers or its public relations advisers, take reasonable care to ensure the information is not inaccurate or misleading. Where they do not, and the information is likely to give rise to a false or misleading impression, they will be regarded as engaging in behaviour which amounts to market abuse."³¹

166. Under the Hong Kong regime, the Securities Ordinance prohibits the dissemination of any statement with respect to securities which the disseminator knows or has reasonable grounds to believe to be false or misleading. The statement must be made for the purposes of inducing the sale of the securities.

167. In the United States, section 9(a)(4) of the Securities Exchange Act 1934 provides:

"If a dealer or broker, or other person selling or offering for sale or purchasing or offering to purchase the security, to make, regarding any security registered on a national securities exchange, for the purpose of inducing the purchase or sale of such security, any statement which was at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, and which he knew or had reasonable ground to believe was so false or misleading."

168. Section 10b of the Act empowers the SEC to make rules and regulations prohibiting the employment of certain types of manipulative or deceptive devices in the trade of securities.

"Rule 10b 5, promulgated by the SEC under the general authority delegated to it by section 10b, has become a highly significant enforcement weapon against securities fraud both in SEC proceedings and in private litigation."³²

169. A common feature of these prohibitions on false or misleading statements is that they include statements where the maker ought to have known or had reasonable grounds to believe that the statement was false or misleading. They may include a purpose based element, that is the statement was made for the purpose of inducing the purchase or sale of a security, or the statement was made to create a false or misleading impression.

Short Selling

Arguments for and against Regulating Short Selling

170. The practice of short selling has been the target of much criticism as a perceived cause of market instability. It has been linked to market manipulation. The issue of whether short selling has a positive or a negative impact on financial markets and whether we need to legislate against it are discussed below.

171. Some commentators have argued that short selling is a normal part of market operation.

"Short selling is, in a wide variety of circumstances, a legitimate and useful practice, and it is this element which distinguishes it from those market practices generally regarded as 'misleading' or 'deceptive.'"³³

172. Short selling is said by its supporters to level out fluctuations in market prices and to increase liquidity in the market.

173. The Securities and Exchange Commission in the United States made the following comments on short selling in SEC Concept Release: Short Sales³⁴ in which it sought public comment on the regulation of short sales of securities.

"Short selling provides the market with two important benefits: market liquidity and pricing efficiency. Substantial market liquidity is provided through short selling by market professionals, such as market makers, block positioners, and specialists, who facilitate the operation of the markets by offsetting temporary imbalances in the supply and demand for securities. To the extent that short sales are effected in the market by securities professionals, such short sale activities, in effect, add to the trading supply of stock available to purchasers and reduce the risk that the price paid by investors is artificially high because of a temporary contraction of supply.

Short selling also can contribute to the pricing efficiency of the equities markets. Efficient markets require that prices fully reflect all buy and sell interest. When a short seller speculates on a downward movement in a security, his transaction is a mirror image of the person who purchases the security based upon speculation that the security's price will rise. Both the purchaser and the short seller hope to profit by buying the security at one price and selling at a higher price. The strategies primarily differ in the sequence of transactions. Market participants who believe a stock is overvalued may engage in short sales in an attempt to profit from a perceived divergence of prices from true economic values. Such short sellers add to stock pricing efficiency because their transactions inform the market of their evaluation of future stock price performance. This evaluation is reflected in the resulting market price of the security. Arbitrageurs also contribute to pricing efficiency by utilizing short sales to profit from price disparities between a stock and a derivative security, such as a convertible security or an option on that stock. For example, an arbitrageur may purchase a convertible security and sell the underlying stock short to profit from a current price differential between two economically similar positions."

174. However the SEC also commented that:

"Although short selling serves useful market purposes, it also may be used as a tool for manipulation. One example is the "bear raid" where an equity security is sold short in an effort to drive down the price of the security by creating an imbalance of sell-side interest. Many people blamed "bear raids" for the 1929 stock market crash and the market's prolonged inability to recover from the crash."

175. Commentators have argued that the regulation of short selling eliminates short sales which would otherwise occur whenever those who did not currently hold a particular security received adverse information about the security. It is argued that the result is to decrease the speed at which information is reflected in market prices and thus to reduce the efficiency of markets.³⁵

176. Short selling is prohibited under the Corporations Act 2001³⁶ in Australia (refer to Appendix I for a copy of the relevant provisions), but the prohibition includes a number of exceptions. This means that short selling is possible under certain restrictive conditions.

177. These conditions are:

• Where the sale is made for the purpose of buying or selling an odd lot of securities;
• Where the sale is part of an arbitrage transaction;
• Where the seller has entered into a contract to buy the securities which is conditional only on payment, an instrument of transfer or documentation;
• Where arrangements have been made for the delivery of the securities to the buyer within three business days. If the sale is made on a stock exchange, the price must not be lower than the last reported sale and the stock exchange must be informed that it is a short sale; or
• Where the securities being sold are the subject of a declaration by a stock exchange that they are approved for short selling.

178. While the description above refers to securities, these provisions apply also to certain other financial products as well as securities.³⁷

179. Short selling in the United States is principally regulated by the SEC. The SEC has promulgated three rules that operate together to regulate short selling:

• Rule 3b-3, which defines the term "short sale";
• Rule 10a-1 which is the prohibition on short selling in a falling market; and
• Rule 10a-2 which prohibits broker-dealers from engaging in certain activities that could facilitate an illegal short sale.

180. Rule 10a-1 of the Securities Exchange Act, known as the uptick rule, seeks to limit short selling in a declining market. The rule prohibits investors from selling an exchange-listed stock short unless the stock's last trade was at the same price or higher than the previous trade.

181. In addition, Rule 10a-2 of the Securities Exchange Act requires brokerage firms that sell a stock short or allow their customers to sell short to first make sure that the shares can be borrowed or that delivery of the securities can be made to the purchaser by the settlement date.

182. The SEC has recently sought comment on the regulation of short selling and whether Rule 10a-1 should be eliminated.

183. Some commentators in Australia have also suggested that the prohibition against short selling should be removed. One of the conditions under which short selling is allowed in terms of the Corporations Act 2001 is where it is the subject of a declaration by a market operator (such as a stock exchange) as approved for short selling. Hence the Australian legislation recognises that short selling may take place in accordance with the rules of the Australian Stock Exchange.

184. There is no legislation dealing with short selling in New Zealand. However, the New Zealand Stock Exchange, in its self regulatory role, has provisions in the regulations governing its members which deal with short selling.

185. As defined in the NZSE membership regulations, a "short sale" means a sale of any approved security where, at the time of the sale, the seller does not have a presently exercisable and unconditional right to vest the security in the buyer.

186. The relevant section of the regulations is summarised in Appendix II.

Enforcement of Market Manipulation Law

187. As well as considering overseas market manipulation laws, it is also useful to consider the powers available to the regulatory bodies in those jurisdictions. In this era of global markets, regulators of securities markets need to be aware of what conduct is prohibited in overseas markets and may need to cooperate in the detection and investigation of market manipulation.

188. There are reforms currently underway to give the Securities Commission powers as a public enforcement agency for insider trading. These powers have the potential to be used for the enforcement of a market manipulation regime.

The Role of the Securities Commission

189. In order for a market manipulation regime to be effective it must be able to be effectively enforced. The Government has recently announced its intention to make the Securities Commission a civil enforcement body for insider trading and continuous disclosure. This role is likely to involve the Commission being empowered to issue restraining orders and to take civil proceedings for breaches of insider trading and continuous disclosure law.

190. It may also be appropriate to give the Commission a civil enforcement role in market manipulation for the following reasons:

• Deterrence: Providing an enforcement body dedicated to the detection and enforcement of market manipulation law could act as a deterrent to potential market manipulators;
• Evidential problems with private enforcement: An individual may not have the ability to require the necessary information from a market manipulator to prove a case. A state agency, such as the Commission, can have a significant advantage over private enforcement in obtaining information through exercising statutory investigative powers. Equally the Commission can have an advantage in obtaining information in foreign jurisdictions through networks and legislation (bilateral and multilateral agreements);
• Lack of incentives for private enforcement: The losses associated with instances of market manipulation are usually dispersed among a number of people, none of which individually may have a sufficient economic motivation to take an action. The Commission would not be deterred by the costs or time involved in taking an action and would be able to undertake an action where there was clear market manipulation and it was desirable for the public benefit;
• Expertise: The Commission can establish a high level of expertise and experience in securities law matters. This gives the Commission an advantage over an individual in being able to efficiently and effectively analyse any information obtained and identify non-compliance with the law;
• The Commission will have the resources to monitor and investigate potential market manipulation activity, which may increase the likelihood of catching manipulators;

The issue of whether criminal penalties should apply and the appropriate body to take criminal actions is discussed in the document entitled Reform of Securities Trading Law: Volume Three: Penalties, Remedies and the Application of Securities Trading Law.

Application of the Law

191. When considering the issue of the regulation of market manipulation, two questions arise on the application of such law. These questions are:

• what entities should the law apply to; and
• what financial products should be covered by the law.

192. These issues are considered in paragraphs 145 to 155 of the discussion document entitled Reform of Securities Trading Law: Volume Three: Penalties, Remedies and the Application of Securities Trading Law.

¹⁵The Australian law relating to market manipulation is part of the Corporations Act 2001. The Financial Services Reform Act 2001 repealed Chapters 7 and 8 of the Corporations Act 2001 and enacted the new provisions as discussed.

¹⁶Section 1041H Corporations Act 2001

¹⁷The linkages between the market manipulation provisions and fault elements as they apply in civil and criminal liability are discussed in the discussion document entitled "Penalties, Remedies and the Application of Securities Trading Law" at paragraphs 186 to 193.

¹⁸Goldwasser, Stock Market Manipulation and Short Selling, 80.

¹⁹Financial Services Authority, Policy Statement, Code of Market Conduct, Feedback on CP59 and CP76, 3.

²⁰Australian Financial System Inquiry, Final Report (Wallis Report) (Canberra: AGPS, March 1997) refers. Australia's current regulatory framework generally implements the recommendations of the Wallis Inquiry resulting in a division of responsibilities between the Australian Prudential Regulation Authority (APRA), the Australian Securities & Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC).

²¹Section 1041A Corporations Act 2001

²²Former Section 997 Corporations Act 2001

²³Goldwasser, Stock Market Manipulation and Short Selling, 75-76

²⁴Ibid., 58

²⁵Section 380(2) of the Criminal Code of Canada.

²⁶Goldwasser, Stock Market Manipulation and Short Selling, 111.

²⁷Section 1041B Corporations 2001.

²⁸Section 1041C Corporations Act 2001.

²⁹Section 1041D Corporations Act 2001.

³⁰Section 1041E Corporations Act 2001.

³¹Code of Market Conduct 1.5.20.

³²Goldwasser, Stock Market Manipulation and Short Selling, 80.

³³Ibid., 19.

³⁴http://www.sec.gov/rules/concept/34-42037.htm

³⁵Fischel and Ross, "Should the Law Prohibit 'Manipulation' in Financial Markets," 522.

³⁶Section 1020B Corporations Act 2001.

³⁷Section 1020B(1) Corporations Act 2001.