1. Introduction
1.1 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. Strengthening the insider trading regulatory regime in New Zealand is only one activity geared at achieving this aim.
1.2 Where insider trading activity is perceived to exist it can be detrimental to investor confidence in the market. Well enforced insider trading laws are important in promoting the market to small investors, and also in determining how overseas investors view the New Zealand market. If investors believe that insider trading exists, and goes unpunished, they may presume that securities are the domain of those with access to privileged information and that others will inevitably miss out as the gains go to insiders.
1.3 Most of New Zealand's insider trading law is found in Part 1 of the Securities Amendment Act 1988. Despite this legislation having been in force for over 10 years, no person has yet been found liable for insider trading under the Act.
1.4 It has been suggested that difficulties in interpretation or application of the SA Act may have hampered the effectiveness of the Act in combating insider trading. These difficulties have been said to include matters such as the lack of clarity in the core definition of "insider" and the circumstances in which an insider is liable for trading, the limitation of the SA Act to information about "public issuers" and questions about the application of the Act to activities occurring outside New Zealand.
1.5 It has also been suggested that there may be gaps in both the detection of insider trading and the enforcement of the legislation. Insider trading is difficult to detect and our current monitoring system is relatively outdated compared to other jurisdictions. There are also clear inadequacies in the area of enforcement. There is no public enforcement body to undertake prosecutions for insider trading and the only recourse individuals have is through private legal action. The cost of taking an action, the difficulties for an individual in detecting the trading, the considerable amount of time necessary and obstacles in obtaining information from the "insider" all act as significant barriers for individuals in taking an action.
1.6 At this relatively early stage in the life of the legislation, and in view of the small number of judicial decisions interpreting it to date, the Government believes it is preferable to focus on making the regime more effective by concentrating on prevention of breach, detection, enforcement of the existing law, and the possibility of introducing criminal penalties. Effectively dealing with the issues of prevention, detection and enforcement is a fundamental step to ensuring the efficacy of our insider trading regime and could pre-empt the need for any further change. Once there is effective detection and enforcement of our insider trading regime, cases have been brought and the legislation tested in Court, it is believed we will be in a better position to know if the provisions of the SA Act are appropriate and workable.
1.7 Having said this however, the Government is also keen to canvas views on potential problems with the SA Act in the area of the key definitions. Therefore, in addition to the key issues outlined above, the paper also invites comment on the core provisions of the Act, and proposes some potential technical changes so as to clarify the interpretation of the current provisions.
Insider Trading Definitions
1.8 Over recent years a number of aspects of the insider trading legislation have been identified as being capable of improvement. Some of these changes relate to the core provisions of the SA Act, while others are more in the nature of fine tuning. Part 3 sets out some of the more fundamental issues for comment, and suggests some potential technical changes which, if appropriate, could readily be included in any amending legislation.
Prevention of breach
1.9 Insider trading involves trading in securities with the benefit of information that is not publicly available. One means of reducing the likelihood of insider trading is to increase the obligations on issuers of securities to make price-sensitive information publicly available. Part 34 sets out some options for doing this.
Detection
1.10 Detecting insider trading is a problem that has been recognised by nearly every country that has insider trading legislation. Detection is typically very difficult, even with the assistance of the most sophisticated monitoring systems. Part 4 sets out some options for improving the detection of insider trading activity in New Zealand.
Enforcement
1.11 The only recourse under New Zealand's insider trading legislation is through private legal action. While specific provision is made in the legislation for current and previous shareholders to undertake legal action on behalf of a public issuer, the costs associated with obtaining leave of the court to do so may act as a significant barrier in some cases. Further, individual shareholders often have insufficient personal incentive to spend the considerable amount of time necessary to mount an insider trading action. Part 6 sets out some options for improving the enforcement of the legislation.
Criminal offences
1.12 As mentioned above, the only recourse under the insider trading legislation is through private legal action. The introduction of criminal penalties may provide a further deterrent to insider trading activity. Part 7 sets out the issues to be considered in relation to criminalising insider trading.
Co-ordination with Australian law
1.13 In view of the obvious advantages of co-ordinating New Zealand and Australian law, the Ministry of Economic Development will give particular attention to the Australian law relating to the issues raised in this discussion paper, and will welcome submissions on the appropriateness of this Australian law being adopted in New Zealand.
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