Most of New Zealand's insider trading laws have been in force for over 10 years, although during that time no one has ever been found guilty of insider trading. In March 2001 the government announced changes to improve New Zealand's insider trading regime. This followed the release of a discussion document on the subject in September 2000, and the resulting submissions, on which the government has decided to act.
New Zealand's existing insider trading laws arise out of the Companies Act 1993, Part I of the Securities Amendment Act 1988, and common law. Common law only operates to a limited extent in the case of a fiduciary relationship where a director purchases shares from a shareholder while having material information not available to the shareholder. The Companies Act is also limited in that it only applies to company directors. It restricts the use of company information by directors, requires directors to disclose share dealings in an interests register and, for private companies, requires directors to buy and sell securities in the company at fair value where they have received material information in their capacity as a director.
The most important insider trading law is Part I of the Securities Amendment Act 1988, which applies to entities listed on the New Zealand Stock Exchange (NZSE). The act distinguishes two types of insider trading: insider dealing and tipping.
Insider dealing occurs when an insider (which may be the entity, a director, employee or substantial security holder (an owner of more than 5% of the issuer), or a person receiving information from any of these people) buys or sells securities of a public issuer in relation to which they hold non-public information which, if generally known, would be likely to materially affect the share price. The insider is then liable to the person who sold or bought the securities for any loss incurred, and to the public issuer for the amount of any gain made or loss avoided by the insider. A pecuniary penalty may also be imposed.
Tipping is when an insider who has non-public price-sensitive information about a public issuer encourages another person to buy or sell securities or provides such information to another person believing they will buy or sell securities. The insider is liable to anyone who sells or buys securities from the tippee for loss incurred, and also to the public issuer for any consideration the insider may have received, any gain made or loss avoided by the tippee, and again possibly a pecuniary penalty.
The September 2000 discussion paper identified problems with New Zealand's existing insider trading laws at several levels. There are problems of definition with the Securities Amendment Act, especially with the definition of "insider". In some cases the definition is too wide (so that it includes transactions between informed parties) and in other cases it is too narrow (for example, it is unclear whether the act applies where information is obtained from the public issuer illegally). The discussion paper also raises the question of whether the insider trading regime should apply to non-listed securities issuers, or to entities listed outside New Zealand.
The government has chosen, at least for now, to retain the same fundamental laws restricting insider trading. Present changes are instead to focus on the prevention, detection and enforcement of insider trading. Once there has been effective enforcement and cases tested in court, the provisions of the Securities Amendment Act may be further examined.
To prevent insider trading, the government plans to introduce two measures. First there is a statutory disclosure regime that requires companies to provide continuous disclosure of information that would have a material effect on the price of securities. However, the extent to which this will increase a listed company's obligations is unclear. There is already a listing rule requirement that they disclose price-sensitive information as soon as the value to the company in keeping the information confidential ceases to exceed the value to the company's shareholders in having the information, and the new statutory disclosure obligation may well be subject to exceptions, yet to be determined. At the end of the day the change in law may result in only a very subtle change in market practice. The second measure is to require directors to disclose share dealings at the time they are made. At present, the public only becomes aware of directors' share dealings when details are disclosed in the company's annual report. However, this is again a fairly subtle change as shareholders already have the right to view the interests register of a company, which must keep an up-to-date record of directors' share dealings.
Regarding the detection of insider trading, the government proposes to place a statutory obligation on the NZSE to provide information about breaches of securities law to the Securities Commission. The government is also investigating the possibility of establishing a sophisticated electronic detection system.
The final change announced by the government is in relation to the enforcement of the existing law. At present there is no public enforcement body to take up prosecutions of insider trading. The government intends to establish the Securities Commission as a public enforcement agency.
The technical details of the changes are expected to be reported back to cabinet by the middle of the year, with legislation to be passed in mid-2002. In addition to these changes, there are also plans for a broader review of the insider trading laws, including implementing market manipulation laws and the possibility of criminal penalties. Further discussion papers on these issues are to be released later in the year.
James Aitken and Hamish Dixon