Noose tightens on insiders

By BRIAN FALLOW

The Securities Commission will gain the power to take alleged insider traders to court and directors will have to disclose their share trading immediately under new rules proposed by the Government.

The measures are part of a policy package revealed yesterday that the Government says will strengthen the prevention and detection of insider trading, and enhance enforcement of the existing laws against it.

But many details remain to be decided and legislation is not expected to be enacted until the middle of next year.

The Government has deferred for a further review such questions as:

Whether the definitions of insider trading are adequate.

Specific provisions on market manipulation.

Whether insider trading should be made a criminal offence.

Stephen Franks, an Act MP and former member of the commission, described the proposal as "sound-bite" law reform.

"It is drip-fed out to look active and tough, but without changing things that will really make a difference."

Acting Commerce Minister Trevor Mallard said the Government intended to make the commission a public enforcement agency.

It would be able to bring legal proceedings itself in insider trading matters.

While the commission can investigate and publish reports at present, only aggrieved shareholders or the company affected can take legal action.

A former commission chairman, Peter McKenzie, had advocated an enforcement role for the commission as a back-stop to private action.

He welcomed the moves yesterday but was less enthusiastic about the possibility of criminalising insider trading.

The burden of proof was higher in criminal matters, he said, and people had a privilege against self-incrimination, which could make the gathering of information more difficult.

Commission chief executive John Farrell said one of the questions still to be resolved was whether, or how, the commission's powers to gather information should be strengthened.

"The question arises whether we should have the power to call on people in their offices or elsewhere to gather information."

Mr Franks said that giving the commission standing to take legal proceedings was less important than inculcating the will to do so.

"When I was on the commission I suggested we should just buy 100 shares in each listed company. That would have given us a shareholder's rights to take proceedings.

"But they kept looking for reasons why they couldn't do things."

Mr Mallard said directors would be required to disclose their share dealings at the time they were made.

Officials were still working on the exact time requirements.

At present, directors' transactions only have to be recorded in a register made available to other shareholders at the annual meeting.

Commission regulations allow safe-haven windows after announcements, during which directors can trade without fear of liability under the insider trading laws.

Mr Franks said the procedure was open to abuse by the dishonest, and was a pain in the neck for the honest.

The Government has also proposed requiring companies to provide continual and timely disclosure of information that would affect share prices.

But Mr Franks said it was easy to get around such regimes.

For example, shareholders could exploit the condition that transactions did not need to be disclosed until they were "complete."

For technology companies, whose stock-in-trade was information and intellectual property, such a requirement could also be a disincentive to list on the stock exchange, he said.

One of the questions officials are working on is whether the disclosure regime should apply only to listed companies.

Also undecided is the extra funding the commission would need for a stronger enforcement role.