Tougher regime to tackle insider trading

The Government's efforts to beef up the insider trading laws are focusing on increased detection and enforcement under the current regime and the possible introduction of criminal penalties.

A discussion document on insider trading was released yesterday for consultation over the next six weeks.

Commerce Minister Paul Swain hopes to put recommendations before the cabinet by February.

The insider trading changes and the introduction next year of a takeovers code are moves to restore the confidence of overseas investors and to bring our commercial laws more into line with Australia's.

No person has been found liable for insider trading since the Securities Amendment Act was passed over 10 years ago.

The Government has decided to make the existing regime more effective rather than replace it.

Act MP Stephen Franks, who is involved in the insider trading case against former Fletcher Challenge chairman Kerry Hoggard, said the discussion paper recycled 1995 Securities Commission recommendations which the Law Society panned at the time.

``There is political pressure to get stuck into it, but Swain has now got cold feet.

``Reality has mugged him.''

The paper says that improving prevention of breaches, detection and enforcement could pre-empt the need for further change.

However, it also asks for comment on the act's core provisions and suggests technical changes, following criticism of lack of clarity on its core definition of an ``insider.''

These changes include applying the law to all issuers of securities to the public, rather than just listed issuers, and extending it to stock exchanges outside New Zealand.It proposes removing share buybacks from the insider trading provisions and applying an automatic prohibition stopping insider traders from continuing to manage companies.

The paper wants to strengthen obligations on making price-sensitive information publicly available by adopting the continuous disclosure regime enforced in Australia.

It recommends a two-step process for improving detection of insider trading, introducing a sophisticated electronic detection system and formalising referrals to the Securities Commission by the NZ Stock Exchange.

The exchange has already said it thought the costs of an electronic detection system would be too high. A proposed alternative is contracting a third party such as the Australian Stock Exchange, which is involved in merger talks with the local exchange, to provide such a system here.

At present, only private legal action can be taken over insider trading and the barriers include cost and detection difficulties.

Options outlined in the paper are to allow class actions and court-approved settlements, and for an applicant to ask for leave under section 18 to not be liable for costs.

Another option is for the Securities Commission to undertake civil enforcement action, but this would require a significant expansion of both the commission's role and its funding.

Comment is also sought on introducing criminal penalties as well as retaining civil remedies in line with the situation that applies in both Australia and the United States.

However, this would necessitate significant amendments to the act and could raise problems with civil cases because of the rule against self-incrimination.