Insider trading bill under fire

The Institute of Directors is baulking at what it terms "draconian" measures in proposed legislation designed to beef up insider trading laws.

The institute, which represents 3500 business leaders including many of New Zealand's most powerful businessmen, said the Securities Legislation Bill, if passed unchanged, would discourage ownership of shares by directors in the companies they serve.

Furthermore, the bill threatened to remove a director's livelihood in an "unreasonable and draconian" manner, institute chief executive Nicki Crauford claimed in a submission to Parliament's commerce select committee.

Now directors and officers are allowed to buy or sell shares during designated periods such as after a company reports quarterly financial results. This provides assurance that inside information is not used in trades by directors - protecting directors, shareholders and the market.

But the bill removes this window as a defence to insider trading liability leaving directors open to liability on a continuous basis as "information insiders". The institute says this may discourage any buying or selling.

Shares that comprise part of a director's remuneration may be inaccessible for an extended period.

The institute encourages share ownership by directors in companies they serve. It says such ownership helps foster good governance by aligning the interests of directors with their companies.

Bell Gully law firm partner Roger Partridge, a securities law specialist, said under the bill directors would have to go through a process to determine whether they had "material" information classed as inside information. If they did not, they should be allowed to trade shares.

"This is definitely second best compared with approved procedure for the purpose of encouraging share ownership by directors," he said.

The bill also bans anyone convicted of an offence or fined from acting as a company director or manager for five years.

The institute says this is despite increasing complexity, meaning there is a growing risk of inadvertent or minor breaches by directors.

"An automatic ban for five years for any offence, which covers insider trading and market manipulation, is a significant penalty that will effectively remove an individual's livelihood," the institute says.

To have that livelihood removed automatically is "unreasonable and draconian".

At some point, the risk associated with directorships may become unmanageable and deter talented individuals from taking up vital roles.

Meanwhile, Partridge points out a firm reviewing its investment portfolio with an adviser or trustees that said "we shouldn't sell those shares", could be liable under the bill for tipping them to hold the shares.

"I don't think that has been well thought through," says Partridge.

The Government hopes the bill, introduced in November, will build confidence in the securities markets and attract the capital investment required to achieve growth aspirations.

The bill also introduces criminal remedies and strengthens civil penalties for insider trading. Companies could face fines of $1 million; individuals could face fines up to $300,000 - and up to five years in jail.

Under existing law, courts can impose penalties of the greater between three times the gain made or loss avoided and the total sum paid for the shares. However, no one has been found liable for insider trading since the 1988 Securities Markets Act came into effect.