Editorial: Securities review is long overdue

For the past five years, the Securities Commission's approach to insider trading has bordered on lethargic. Euan Abernethy had barely seated himself behind the chairman's desk when the watchdog abandoned the idea of seeking powers of its own to take legal action against insider traders. The commission no longer wanted to become the prosecuting agency that many deem essential to tackle insider trading - the practice whereby shares are bought or sold on the basis of confidential company information not yet made public. The commission contented itself with being an adviser to the Government.

Suddenly, however, Mr Abernethy has changed tack. The commission is leading the charge against insider trading, demanding, for example, changes to the law to allow criminal prosecutions. Why the change of heart? Very likely the fall from grace of Kerry Hoggard. The one-time business pinup boy and Fletcher Challenge chairman - widely viewed as a model of integrity - breached insider trading laws when he bought 390,000 of the company's shares last December. So much has been confirmed by a commission investigation begun at the behest of the media.

Yet Mr Hoggard's downfall owes nothing to the commission's vigilance or the excellence of the law. He was tripped up by Fletcher Challenge procedures, whereby a director must seek permission from the board before trading company shares. Likewise, it was the company which now concedes that Mr Hoggard also acted outside those procedures when he bought 9455 shares in 1998.

The tumble of a man of Mr Hoggard's standing raises obvious questions about the extent of the practice. If it has galvanised the commission, it may also be far from coincidental that we have a more activist Government. The commission's torpor corresponded with a period when governments were keen on self-regulation and less than eager to increase its funding. Never mind that the flaws in the insider trading laws were becoming ever more apparent. Or that the commission should have been vigorously pursuing far-reaching change, as it had under the previous stewardship of Peter McKenzie.

Finally, widespread unease has prompted a Government review. Perhaps not coincidentally, the Government has also indicated that it may make insider trading a matter of criminal liability. The Hoggard case, and others before it, emphasise that change is overdue. A law passed in 1988 makes insider trading a civil matter, leaving it to aggrieved shareholders to shoulder the financial burden of litigation. The potential reward, though, will often be less than the cost. Unsurprisingly, no successful action has ever been brought.

Inaction over blatant examples of insider trading raises obvious questions about the integrity of our sharemarket. Overseas investors are accustomed to stricter laws, and to regulators putting the heat on insiders and bringing legal proceedings. And local investors can hardly be blamed if they believe they are not getting a fair go.

There is little reassurance in a Securities Commission report that finds a clear breach of the insider trading laws but deems that no further action would be taken against Mr Hoggard. He has already compensated shareholders who lost money from the deal. Similarly, the report finds staff at J.B. Were did not follow their own guidelines covering inside information when handling Mr Hoggard's order - but that the broker was not guilty of wrongdoing.

The commission says it is surprised at the lack of familiarity with securities law obligations. In fact, an inoperable law is always likely to be ignored. Criminalising insider trading will require a higher standard of proof, but the prospect of jail is, in itself, a big deterrent. That, and an enforcement role for the Securities Commission, are logical steps if the market's credibility is to be restored.