Insider trading is a common term briefly defined as a form of market abuse whereby an insider (which can be a juristic person, trust partnership, or person) with insider knowledge makes use of this knowledge which is unfair to the other market participants. Insider trading is an offence given the fiduciary nature which exists between an insider and the business and is detailed in legislation in the Financial Markets Act (the Act) which aims to –
- Ensure that the South African financial markets are fair, efficient, and transparent;
- Increase confidence in the South African financial markets by requiring that securities services be provided in a fair, efficient, and transparent manner; and contributing to the maintenance of a stable financial market environment;
- Promote the protection of regulated persons, clients, and investors;
- Reduce systemic risk; and
- Promote the international and domestic competitiveness of the South African financial markets and securities services in the Republic.
An insider is also defined in the Act and refers to a person with inside information through his or her company role, whether it be a director, employee, shareholder, or issuer of securities listed on the regulated market to which inside information relates (s 77 of the Act). The term “regulated market” is also defined in the definitions section of the Act in s 77 and means any market, domestic or foreign which is regulated in terms of the law of the country in which the market conducts business as a market for dealing in securities listed on that market. Insider information refers to information or knowledge that the insider makes use of to their benefit where such information is not publicly known where, should the information be publicly known, it would affect the price of the security on the regulated market.
Prohibited trading practices are stated generally in the Act’s s 80(1) while 80(3) details more specific and additional contraventions. In terms of making false statements, s 81 states that no person may directly or indirectly make or publish in respect of securities traded on a regulated market, or in respect of the past or future performance of a company whose securities are listed on a regulated market. Defences to insider trading are stated in s 78 of the Act and must be proven on a balance of probabilities. The defences deal with the following offences as listed in the Act, there is no defence for encouraging or discouraging a person to deal as defined in the Act including conveying or giving instruction to deal –
- Dealing in securities for your account while having inside information;
- Dealing in securities for another while having inside information;
- Dealing in securities for an insider; and
- Disclosing inside information.
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