NEW SECURITIES SERVICES
ACT ALIGNS SOUTH AFRICA WITH BEST INTERNATIONAL REGULATORY
By Norman Müller, Head: Capital
Securities Services Act, No. 36 of 2004, (SSA) came into
operation on 1 February 2005. The SSA replaces the Stock
Exchanges Control Act, 1985, the Financial Markets Control
Act, 1989, the Custody and Administration of Securities
Act, 1992 and the Insider Trading Act, 1998.Apart from consolidating
the above Acts, it also seeks to add a significant number
of new provisions, some of which relate to previously unregulated
matters and of which the investment services industry should
The Act strives to maintain a healthy balance
between investor protection and the enhancement of international
competitiveness of securities services in South Africa.
It is also expected that the Act will promote confidence
in the South African securities market, locally as well
as internationally, and maintain a stable securities market
In the light of international developments,
it was realised some years ago that the current South African
securities legislation had become outdated, and did not
comply with best international regulatory practice.
Consequently, a team was appointed consisting
of representatives of the FSB, the licensed exchanges, the
central securities depositories, the Banking Association
and other stakeholders to draft a Act that will bring the
regulation and supervision of all aspects of the South African
securities markets, including the custody and administration
of securities and the provision of clearing house services
to an exchange, in line with international developments
and regulatory standards.
The Act has been drafted to increase confidence in the South
African financial markets; promote the protection of regulated
persons and clients; reduce systemic risk; and promote the
international competitiveness of securities services in
It applies to exchanges and authorised
users; central securities depositories and its participants;
clearing houses; persons who buy and sell unlisted securities;
issuers of securities; clients of authorised users and participants;
and market abuse consisting of insider trading and market
Nobody may operate as an exchange, central securities depository
or clearing house unless he is licensed in terms of the Act.
The Act further states that no person may act as an authorised
user or a participant unless authorised by an exchange in
terms of the exchange rules or accepted as a participant in
terms of the rules of a central securities depository.
Only those who comply with the provisions
of the Act may buy and sell listed securities. Furthermore,
a person is not allowed to buy and sell unlisted securities
if it is prohibited or in contravention of the Act’s
conditions. An authorised user may not undertake the management
of securities unless he complies with the exchange rules regulating
the management of securities.
The Act confers the status of a self-regulatory organisation
on exchanges and central securities depositories. The two
licensed exchanges, namely the JSE Securities Exchange South
Africa and the Bond Exchange of South Africa, as well as the
central securities depository, STRATE Ltd, will continue to
operate as self-regulatory organisations. They are expected
to regulate their activities and those of authorised users
(members of exchanges) and participants (members of central
securities depositories) by making and enforcing rules that
comply with the Act’s requirements.
The Act is structured in nine chapters and
emphasis is placed on the significant legislative changes
and new principles that have been introduced.
Unlike before, the new Act clearly states what the functions
of an exchange are by explicitly defining an exchange to mean
a person who constitutes, maintains and provides an infrastructure
- for bringing together buyers and sellers of securities;
- for matching the orders for securities of multiple buyers
and sellers; and
- whereby a matched order for securities constitutes a
The Act now provides for any person, or different
forms of juristic entities, including an association and a
company, to apply for an exchange licence.
It prescribes requirements with which an
applicant for an exchange licence must comply. However, the
Registrar may determine to what extent an applicant must comply
with those requirements. Provision is therefore made for the
licensing of different types of exchanges with different business
models, such as electronic communications networks, alternative
trading systems, traditional exchanges, etc.
The main reason for this approach is that
all secondary markets should be regarded as exchanges, all
of which are subject to the same basic requirements.
The Stock Exchanges Control Act, 1985 required
an exchange to establish a Guarantee Fund of which the Registrar
must approve the rules.
A more flexible approach is being followed
in the Act. An applicant for an exchange licence must have
insurance, a guarantee or compensation fund or other warranty
in place to enable it to provide compensation, subject to
the exchange rules, to clients of authorised users.
The provisions on the listing of securities
have become more onerous and provide the exchange with greater
powers. For example, an exchange is required to make listing
requirements which prescribe the following:
The steps that the exchange must take for
the investigation and discipline of an issuer, director, officer
or employee of an issuer who contravenes or fails to comply
with the listing requirements.
- One or more of the following penalties may be imposed
by the exchange for any contravention of or failure to comply
with the listing requirements –
- A reprimand
- A fine not exceeding R5 million
- Disqualification, in the case of a natural person, from
holding the office of a director or officer of a listed
company for any period of time
- The payment of compensation to any person prejudiced
by the contravention or failure
The Act clearly states that the listing requirements
and any other conditions of listing are binding not only on
an issuer and an authorised user, but also on their directors,
officers, employees and agents.
Contrary to the repealed securities legislation,
the Act requires exchanges to make rules for:
- The approval of a nominee of an authorised user in terms
of exchange rules.
- The equitable settlement of disputes between authorised
users and authorised users and clients regarding dealings
in listed securities.
- The manner in which to investigate complaints.
- The supervision of compliance with the duties imposed
on it and its authorised users by the Financial Intelligence
Centre Act, 2001.
Off-market transactions in listed securities
resulting in a change of beneficial ownership, between financial
institutions (as defined in the SSA) are allowed on condition
that the financial institutions transact with each other as
All off-market transactions in listed securities
are subject to a reporting requirement to the Registrar and
he must disclose this information to the exchange on which
the securities are listed. The Registrar must also disclose
the information to the public unless he is satisfied that
such disclosure will be contrary to the objects of the Act.
Although it is not required that those who
buy and sell unlisted securities of public companies be approved
or licensed, the Registrar may prohibit a person from carrying
on such business, or may impose or prescribe conditions in
respect of such business.
No person, other than an authorised user
or its officer or employee who is so permitted in terms of
exchange rules, may advertise or canvass for the business
of an authorised user.
Central securities depositories will not
be registered in future, but will be licensed in line with
the approach followed regarding exchanges and their licences
need to be renewed annually. A person may apply to the Registrar
for a central securities depository licence and must comply
with the prescribed requirements.
To prevent unnecessary duplication, the Registrar
will no longer have to approve a participant of a central
securities depository as a depositary institution before the
central securities depository may accept that institution
as a participant. The only requirement is that the participant
must comply with the central securities depository’s
rules, as approved by the Registrar.
The Act provides for the approval of nominees
that act as the registered holders of securities or an interest
in securities on behalf of others. A nominee of an authorised
user (member of an exchange) must be approved by the exchange
in terms of exchange rules, and the nominee of a participant
must be approved by the Central Securities Depository (CSD)
in terms of its rules. Nominees that are not approved by an
exchange or a CSD must be approved by the Registrar.
The Act generally enables the conversion
of all types of certificated securities, not only equity securities
that may currently be dematerialised in terms of section 91A
of the Companies Act, 1973, to uncertificated securities,
as well as the issuing of uncertificated securities.
The Act provides for the demutualisation
of self-regulatory organisations and the amalgamation of two
or more exchanges or two or more central securities depositories.
The regulation of demutualisation and amalgamation
has become necessary in the light of international trends.
Most of the members of the World Federation of Exchanges,
which represents the largest stock exchanges in the world,
are in the process of demutualisation or intend to demutualise.
A self-regulatory organisation must, within
14 days of the appointment of a new member to its controlling
body, inform the Registrar of such an appointment and furnish
him with the necessary information. If the Registrar believes
that a member should not be appointed or act as a director
in terms of section 218 of the Companies Act, 1973 or has
been penalised in disciplinary proceedings for failure to
observe the rules of any professional organisation, including
a self-regulatory organisation, he may instruct the self-regulatory
organisation to remove that member from its controlling body.
The Act introduces a limitation of control
of and shareholding in a self-regulatory organisation that
is a company or close corporation.
The Act requires the Registrar’s approval
for acquiring shares in a self-regulatory organisation if
the aggregate nominal value of those shares will amount to
more than 15% of the total nominal value of all the issued
shares of that organisation. The purpose of this provision
is to prevent disreputable people from controlling a self-regulatory
organisation and thereby introducing systemic risks into the
A self-regulatory organisation must in future
provide the Registrar with explanations and reasons for proposed
To expedite the approval of rule amendments,
notices of a proposed rule amendment published in the Gazette
will call upon people to lodge objections to proposed amendments
within 14 days from the publication date (this period was
previously 30 days).
A departure from the current approach is
that clearing houses, when this function is not performed
in-house by an exchange, must be licensed separately. Also,
their licences need to be renewed by the Registrar annually.
The Act enables two or more clearing houses
to amalgamate or merge with each other or with any self-regulatory
organisation. It also provides for any of the assets and liabilities
of a clearing house to be transferred to or taken over by
any other clearing house with the Registrar’s approval.
The Act prescribes a code of conductfor authorised
users, their officers, employees and clients. The Act prescribes
the basic principles for the code, while the Code deals with
general duties of authorised users, furnishing of advice,
disclosure to clients, record-keeping, inducements, advertisements,
client statements, etc.
Manipulative, improper, false or deceptive
practices of trading as well as false, misleading or deceptive
statements, promises and forecasts will from now on fall under
the supervision of the Directorate of Market Abuse, formerly
known as the Insider Trading Directorate. The criminal penalty
for committing any of the above market abuse practices has
been increased substantially – a fine not exceeding
R50 million, or imprisonment for a period not exceeding 10
years, or both.
In the clause dealing with market manipulation,
allowance is made for the introduction of price stabilising
mechanisms, regulated by the rules or listing requirements
of an exchange. The purpose of such mechanisms is to promote
an orderly secondary market following a new issue of shares,
but only for a limited period of 30 days. Price stabilisation
does not constitute a manipulative practice or insider trading
and is followed in a number of overseas countries.
The Act introduces the establishment of an
Enforcement Committee with the power to impose an administrative
penalty on, or provides for the payment of compensation (in
the case of insider trading) by a person who contravenes or
fails to comply with the provisions of the Act. It is expected
that this will give the FSB more effective and expeditious
powers. In the past the FSB was able to take civil legal action
against insider traders, and has used this enforcement option
very successfully. In such a case the wrongdoer could be sued
for the profit made or loss avoided, as a result of the offending
transactions, as well as a penalty of three times such amount.
The FSB can still sue for these amounts in a civil court,
but now also has the option to request the Enforcement Committee
to make such an order.
introduction of the SSA will bring South Africa’s securities
regulation and supervision on a par with best international
practice. The Act also considers the most important developments
within the local and foreign securities markets industry.
A copy of the Act is available on the FSB’s
website at www.fsb.co.za.