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By Norman Müller, Head: Capital Markets, FSB

he 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 note.

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 environment.

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developments, it was realised some years ago that the current South African securities legislation had become outdated, and did not comply with best international regulatory practice.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 South Africa.

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 manipulation.

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 transaction.

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 principals.

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 securities markets.

A self-regulatory organisation must in future provide the Registrar with explanations and reasons for proposed rule amendments.

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.

GO TO FSB WEBSITEThe 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.

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