PRESENTATION BY FINANCIAL SERVICES BOARD TO PCOF THE SECURITIES SERVICES BILL, 2004

1
PRESENTATION BY FINANCIAL SERVICES
BOARDTO PCOFTHE SECURITIESSERVICES BILL,2004
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TOPICS TO BE ADDRESSED

• Background
• Ambit
• Objects
• Application
• Prohibitions
• Structure
• Conclusion

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BACKGROUND

• Policy Board reviewed regulatory framework in
  1998
• Legislation outdated
• Legislation does not comply with best
  international practice
• FSB established drafting team in1998 consisting
  ofrepresentatives of

4
BACKGROUND

• FSB
• Licensed Exchanges
• Banking Council (South Africa)
• CSDs
• Other stakeholders

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BACKGROUND

• Cognisance was taken of IOSCOs objectives and
  principles of securities regulation and other
  regulatory practices
• Foreign legislation - UK, Australia, European
  Directive, etc.

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BACKGROUND

• Various drafts of the SSB were submitted to the
  FMAB in 2000 2001. The FMAB approved the Bill
  in principle at its meeting of 9 March 2001
• On 4 May 2001 the Policy Board for Financial
  Services and Regulation approved the Bill

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BACKGROUND

• Bill was submitted to Cabinet in May 2002, but
  subsequently withdrawn from the process by the
  Minister and revised by National Treasury and the
  FSB
• Bill was resubmitted and approved by Cabinet on
  23 June 2004

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BACKGROUND

• We consulted with all interested parties
• None of the parties was opposed to the Bill
• Most of the comments were accepted and
  incorporated
• Bill was displayed for a considerable time on the
  FSBs website
• The list of persons institutions consulted is
  available

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AMBIT

• Will consolidate the -
• Stock Exchanges Control Act, 1985 JSE
• Financial Markets Control Act, 1989 BESA JSE
• Custody and Administration of Securities Act,
  1992 STRATE Ltd
• Insider Trading Act, 1998
• Will repeal these Acts
• Also adds new provisions to thoseActs

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AMBIT

• Since the repealed Acts were approved by
  Parliament, it is unnecessary to refer to or
  explain those clauses of the Bill that
  essentially reiterate the provisions of the
  repealed Acts

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OBJECTS

• Increase confidence in the SA financial markets
  by
• requiring that securities services are provided
  in a fair, efficient and transparent manner
• contributing to the maintenance of a stable
  financial market environment

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OBJECTS

• Promote protection of regulated persons and
  clients
• Reduce systemic risk
• Promote international competitiveness of
  securities services in the RSA

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APPLICATION

• Exchange and authorised users (members)
• CSD and participants
• Clearing house
• Person trading unlisted securities
• Issuers of securities
• Clients of authorised users and participants
• Market abuse - insider trading and market
  manipulation

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PROHIBITIONS

• Exchange needs to be licensed Renew
• CSD needs to be licensed Renew
• Clearing house needs to be licensed Renew
• Authorised user needs to be authorised by the
  exchange i.t.o. exchange rules
• Participant must be accepted by CSD
• Business of trading listed andunlisted
  securities - must complywith Bill

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PROHIBITIONS

• Authorised user must comply with exchange rules
  to manage securities
• Management of investments by non-authorised users
  is regulated by the Financial Advisory and
  Intermediary Services (FAIS) Act

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STRUCTURE

• The Bill confers the status of a SRO on exchanges
  and CSDs
• The Bill is structured in 9 chapters
• Emphasis is placed on significant legislative
  changes and new principles

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CHAPTER 1PRELIMINARY PROVISIONS

• Objects and application of Bill and prohibited
  activities
• Concepts common to the whole Bill are defined
• Following definitions warrant special attention

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DEFINITION OF EXCHANGE

• 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 forsecurities
  constitutes atransaction

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DEFINITION OF SECURITIES

• Definitions of securities and financial
  instruments in the SECA and FMCA respectively,
  have been consolidated into one definition of
  securities
• The definition excludes money market instruments
  (except for purposes of Chapter 4)

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DEFINITION OF SECURITIES

• The Registrar may declare a security and
• may also declare a security included in the
  definition of securities not to be a security

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DEFINITION OF REGULATED PERSON

• A SRO or any other person who provides securities
  services

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DEFINITION OF SECURITIES SERVICES

• Services provided in respect of
• Buying and selling of securities
• Custody and administration of securities
• Management of listed securities by an authorised
  user
• Clearing settlement oftransactions in listed
  securities

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CHAPTER 2 REGULATION SUPERVISION OF SECURITIES
SERVICES

• Functions of the Registrar/Deputy
  Registrar of Securities Services
• - In performing those functions, the
  Registrar must have regard to a number of
  issues

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CHAPTER 2 REGULATION SUPERVISION OF SECURITIES
SERVICES

• Financial Markets Advisory Board
• - May on its own initiative, and must, at the
  request of the Min. or Registrar, investigate and
  report or advise on matters re regulated persons
  or the provision of securities services

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CHAPTER 3 EXCHANGES

• Licensing
• Any person may apply for an exchange licence, not
  only an association
• Exchanges are subject to the same basic
  requirements
• However, the registrar may determine to what
  extent an applicant must comply with those
  requirements
• Provision is not made for different tiers
  of markets, each with its own separate set of
  requirements

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CHAPTER 3 EXCHANGES

• Applicant must have insurance, a guarantee or
  compensation fund orother warranty to enable it
  to provide compensation to clients of
  authorised users

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FUNCTIONS OF AN EXCHANGE

• Registrar may assume responsibility for certain
  exchange functions
• The provisions on the listing of securities have
  become more onerous, e.g. the listing
  requirements are binding not only on an issuer
  and an authorised user, but also on their
  directors, officers, employeesand agents
• Bill provides for the closure of a board

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RULES OF THE EXCHANGE

• Contrary to current requirements, the Bill
  requires exchanges to make rules for
• Approval of a nominee of an authorised user
• Settlement of disputes between authorised users
  and between them and their clients
• Manner in which complaintsagainst an authorised
  user must be investigated

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RULES OF THE EXCHANGE

• To provide for the supervision by an exchange of
  compliance with the duties imposed on it and its
  authorised users by the Financial Intelligence
  Centre Act, 2001.

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OFF-MARKET TRANSACTIONS INLISTED SECURITIES

• This is allowed between financial institutions,
  on condition that they transact with each other
  as principals. Financial institution is defined
  for this purpose.

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REPORTING OF OFF-MARKET TRANSACTIONS IN LISTED
SECURITIES

• Must be reported to the Registrar
• Registrar must disclose the information to the
  exchange on which the securities are listed
• Registrar must also disclose the information to
  the public, unless the Registrar is satisfied
  that suchdisclosure will be contrary to
  theobjects of the Bill

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TRADING OF UNLISTED SECURITIES

• It is not required for people who carry on the
  business of buying selling unlisted securities
  to be approved or licensed.
• However, the Registrar may prohibit a person from
  carrying on such business, or may impose or
  prescribe conditions in respectof such business

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UNDESIRABLE ADVERTISING AND CANVASSING RELATING
TO SECURITIES

• 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

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CHAPTER 4 CUSTODY ADMINISTRATION OF SECURITIES

• Licensing of a CSD
• CSDs will not be registered in future, but will
  be licensed and its licences will be renewed
  annually
• Acceptance of participants
• To prevent unnecessary duplication, it will no
  longer be a requirement for the registrar to
  approve a participant of a CSD as a
  depositary institution before the CSD may
  accept that institution as a participant

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CHAPTER 4 CUSTODY ADMINISTRATION OF SECURITIES

• Approval of nominees
• The Bill provides for the approval of nominees
  that act as the registered holders of securities
  on behalf of other persons
• A nominee not approved In terms ofexchange/CSD
  rules, must be approvedby the Registrar

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CHAPTER 4 CUSTODY ADMINISTRATION OF SECURITIES

• Uncertificated securities
• - The Bill enables the conversion of all types
  of certificated securities (not only equity
  securities) to uncertificated securities, as well
  as the issuing of uncertificated securities

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CHAPTER 5 GENERAL PROVISIONS APPLICABLE TO SROs

• SRO is defined as an exchange or a CSD
• Renewal of licences
• Licence of CSD needs to be renewed annually in
  line with the approach applicable to exchanges

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DEMUTUALISATIONOF SROs

• The Bill provides for the demutualisation of SROs
  and the amalgamation of two or more exchanges or
  two or more CSDs the Registrar must prescribe
  conditions
• Most of the members of the World Federation of
  Exchanges are in the process of
  demutualisation

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APPOINTMENT OF MEMBERS OF CONTROLLING BODY OF SRO

• Duty of care and skill owed by directors and
  executive officers to SRO
• No person who does not qualify ito the SSB, may
  be appointed as a member of the controlling
  body of a SRO

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APPOINTMENT OF MEMBERS OF CONTROLLING BODY OF SRO

• SRO must within 14 days of the appointment of a
  new member to its controlling body, inform the
  Registrar and furnish the Registrar with the
  required information
• The Registrar may under certain circumstances
  instruct the SRO to remove that member from its
  controlling body

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LIMITATION ON CONTROL IN SROs

• The Registrars approval is required for the
  acquisition of shares in a SRO (company or close
  corporation)
• if the aggregate nominal value of those acquired
  shares will amount to more than 15 of the total
  nominal value of all the issued shares of the SRO
• If that person holds shares which entitle him to
  exercise more than 15 of the voting
  rights attached to the issued shares

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LIMITATION ON CONTROL IN SROs

• If that person has the power to determine the
  appointment of more than 15 of the directors of
  the SRO
• Purpose to prevent disreputable people from
  controlling a SRO and thereby introducing
  systemic risks into our securities markets

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AMENDMENT OF RULES

• A SRO will have to provide the Registrar with
  explanations and reasons for proposed rule
  amendments
• The period for objections has been reduced from
  30 to 14 days to expedite the approval of rule
  amendments

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CHAPTER 6CLEARING HOUSE

• Clearing houses need to be licensed (annually
  renewed) if this function is not performed
  in-house by an exchange
• Currently the FMCA provides for the recognition
  of a clearing house
• Amalgamation or transfer of clearing house two
  or more clearing houses may amalgamate or merge
  with one another or with any SRO

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CHAPTER 7CODE OF CONDUCT

• The Bill requires the Registrar to prescribe a
  code of conduct
• The Bill prescribes the basic principles for the
  Code
• The Code is binding on authorised users, their
  officers, employees and clients

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CHAPTER 8MARKET ABUSE

• Insider trading can now be committed by any
  person.
• Person defined to include a trust.

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MARKET ABUSE

• A sub-section has been allocated for each
  prohibition together with the defences that
  relate to the specific prohibition.

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MARKET ABUSE

• The defence that an insider would have acted in
  the same manner even without the inside
  information has been removed.

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MARKET ABUSE

• New defence introduced namely the insider only
  became an insider after he/she had given the
  instruction to deal to an authorised user, and
  the instruction was not changed in any manner
  after he/she became an insider.

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MARKET ABUSE

• The defence that an insider was acting on
  specific instructions from a client is now
  available only to authorised users.

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MARKET ABUSE

• Manipulative, improper, false or deceptive
  practices of trading
• The wording is now more clear
• We have added certain examples of what would
  constitute or what would be deemed to be market
  manipulation

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MARKET ABUSE

• False, misleading or deceptive statements,
  promises and forecasts
• - We have expanded on this provision and
  prohibited the publication iro listed securities
  as well as iro the past or future performance of
  a public company of any statement, promise and
  forecast by any person, which is false,
  misleading or deceptive

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MARKET ABUSE

• As in the case of insider trading, these abuses
  will henceforth fall under the supervision of the
  Directorate of Market Abuse, formerly known as
  the Insider Trading Directorate.
• The penalties for these prohibited practices as
  well as for insider trading have been
  substantially increased, i.e. a fine not
  exceeding R50m or imprisonment for a period
  not exceeding 10 years, or both a fine
  and imprisonment.

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MARKET ABUSE

• Minister to appoint Chairperson of the
  Directorate of Market Abuse.
• The Directorate of Market Abuse must report
  quarterly to the Minister on its activities.

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MARKET ABUSE

• A member of the Directorate of Market Abuse shall
  be appointed for a period not exceeding three
  years subject to reappointment at the discretion
  of the Minister

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MARKET ABUSE

• The following stakeholders may now nominate
  members to the Directorate of Market Abuse
• The Fund Management industry
• Shareholders Association
• South African Reserve Bank

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CHAPTER 9GENERAL PROVISIONS

• Auditing
• Powers of the Registrar and court

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ESTABLISHMENT OF ENFORCEMENT COMMITTEE

• Establishment, composition, functions,
  proceedings, etc. of an independent EC
• With the power to impose an administrative
  penalty on, or to require the payment of
  compensation (only iro insider trading) by a
  person who contravenes, or fails to comply with
  the Bill
• It is expected that the EC will give
  the FSB more effective and expeditious
  enforcement powers

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ESTABLISHMENT OF ENFORCEMENT COMMITTEE

• Registrar or Directorate can refer a matter to
  the EC
• Must submit an annual report to FSB
• Each matter referred to the EC will be assigned
  to a panel (chair not less than 2 other
  members)
• Proceedings of panel are open to public

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ESTABLISHMENT OF ENFORCEMENT COMMITTEE

• Referral of matter must be accompanied by an
  inspection report or report on investigation done
  under Chapter 8
• Panel may summon a person to appear before the
  panel
• A legal representative may assist such person
• If respondent admits contravention, Panel may
  impose penalty

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ESTABLISHMENT OF ENFORCEMENT COMMITTEE

• If respondent did not admit contravention, EC may
  deliver to respondent a notice contained the
  details in clause 104
• Respondent may appeal against the penalty
• If the respondent fails to comply with the
  requirements of the notice, the registrar may
  file with any competent court a statement, which
  will have all the effects of a civil
  judgment lawfully given in that court in
  favour of the FSB

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ESTABLISHMENT OF ENFORCEMENT COMMITTEE

• If panel is satisfied that respondent has
  contravened section 73 (insider trading), the
  panel may require the respondent to pay to the
  FSB a compensatory amount
• However, no civil proceedings iro the same set of
  facts may be instituted under section 77 against
  a respondent if the respondent has paid the
  compensatory amount
• Registrar must make public the
  decision of the EC

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CHAPTER 9GENERAL PROVISIONS

• Winding-up, judicial management and curatorship
• Right of appeal
• Offences and penalties
• Regulations

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SCHEDULE - AMENDMENTS TO THE FSB ACT, COMPANIES
ACT AND INSOLVENCY ACT

• The amendments to these Acts are of a
  consequential nature

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CONCLUSION

• SSB will bring SAs securities legislation on a
  par with best international practice
• SSB takes cognisance of important developments
  within the local and foreign securities markets
  industry
• SSB will further promote confidence and the
  maintenance of a stableSA securities
  marketenvironment

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CONCLUSION

• The SSB strives to maintain a healthy balance
  between investor protection and the enhancement
  of international competitiveness of securities
  services in the Republic

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ANY QUESTIONS?