Tuesday, May 17, 2005

The Securities Services Act 36 of 2004 ("the SSA") came into effect on 1 February 2005. The SSA repeals a number of important statutes such as the Stock Exchanges Control Act, 1985 ("the SECA"), the Financial Markets Control Act, 1989 ("the FMCA"), the Custody and Administration of Securities Act, 1992 ("the CASA") and the Insider Trading Act, 1998 ("the ITA") and usefully consolidates them into one Act. It is, however, not merely a consolidation of legislation which it repeals – it also amends these Acts and at the same time, introduces new and more effective provisions into our law.

The SSA also amends section 91A of the Companies Act, 1973 ("the Companies Act"); section 1 of the Financial Services Board Act, 1990 and section 35A of the Insolvency Act, 1936. These amendments are merely consequential, arising from references in these Acts to the CASA, the SECA and the FMCA, which are now repealed by the SSA. However, some confusion has now been created because certain other sections of the Companies Act (such as sections 134, 135 and 140A) as well as the Insolvency Act, 1936 (such as sections 35B and 83) still contain references to the SECA and the FMCA. The same applies to several other pieces of legislation, such as the Banks Act, 1990, the Financial Intelligence Centre Act, 2001, the Collective Investment Schemes Control Act, 2002 ("the CISCA") and the Income Tax Act, 1962, to name a few. These Acts ought to have been amended as well.

Objects of the SSA

One of the objects of the SSA is to enhance confidence in the South African financial markets. The SSA also aims to promote the protection of regulated persons (being exchanges, central securities depositories ("CSD") or any other persons who provide securities services) and clients. In addition, the SSA purports to reduce systemic risk and to promote the international competitiveness of securities services in South Africa (section 2 of the SSA). The SSA applies to regulated persons, issuers of securities, clients, market abuse and incidental matters thereto. It does not apply to collective investment schemes in terms of the CISCA or to the activities regulated by the Financial Advisory and Intermediary Services Act, 2002.


"Securities services" is defined in the SSA as services provided in respect of the buying and selling of securities, the custody and administration of securities, the management of securities by an authorised user (that is, a person authorised by an exchange in terms of the exchange rules to perform the securities services as the exchange rules permit) and the clearing and settlement of transactions in listed securities (section 1 of the SSA).

"Securities" comprise:

· shares, stocks and depository receipts in public companies and other equivalent equities (other than shares in a share block company as defined in the Share Blocks Control Act, 1980);
· notes;
· derivative instruments;
· bonds;
· debentures;
· participatory interests in a collective investment scheme as defined in the CISCA and units or any other form of participation in a foreign collective investment scheme approved by the Registrar of Collective Investment Schemes in terms of the CISCA;
· units or any other form of participation in a collective investment scheme licensed or registered in a foreign country;
· instruments based on an index;
· the securities contemplated in all of the above which are listed on an external exchange;
· an instrument similar to one or more of the securities listed above which is declared by the Registrar or Deputy Registrar of Securities Services ("the Registrar") by notice in the Government Gazette to be a "security" for purposes of the SSA; and
· rights in the securities listed above.

A "security" excludes a money market instrument (except for the purposes of Chapter IV of the SSA dealing with the custody and administration of securities) and a security listed above which is specified by the Registrar by notice in the Government Gazette.

Amendments to the SECA and the FMCA

The SSA widens the scope of persons who qualify to apply for a stock exchange licence or financial market licence. In terms of the SECA and the FMCA, only an association of not less than ten persons was able to apply for a stock exchange licence or a financial market licence. In terms of the SSA "a person", and not only an association of persons, may now apply for an "exchange licence" (section 8 of the SSA). An "exchange" is defined in section 1 of the SSA as 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 contract of purchase and sale of securities.

The SECA regulated the buying and selling of listed securities, but did not regulate the buying and selling of unlisted securities. The SSA now places a restriction on the buying and selling also of unlisted securities. In terms of section 20 of the SSA, the Registrar may prohibit a person from carrying on the business of buying and selling unlisted securities if the business is carried on in a way that defeats an object of the SSA. The Registrar may also impose or prescribe conditions in respect of such a business.

An exchange and a CSD have been given the status of a "self-regulatory organisation" by the SSA. Chapter V of the SSA sets out the general provisions which apply to self-regulatory organisations. According to section 55 of the SSA, every member of the controlling body of a self-regulatory organisation owes a fiduciary duty as well as a duty of care and skill to the self-regulatory organisation. The SSA places a limitation on the control of a self-regulatory organisation and on the shareholding and interest permitted in a self-regulatory organisation.

A clearing house, which may be appointed by an exchange to provide clearing house services or settlement services, or both, to an exchange is now required to obtain a licence to provide these services to an exchange (section 64 of the SSA).

The SSA confers wide powers on the Registrar. If the Registrar, for instance, considers it necessary in order to achieve the objects of the SSA, he may assume responsibility for functions which have been assigned to an exchange (section 11 of the SSA). Moreover, the SSA requires the Registrar to prescribe a code of conduct for authorised users, their officers, employees and clients, which has been prescribed by the Registrar in terms of Notice 20 of 2005. The SSA prescribes the principles on which the code must be based. One of the principles is that the code must be based on the fundamental principle that an authorised user must act honestly and fairly, with due skill, care and diligence and in the interests of clients (section 71 of the SSA).

Amendments to the CASA

A CSD is required to have rules which are consistent with the SSA. The rules are required to deal with particular issues set out in the SSA (section 39). These issues are in some respects more stringent than those under CASA. For instance, a new issue which the rules are required to deal with, in terms of section 39(2)(k), is that they must provide for the duty of a client to disclose to a participant (being a person authorized by the Registrar to hold and administer securities or an interest in securities, which has been accepted by a CSD as a participant in terms of the rules of the CSD), and the duty of a participant to disclose to a CSD, information about a beneficial, limited or other interest in securities deposited by a client with a participant or by a participant with a CSD, as the case may be, and the manner, form and frequency of the disclosure.

Furthermore, the rules in the SSA bind a much wider group of persons than in the CASA. In terms of the CASA, the rules were binding on all participants and on every person utilising the services of a participant. The rules in terms of the SSA bind not only the participants, but also the CSD, an issuer of securities deposited with the CSD, and their officers and employees and clients.

The SSA introduces a new requirement into our law regarding the approval of a nominee. A "nominee" is defined as a person who acts as the registered holder of securities or who holds an interest in securities on behalf of other persons. Section 36 of the SSA provides that a nominee of an authorised user must be approved by the exchange in terms of exchange rules, and a nominee of a participant or any other nominee who has an account with a participant, must be approved by the CSD in terms of the depository rules. A nominee that is not approved in this manner is required to be approved by the Registrar and is furthermore required to comply with the requirements which the Registrar may prescribe for nominees before it may function as a nominee. In terms of sections 18(1)(l) and 39(2)(q) of the SSA the exchange rules and depository rules, respectively, are required to provide for the approval by the exchange or CSD, respectively, of a nominee of an authorised user or a participant, as the case may be, or any other nominee who has an account with a participant. In terms of section 61 of the SSA the exchange rules and depository rules may prescribe the penalties that may be imposed for a contravention thereof or a failure to comply therewith, such as a reprimand, censure, a fine not exceeding R5 million, the suspension or cancellation of the right to be an authorised user or participant, a restriction on the manner in which an authorised user or participant may conduct business or utilise an officer, employee or agent, or the payment of compensation to clients prejudiced by the contravention or failure by the authorised user or participant to comply with the rules.

Section 37 of the SSA enables the conversion of certificated securities to uncertificated securities. The section provides that certificated securities may be converted to uncertificated securities despite any contrary provision in any other law, the common law, an agreement, the articles of association of an issuer of securities, a prospectus or any other condition applicable to the issuing of securities. Section 38 of the SSA permits the issuing of uncertificated securities.

Market Abuse

The SSA introduces detailed market abuse rules into our law, which are contained in chapter VIII of the Act. According to the leading English academic Paul L. Davies (in Gower and Davies’ Principles of Modern Company Law), one reason why it has become necessary to regulate market abuse by means of detailed rules, is not because of a deterioration in standards of market conduct, but because of the growth of shareholder and investor power as financial markets have come to play a more significant role in national and international business. By regulating market abuse, investors are protected against opportunistic behaviour by corporate and market insiders and this would have the effect of making markets more attractive places to carry on business.

Four offences constitute "market abuse" in terms of the SSA. These are insider trading, the publication of inside information, engaging in a prohibited trading practice, and the making or publishing false, misleading or deceptive statements, promises or forecasts.

Amendments to the ITA

Regarding insider trading, for the most part, subject to a few minor amendments, the SSA reproduces the contents of the ITA. But one significant amendment made by the SSA is that it widens the scope of who constitutes an "insider". In terms of the ITA an "insider" was defined as an "individual who has inside information", but under the SSA, an insider is defined as "a person who has inside information". A "person" would include an individual as well as a juristic person. The SSA goes further in that it defines a "person" as including a partnership and any trust for the purposes of the Market Abuse prohibitions.

The Insider Trading Directorate established by the ITA survives the repeal of the ITA, except it is now known as the Directorate of Market Abuse.

Market and price manipulation

The prohibition of market and price manipulation is not an entirely new concept in our law as the SECA and the FMCA prohibited these practices. However, the SSA goes much further than those Acts in prohibiting market and price manipulation, even to the extent that certain acts are deemed to constitute a manipulative practice.

Section 75(1) of the SSA prohibits a person from using or knowingly participating, directly or indirectly, for his own account or on behalf of another person, in the use of any manipulative, improper, false or deceptive practice of trading in a listed security on a regulated market, which practice creates or might create a false or deceptive appearance of the trading activity in connection with that security or an artificial price for that security. Placing an order to buy or sell listed securities which to a person’s knowledge will, if executed, have such an effect is also prohibited.

Some of the practices deemed to be manipulative, improper, false or deceptive trading practices are:

· approving or entering on the market an order to buy or sell a listed security which involves no change in the beneficial ownership of that security;
· approving or entering on the market orders to buy a listed security at successively higher prices or orders to sell a listed security at successively lower prices for the purpose of unduly or improperly influencing the market price of such security;
· engaging in any act, practice or course of business in respect of dealing in listed securities which is deceptive or which is likely to have such an effect;
· maintaining at a level that is artificial the price for dealing in securities listed on a regulated market; and
· effecting or assisting in effecting a market corner. A market corner is an arrangement, agreement, commitment or understanding involving the purchasing, selling or issuing of listed securities by which a person or group of persons acting in concert acquires direct or indirect beneficial ownership of listed securities, or exercises control of listed securities, or is able to influence the price of listed securities, and where the effect of the arrangement, agreement, commitment or understanding is, or is likely to be, that the trading price of the securities is, or is likely to be, abnormally influenced or arbitrarily dictated by such person or group of persons in that the trading price of the securities deviates or is likely to deviate materially from the trading price which would otherwise likely have been reflected on the market.

These deeming provisions are subject to the proviso that the use of price-stabilising mechanisms regulated in terms of the rules or listing requirements of an exchange would not constitute a prohibited trading practice. Chapter 5 of the Listings Requirements of the JSE Securities Exchange, South Africa regulates price stabilisation mechanisms as a defence against the offence of manipulative, false or improper trading practices.

The SSA also makes it an offence to make or publish, directly or indirectly, in respect of listed securities or in respect of the past or future performance of a public company, any statement, promise or forecast which is, at the time and in the light of the circumstances in which it is made, false or misleading or deceptive in respect of any material fact, or omission of any material fact, which the person knows, or ought reasonably to know, is false, misleading or deceptive (section 76 of the SSA). The SECA did not go this far as it made it an offence to make a statement, promise or forecast or engage in any other misleading action but only with the aim of inducing any other person to buy or sell listed securities, while the FMCA prohibited the making of a false or misleading statement which would be likely to induce another person to deal in financial instruments or would have the effect of inflating, depressing or maintaining the price for dealing in financial instruments. The SSA, on the other hand, simply makes it an offence to make a false, misleading or deceptive statement, promise or forecast, irrespective of the motive for, or effect of, making such a statement.

The penalty for committing an offence under the ITA has been drastically increased by the SSA. Previously, an individual convicted of the offence of insider trading was liable on conviction to a fine not exceeding R2 million or to imprisonment not exceeding 10 years or to both such fine and imprisonment. Under the SSA, the fine for committing an offence of insider trading may be a maximum of R50 million and/or imprisonment for a maximum period of 10 years.

The penalties for engaging in market and price manipulation have also been significantly increased in the SSA. Under the SECA if a person engaged in price or market manipulation he would be liable on conviction to a fine or imprisonment up to a period of 5 years, and under the FMCA, to both a fine and imprisonment up to a period of 5 years. Under the SSA, for a conviction of an equivalent offence, a person is now liable to a fine not exceeding R50 million and/or to imprisonment not exceeding 10 years. The SSA further establishes an enforcement committee which is empowered to impose an administrative penalty, to be paid to the Financial Services Board established by the Financial Services Board Act, 1990, on a person who has contravened the SSA or who has failed to comply with the SSA. In the case of an offence under the Insider Trading provisions, the enforcement committee may require the wrongdoer to pay a compensatory amount to the Financial Services Board.


The SSA consolidates existing legislation but also amends and introduces many new provisions into our law. There are, however, some consequential amendments to legislation which the SSA would impact on that have not been properly considered. It remains to be seen whether the new provisions introduced into our law by the SSA will indeed fulfil the objects of the SSA, namely to enhance confidence in the South African financial markets, protect regulated persons and clients, reduce systemic risk and promote the international competitiveness of securities services in South Africa, but they certainly are a step in the right direction.