INTRODUCTION
Recent decades have witnessed increased globalization of financial markets.Footnote 1 More particularly, the cross-border establishment of financial players has culminated in “markets without a state”.Footnote 2 The interdependence and transnationalization of financial structures have been effected through various vehicles but typically via myriad trading blocs and international economic integration arrangements. Such interconnectedness has, among other things, empowered market players to maximize the regulatory benefits provided by foreign jurisdictions and platforms. More beneficially it has enabled “parties that feel overburdened by their government's system of regulation to reconfigure their business to slide into the jurisdiction of a more advantageous supplier of regulatory services”.Footnote 3 Nonetheless, in a setting where there are global linkages comes the need to craft entry and exit mechanisms for foreign players. It also means that regulatory and enforcement mechanisms are usually put to the test and remodelled by changes in the net regulatory problems that emerge from jurisdictional competition for financial services.Footnote 4 Failure to standardize regulations results in regulatory competition, which can be exacerbated, especially in an environment where there are information asymmetries between the various interconnected jurisdictions. Such an environment then engenders, inter alia, systemic vulnerabilities and negative spillovers.Footnote 5 Worse still, regulatory competition might result in regulatory arbitrage, where jurisdictions that introduce tougher regulation ultimately suffer “first mover disadvantage” as financial market players move elsewhere.Footnote 6 It is these perceived risks that detractors have cited as outweighing the touted benefits of economic blocs.Footnote 7
To remedy that, there have been increased calls for the harmonization of financial regulation, it being argued that aligning regulatory standards across members trading in financial services forms the basis of market integration.Footnote 8 Furthermore, a shared goal of implementing a harmonized securities regulatory architecture is given impetus by the recognition that lack of co-ordination can result in policy and regulatory leakages, setbacks that are likely to hinder the attainment of efforts aimed at building consumer and investor confidence.Footnote 9 Sadly, however, endeavours towards regulatory harmonization have been left mostly to market forcesFootnote 10 and further, “[w]ith few exceptions, there is little theoretical discussion of institutionalized international cooperation for harmonizing securities regulation regimes. The bulk of the literature on these aspects invariably revolves around the practical and administrative aspects of regulatory cooperation. While these aspects are important for their own sake, they leave unanswered the underlying issues of substantive regulatory diversity.”Footnote 11
That scenario typically results in a messy and counter-productive regulatory interaction stemming from policy misalignment between the countries in the coalition. The recent financial crisis has provided crucial lessons in this regard; for instance, it has been shown that “[h]armonization … can increase control by a group of countries over another's regulatory regime and thus reduce the vulnerabilities that independencies create. Further, as the handling of the crisis demonstrated, unilateral actions by one country can have negative spillover effects on others, which coordinated action can avoid.”Footnote 12 Such is the importance of regulatory convergence. Nonetheless, as a precursor or sine qua non to the accomplishment of that mission, there must be an appreciation of the laws as they obtain in the different states.Footnote 13
To kick-start efforts to eliminate vulnerabilities and attain coherence in the financial regulatory framework within the BRICS bloc,Footnote 14 this article attempts to identify and understand the commonalities and practical differences in approaches towards the regulation of insider dealingFootnote 15 between two of the main trading partners, China and South Africa. A comparison of this nature is potentially laudable for a number of practical reasons. First, it has been shown that a comparison of jurisdictions presents or can have transformative effects, the net effect of which is likely to be an accelerated pace of financial globalization, which in turn results in increased capital flows, expansion of financial intermediaries and increased foreign listings.Footnote 16 Likewise, a comparison of this nature lays the foundation upon which “recognition of ways in which our own framework is deficient or flawed”Footnote 17 can be accomplished. It can also act as a guide or model for legal policy reform activities,Footnote 18 and it is hoped that it will result in the equal treatment of players within BRICS. The choice of South African and Chinese regimes for this purpose is premised on purely pragmatic considerations that combine to make an interesting area for an examination of the scope and application of insider trading laws. These factors include the fact that, even though it is the smallest economy in the BRICS grouping,Footnote 19 South Africa nonetheless occupies a strategic position on the continent.Footnote 20 With an effective stock exchange and a robust regulatory environment for the financial services sector, South Africa is better placed to attract foreign investors who eventually expand their investment activities into the rest of the continent. It is no wonder therefore that South Africa is regarded as the gateway to the rest of the African continent.Footnote 21 Likewise, being South Africa'sFootnote 22 as well as Africa's major export and import market and largest trading partner,Footnote 23 China has had an immense impact on the continent. So deeply-rooted and dominant are China's influence and intentions in Africa that it has managed to craft a Sino-African policy;Footnote 24 on that basis it is only proper that China be subjected to this discussion. Equally important is the fact that China and South Africa have increasingly embarked on a mission to expand their strategic partnership in the financial markets.Footnote 25
THE INSIDER TRADING REGULATORY FRAMEWORK
Although their institutional and regulatory regimes for regulating and supervising securities are fairly young, the approaches adopted by China and South Africa to create robust, liquid and well-regulated securities markets have evolved rapidly over the years.
China
Within China, it has long been recognized that “insider trading has hurt the interests of retail investors for decades”Footnote 26 and there have been numerous demands that “regulators must address the issue to allow the country's capital market to flourish”.Footnote 27 To its credit, and maybe having learned from the experience of more mature markets and regulators, China responded rapidly to the problem by launching its prohibition on insider trading at almost the same time that the government founded the Chinese stock market.Footnote 28 In essence therefore, the coming into effect of the insider trading regime is regarded as a culmination of the country's economic development.Footnote 29 Nonetheless, that regulatory regime is essentially transplanted from more mature markets, mainly that of the USA.Footnote 30 Nevertheless, a peculiar characteristic of the Chinese regime for the proscription of insider trading is the fact that there is no distinct piece of legislation governing the prohibition.Footnote 31 Of the existing piecemeal rules, noteworthy proclamations include the Provisional Measures for Regulating Securities Companies (promulgated in October 1990 and issued by the People's Bank of China) article 17 of which states that “securities companies are prohibited from engaging in market manipulation, insider trading, and other types of misconduct that yield profits by unlawfully affecting the market”.Footnote 32 Likewise, the China Securities Regulatory Commission (CSRC)Footnote 33 promulgated Provisional Measures for the Prohibition of Securities Fraud in September 1993, which focused on proscribing typical fraudulent securities activities, including insider trading. However, with the current Securities Law of the People's Republic of China (Securities Law),Footnote 34 the country has not only come up with a more comprehensive regulatory structure but has also sought to generate uniformity in securities market regulation.Footnote 35 Article 75 of the Securities Law outlines unpublished information relating to a business that would be deemed to constitute inside information.Footnote 36 Article 74 of the Securities Law gives an account of people who may be considered to be insiders and who cannot, before information is made public, disclose, purchase or sell securities of the relevant company.Footnote 37 It also outlaws making suggestions to other persons (“tipping”) to trade in those securities. Under article 76 of the Securities Law, those individuals include anyone who might have obtained such inside information illegally. Equally notable is the fact that the definition of an insider under article 74 captures not only natural persons but also “other persons” such as juristic persons and other business entities.Footnote 38 Loss to any investor as a result of the contravention of that prohibition results in liability.
An array of sanctions is provided as part of the regulator's enforcement tool-kit. The CSRC has a mandate to investigate and penalize violations relating to securities market regulations and laws. Article 180 of the Securities Law provides that the regulator is empowered to act through its Administrative Sanctions Committee to enter premises, copy and seal records, and interview the suspect's personnel, among other things. It can also issue administrative orders, such as to freeze assets until investigations are complete.
For the administrative sanctions option, negligence is sufficient for insider trading to be penalized. Where the illegal income is less than RMB 30,000 (approximately USD 4,400), an administrative penalty of between RMB 30,000 and RMB 600,000 is provided. More egregious cases are subjected to criminal penalties under the Criminal LawFootnote 39 and conviction may result in imprisonment of up to ten years and a fine of up to five times the illegal income.Footnote 40 To sustain a conviction, it must be proved that the defendant appreciates that what they possess is material inside information that is not in the public domain. To that end, recklessness or actual intention is a requirement for insider trading liability under article 14 of the Criminal Law. Furthermore, according to article 73 of the Securities Law, the subjective test requires proof that the defendant knew of that fact, while the objective test demands establishment of the fact that the offender ought to have reasonably known that they had material non-public information. Much as the criminal liability option forms part of the broader enforcement option, the CSRC has no power to prosecute insider trading. Instead, it refers all suitable cases to the police and prosecutors for investigation and prosecution. The fact that a violation is being so referred does not extinguish the regulator's right to deal with the matter administratively.
Also available are civil or private remedies under articles 76, 77 and 79 of the Securities Law. These allow for compensation for anyone who has been prejudiced or suffered loss arising from insider trading, market manipulation or fraud. More specifically, article 76 provides that, “[w]here any insider trading incurs any loss to investors, the actor shall be subject to the liabilities of compensation according to law”. These provisions simply build on earlier pronouncements that initially brought to the fore the existence of civil enforcement. These include the Notice on the Issues of the Trial of Civil Damages Cases Arising from Misrepresentations in the Securities Markets of 2002 as well as the Provisions Governing the Trial of Civil Damages Cases Arising from Misrepresentation in the Securities Markets of 2003.Footnote 41 Much as that option exists, civil litigation is still absent and, as such, the enforcement of insider trading is characterized by a heavy dependency on the CSRC's administrative and criminal sanctions.Footnote 42
Supplementing the traditional prohibition are rules enacted by the CSRC through which executives and large shareholders are banned from trading ten days before earnings preannouncementsFootnote 43 and 30 days before a formal financial report is issued;Footnote 44 this is known as the trading ban regulation. In line with this, the Hong Kong Stock Exchange has gone further and lengthened the period of the board of directors’ trading ban from 30 to 60 days before the announcement of year-end earnings. This has been said to be more effective than traditional enforcement measures in that, while the traditional measures entail longer years of investigation that often yield little success, the trading ban regulation has been said to be effective in constraining insider trading by thwarting trading prospects during an informational advantage period, within which insiders are most likely to trade on the basis of non-public information.Footnote 45
Enforcement
The CSRC is the primary securities regulatory authority under the State Council. As stated earlier, much as it has made great strides in setting up a regulatory framework aimed at creating a cleaner securities market:Footnote 46
“[In] China's securities market, there are many serious problems that need to be addressed. The problem of insider trading is an excellent example of the difficulties that Chinese regulators must confront … Although the Chinese securities law has made a quantum leap in the area of insider trading, China's efforts to combat insider trading are far from satisfying. As discussed below, there have been a very limited number of reported insider trading cases so far, contrasting strikingly with the perceived prevalence of insider trading activities in the market.”Footnote 47
To put that critical observation in context, it is important to outline the enforcement trend undertaken by the CSRC.
As Chinese financial markets have grown, so has the number of insider trading cases. More particularly, there has been a steady growth in incidences of the offence, with global calls for the heightened enforcement of prohibitions of insider trading playing a major role in this shift. Much as that is so, enforcement leaves much to be desired and enforcement statistics demonstrate an unconvincing trend. More specifically,
“only a limited number of insider trading cases have been processed, and the processing cycle is long … From the perspective of regulatory and judicial practices, the CSRC only enforced penalties in 12 insider trading cases from 1990 to 2006 … From 2008 to 2011, it investigated 153 insider trading cases and imposed administrative penalties in only 31 cases, moving 39 cases to the judiciary system. From 2007 to 2011, the courts around the country finished only 22 cases related to insider trading and the administrative penalties and criminal fines in these cases were too light to have any deterrent effects …”Footnote 48
In terms of the criminal enforcement of insider trading law, few cases investigated by the regulator have been subjected to prosecution. For instance, between 2008 and 2012, 1,458 cases were investigated by the CSRC but only 125 of those were referred to the Economic Crime Investigation Division and these were not exclusively insider trading cases but also other types of case, such as cases of market manipulation or undue information disclosure.Footnote 49 It is this limited number of cases that have earned China much criticism and growing calls for the use of criminal sanctions to boost deterrence.Footnote 50 Nonetheless it is worth pointing out that, despite the low numbers, it is fair to say that China has attained significant convictions that have underscored its intention to curb insider trading.Footnote 51
Despite these gloomy findings, a notable achievement since the inception of the prohibition of insider trading relates to a period from 2011 that saw the investigation of over 40 insider trading cases, the imposition of a total of ¥335 million (approximately USD 50 million) in fines and the debarring of eight investors. Also notable is that, before 2008, the only criminal conviction for insider trading took place in 2003.Footnote 52
South Africa
One distinction between the Chinese and South African approaches is that the South African prohibition of insider trading has a much older history. Section 70 of the Companies Act 46 of 1926 has been celebrated as South Africa's first attempt at curtailing insider trading. That provision basically required all companies to maintain a register of shares and debentures held by their directors.Footnote 53 On account of the fact that section 70 did not unequivocally prohibit insider trading, among other flaws, that statute was said to be ineffectual and was repealed by the Companies Act 61 of 1973 (the 1973 Companies Act). In contrast, section 233 of the 1973 Companies Act introduced an explicit proscription of insider tradingFootnote 54 and provided that its contravention amounted to a criminal offence, attracting a penalty of imprisonment for a period not exceeding two years or a fine not exceeding R8,000 (approximately USD 540) or both a fine and imprisonment.Footnote 55 However, the 1973 Companies Act also proved to be inadequate and therefore ineffective in combating insider trading.Footnote 56
To remedy these perceived weaknesses, the Companies Amendment Act 78 of 1989 (Companies Amendment Act) came into effect and, under section 440F, introduced an insider trading prohibition,Footnote 57 which nonetheless retained the criminal sanctions. For the first time, an offence was introduced based on knowingly (directly or indirectly) trading on the basis of unpublished price-sensitive information in respect of a security. The penalty for breaching the insider trading prohibition was increased sharply from R8,000 to a maximum of R500,000 (approximately USD 34,000), and the imprisonment term rose from two to ten years, or both a fine and imprisonment.
Owing to defects such as enforcement failures, section 440F also proved to be ineffectual.Footnote 58 This catalogue of failures gave credence to extensive criticism of the insider trading regulatory environment. For instance, in an apt summary of the enforcement process during that era, one commentator observed that, “the attempts to create liability and administer sanctions have been clumsy and have resulted in an unsystematic basis for the control of insider trading with borrowed legislation to clarify the concepts of an insider and insider information, questionable procedures to monitor, apprehend and penalize the practice, and penalties which may not be adequate deterrents in all cases”.Footnote 59
Such weaknesses led to the enactment of the Insider Trading Act in 1999. Besides introducing the Insider Trading Directorate, dedicated to considering insider trading cases, the new statute brought a new penal regime. For the first time insider trading was now a statutory civil offence for which the then Financial Services Board (FSB, now called the Financial Conduct Authority) could bring an action before the High Court. The new regime empowered the then FSB to sue for the profits made or the losses avoided through illicit transactions. In addition, the regulator could impose a penalty of three times the amount that had been made or avoided. Another radical change was the introduction of a strategy through which funds extracted through a successful action could be distributed to persons who had been prejudiced by the transaction.
South Africa's re-integration into the international global economy necessitated a review of laws governing its financial markets. Thus in 2005 the Securities Services Act 36 of 2004 (the Securities Services Act) repealed the Insider Trading Act 135 of 1998.Footnote 60 This move was associated with the introduction of the Enforcement Committee (which was empowered to impose administrative penalties), and a fine-tuning of the insider trading and other market abuse prohibitions in a bid to increase investor confidence, improve financial market efficiency and maintain a stable market environment.Footnote 61 The civil penalties regime introduced under the Insider Trading Act was retained, supported by a discretionary criminal law penalties option. Notably there was a shift towards stringent enforcement,Footnote 62 as evidenced by the substantial increase (under section 115(a) of the Securities Services Act) of the potential criminal fine from R2 million to a fine not exceeding R50 million. The objective of curbing insider trading is a joint effort between the Financial Conduct Authority's Directorate of Market Abuse and the Johannesburg Stock Exchange's Market Practices Department, especially its Surveillance Department, which is tasked with preventing and detecting market abuse activities such as insider trading.Footnote 63
The global trend towards revisiting the financial sector's regulatory framework to avert the recurrence of the debilitating effects of the 2007–09 financial crisis has mainly been reflected in the repeal of the Securities Services Act and the enactment of the Financial Markets Act 19 of 2012 (FMA). The FMA builds on the previous regime under the Securities Services Act. More particularly, in section 78 the new statute has retained the definitions of “insider” and “inside information”. Nonetheless, it is worth noting that the FMA has widened the realm of the insider trading prohibition and its penalties. More specifically, section 78(3) introduced a new offence of dealing with an insider while knowing that the person is an insider. Furthermore, it increased the maximum penalties for both primary and secondary liability. However, in a clear departure from the previous penal provisions that were built around civil sanctions, section 82(1) of the FMA states: “any person who contravenes [the insider trading prohibition] … is liable to pay an administrative sanction not exceeding - (a) the equivalent of the profit that the person, such other person or such insider, as the case may be, made or would have made if he or she had sold the securities at any stage; or the loss avoided, through such dealing; (b) an amount of up to R1 million”.
It is clear therefore that, while section 77 of the Securities Services Act empowered the judiciary to impose sanctions (at the instance of the FSB through a civil suit), that function has now been assumed by the regulator through the administrative enforcement mechanism. It is has been argued that this policy shift (from civil to administrative sanctions) was largely influenced by lessons learned from the enforcement experiences of other jurisdictions, especially the United Kingdom:
“As with South Africa before the introduction of the Financial Markets Act, the UK penalised market abuse under a civil sanctions system. However, a market cleanliness analysis concluded that the civil sanctions system was connected, not with an improvement, but with deterioration in market behaviour. The culmination of such criticism has been a reconsideration of the market abuse penalty framework and the introduction of inter alia, a more punitive enforcement agenda aimed at engendering ‘credible deterrence’. … it can be justifiably averred that the criticism of the UK's civil regime justifies the new administrative system brought about under the Financial Markets Act.”Footnote 64
Obviously, the change in strategy may also have been motivated by the need to dispose of cases expeditiously, an advantage of the administrative route. It is argued further that such administrators are better acquainted with the regulations at issue, than judges who are detached from the financial sector industry and as such may not be proficient in its provisions and customs. Likewise, the evidentiary requirements for proving fault for administrative enforcement purposes are not as stringent as with the other routes. Another advantage is that administrative remedies such as disgorgement are associated with the compensatory convenience of transmitting resources (part of the disgorged profits) to the prejudiced investor. Besides disgorgement of an offender's profits, the FSB makes use of naming and shaming as an enforcement tool.Footnote 65 The theory is that status and reputation are essential assets to an individual or firm and that losing these aspects can have repercussions that exceed the effect of the most stringent sanction that a court could impose.Footnote 66 In other words “it is not the severity of the sanction in financial terms, but the amount of public shame that it invokes, which is the most important motivator of compliance”.Footnote 67 Furthermore, such naming and shaming serves as a statement to warn the public about the shenanigans of the exposed party. By so doing, the FSB effectively communicates guidance to the public.
That should not be interpreted to mean that there is no longer recourse to the civil enforcement route. Section 84(2)(c) of the FMA empowers the FSB to institute “such proceedings” as are contemplated in chapter X and, according to section 85(1)(c)(i), the Directorate of Market Abuse has the power to “institute proceedings as are contemplated in section 84(2)(c) in the name of the board”. As such the FSB can still make use of the civil court process under section 83 to obtain relief such as interdicts or attachment orders.
Enforcement
It is therefore clear that South African legislative history and reform have mainly been spurred by the need to address shortcomings in the enforcement processes. To that end, the enforcement of securities regulations has also been subjected to constant refinement, necessitated by the need to create deeper and cleaner markets. It has been argued that an effective mechanism for understanding the efficacy of regulatory processes is look at enforcement actions at “street level” or “on the ground”.Footnote 68 This section endeavours to outline and analyse the enforcement trends in South Africa regarding various pieces of legislation mentioned above.
A salient feature of the enforcement process has been the absence of criminal prosecution for insider trading. Although stringent penalties have always been prominently pronounced in the statutes, unlike in China where there is a record (albeit meagre) of prosecutions, attaining prosecutions in South Africa has been problematic. In South Africa it is the prerogative of the Director of Public Prosecutions,Footnote 69 not the securities agency, to undertake prosecutions; however, over the years, in South Africa as in many other jurisdictions,Footnote 70 authorities have found prosecuting complex financial offences such as insider trading to be a time-consuming and difficult activity. The limits of criminal law as an enforcement tool are best summed up by Kgomo, J who states:
“Prosecutors do not always possess the necessary specialised knowledge or skills or expertise to prosecute regulatory contraventions or transgressions, which might result in active and serving private legal practitioners being approached and appointed as ex officio prosecutors of such matters. Furthermore, the stigma attached to a criminal conviction will always or often mean that industry professionals are likely to fight a relatively minor contravention tooth-and-nail.”Footnote 71
This is especially true and explains why, in South Africa, despite the proscription of insider trading as long ago as 1973 by the Companies Act, 61 of 1973, the paucity of criminal enforcement is still prominent.Footnote 72 It follows therefore that “[i]f the effectiveness of legislation which makes certain conducts an offence is measured in terms of the number of successful prosecutions for that offence, then the regulation prohibiting insider trading [in South Africa] has failed”.Footnote 73
In the absence of criminal sanctions, it has been hoped that the shift to civil enforcement would better reinforce the regulator's goals of minimizing insider trading. Features such as the possibility for remedies enabling investors to recover losses emanating from market abuse by individuals and firms as well as the low evidentiary requirements needed to prove contravention of the statutes, which are associated with civil sanctions, have always been touted as justifying the preference for civil liability as an enforcement tool.Footnote 74
That shift was evidently concomitant with intensified enforcement efforts by the FSB. For instance, according to media releases by the FSB's Enforcement Committee, the enactment of the Insider Trading Act led, for the first time, to violations of the insider trading prohibition actually being sanctioned and a marked drop in the prevalence of suspicious trades.Footnote 75 According to such media announcements, 23 cases involving contraventions of section 6 of the Insider Trading Act were instituted by the regulatory agency in the High Court between 1999 and 2005. Much as the act has been acclaimed as a massive statement of intention, this option nonetheless translated into a record number of settlements between the FSB and those who would have contravened the insider trading provisions.Footnote 76 As with the criminal prosecution route, proceedings instituted under this technique have not resulted in any case being decided by the South African courts through the civil enforcement process.Footnote 77 It follows therefore that no corpus or precedent pertaining to civil court judgments has been handed down on an insider.
As stated above, under section 82 of the FMA, a breach of the insider trading prohibition results in an administrative sanction. Nonetheless, the FSB is still empowered, under section 84(2)(c) of the FMA, to institute “such proceedings” as are contemplated in chapter X, in addition to the power under section 85(1)(c)(i) under which the Directorate of Market Abuse can “institute any civil proceedings as contemplated in this Chapter”. Of late, despite the availability of other options as stated in section 84(2)(c) and mainly because of the flaws associated with the civil process, the FSB's enforcement trend has gravitated towards a preference for administrative sanctions. These have been largely expressed through settlements, a process preferred under the previous regime under the civil enforcement approach of the Securities Services Act. It has been argued that:
“Since the South African regulator's enforcement endeavors are hampered by resources limitations, it has pragmatically sought to generate compliance through higher levels of co-operation. What seems to underpin the predilection for co-operation seems to be considerations such as limitations linked to the traditional enforcement options such as civil sanctions as well as the usual absence of external pressures for assertive enforcement … Other compelling considerations for the popularity of settlement hinge on some attractive aspects stretching from, the fact that settling out of court resolves issues expeditiously and is not constrained by excessive litigation costs or lengthy court trials which are often exacerbated by backlogs. In addition, there is need for the FSB to maintain positive and stable working relationships and settling is one way of accomplishing this. The assumption therefore seems to be that the benefits of settling exceed the costs involved.”Footnote 78
The problem with that approach is that settlement entrenches the problems identified in the previous regime, more particularly the failure to discharge the public interest through res judicata or the creation of precedent. Further, as can be seen from the FSB's annual reports, settlements between the FSB and market offenders are made on a “without admitting or denying” liability basis through which the respondent or defendant continues to maintain the appearance of innocence despite paying a fine.Footnote 79 Nonetheless, that approach has been celebrated locally and internationallyFootnote 80 as having enabled the expeditious resolution of cases, especially given that those cases are generally determined on paper.
Also in the FSB's administrative enforcement tool-kit is disgorgement.Footnote 81 As in China, privately instituted actions are not a feature of the South African enforcement landscape; instead, there is an innovative and effective scheme through which, after recovering its costs, the regulator dispenses part of the fine and profit disgorged from the offender to persons who would have suffered loss as a result of insider trading.Footnote 82 Although disgorgement is an effective remedy that serves as an effective substitute of common law remedies such as restitution, it is nonetheless flawed in that offenders are rarely liable to contribute much, as 50 per cent or more of the settlement payment usually comes from insurance. Similarly, disgorged proceeds are not usually directly derived from the offending individual. This is because directors’ and officers’ liability policies provide the primary source of insurance funding and these policies are paid for by the corporation. Equally, the disgorged amount can easily be absorbed by a large company and become a part of doing business, by for instance pecuniary penalties being factored into the company's operating risks or overhead costs provisions.Footnote 83
As stated above, disclosure, more particularly naming and shaming offenders, has served as an alternative enforcement tool for the South African regulator.Footnote 84 In line with that strategy the FSB has made numerous public pronouncements of alleged or actual odious market conduct. With the coming into effect of the Insider Trading Act 135 of 1998, six market offenders were extensively publicized and, through that disclosure, it was shown that share prices fell by 8–20 per cent within a week. In another case, the falling share price emanating from the FSB's disclosure led to the company being compelled to abandon its takeover strategy.Footnote 85 As such, through disclosure the consumer is empowered to influence company behaviour.Footnote 86
DISCUSSION
It cannot be doubted that China has made considerable progress in regulating the conduct of players in its securities markets. Nevertheless, when it comes to combating insider trading, there is evidence of under-enforcement and much still needs to be done to ensure that its regulatory and supervisory regimes meet the objective of creating cleaner and fairer securities markets. Such a gloomy perception is not without substance. It has been observed that insider trading “is arguably a reason for China's lacklustre stock market. It also provides cover for other kinds of corrupt behavior and is a stumbling block in China's effort to build a sound market economy based on the rule of law”.Footnote 87 Much as there might be will on the part of the regulator to revamp the sector, “[t]hree difficulties stand in its way: a weak foundation of the rule of law, weak supervisory powers and institutional obstacles. Although China's criminal law and securities law both set out the parameters of insider trading, its definition remains too broad. The punishment spelled out is also too light to act as a deterrent. Investigating such crimes can also take up resources that China does not have, especially when compared with mature markets like the United States.”Footnote 88
Those challenges are exacerbated by the investigatory, enforcement and judicial environment within which the regulator operates. Besides financial and human resource constraints, as a public enforcer the CSRC's effectiveness is also impeded by its lack of accountability and independence.Footnote 89 Equally prejudicial is the fact that insider trading involves high ranking government and party cadres whom the CSRC, being subordinate to the government, has limited capacity to discipline.Footnote 90 In keeping with its communist ethos, the Chinese government exercises top-to-bottom control over institutions such as the CSRC and, since the government is the largest investor in securities traded on the two exchanges,Footnote 91 the government finds it convenient to interfere in the regulator's activities and has a large say on who should be punished by the regulator. Such decisions are often made on the basis of political expedience.Footnote 92 This is best illustrated by a lack of transparency in the regulator's enforcement processes. For instance, it has been recorded that the CSRC's disciplinary hearings are often conducted during closed-door sessions on the pretext that some of the information pertaining to the offence might amount to state or business secrets.Footnote 93 To that end, the public is not privy to such hearings. Neither does the CSRC issue annual reports to the public concerning its enforcement activities.Footnote 94 In addition, although they are deemed to be self-regulatory, the Shanghai and Shenzhen Stock Exchanges are also undermined by political interference and are not autonomous.Footnote 95 These factors have spurred calls for the transformation of the current approach and especially for a transition towards a rule of law approach to regulation of the industry.Footnote 96
Furthermore, courts are not fully independent but are frequently influenced by the government and the leaders of the Communist Party. Most fundamentally courts are overladen by a heavy workload, lack of expertise relating to securities litigation and the operational judicial interpretation of the laws. These factors drastically limit the number of insider trading cases that the courts can handle and heavy backlogs are not uncommon.Footnote 97 Much as the CSRC has penalized a number of cases, some scholars are sceptical, arguing that most of these are largely symbolic and imposed “probably to foster the illusion that it was able to adequately enforce the insider trading law”.Footnote 98
In comparison, China seems to take a more pro-active stance against insider trading through criminal prosecution. Nonetheless, what emerges from this discussion is that both South Africa and China face challenges in their fight against insider trading. Probably the greatest indication of this is the minimal number of convictions for insider trading in China and, worse still, the paucity of insider trading convictions in South Africa. Such a state of affairs indicates that, when compared to China, South Africa has had little success in combating insider dealing.Footnote 99 In fact, the absence of a rich corpus of decided cases may have an impact on the development of the law pertaining to the containment of insider trading. This is especially so in view of the experience of more mature markets, which demonstrates that “the laws of insider trading have evolved through a number of judicial opinions in a process of assembling the common law adjudication rather than statutory interpretation and promulgation”.Footnote 100 Without such judicial pronouncements it goes without saying that South African efforts aimed at containing insider trading are arguably being hindered.
Much as reported cases indicate that China and South Africa have made inroads in bringing offenders to justice, it is reasonable to argue that the number of reported insider trading cases does not represent a comprehensive picture, nor are they a true reflection of the prevalence of insider trading activities in these countries’ markets and, in fact, the limited number of reported incidences does not bode well for endeavours aimed at deterring future violations.
That should not detract from the accomplishments that these fairly young regimes have made since proscribing insider dealing.Footnote 101 In any case, prosecuting this offence has always proved to be a challenge, particularly owing to the evidentiary requirements needed to obtain a conviction.Footnote 102 That China and South Africa have made slow progress to this effect is in no way peculiar to them alone; history has shown that their more mature counterparts who are endowed with sophisticated investigatory and regulatory devices are still tainted by poor records of cracking down on insider trading.Footnote 103 With limited resources, Chinese and South African regulators face many challenges and have to allocate available resources effectively to combat insider trading offences so as to maintain their reputation as financial centres in the BRICS bloc as well as to retain investor confidence in their markets. It should also be noted that, for as long as the offence of insider trading is rooted in people's hubristic nature, even with well-crafted laws and stringent penalties aimed at the offence, eradicating insider trading will always be a challenge.Footnote 104 Regulators will have to play catch-up to offenders’ sophisticated schemes and, unless resources are made available, attaining regulatory objectives will always be an overwhelming exercise.
CONCLUSION
This article has sought to identify and understand the possible similarities and differences between the legal systems in the prohibition of insider trading in South Africa and China. The principle purpose has been to kick-start the process of ensuring consistency in the regulation of capital markets within the BRICS countries. It is hoped that engaging the issue through a comparative exposition of the strategies adopted in South Africa and China to combat market abusive conduct, especially insider dealing, would form the first step towards enhancing the transparency of the regulatory environments in these jurisdictions, an element that is core to the growth and development of sound, safe capital markets within the BRICS economic bloc. With the current trend of financial globalization through trading blocs such as BRICS, there is a need not only for the standardization of regulation, but also the enforcement of the regulation of securities markets laws. Furthermore, it is hoped that, by highlighting regulatory and enforcement processes pertaining to insider trading in these two jurisdictions, policy makers, investors and other relevant stakeholders will be empowered to make informed decisions as they seek to benefit from the objectives of the BRICS coalition.
