PRESENTATION BY FINANCIAL SERVICES

BOARD

TO PCOF

THE SECURITIESSERVICES BILL,

2004

TOPICS TO BE ADDRESSED

Background Ambit Objects Application Prohibitions Structure Conclusion

BACKGROUND

Policy Board reviewed regulatory framework in 1998

Legislation outdated Legislation does not comply with

best international practice FSB established drafting team in

1998 consisting ofrepresentatives of:

–FSB

–Licensed Exchanges

–Banking Council (South Africa)

–CSD’s

–Other stakeholders

BACKGROUND

Cognisance was taken of IOSCO’s objectives and principles of securities regulation and other regulatory practices

Foreign legislation - UK, Australia, European Directive, etc.

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

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Bill was submitted to Cabinet in May 2002, but subsequently withdrawn from the process by the Minister and revised by National Treasury and the FSB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

BACKGROUND

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 FSB’s website The list of persons & institutions

consulted is available

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 those

Acts

Since the repealed Acts were approved by Parliament, it is unnecessary to refer to or explain those clauses of the Bill that essentially reiterate the provisions of the repealed Acts

AMBIT

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

Promote protection of regulated persons and clients

Reduce systemic risk Promote international

competitiveness of securities services in the RSA

OBJECTS

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

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 and

unlisted securities - must complywith Bill

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

PROHIBITIONS

STRUCTURE

The Bill confers the status of a SRO on exchanges and CSD’s

The Bill is structured in 9 chapters

Emphasis is placed on significant legislative changes and new principles

CHAPTER 1:PRELIMINARY PROVISIONS

Objects and application of Bill and prohibited activities

Concepts common to the whole Bill are defined

Following definitions warrant special attention:

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 for

securities constitutes atransaction

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)

The Registrar may declare a security; and

may also declare a security included in the definition of securities not to be a security

DEFINITION OF SECURITIES

DEFINITION OF REGULATED PERSON

A SRO or any other person who provides securities services

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 of

transactions in listed securities

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

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

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

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

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

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

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.

RULES OF THE EXCHANGE

OFF-MARKET TRANSACTIONS IN

LISTED SECURITIES This is allowed between financial

institutions, on condition that they transact with each other as principals. “Financial institution” is defined for this purpose.

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

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

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

CHAPTER 4: CUSTODY & ADMINISTRATION OF

SECURITIESLicensing 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

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

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

CHAPTER 4: CUSTODY & ADMINISTRATION OF

SECURITIES

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

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

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

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

APPOINTMENT OF MEMBERS OF CONTROLLING BODY OF

SRO

LIMITATION ON CONTROL IN SROs

The Registrar’s 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

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

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

CHAPTER 6:CLEARING 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

CHAPTER 7:CODE 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

CHAPTER 8:MARKET ABUSE

Insider trading can now be committed by any person.

Person defined to include a trust.

MARKET ABUSE

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

MARKET ABUSE The defence that an insider “would

have acted in the same manner even without the inside information” has been removed.

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.

MARKET ABUSE

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

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

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

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.

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.

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

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

CHAPTER 9:GENERAL PROVISIONS

Auditing Powers of the Registrar and court

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

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

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

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

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

CHAPTER 9:GENERAL PROVISIONS Winding-up, judicial management

and curatorship Right of appeal Offences and penalties Regulations

SCHEDULE - AMENDMENTS TO THE FSB ACT, COMPANIES ACT AND

INSOLVENCY ACT

The amendments to these Acts are of a consequential nature

CONCLUSION

SSB will bring SA’s 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

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

CONCLUSION

ANY QUESTIONS?