Book Review – Principles of Market Abuse Regulation

A Comparative South African Perspective

by Howard Chitimira (168 pages)
Juta & Co (Pty) Ltd www.jutalaw.co.za

Principles of Market Abuse Regulation“Take care to get what you like or you will be forced to like what you get.”– George Bernard Shaw (1856-1950)

Where there is money, there is mischief. Every coin has a flip side, and so does every banknote. Not surprisingly, financial markets provide fertile ground for this contagion of corruption, manipulation, price-fixing, fraud, insider trading, rigging and abuse on a grand scale, all fuelled by “the lure of the lira.”

To attempt to combat, outlaw and regulate these practices, market abuse laws had been introduced in many jurisdictions, primarily aimed at enhancing market integrity and public investor confidence. These laws are targeted at promoting free and fair financial markets that will competetively attract both domestic and foreign investment into transparent and efficient securities markets where the price of a security reflects its true value.

In South Africa, market abuse practices were initially outlawed in legislation such as the Companies Act of 1973, the Stock Exchange Control Act of 1985 and the Financial Markets Control Act of 1989. But this did not effectively deter such unscrupulous activities, which continued in both the regulated and unregulated financial markets. This led to the enactment of the Insider Trading Act of 1998, the Financial Institutions (Protection of Funds) Act of 2001, and the Securities Services Act of 2004.

The global financial crises of 2008 crashed through international markets including financial markets like an earthquake-driven tsunami from which many economies have not yet recovered.

This culminated in South Africa in the Financial Markets Act of 2012 which introduced certain provisions and civil penalties mainly to further combat insider trading. But the malaise continues and it is evident that adequate market abuse laws will not automatically smother market abuse activities or increase market integrity and give rise to improved investor confidence. This will only happen if such laws are robustly and consistently enforced.

The more recently enacted Financial Sector Regulation Act of 2017 creates mechanisms that are designed to prevent insider trading and market manipulation practices in South Africa. It is hoped that the enforcement authorities established by the Act, the Prudential Authority and the Financial Sector Conduct Authority, which replaces the Financial Services Board, will effectively enforce its provisions.

The production of this book, giving a comparative South African perspective to the principles of market abuse regulation, brings to fruition the author’s dedicated research and academic publications on the subject over a number of years. His extensive analysis, examination and suggestions on dealing with this multi-tentacled problem are soundly based, and logically and clearly set out.

The core chapters explain what constitutes prohibited offences under the Financial Markets Act, analyses the remedies available, and deals with the adequacy and problems related to enforcement. There is an illuminating and in-depth examination of market abuse practices that occurred during the global financial crisis of 2008. The cast of villians is at times quite chilling – front running and quote stuffing, dark pools and flash orders, hedge funds insider trading, high yield securities investment fraud, high frequency trading, credit default swaps and short selling. The author expertly reveals the current shortcomings in effective enforcement and makes practical and constructive recommendations for consideration and implementation by the regulatory authorities, including the Johannesburg Stock Exchange.

Explanatory diagrams clarify the complexities of the problems and proposed solutions, footnotes underpin the text, and an extensive bibliography includes domestic South African and selected foreign case law, legislation, reports and extensive internet sources.

This comprehensive overview is a welcome guide to corporate and commercial legal practitioners, accountants, brokers, securities shareholders, market regulators, law enforcement officials, academics and students.

The author, Professor Howard Chitimira LLB, LLM, LLD, is an advocate and teaches at the Faculty of Law at North-West University. He is a well-published law journal author, reviewer and editorial board member, and a respected peer reviewer and external examiner to doctorate level for several universities.

The scourge of crime has many shocking and lasting impacts, some direct and some indirect. The abuse of financial markets can unleash the most devastating consequences not only on individual investors but far beyond that, and is capable of bringing entire economies and countries to their knees.

With technological innovation has come abuse that can infiltrate the most advanced private and public systems. This book serves as a timely warning that sophisticated and properly resourced measures to identify, pursue and prevent market abuse will inevitably have to be extended to and co-ordinated with damage control in the political, security and other spheres of government also threatened by manipulation and malignant intent.

Publisher Juta and Prof Chitimira have rung the warning bells. Vigilance alone is no longer sufficient. Pro-active measures introduce and given effect to must be the watchword, and this comparative study certainly spells that out.

Review by Louis Rood BA LLB (UCT), Consultant at Fairbridges Wertheim Becker Attorneys.

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