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There is protection in the market

22 March 2018 Jonathan Faurie

After the Steinhoff debacle in December 2017, fund managers are approaching investments with a more cautious view cognisant of how quickly a company can crumble. However, the Financial Services Board (FSB) reports that the regulator is on top of market abuse issues and that its Directorate of Market Abuse (DMA) has been somewhat successful in its role in the industry.

Wide mandate

In a briefing with the media, Solly Keetse, Head of the DMA, said that the mandate of the DMA is wide enough to investigate all areas of concern in the market. 

The mandate of the DMA includes investigations into insider trading, market manipulation and false or misleading statements (which includes accounting irregularities). 

“If a complaint is made to the DMA, it has to comply with two aspects before it is investigated further. The first aspect that it must comply with is that the complaint must be made against a company that is listed on the Johannesburg Stock Exchange (JSE). The second aspect that needs to be adhered to is that the complaint must have a clear indication that there has been a contravention of the Financial Markets Act,” said Keetse. 

If both boxes are checked, the DMA investigates the issue further and then reports any possible recommendation to the FSB’s enforcement committee which then issues a relevant fine. 

A measure of success

Keetse adds that since the establishment of the DMA in 1999, the FSB has issued fines to the tune of R100 million, which shows that the DMA has achieved a certain measure of success. 

However, there are still a lot of questions regarding how the FSB measures this success. If a complaint turns into an offense – a company that is found guilty of any of the areas within the DMA’s mandate – then why are none of the offending parties being put into jail? 

“It is important to note that the DMA and FSB’s enforcement committee cannot recommend jail time for any offending party. We issue administrative fines and where necessary, we hand over these cases to the Public Prosecutor to investigate the matter further,” said Keetse. 

Like with a determination handed down by an Ombudsman, the ruling and fine handed down by the FSB enforcement committee carries the same weight as a High Court judgement and cannot be ignored.  When pressed on how the FSB measures the success of the DMA, Keetse says that it is the collaboration between the DMA and the FSB’s Enforcement Committee that indicates that the DMA is successful in its investigations. 

Early information

When investigating issues of market abuse, releasing any information into the market is done in a deliberate and responsible manner. At the outset of the media briefing, Keetse admitted that the DMA has ongoing investigations into both Steinhoff and Viceroy, and that the information that they give to the media related to these cases needs to be limited. 

However, a fine line exists here. While any warning against Steinhoff would have affected the company’s share price in a similar way than the saga did, a warning that all is not right with the company would have made stock brokers a bit cautious and the losses could have been a bit more contained. As it stands, the Steinhoff saga resulted in R300 billion being wiped off the JSE. 

“It is true that a fine line exists here. And we are aware of this. However, there are systems and processes which need to be followed to warn the public. If there is something that the public needs to be aware of, the company needs to release a SENS statement. The FSB has access to these statements and uses its judgement when deciding on whether this needs to be investigated further,” says Keetse. 

The big fish

One of the biggest offenses that the DMA can investigate is insider trading. 

While we are all aware of what the definition of insider trading is, there are very specific triggers that need to be looked at when deciding if insider trading did occur. 

“One of the issues that we need to look at is whether there was a dealing in securities for another party’s account while the person or agent knew that they have inside information relating to the stock in question and that the information would affect its price,” said Keetse. 

Extreme caution needs to be used here. The person who has such information cannot divulge this to anyone; not even a spouse or family member, even if this information is not acted upon. “The problem in this case is that once the information has been divulged, there is no way that the person who originally had the information would know what would be done with it. There is too much danger involved here,” says Keetse. 

A new measure of appreciation

When one looks at the ambit of the DMA and the intricacies that are involved in investigations into market abuse, one gains a new measure of appreciation into the sensitivity of these investigation and the caution that is taken. 

However, more can be done to improve the process and to make the public aware of areas where they need to be cautious. The FSB admits this and says that it is learning from each case that is presented before it. Could the public have been warned earlier about an issue such as Steinhoff? Maybe. Would it have changed the losses that occurred in the industry? Possibly. 

Editor’s Thoughts:
The one thing that the Steinhoff saga has done is that it has made the public more aware of the performance of companies and the possible dangers that are involved in cases of market abuse. Fool me once…shame on you; fool me twice… shame on me. Let’s hope this does not happen again. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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