Author: Gary Moore

Date: 31 October 2018

The Financial Markets Act, 2012[1] states that it is an Act to provide for[2] the regulation of financial markets, inter alia.[3]

The Act stipulates that it must be interpreted in a manner that gives effect to its objects.[4] The objects of the Act are to: Ensure that financial markets are fair, efficient and transparent;[5] increase confidence in financial markets;[6] promote the protection of regulated persons, clients and investors; reduce systemic risk; and promote international and domestic competitiveness of financial markets and securities[7] services.[8]

The Act (after the adding or deleting of sections by amending statutes[9]) currently contains 114 sections. The statute is on the whole fairly carefully drafted. Provisions which violate the Rule of Law are dealt with below:[10]

Certain provisions violate the Rule of Law by being unduly vague. The Rule of Law entails that laws be accessible, and[11] intelligible, clear and predictable.[12]

Other provisions violate the Rule of Law by conferring unduly wide discretion on official decision-makers. Questions of legal right and liability should ordinarily be resolved by application of law, not the exercise of discretion. Any discretions should ordinarily be narrowly defined. The broader and more loosely textured a discretion conferred on an official is, the greater the scope for subjectivity and arbitrariness, the antithesis of the Rule of Law.[13]

Minister may prescribe requirements for regulation of unlisted securities

The Act states that the Minister may by regulation prescribe requirements for the regulation of unlisted securities.[14] This phrasing leaves the requirements to the Minister’s discretion.

It is true that in prescribing the requirements the Minister must “take into account” the  objects of the Act.[15] But this means merely to “have regard to” or “consider as a factor”.[16]

And it is true that the Minister may only make regulations “not inconsistent with” the Act.[17] But this still leaves him with a fairly wide discretion about the regulations to make.

It is also true that the Minister before making regulations must: Ensure “consultation with” recognised industry bodies; “consider” any recommendations from the Authority prior to the publication of draft regulations; publish in the Gazette a notice of the release of draft regulations indicating that they are available on the National Treasury official website and calling for public comment;[18] publish on the Treasury website[19] a policy document that informs the draft regulations and a report on the regulations’ expediency, effect and implication; and submit[20] the draft regulations to Parliament[21] for scrutiny.[22]

After “consideration” of any comments received in response to the publication and tabling of the draft regulations, the Minister may alter the draft regulations.[23] After promulgation, a copy must be tabled in Parliament.[24] (The Minister must also publish on the Treasury website a summary of comments received, and providing a brief response to those comments that were “not accommodated” in the final regulations promulgated.[25])

This still leaves the Minister with discretion about the regulations to make. A duty to “consult” requires no more than that serious “consideration be given” to views expressed.[26]

A discretion should ordinarily be narrowly defined.

Minister may regulate providers if in his “opinion” it would further Act’s objects

The Act states that the Minister may prescribe a category of persons,[27] if the securities services[28] which they provide[29] are not already regulated under the Act and if “in the opinion of the Minister”, it would further the objects of the Act to regulate persons in that category.[30]

This too confers on the Minister a discretionary power that violates the Rule of Law.[31]

Before the Minister makes any such regulation, he must (in addition to the other duties to consult and publish[32]) publish a notice identifying persons who may be declared to be regulated persons and inviting comment from them.[33]

(The Minister must also take the other steps mentioned. After “consideration” of any comments received, he must publish on the Treasury website a brief response to comments received that were not accommodated in the final regulations.)

This leaves the Minister with discretion about what regulations to make. A duty to consult requires no more than that consideration be given to any views expressed.

Authority may assume securities-depository’s functions if “considers it necessary”

The Act states that a central securities depository must be licensed.[34] A central securities depository provides an infrastructure for holding “uncertificated securities” which enables the making of entries i.r.o. uncertificated securities and includes a securities settlement system.[35]

(Uncertificated securities either are not evidenced by written instruments, or are certificated but held in collective custody[36] by a central securities depository;[37] and in both cases are transferable “by entry without a certificate or written instrument”.[38])

The Act has a provision which lists in detail a licensed central securities depository’s duties and powers i.c.w. the operating of a central securities depository.[39]

The Act then states that the Financial Sector Conduct Authority “may” assume responsibility for one or more of the regulatory or supervisory functions referred to in that provision listing a licensed depository’s extensive duties and powers, if “the Authority considers it necessary” to achieve the objects of the Act.[40]

This violates the Rule of Law by conferring an unduly wide discretion on the Authority. The broader a discretion conferred on an official body is, the greater the scope for subjectivity and arbitrariness, which is the antithesis of the Rule of Law.

It also violates the Rule of Law by being vague. It is not clear if Authority may assume responsibility for only “regulatory or supervisory” functions in that list of a licensed depository’s duties and powers. And, if so, it is not clear which of those duties and powers are “regulatory or supervisory” functions and which are not.

The Rule of Law requires laws to be intelligible and clear, so far as possible.

Securities depository to “show cause” why responsibility “should not be” assumed

The Authority must, before assuming responsibility for any such functions, inform the securities depository of the Authority’s intention to do so, give the depository the reasons for the intended assumption, and call upon the depository to “show cause”[41] why responsibility “should not be” assumed by the Authority.[42]

This too is vague. It does not make clear, if the depository does “show cause”, whether the Authority is then obliged not to assume responsibility or whether it retains a discretion to assume responsibility or not.

 

[1] Financial Markets Act 19 of 2012.

[2] As its short title suggests.

[3] And to license and regulate exchanges, central securities depositories, clearing houses, central counterparties and trade repositories; regulate and control securities trading, clearing and settlement, and custody and administration of securities; prohibit insider trading, and other market abuses; provide for approval of nominees; provide for conduct standards; and align the Act with international standards. Financial Markets Act, Long title.

[4] Financial Markets Act s 104.

[5] Financial Markets Act s 2(a).

[6] By requiring that securities services be provided in a fair, efficient and transparent manner; and contributing to the maintenance of a stable financial market environment. Financial Markets Act s 2(b)(i) and (ii).

[7] “Securities” are extensively defined so as to include, generally speaking—

Listed and unlisted shares in companies private and public (other than in share-block companies), debentures and bonds issued by public companies and government entities, derivative instruments, notes, participatory interests in collective investment schemes, and instruments based on an index;

units or other forms of participation in collective investment schemes licensed in other countries;

securities listed on external exchanges;

instruments similar to any of the aforesaid prescribed to be securities for the purposes of the Act; and

rights in any of the aforesaid securities with specified exclusions.

See Financial Markets Act s 1(1) sv “securities”.

[8] Financial Markets Act s 2(c), (d) and (e).

[9] By Financial Services Laws General Amendment Act 45 of 2013, Financial Sector Regulation Act 9 of 2017.

[10] Without implying that the provisions identified as violating the Rule of Law are the only such provisions.

[11] So far as possible.

[12] Rt. Hon Lord Bingham of Cornhill, The Sixth Sir David Williams Lecture (2006), Centre for Public Law, Univ of Cambridge. “The Rule of Law” (first sub-rule).

[13] Bingham, supra, “The Rule of Law” (second sub-rule).

[14] Financial Markets Act s 5(1)(a) read with s 107(1)(a) and (2).

[15] And the principle that competition between regulated persons should not be impeded or distorted. Financial Markets Act s 5(3).

[16] Harnaker v Minister of the Interior [1963] 4 All SA 444 (C) 460.

[17] Financial Markets Act s 107(1).

[18] In writing within a stated period which may not be less than 30 days from the date of publication of the notice.

[19] With the draft regulations.

[20] At least one month before promulgation.

[21] While it is in session.

[22] Financial Markets Act s 107(2)(a)(i)–(iv) and (vi).

[23] And need not publish the alterations before promulgating the regulations.

[24] Financial Markets Act s 107(2)(b)(i) and (ii).

[25] Financial Markets Act s 107(2)(c).

[26] And in good faith. McDonald and others v Minister of Minerals and Energy and others 2007 (5) SA 642 (C) par 18D.

[27] Other than those specifically regulated under the Act.

[28] “Securities services” means—

  • the buying or selling of securities for own account or on behalf of another person as a business, a part of a business or incidental to conducting a business;
  • the use of the trading system or infrastructure of an exchange to buy or sell listed securities;
  • the furnishing of advice to any person;
  • the custody and administration of securities by a participant or nominee;
  • the management of securities and funds by an authorised user;
  • clearing services; or
  • settlement services.

Financial Markets Act s 1(1) svv “securities services”.

[29] And the functions and duties exercised, whether in relation to listed or unlisted securities.

[30] Financial Markets Act s 5(1)(b) read with s 107(1)(a) and (2).

[31] For the reasons mentioned above about the Minister’s power to regulate unlisted securities.

[32] Discussed above i.c.w. the Minister’s power to regulate unlisted securities.

[33] In writing in a period stated in the notice, which may not be less than 30 days from publication of the notice. Financial Markets Act s 107(2)(a)(v).

[34] Financial Markets Act s 27.

[35] Financial Markets Act s 1(1) svv “central securities depository”.

[36] In a separate central securities account.

[37] Or its nominee.

[38] Financial Markets Act s 1(1) svv “uncertificated securities”.

[39] See Financial Markets Act s 30(2)(a)–(x): A licensed central securities depository—

must maintain and provide an infrastructure for holding, and enabling the making of entries i.r.o., uncertificated securities;

must maintain and provide an infrastructure including a securities settlement system;

must perform custody and administration in respect of a central securities account;

must issue depository rules;

must supervise compliance by participants with the depository rules and depository directives;

must supervise compliance with the Act by participants, report non-compliance to the Authority and assist it in enforcing the Act;

must enforce the depository rules and depository directives;

must as soon as it becomes aware inform the Authority of any matter that it reasonably believes may give rise to or increase systemic risk;

may issue depository directives;

may amend or suspend the depository rules;

must maintain a central securities account with due regard to the interests of the participant and its clients;

may hold all securities of the same kind deposited with it by a participant collectively in a separate central securities account;

must notify a participant in writing or as otherwise agreed of an entry made in the central securities account of the relevant person;

must balance and reconcile the number and where applicable, the nominal value of each kind of uncertificated securities held on its uncertificated securities register with the records of the relevant issuer i.r.o. certificated securities of the same kind reflected in the central securities account not less than once every six months and i.r.o. uncertificated securities of the same kind not less than once every month if that aggregate has not changed or on the business day after such change if that aggregate has changed;

must administer and maintain a record of uncertificated securities deposited with it;

is entitled to access the records of uncertificated securities administered and maintained by its participants to perform its functions;

may, if the central securities depository is licensed as a clearing house, clear transactions in securities i.a.w. its clearing house licence;

must disclose to persons for whom central securities accounts are kept, participants and issuers, its fees and charges for its services, which disclosure must give the specific monetary amount for each service or if the amount is not pre-determinable the basis of the calculation;

must on request disclose to the Authority information about the securities held in a central securities account, and on request disclose to an issuer information about the securities issued by that issuer and held in central securities accounts;

must notify the Authority as soon as it becomes aware that a participant will cease or has ceased to be a participant;

may subject to conditions enter into agreements for external central securities depositories to provide securities services in the Republic;

must establish and maintain effective, efficient and sustainable infrastructure to perform the functions for which it is licensed;

must notify the Authority as soon as it commences an insolvency proceeding or an insolvency proceeding is commenced against it; and

may do other things incidental or conducive to operating a central securities depository that are not inconsistent with the Act.

[40] Financial Markets Act s 30(3)(a).

[41] Within a period specified by the Authority.

[42] Financial Markets Act s 30(3)(b)(i), (ii) and (iii).

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Gary Moore

Gary Moore BA LL.B. (Witwatersrand) LL.M. (UC London) is a South African lawyer and Senior Researcher at the Free Market Foundation.

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