Annual Report

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ENFORCEMENT

Our key areas for enforcement work were:

	improved quality of offer documents,
	improved quality of investment advice,
	improved market behaviour, with particular reference to the secondary market for securities,
	improved funds management practices.

We allocated $1.205 million to enforcement this year compared with $0.943 million in the 1999/2000 year, an increase of 28 percent. Enforcement is core work of the Commission. There was a significant increase in enforcement work. We wish to maintain the present level in the coming years. This is important to us in preparing for the possible changes to insider trading law.

OFFER DOCUMENTS

Our first priority is invariably the offer of securities to the public for initial subscription. It is here, under existing law, that our efforts can be most effective. Our aim is to encourage the dissemination of high quality offer documents and to prevent dishonest offers where we can.

There are two aspects to our review work. We maintained a continuing review of offer documents, in particular this year the offer documents for superannuation schemes, including employer-sponsored schemes and those promoted to the wider public.

We investigated offer documents, on our own initiative or drawn to our attention by the public, where there appeared to be grounds for unease. Areas of concern were forestry syndicates, property investment schemes and contributory mortgage brokers. We wrote to promoters of forestry investment schemes about the quality of many offer documents, including advertisements and website offers. Some of these do not comply with the law and may mislead investors. We asked the Registrar of Companies to conduct inspections of several brokers offering contributory mortgage schemes. We have also taken other enforcement action as appropriate in relation to their activities. We think there is a lot of room for improvement in the standard of compliance with securities law in the contributory mortgage industry.

We reviewed 37 prospectuses and 42 investment statements of 42 issuers. As a result of this 28 offer documents of 20 issuers were amended or withdrawn.

The Commission suspended and subsequently prohibited the distribution of one investment statement and suspended and cancelled the registration of the related prospectus. We also suspended the distribution of two investment statements and suspended the registration of the prospectus related to one of those investment statements.

We targeted routine advertising for financial products. It is important to encourage good compliance standards among established financial institutions. It is not often necessary to resort to formal powers of action as the material is normally amended or withdrawn. We prohibited the distribution of five advertisements for offers of securities by three issuers.

We asked the Registrar of Companies to inspect the documents of issuers, promoters or investment advisers on 30 occasions. We regularly confer with the Registrar on proposals for action.

ILLEGAL INVESTMENT SCHEMES - INVESTMENT ADVISERS

We continue to be surprised by the number of people taken in by schemes that offer unrealistic rates of return. A highly publicised example is Big International on which we issued a warning in October 2000. The scheme was being promoted in Nelson and Otago. New Zealand investment advisers were actively involved. It was part of an international scheme and its exact domicile was unclear. Big International was the subject in a case brought by the Secretary of State for Trade and Industry in the High Court in England. Justice Neuberger described the scheme as "nothing more than a sham designed to defraud the badly advised, the ignorant and the greedy of their money".

Unfortunately we see too many such schemes. Some New Zealand investment advisers still also claim the existence of a prime bank market which is highly secretive and used only by the rich elite. This market is a nonsense. It does not exist. We have encouraged people not to commit money to these schemes.

Some of the investment advisers involved are established in the conventional investment advisory business. Practising lawyers and accountants have been involved. Where we encounter evidence of fraud we refer it to the Serious Fraud Office. Our own powers of intervention in the affairs of investment advisers are very limited. We are examining this in the context of our law reform work.

COLD CALLING FROM OVERSEAS

We have seen an upsurge in the number of overseas brokers cold calling New Zealanders by telephone. Usually the brokers are based in Manila, Bangkok or Jakarta. They persuade people to buy shares usually in technology companies in the United States. They routinely say that the company is about to make an important announcement which will see the share price increase dramatically.They are extremely persistent and persuasive. These offers may be fraudulent. There may be no intention on the part of the broker to buy any shares.

We publish on our website the names of brokers who have approached people in this country. The list now has 29 names and it continues to grow. Many of these brokers are now the subject of investigation in their home jurisdiction.

SHARE DEALING

We completed 13 insider trading inquiries during the year. We published a report on trading in the shares of Fletcher Challenge Limited in November 2000. The report highlighted weaknesses in the laws concerning insider trading and market manipulation.

Addressing insider trading, and market malpractice more generally, is important. It impacts very strongly on market confidence and on the reputation of the New Zealand markets for integrity.

FUNDS MANAGEMENT PRACTICES

We are undertaking a review of funds management practices in New Zealand. We expect to publish a report in the new year. We believe that funds managers, investors, the Government and the community will benefit from a fuller understanding of this important industry.

FINANCIAL STATEMENTS

The Registrar of Companies referred 14 sets of financial statements of issuers to us on the grounds that the auditors' reports were qualified. We took action in respect of five issuers, all from the same group of companies. The other referrals did not call for action on our part although we maintained a dialogue with the Registrar on follow-up action by him.

CORPORATIONS (INVESTIGATION AND MANAGEMENT) ACT 1989

This Act enables the Government to place companies and associated persons in statutory management on the recommendation of the Commission. It also provides for the Registrar of Companies to declare companies at risk and, with our consent, to issue directions to the company.

We considered one statutory management matter this year, Hartner Construction Limited. Statutory management is a measure of last resort. It applies:

	to a corporation that may be operating fraudulently or recklessly; or
	where it is desirable that the Corporations (Investigation and Management) Act 1989 should apply to preserve the interests of the corporation's shareholders or creditors or beneficiaries, or the public interest and these cannot be adequately protected in any other lawful way.

The Commission considered that the criteria for statutory management did not apply. It decided not to recommend that the company be placed in statutory management. It recommended a programme of investigation work under the ordinary law.

IMI Pacific Group Limited and Walakahai Pacific Corporation Limited were placed in statutory management in December 1999, along with Willard Karaitiana Amaru and John Edward Baylis (as associated persons). Max Resources Limited was placed in statutory management in August 1998. Criminal charges have been brought in respect of both matters.

OVERSEAS REQUESTS

We regard international cooperation as extremely important. Markets are increasingly global and e-commerce contributes to this to a very great extent. We received one formal request to exercise our statutory powers to obtain information in New Zealand. We responded to requests for information from our counterparts overseas. We made many requests ourselves for information from overseas authorities, particularly in Australia, Asia and the United States.

REGULATORY COORDINATION

A core aspect of our regulatory effort is to cooperate with other agencies involved in regulating securities markets, in particular those responsible for criminal law enforcement and those which administer programmes of self-regulation.

Prosecutions: We work closely with the Registrar of Companies on all securities investigations. The Registrar's staff undertake much of the investigation work at our request under section 67 of the Securities Act. We also confer with the Serious Fraud Office on all matters which we believe should attract its attention. Much of this cooperative work leads to criminal prosecution by the appropriate agency.

Self-regulation: We support self-regulation under competent, independent and preferably statutory oversight. In exercising our statutory powers we continue to coordinate our efforts with:

	NZSE and its Market Surveillance Panel,
	NZFOE and its Business Conduct Committee,
	Advertising Standards Complaints Board,
	local authorities in relation to their venture capital schemes,
	New Zealand Thoroughbred Racing and Harness Racing New Zealand,
	Investment and Savings Ombudsman,
	Banking Ombudsman,
	Commerce Commission,
	Institute of Chartered Accountants of New Zealand,
	New Zealand Law Society.

Financial Regulation Coordination Group: We met regularly with the Reserve Bank of New Zealand, the Registrar of Companies, the Government Actuary and the Ministry of Economic Development to ensure effective coordination of our respective regulatory efforts.

We value our association with each of these organisations.