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2006 Annual Report

From the chairman

A number of themes have emerged from the Commission’s work this year. It has been an exciting and challenging year in relation to the need for a well-informed market of listed issuers and for uniform disclosure to investors in New Zealand’s listed companies. Our relationship with the NZX has matured and our oversight of the exchange’s regulatory function has proceeded. Disclosure in relation to finance companies and the need for investors to understand more fully the risks and rewards of their investment have been highlighted. The enforcement focus has been strengthened, and the Commission has continued its leadership role on the international scene.

The Commission has given guidance to New Zealand market participants. We highlighted the need for broking firms to have good controls to regulate flows of confidential information between their investment banking and client advisory divisions. We published our reviews of financial reporting by issuers showing where improvements could be made. The aim is to help companies improve their financial reporting and thereby increase the integrity of the markets by providing complete and accurate information for investors. Following our 2005 report on disclosure by finance companies we reviewed prospectuses registered by finance companies since our report. Generally the standard of these documents had improved, and those who needed to address shortcomings were willing to do so. This should mean that investors in these companies are better informed than in the past.

Disclosure by issuers is only part of the process for an informed market. Investors, both institutional and individual, and investment advisers need to read the disclosure documents so that they understand the investment and the risks associated with it. The need to educate people to make wise investment decisions to achieve their investment goals is recognised both in this country and overseas. The Commission continued its education programme. Of particular importance is our sponsorship of Enterprise New Zealand Trust’s work in schools. We look forward to financial education gaining NCEA accreditation and the encouragement that it will bring for schools to provide these courses. This will lead to a generation of young people who will be ready to take part in the securities markets.

Changes to the Securities Markets Act 1988 which came into force in late 2004, established coregulatory roles for the Commission and the NZX in relation to NZX’s markets. This important relationship matured during the year. The Securities Act 1978 requires the Commission to review and comment on NZX’s performance of its obligations as a registered exchange. We reported on the performance by NZX of its regulatory functions prior to the collapse of Access Brokerage. Although there were some shortcomings in the early operation of the NZX broker compliance programme, NZX has made significant progress since demutualization to increase its focus on regulation in the listed market. We undertook the first oversight review of NZX and will report on this early in the new financial year.

We achieved strong regulatory outcomes that benefit investors and the markets. We used enforceable undertakings as a flexible and practical means to address breaches of the law. We have granted exemptions that allow new products to be offered without excessive costs for issuers and broaden the choices for investors. Futures dealers have the option of relying on a class authorisation by becoming NZX participants. There have also been good results in the insider trading cases. It is always a question of judgement to decide when and whether to settle a case. In the two settlements in the Tranz Rail case and the settlement of the Provenco case positive results were achieved for investors and the markets more generally.

It will become easier for issuers and investors to take part in the trans-Tasman securities markets. We continued to work towards trans-Tasman alignment that will reduce costs for issuers and increase choices for investors. The government’s moves towards mutual recognition of securities offerings between the two countries and the memorandum of understanding on coordination of business law are welcome. The relationship between the Commission and the Australian Securities & Investments Commission was enhanced by regular meetings between the two Commissions, as well as by our close operational interaction.

In the wider regulatory community New Zealand continued its leadership role. As Chairman of the Executive Committee of the International Organisation of Securities Commissions (IOSCO) it has been a privilege to see the advances made since that organisation set a new strategic direction in 2005. The strategy has two principal objectives. They are to encourage jurisdictions to implement the IOSCO Principles of Securities Regulation and thereby raise the standard and consistency of regulation worldwide, and to increase the number of signatories to the IOSCO MMoU which enables exchange of information between regulators to combat international fraud. Considerable progress has been made on these. As a signatory to the IOSCO MMoU the Commission has obtained useful assistance from overseas regulators in several investigations, and has provided assistance to our counterparts overseas.

Further significant developments have been IOSCO’s constructive relationships with the World Bank, the IMF and the Financial Stability Forum, and its dialogue with the business community. I have been re-elected to chair IOSCO’s Executive Committee for a further two year term. It is a great honour for New Zealand to participate at such an important international level, and an affirmation that our regulatory framework is in line with international best practices. It enables the New Zealand market to have exposure at an international level.

The Commission is reporting this year under New Zealand equivalents of International Financial Reporting Standards in its annual financial statements to 30 June 2006. The Commission is the first public sector entity to adopt NZ IFRS. We believed we had an obligation to set standards for public entities and decided to be an early adopter of the new standards. We committed to making the transition this year in our 2004 annual report.

This year of achievements was made possible by the dedicated work of the Members and staff of the Commission. I am grateful to them. In the Unlimited/JRA Best Places to Work in New Zealand Survey this year we were ranked 2nd out of 69 small workplaces. This is a reflection of the vibrant and friendly culture of our workplace and the commitment by all staff to achieve excellent results.

Jane Diplock AO
Chairman