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2006 Annual Report

ACHIEVEMENTS 2006 - 2007 cntd.

EXEMPTIONS AND AUTHORISATIONS

The Commission’s goal in this key result area is that the securities law regime is tailored to the needs of the market.

Responsibilities

consider applications for exemption from securities law
review existing exemptions
authorise futures dealers and exchanges
review existing authorisations
approve amendments to futures exchange rules
approve trustees and statutory supervisors
designate certain substantial security holders
approve electronic systems for the transfer of securities

Achievements this year

considered 60 applications for exemption from securities law
granted 45 individual exemptions
granted or reviewed 6 class exemption notices
authorised 3 futures dealers
made 2 futures contract declarations
approved 10 trustees and/or statutory supervisorsty

8% of expenditure

Exemptions
The Securities Act and the Securities Markets Act empower the Commission to exempt people from compliance with various provisions of securities law. The power to grant exemptions from the law is very significant. We aim to base all exemptions soundly on the policy of securities law. Conditions of exemption provide alternative compliance procedures so that the spirit of the law is complied with, particularly the requirement to provide investors with relevant information on which to base investment decisions. Directors and advisers of issuers who are granted exemptions, or who rely on class exemptions, should be aware of this.

We use our exemption power to remove rigidities in the law for traditional investment products and to facilitate offers of new products, and products offered by overseas issuers, so that they are available to the public cost-effectively and without delay. We prefer to grant class exemptions rather than individual exemptions. When time allows we consult publicly, particularly where an application involves significant policy questions. We recognise that an applicant may incur costs in time and resources for this public benefit and we are grateful for this.

The continuing high demand for exemptions, often required urgently, placed pressures on the resources of both the Commission and the Parliamentary Counsel Office. We have endeavoured to meet the reasonable needs of market participants when considering exemptions. The Commission considered 60 new applications for exemption during the year. It granted 45 individual exemptions, two class exemptions, and renewed four class exemptions.

Specific work on exemptions
Employee share purchase schemes
The Commission granted a class exemption for unlisted companies operating employee share schemes. This exemption allows unlisted companies to operate employee share schemes on a continuous basis with an "evergreen" prospectus, and update the information via their annual reports and annual and interim financial statements. The exemption reduces the ongoing compliance costs associated with preparation and registration of prospectuses, and provides employees with up to date information about the company and its financial affairs. Companies using the notice must provide an exit mechanism for people who want to sell their shares upon leaving employment. This can be effected through an established market for trading in the shares or by an offer by the company to repurchase the shares from shareholders who cease to be employees.

The Commission also renewed its exemption for employee share schemes operated by listed companies. This exemption also allows the use of an "evergreen" prospectus, but does not require additional disclosure in annual reports, recognising instead that investors can remain informed about the company by way of continuous disclosures made by listed companies under the NZX Listing Rules.

NZX issuers share and unit purchase plans
NZX issuers can make limited offers of securities to existing shareholders without a registered prospectus or investment statement under a class exemption granted in November 2005. This exemption applies to listed companies and unit trusts, and permits offers of shares or units up to a maximum of $5,000 per shareholder in any 12-month period. This gives listed issuers a means to undertake limited capital raisings with few compliance costs, and allows shareholders and unit-holders to purchase securities at discounted prices. The exemption recognises that existing shareholders and unit-holders in listed companies have access to information about the company or unit trust through periodic reporting and the continuous disclosure rules of the Securities Markets Act 1988 and the NZX Listing Rules. The exemption is designed to allow offers to be extended to people who hold shares or units through custodians, requiring any custodian to certify, and the issuer to be reasonably satisfied, that no beneficial owner of shares or units will receive more than the individual limit permitted under the exemption in any 12-month period.

Class exemption renewals
The Commission renewed its class exemption for financial institutions. This allows these issuers to disclose their accounts in prospectuses using the financial reporting standard for financial institutions, FRS-33. The exemption was updated to also allow reporting in accordance with the New Zealand equivalent to International Accounting Standard 30, which is the standard applying to financial institutions that have adopted NZ IFRS. Disclosure under these reporting standards provides investors with more comprehensive information about asset quality and risk management than the disclosure ordinarily required for issuers under the Securities Regulations. It also reduces compliance costs for these issuers by allowing them to use the same accounts for their prospectuses as they prepare for general purpose reporting.

The Commission also renewed its class exemptions for dividend reinvestment schemes, retirement villages, and unit trust short form prospectuses.

Authorisations
The Commission authorised three futures dealers, made two futures contract declarations and approved 10 trustees and statutory supervisors during the year.

Specific work on authorisations
Regulation of futures dealers
Futures dealers are regulated either by the Securities Commission or under class authorisations granted to NZX Futures and Options Participants and to Sydney Futures Exchange (SFE) Participants. The class authorisation for SFE Participants only authorises these dealers for SFE-traded contracts. SFE Participants wishing to trade in New Zealand in other types of futures contracts (including contracts traded on any futures exchange other than SFE) must either seek additional authorisation from the Commission or apply to be accredited as an NZX Futures and Options Participant.NZX is the frontline regulator of futures dealers who operate under the NZX Futures and Options Rules. These Rules are designed primarily for firms dealing in futures contracts that are derived from securities. NZX regulation is likely to be most suitable for firms that:

receive and pass orders in futures and options products to a futures exchange; or
deal in futures and options products with similar characteristics to those traded on an exchange.

The NZX Futures and Options Rules are unlikely to be suitable for dealers who:

deal primarily in foreign exchange futures, and related products;
act as issuers of derivative products;
act primarily as market providers;
deal solely in their capacity as funds managers; or
deal solely for wholesale clients.

These dealers need to seek authorisation from the Commission.

Foreign exchange futures contracts
The Commission proposes to declare certain foreign exchange contracts, known as margined foreign exchange contracts, or "rolling spots", to be futures contracts under the Securities Markets Act. The effect of this would be that dealers in these contracts will need to be authorised as futures dealers. We sought comments on this proposal in a discussion paper. These submissions are currently under consideration.

Trustees and statutory supervisors
The Commission considered and approved 10 new applications for trustees and statutory supervisors during the year.

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