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2007 Annual Report

Chairman's report

This has been a landmark year for New Zealand investors and securities markets. The settlement of the Tranz Rail insider trading case was an excellent outcome for shareholders and a signal that investors can have confidence that the law will be enforced. The case achieved the largest insider trading settlement in Australasia which, after costs, will be paid to classes of shareholders approved by the Court.

The result is a strong endorsement of the strengthening of public enforcement of securities laws. The two insider trading cases taken by the Commission (Tranz Rail and Provenco) were brought under insider trading law that came into effect in late 2002. These successful outcomes send a strong signal to the market that the law will be enforced and poor behaviour is not tolerated. The Commission has the resources, the capability and the commitment to effectively take action to remedy illegal behaviour and improve market transparency.

A co-regulatory regime for stock exchanges was also established by the 2002 law reforms. The stock exchange is the front line regulator concerned with the rules of the exchange; the Commission, as the statutory regulator, is concerned with breaches of the law and oversees the exchange’s regulatory role. This innovative regime was considered best for New Zealand’s markets and it works well in practice. The Commission’s second annual review of NZX’s performance of its regulatory role was published in June 2007. This found that NZX was satisfying its obligations and its performance of its regulatory functions was good. These reviews show that investors can have confidence in NZX’s performance as a registered exchange.

Insider trading and exchange reforms are part of the process of building a regulatory framework that enables New Zealand to be seen in the global securities markets as an attractive destination for investment in productive businesses. Further significant steps were achieved this year. Legislation passed in October 2006, and due to come into force later in 2007, toughens insider trading law, brings in new law against manipulating the markets, and new disclosure rules for people with substantial holdings in listed companies. Investment advisers will have to tell their clients more about themselves, the investments they advise on, and the money and other benefits they receive from recommending investment products. All these reforms improve the transparency of the New Zealand markets. Along with these changes come new powers for the Commission to enforce the law.

IMF experts reviewed New Zealand in 2003 and identified gaps in the regulatory framework and a number of issues relating to managed funds. Some of these have been addressed and Government and the Ministry of Economic Development are dealing with others in their wider reviews of the regulation of financial intermediaries and financial products and providers.

This work is being done in two stages so that high priority issues can be addressed quickly. In June 2007 Cabinet decided on stage one reforms which include registration of financial service providers, regulation of non-bank deposit-takers, and a new regulatory framework for financial advisers. The Commission has had extensive input into these reviews and will continue to provide advice to the Ministry of Economic Development on detailed policy and drafting of legislation. The Commission welcomes these reforms which will complete a world class regulatory framework for New Zealand.

The globalisation of securities markets has brought new and rapidly changing investment products and new ways of doing business. Issuers raise capital and investors place their funds in foreign jurisdictions. Transactions are instantaneous. This has challenges for regulators which can be met by implementing consistent and high standards of regulation worldwide and cooperating across borders to combat international financial fraud.

The International Organisation of Securities Commissions (IOSCO) is the international standard setter for securities regulation. As Chairman of IOSCO’s Executive Committee for the last three years I have been encouraged and impressed by members’ determination to raise standards. During this time IOSCO adopted a bold new strategic direction. This includes a commitment for all jurisdictions to meet the stringent requirements to sign on to the IOSCO Multilateral Memorandum of Understanding which enables regulators to exchange information for enforcement work. New Zealand was accepted as a signatory to the IOSCO MMOU in 2003.

New Zealand’s involvement with IOSCO gives us input to regulatory innovations at the highest level, and provides opportunities to promote New Zealand internationally as an attractive market for investment.

An important international focus this year has been our relationship with Australia. The new regime for mutual recognition of securities offerings, to come into effect later this year, is an exciting, cutting edge development. The regime will give New Zealand business access to a larger pool of capital and investors will have greater choice of investments. The Commission and the Australian Securities and Investments Commission are making arrangements which will avoid duplication and provide seamless, cost-effective regulation of offers made in both countries.

We were delighted to win the small employer category of the Unlimited/JRA Best Places to Work in New Zealand Survey in 2006, after coming second in 2005. This is a great credit to all staff. It is an achievement which reflects and endorses their high levels of professionalism and commitment.

I thank the Members and staff of the Commission for their excellent work this year, in particular for their contribution to the development of a securities regulatory framework and practices that are world class.

Jane Diplock AO, Chairman.

Jane Diplock AO
Chairman

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