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2007 Annual Report

Exemptions and authorisations

Exemptions from the law reduce costs for issuers bringing new and overseas investment products to the New Zealand markets. The power to exempt people from complying with various parts of securities law is not used lightly. All exemptions are based on the policy of the law and conditions are imposed so that issuers comply with the spirit of the law. In particular, conditions relate to the information that issuers must give investors to enable them to make informed investment decisions.

It is more cost-effective for issuers to rely on class exemptions, but where this is not possible individual exemptions can be granted. Where an application for exemption raises policy questions the public is consulted if time allows. In these cases an applicant may incur costs for this public benefit and the Commission is grateful to applicants for their willingness to do this.

Authorisations by the Commission are required by certain market participants including trustees and statutory supervisors, and futures dealers who cannot rely on a class authorisation granted to futures and options participants on the NZX and the Sydney Futures Exchange.

Review of class exemptions
The Commission reviews its class exemption notices every five years to make sure they are current and useful for market participants, and consistent with Commission policy. For the 2007 review comments were sought on some 50 class exemptions from market participants, industry groups, lawyers, accountants and others. We are grateful for the industry involvement in this process. We do not expect to make significant policy changes in this review given the Government’s current reform projects. However, where appropriate, amendments will be made to make sure that exemption notices are in line with market developments and industry practice.

As part of the review the Commission will grant a new class exemption for initial public offerings by companies intending to list on the NZSX market. This will reflect exemptions routinely sought by companies seeking to list on the NZSX market. It will reduce compliance costs for these companies, while protecting investors’ interests by making sure that relevant information is provided in the offer documents. The review of class exemptions is due to be completed by 30 September 2007.

Exemptions for property developers
An increasing number of exemptions are being sought by property developers whose developments raise securities law issues. This has largely occurred since the Commission accepted enforceable undertakings from several developers who had inadvertently breached securities law. The Commission is expanding the class exemption for residential property developments to allow a wider range of developments to use this exemption rather than apply for an individual exemption.

New exemption power
Changes to the Financial Reporting Act in 2006 gave the Commission a new exemption power concerning financial reporting by overseas issuers. This came into force on 18 June 2007. It will be used to ease compliance costs for overseas issuers where financial reporting requirements of their home jurisdictions are sufficiently robust that New Zealand investors will not be prejudiced if the issuer files its overseas accounts in New Zealand, instead of financial statements that comply with the Financial Reporting Act. The first exemption, for certain issuers incorporated in the United States and subject to reporting requirements under United States securities law, was gazetted on 26 June 2007.

Futures contracts
The Commission intends to make a declaration that "rolling spot" foreign exchange contracts be regulated as futures contracts. This was supported by most submissions received on the Commission’s April 2006 discussion paper on regulation of these contracts. As a result, a number of foreign exchange dealers may need to seek authorisation as futures dealers, and requirements for futures dealer authorisations are being reviewed, including terms of authorisation that suit dealers who are not under the day-to-day supervision of a registered exchange. A revised policy on authorisations will be published in the second half of 2007.

The Commission published a discussion document suggesting that contracts for difference over equity securities should be declared to be futures contracts, as a class. This follows several individual declarations sought by market participants who offer these products. The purpose of the declaration would be to give certainty to the market about the regulatory treatment of these contracts. Submissions are currently being considered.

Registered banks and foreign exchange derivatives
The Commission granted an exemption from securities law and an associated futures dealing authorisation for registered banks that deal in foreign exchange derivatives. The combined exemption and authorisation gives banks clarity about the law that applies to these products. It also means investors will be given disclosure about these products based on the investment statement, but tailored to the particular requirements of foreign exchange investment, and flexible enough to be compatible with disclosure documents required under Australian law.

International cooperation and recognition

The Commission’s international work has three main components:

enforcement of New Zealand securities law where cross-border breaches and fraud are suspected;
contributing to strengthening the international investment environment by raising the standard and consistency of regulation and cross-border cooperation at the global level; and
contributing towards a single economic market between New Zealand and Australia and facilitating mutual recognition of securities offerings.

Enforcement of securities law in cross-border cases
In today’s global environment it is vital for securities regulators to work together to combat financial fraud. The Commission has multilateral and bilateral arrangements with overseas regulators to enable enforcement of securities law where cross-border fraud is suspected.

The Commission is a long time member of the International Organisation of Securities Commissions (IOSCO). IOSCO’s members regulate over 90 percent of the world’s securities markets across more than 100 jurisdictions. The IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (IOSCO MMOU) enables signatories to exchange information across borders to enforce domestic legislation and combat international fraud. The Commission was accepted as a signatory in 2003 after rigorous scrutiny by international experts and increasingly uses the IOSCO MMOU to gather information from overseas. In the 2006 calendar year, the Commission used the IOSCO MMOU eight times for enforcement inquiries.

The Commission also has a number of bilateral agreements and this year signed a bilateral Memorandum of Understanding with the Dubai Financial Services Authority. Assisting overseas counterparts contributes to global and domestic investment environments in which investors can have confidence. The Commission gave priority to requests for assistance from other regulators. The Commission completed a regional IOSCO survey about the process for requesting and providing assistance to counterparts overseas when local law requires checks on the standing of persons applying to be authorised as cross-border market intermediaries.

Contributing to the international investment environment IOSCO is the international standard setter for securities regulation. It aims to:

establish and promote high regulatory standards for just, efficient and sound markets;
establish an effective surveillance of international securities transactions;
promote market integrity through mutual assistance for a rigorous application of standards and effective enforcement against offences; and
promote the development of domestic markets.

The Commission is a member of IOSCO’s governing body, the Executive Committee. In 2006, Jane Diplock was re-elected to chair this committee for a further two years. The Commission is also Vice-Chair of IOSCO’s Asia Pacific Regional Committee. These roles raise New Zealand’s profile in the international financial community and provide opportunities to promote New Zealand as a market regulated in accordance with the IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles). The Principles are the benchmark for securities regulation that protects investors, ensures markets are fair, efficient and transparent, and reduces systemic risk. The IOSCO Principles are used by the International Monetary Fund and the World Bank in financial sector assessment programmes to evaluate the strength of a jurisdiction’s securities regulation.

IOSCO adopted a new strategic direction in April 2005 under Jane Diplock’s chairmanship. This aims to raise the standard and consistency of securities regulation worldwide and combat cross-border fraud by encouraging and helping member jurisdictions to implement the IOSCO Principles and sign on to the IOSCO MMOU. The Presidents Committee (the annual meeting of all member regulators) set a deadline of 1 January 2010 for all IOSCO member regulators to join, or commit to join, the IOSCO MMOU.

In the past year IOSCO made substantial progress on increasing signatories to the IOSCO MMOU, helping members to implement the IOSCO Principles, and engaging with the wider international financial community. To date, 41 member regulators have joined the IOSCO MMOU, and a further 15 have committed to the reforms needed to join. The Commission is on the screening group which reviews applications to join the IOSCO MMOU.

At the 2007 conference, IOSCO members decided to increase efforts to implement the IOSCO Principles. The Commission is a founding member of the task force which assists with this through workshops, regional presentations and training.

The Commission took part in the work of IOSCO’s Asia Pacific Regional Committee contributing to the annual meeting of enforcement directors, the first meeting of directors of intermediaries’ supervision, and a sub-committee on implementing the IOSCO Principles. The Commission has joined a database set up by IOSCO to enable regulators to share information on applying International Financial Reporting Standards (IFRS). The aim is to promote consistency in applying IFRS. IOSCO monitors the database and refers any interpretation issues to the International Accounting Standards Board or the International Financial Reporting Interpretations Committee.

In her IOSCO role, the Chairman met with the IMF and World Bank, and spoke at IOSCO’s annual, technical committee and emerging markets committee conferences. She also spoke to the International Council of Securities Associations, the inaugural Gulf Cooperation Council’s Regulators Summit (which she chaired), and the first joint IOSCO / Financial Stability Institute seminar. The Commission contributed to regional and national comparative studies for IOSCO, APEC and the IMF on the IOSCO Principles, capacity building of regulatory agencies, and governance practices of financial regulators and supervisors.

Contributing to a single economic market with Australia
The Commission met with the Australian Securities and Investments Commission (ASIC) to discuss trans-Tasman regulatory and enforcement issues. The two regulators are developing arrangements to regulate securities offerings under the mutual recognition regime due to come into effect later this year. Commission staff work regularly with ASIC counterparts on operational matters. As in previous years, several senior staff attended the ASIC Summer School. The Commission and ASIC provided technical assistance to the securities regulator of Brunei Darussalam to help them apply to join the IOSCO MMOU. This project, under the IOSCO MMOU assistance programme, was partially funded by the Asian Development Bank.

The Chairman took part in the Australia New Zealand Leadership Forum and the Trans-Tasman Business Circle. Commission Member Keitha Dunstan spoke on developments in New Zealand’s regulatory framework to the Banking and Financial Services Law Association in Queensland.

Other international liaison
During commitments to IOSCO Chairman Jane Diplock takes up opportunities to promote New Zealand as a well-regulated market in which investors can have confidence. This year she met with the United States Securities and Exchange Commission, the Securities and Exchange Surveillance Commission and the Financial Services Agency in Japan, the Dubai Financial Services Authority, the Comisión Nacional de Valores in Argentina and the Comisión Nacional del Mercado de Valores in Spain.

Commission Member Lloyd Kavanagh took part in the OECD’s Roundtable on Capital Market Reform in Asia. Senior staff presented papers on exchange demutualization, consolidations and alliances at an IOSCO conference in Vietnam, attended an enforcement symposium hosted by the United Kingdom Financial Services Authority and an IFRS course organised by the International Accounting Standards Board. A delegation from the Shanghai Stock Exchange visited the Commission.

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