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1997 Annual Report

CHAIRMAN'S REVIEW

The year under review has been a most productive one for the Commission.
The high level of output was achieved in a year of major legislative changes to securities laws in New Zealand.
The statutory requirements for disclosure to investors and savers about securities products have undergone major changes in the past financial year although the effects will not be felt until 1 October 1997. These changes were brought about following the Accord on Retirement Income Policies and extensive work carried out by a working group in consultation with various industry bodies subsequent to that Accord.

The new statutory requirements extend to securities previously not included under the Securities Act. They now include unit trusts, superannuation funds and some life insurance policies. The new rules also provide a different approach to disclosure about securities products generally. A prospectus is not required to be sent to applicants before the allotment of a security. What will be required is the delivery of a simplified standard disclosure document called an Investment Statement. Such a statement is designed to describe the nature and effect of the security in a short readily understandable form and to allow easy comparison between different investments.

A prospectus must still be prepared and registered by issuers and must be made available on request.

The new rules are seen as providing a more simple system at a lower cost on those raising capital while at the same time making the risks and rewards of investment more easily understood by investors.

The Securities Commission has been heavily involved in the processes leading to the new requirements.

As well as assisting in the working party on the design of the new legislation, the Commission has been responsible for drafting the new Regulations which detail the specific requirements under the new regime. This process involved extensive consultation with those industry groups directly affected, with participants in the wider market and with Government and professional bodies such as the Institute of Chartered Accountants and the Law Society. The resultant regulations reflect the advice and assistance provided by all of these bodies and other interested parties.

As a result of the changes in legislation, all of the existing exemptions issued by the Commission over the years required review by the Commission. The changes had made some of the existing exemptions obsolete and others were inappropriate to the new requirements. Although the new requirements do not commence until 1 October 1997 it was essential that all of the new rules be in place well before that time to enable those raising capital on the markets to prepare the new documentation required.

This review of old exemptions had to be carried out at the same time as the Commission was receiving a greatly increased number of applications for new exemptions. Both the review of the old exemptions and consideration of new applications were regarded as matters of priority for the Commission.

The ability of the Commission to grant exemptions from the statutory requirements about disclosure allows for the quick and low cost ability of issuers to introduce new and innovative products to the market. It is in the nature of securities markets that changes do occur rapidly. Adherence to old standards without the flexibility accorded by the exemption regime means that inappropriate information may be required to be given to investors and to the market and the cost of complying with that requirement may deter issuers from using the New Zealand market.

While the review of the existing exemptions is well on the way to completion there will be a number of new exemptions to be granted in the new financial year. As issuers of securities come to adopt the new rules it is inevitable that there will be some securities products which do not fit easily within the existing Regulations. Formulating details of the new rules will continue to be a high priority for the Commission for at least the first half of the new financial year.

In the year under review the Commission commenced an examination of its role and function. The Commission engaged the services of an economist to examine the nature and operations of the securities markets in New Zealand. That gave rise to a number of issues and questions about the role and function of regulation of securities markets generally and of the role and function of a body such as the Securities Commission in particular. That examination of the role and function of the Commission will be continued by the Ministry of Commerce. The work undertaken by the Commission in this area during the year has been very useful in focusing attention on economic issues affecting the work of the Commission and in explaining its work within the framework of economic principles.

The Commission's functions include the reinforcement of market disciplines by both direct means and by the use of its power of inquiry and comment on market practices. This remains a most important element in promoting confidence in the integrity of the markets thereby helping to encourage savers and investors as well as those accessing capital to use those markets.

The Commission can act directly to cancel false and misleading prospectuses and advertisements and in some other cases of direct enforcement.

In other cases the Securities Commission may obtain information by use of statutory powers and publicise what are considered by the Commission to be unacceptable market practices. The Commission may also assist those wishing to pursue remedies in cases of insider trading and in some other particular areas.

One of the difficulties encountered by market participants in enforcing market disciplines themselves is the absence of information on which to base cases. The Commission may obtain information in order to assist that process. In addition, the power of comment on market practices acts in itself as a deterrent to those who might otherwise wish to engage in improper practices.

The Commission also carries out monitoring of share trading. This often gives rise to further inquiry by the Commission about share trading from the companies concerned, from brokers and from those engaged in the trading itself. While this activity does not always lead to any conclusions about impropriety in the transactions carried out, market participants know that the Commission does take an active role in questioning particular transactions. This in itself can act as a reinforcement of market disciplines against insider trading.

The year under review has been a particularly busy one for the Commission. The statistics appearing in the Chief Executive's report demonstrates the level of increased productivity during the year. This is evidenced by the number of exemptions granted, the number of authorisations given to the Registrar of Companies to ban company directors of liquidated companies and in the other areas mentioned in the report.

This, together with major work involving consultation with the industry over a long period of time on appropriate disclosure regimes for retirement villages, equity warrants and real estate schemes has required a great effort from all of those involved at the Commission.

Commission staff have all performed to a very high level during the year. Staff levels were depleted at various times during the year. That combined with the increased demands on the Commission, the novelty of a great deal of the work and the necessity to comply with tight time frames has imposed heavy demands on the staff. We are very grateful for the dedication and effort by all staff members and by the professionalism of the work produced.

The additional work has also required a greater input from Commission Members at a time when the Commission has not been at full strength. Members have given their time and knowledge willingly in spite of the other demands on their time and expertise. The efficient functioning of the Commission and the securities markets depends on those with wide experience and knowledge about those markets being prepared to devote themselves to the Commission's work.

Two Members of the Commission retired during the year.

Selwyn Cushing, a Member for 13 years, came to the end of his term in April 1997. Mr Cushing brought to the Commission, not only his knowledge and wide experience, but his judgement and commonsense. He will be sorely missed.

Judith Potter resigned in April 1997 upon being appointed a judge of the High Court. Such an appointment speaks for itself so far as her standing and reputation is concerned. Ms Potter brought experience and commonsense to the deliberations of the Commission and she also will be greatly missed.

The new appointments are Ms Joanna Perry and Mr Ian Farrant and the Commission welcomes their offering to serve. One vacancy remains to be filled.

The year ahead promises much of the same as for the previous year especially during the first six month period. Work on the new legislation and the Regulations and exemptions flowing from it will be the prime focus of the Commission during the first few months of the new financial year. This work is essential to enable the new legislation to operate efficiently and to ensure that securities do not have to be removed from the market because of the cost of inappropriate disclosure requirements.

Towards the second half of the financial year that immediate pressure should reduce. That will enable the Commission to apply its resources more towards the oversight of the securities markets, the inquiry work and the other aspects which go to promoting confidence in the integrity of the market.

One part of the Commission's work which will demand more attention is in New Zealand's co-operation with overseas market regulatory bodies. Securities markets no longer observe national boundaries. Countries are moving to co-operate more and more in the passing to one another of information about securities markets and their participants and in assisting to enforce internationally good standards of market behaviour.

New Zealand has a very high level of overseas investment. One of the attributes sought by overseas investors is the existence of internationally acceptable market rules and the means by which those rules may be enforced. The Commission considers it important that New Zealand play a role internationally in demonstrating that the New Zealand markets remain subject to those rules and that investors and those raising capital can be confident such rules will be enforced.

It is not only internationally that such confidence is required. There is increasing emphasis on the need for individuals in New Zealand to save for retirement and for other purposes. Savers and investors as well as those raising capital must be confident that the securities markets operate to their reasonable expectation and that market disciplines will be observed. The Securities Commission will continue to play a part in promoting confidence in the integrity of securities markets in New Zealand by continuing its investigatory and reporting function and by monitoring and making more effective the new disclosure rules.

Signature

E.H. Abernethy

Chairman

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Securities Commission, New Zealand

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