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1997 Annual Report

EXEMPTIONS

Section 5 of the Securities Act empowers us to exempt persons and classes of persons from compliance with a number of the provisions of the Securities Act and Regulations.

Our exemption notices facilitate the development of new investment products under terms and conditions which enable securities law to operate in a suitably straightforward manner. They also address rigidities which from time to time affect more traditional products. We aim to respect the reasonable needs of both the investment institutions seeking the exemption and the investors present and prospective. We wish to ensure that there is a reasonable equivalence of regulatory burden applying to different entities offering similar financial services to the community. We consider that each exemption should be soundly based within the general policies of the Securities Act and Regulations.

We considered 85 exemption applications and we issued 68 exemption notices during the year. The cumulative total of all exemptions approved by the Commission since Part II of the Securities Act came into force in 1983 now stands at 642. Of these 152 are in full force and effect, 309 have been revoked, and some 181 would appear now to have no further application.

Exemptions have come to play a major part in our annual programme of work.

New exemptions which have attracted particular attention in the course of the year include those applying to equity warrants, group investment index funds and real property proportionate ownership schemes.

We reviewed a number of existing exemptions including those relating to credit unions, employee share schemes, both New Zealand and overseas, and co-operative companies.

We published a discussion paper on a new and quite extensive exemption for the offer to the public of interests in resident funded retirement villages. We expect to issue a new exemption notice shortly. We are reviewing the exemption for Australian unit trusts and expect to issue a new class exemption before 1 October 1997 when the new Securities Amendment Act comes into force. We published a discussion paper on equity warrants and we expect to issue a new class exemption in the new year.

More importantly, we have commenced a review of all exemption notices issued since Part II of the Securities Act came into force in 1983. This became necessary on the enactment of the Securities Amendment Act 1996. Many exemptions will no longer be necessary when the Amendment Act, and regulations made under it, come into force on 1 October 1997. Of those which are still necessary most will need to be redrafted to reflect the detail of the new Act. This review has involved us in a major programme of consultation with exempted persons and their legal advisers and a major programme of deliberation.

As at 30 June 1997 there are 80 exemption applications before the Commission. This represents close to a year's programme of exemption work based on previous annual work levels. In addition, new exemption applications will come to us during the course of the new financial year. We need to examine our exemption work priorities with great care. It is not possible at the present time to undertake significant new policy initiatives. Subject to this reservation we shall continue to provide an energetic and perceptive service on exemption matters in the new year.

MARKET AUTHORISATIONS

As a general rule people do not need to be authorised or registered in New Zealand to undertake securities market activity. However, the Commission has certain powers to authorise people to undertake specified activities. We give a high priority to this work.

Trustees and Statutory Supervisors

We have power to approve people to act as trustees or statutory supervisors in respect of the offer of securities to the public. The primary duties of trustees and statutory supervisors are specified in the Securities Regulations.

During the course of the year we reviewed all existing authorisations. We revoked 10 authorisations on the grounds that they were no longer required. We revoked and reapproved a further 10 authorisations on new conditions. We received and approved 3 new applications for authorisation.

Futures and Options Contracts

We authorised 17 people to deal in futures contracts during the year. Of these 5 people were authorised to deal in futures contracts generally and 12 people to deal in electricity price futures contracts. These latter authorisations were given subject to the condition that the parties to the electricity price futures contracts are persons with a professional interest in the electricity industry in New Zealand.

Our powers of authorisation are contained in Part III of the Securities Amendment Act 1988. We have recommended to the Government that Part III be amended, among other things to empower us to authorise dealers on a class basis. It would, for example, have simplified greatly the process of approving the electricity price futures dealers if we had had that power.

We have obtained information from authorised futures dealers about their practices in dealing in over the counter derivative contracts. This information was requested in the course of a continuing review of futures market activity involving New Zealand authorised persons.

Electronic Securities Transfer Systems

The Commission is empowered to recommend that the Government approve any electronic system for the transfer of securities.

During the year we made one recommendation, namely, that the Government approve the CHESS system for the transfer of securities to enable the Australian Stock Exchange to apply the system to New Zealand companies which are listed and traded on the Australian Stock Exchange.

We expect a further application from the New Zealand Stock Exchange in respect of its FASTER system for the electronic transfer of securities on the New Zealand market.

MARKET INTERVENTION

During the year we endeavoured to limit our market intervention to those areas in which we have particular statutory powers or responsibilities, for example, the offer of securities to the public, financial reporting by issuers of securities, insider trading, the disclosure of substantial holdings in listed securities, and dealing in futures and options contracts.

We made inquiries into aspects of the financial statements of 17 listed companies. We did not publish a comment on any of these. The Registrar of Companies referred some 166 sets of financial statements to us on the grounds that the auditors' reports were qualified. Generally these did not call for action on our part but we maintain a continuing dialogue with the Registrar on matters arising from consideration of these financial statements.

We completed inquiries into dealing in the shares of 6 listed companies, particularly dealing by insiders and by substantial security holders. Four inquiries were continuing at year end. We expect the New Zealand Stock Exchange to draw our attention to matters of concern to them.

We asked, or approved the requests of, the Registrar of Companies to inspect the books and papers of issuers or promoters of securities on some 17 occasions. We have received 15 reports and have commented on all recommendations made by the Registrar in these reports.

We received 3 requests for information or assistance from overseas agencies, in particular, from the Australian Securities Commission, the United States Securities and Exchange Commission and the United States Commodity Futures Trading Commission. The Minister of Commerce, acting in accordance with the appropriate statutory authority, accepted our recommendation that we comply with two requests. The third request has just been received and is at present under action. We believe we have enhanced our standing in overseas jurisdictions by our ability to respond promptly and positively to qualifying requests of this kind.

Offers to the Public

We suspended one registered prospectus. We cancelled one prospectus. We prohibited advertising for securities in respect of 4 offers of securities. The claims of many promoters are quite outrageous. Notwithstanding this we are unable to deal with all advertisements that come to our attention and increasingly we rely on the general public to act with prudence and discretion in choosing their investment opportunities. In the longer term, programmes of education are more important than prohibition orders in promoting orderly behaviour in the investment promotion and advisory industries.

Prohibition of Directors

We considered 29 requests from the Registrar of Companies for consent to prohibit persons from promoting, directing or managing a company registered under the Companies Act 1955 or the Companies Act 1993. This is a substantial increase on the 16 requests received last year. This is a difficult and time consuming task for the Commission.

The Registrar has informed us that as at 30 June 1997 he has some 20 requests pending. It seems probable that the programme of work for the Commission in the new year will be even more substantial than it has been this year.

We have asked the Ministry of Commerce to review the nature of and need for our involvement in this process. In the meantime we give priority to these requests.

Corporations (Investigation and Management Act) 1989

This Act provides, among other things, for companies to be placed in statutory management or for companies to be declared at risk and for the Registrar of Companies, with our consent, to issue directions to the company. We received one request for action during the year, in respect of two associated companies, and this was approved.

REFORM

In establishing our priorities for the review of business law and practice we have concentrated on those matters which should represent a first call on our resources, important matters on which we have an explicit statutory responsibility.

Private Provision for Retirement

Our most important commitment during the year has been to complete the programme of work initiated by the Working Group on Improved Product and Investment Adviser Disclosure at the request of the Parliamentary Accord Parties on Private Provision for Retirement.

The Securities Amendment Act 1996, the Investor Adviser (Disclosure) Act 1996 and certain other related Acts were passed into law on 2 September 1996. They provide for improved disclosure of information about investment contracts, about the people who offer securities to the public, and about the people who act as investment advisers to the public. They extend the Securities Act to apply to the disclosure of information by life insurance companies, superannuation scheme managers and unit trust managers and trustees. They come into force on 1 October 1997.

The principal programme of reform work for the Commission has been to settle the terms of Securities Amendment Regulations for recommendation to the responsible Minister, the Minister of Commerce. These new regulations will prescribe the information to be contained in the new Investment Statements, which are intended to assist the prudent but non-expert investor. In the case of life insurance, superannuation and unit trusts the new regulations will also specify the information to be contained in a registered prospectus.

Throughout this period of work we have relied heavily on the advice, comment and submissions of market participants and industry associations. We are particularly grateful to the New Zealand Law Society, the Institute of Chartered Accountants of New Zealand and the Association of Superannuation Funds of New Zealand Inc all of whom were actively assisting us until it became necessary for us to make our recommendation to the Government.

We made our recommendation for new regulations on 30 May 1997.

Securities Act 1978

The Commission is pleased to note that there is a Statutes Amendment Bill at present before Parliament which provides for a number of amendments to the Securities Act 1978. These amendments were included in the Bill on the recommendation of the Commission. If enacted they will assist us in simplifying and streamlining the management of business within the Commission. This will be particularly helpful in enabling us to cope with the new work which will result from the coming in force of the Securities Amendment Act 1996. It will be particularly reassuring for us if these amendments are in force by 1 October 1997.

We also have under consideration a number of possible amendments to the Securities Act which were not appropriate for consideration in the Statutes Amendment Bill because they had a policy content. We have deferred work on these until we have completed the review of exemption notices made necessary by the enactment of the Securities Amendment Act 1996.

Securities Regulations 1983

The Securities Regulations in their present form were enacted in 1983. They have not been comprehensively reviewed since then. A number of changes were recommended as a result of the recommendations of the Working Group on Improved Product and Investment Adviser Disclosure. However, the Working Group was not able to undertake a comprehensive review of the Regulations and it has not been possible to undertake this in the meantime. It remains a high priority to complete a review of the Regulations and we aim to commence this work in the new year.

In undertaking this review we propose to pay close attention to the relationship between the provisions of the Securities Regulations relating to the disclosure of financial information and the financial reporting standards approved under the Financial Reporting Act. We shall aim to address any unnecessary duplication of disclosure rules.

We have previously made recommendations to the Government on the amendment of the regulations relating to the disclosure of prospective financial information in a registered prospectus for equity, debt and participatory securities. The recommendations were prepared after careful consideration of comments and submissions received from interested members of the public.

We have also made recommendations for the amendment to the regulations about accounting by a borrowing group for investments in non-guaranteeing subsidiaries for the purposes of disclosure in a registered prospectus for debt securities. Again, these recommendations were prepared after careful consideration of submissions from interested persons.

Financial Reporting

We have conferred regularly with the Financial Reporting Standards Board of the Institute of Chartered Accountants of New Zealand about financial reporting matters. We aim to maintain the ability, where appropriate, to evaluate the conceptual basis of the Institute's Exposure Drafts for financial reporting standards. This has become all the more important since the establishment of the Accounting Standards Review Board under the Financial Reporting Act.

We comment regularly to the Institute on Exposure Drafts. During the year we commented on 6 Exposure Drafts or Standards.

We participated in industry working groups established for the purpose of developing Exposure Drafts on life insurance and financial institutions. The Institute, jointly with its equivalent body in Australia, has published an Exposure Draft on life insurance and has invited submissions from interested people. It is at present reviewing submissions received. The Institute has approved a standard on financial institutions. This has also been approved by the Accounting Standards Review Board and is now an approved financial reporting standard under the Financial Reporting Act.

Insider Trading

We completed our review of Part I of the Securities Amendment Act 1988 and made recommendations to the Government for reform on 15 June 1996.

We consider our recommendations to be appropriate and timely and we are corresponding with the Ministry of Commerce about them.

Dealing in Futures Contracts

We completed a review of Part III of the Securities Amendment Act 1988 and made recommendations to the Government for reform on 21 December 1994.

We continue to consider our recommendations to be appropriate and timely and we are corresponding with the Ministry of Commerce about them.

Substantial Security Holders

We have reviewed the operation of Part II of the Securities Amendment Act 1988. Part II has been in force for 8 years now and important changes have occurred in corporate law and securities market practice in that time.

Notwithstanding extensive comment from the public on our discussion paper we have encountered difficulty settling our views on the disclosure of interests in options and other convertible securities. The terms of convertible securities issued by New Zealand listed companies are extremely varied. They do not always lend themselves to disclosure in a clear and straightforward manner. We are aware that a similar difficulty has been encountered in other jurisdictions.

We hope to be able to issue a paper containing proposals for reform in the new year.

In close consultation with the industry we redesigned the forms prescribed in the Regulations for the disclosure of interests by substantial security holders for the purpose of making them simpler and clearer. We made recommendations to the Government for new regulations during the year. The Government accepted these recommendations and enacted new regulations on 9 June 1997. These will come into force on 1 August 1997.

Other Comments and Recommendations

We have commented on matters of interest to the Commission at the invitation of the Company Law Monitoring Group, of an industry review committee on the Insurance and Savings Ombudsman Scheme, of the New Zealand Society of Actuaries, the Retirement Commissioner, the Law Commission, the New Zealand Stock Exchange, the Australian Financial System Inquiry Committee chaired by Mr Stan Wallis, and others.

Other Matters

We included in our Work Programme for the present year items of work on due diligence, corporate governance and funds management. With the great pressure of other projects we did not complete our work on these matters.

Similarly we were unable to complete our discussion paper on market manipulation.

Self-Regulation

We advocate self-regulation under competent, independent and preferably statutory oversight. We have the following special associations developed in the course of exercising our statutory powers:

  1. Advertising Standards Complaints Board - The Securities Regulations 1983 include rules about advertisements for securities. These regulations are supplemented by the Code of Practice for Financial Advertising of the Advertising Standards Authority, an authority comprising representatives of the media and the advertising industry with objectives which include:

    1. "to seek to maintain at all times and in all media a proper and generally acceptable standard of advertising", and

    2. ""to establish and promote an effective system of voluntary self-regulation".

    The Authority has established and funds an Advertising Standards Complaints Board which adjudicates on complaints about advertisements. As a general policy the Commission expects the Board to handle all financial advertising complaints in relation to the media and we refer complaints to the Board. The Board routinely requires the media to withdraw advertisements that do not comply with the Code. Difficult cases may be referred to us, as we have authority under the Securities Act to prohibit advertisements in appropriate cases;

  2. Investment Savings and Insurance Association of New Zealand - Life insurance companies, as a condition of exemption from the provisions of the Securities Act relating to prospectuses and trust deeds, have complied with the Association's Code of Business Practices. In doing so, they have accepted the jurisdiction of the Insurance and Savings Ombudsman, previously the Life Office Association, to handle policy holders' complaints. The ISIA has remained responsible for matters arising under the Code before the Ombudsman scheme was established. With effect from 1 October 1997 the life insurance companies will be subject to the provisions of the Securities Act and Regulations about the disclosure of information when offering their investment products. From that date the rules of law about prospectuses and investment statements will apply;

  3. New Zealand Racing Conference and Harness Racing New Zealand - The primary responsibility for regulating the syndication of thoroughbred and standardbred breeding stock at present rests with these Associations. Members of an Association are exempted from the rules of law about the prospectus and the statutory supervisor, if they comply with the Association's Code of Conduct;

  4. Local Authority and Other Venture Capital Schemes - We have seen a need to reduce the cost to small firms, particularly venture capital firms, of raising small amounts of equity capital. We have identified people, predominantly people associated with local authorities, who are willing to administer schemes for the promotion of equity investment in business based in their respective districts. We have approved an exemption in respect of the offer of shares to the public in accordance with these schemes, subject to compliance with an approved Code of Practice and subject to the presentation of a scheme report to the Commission annually.

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    Securities Commission, New Zealand

    12th floor, Reserve Bank Building, 2 The Terrace, PO Box 1179 Wellington, New Zealand

    +64 4 472 9830 phone +64 4 472 8076 fax

    Inquiries to seccom@seccom.govt.nz