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Annual Report 30 June 1998
   
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.. Chief Executive's report continued
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 received and approved one new application for authorisation. Futures and Options Contracts We authorised 2 firms to deal in futures contracts during the year. Both firms are members of the New Zealand Futures & Options Exchange. Electronic Securities Transfer Systems The Commission is empowered to recommend that the Government approve any electronic system for the transfer of securities. At the request of the Australian Stock Exchange the Commission recommended an amendment to the Securities Transfer (System for Electronic Transfer of Securities on the Australian Stock Exchange) Order 1997. The Government approved this amendment. It allows shareholders of New Zealand issuers with securities listed on the Australian Stock Exchange to benefit more fully from the CHESS system for the transfer of securities by having their shares recorded in an issuer-sponsored sub-register. At the request of the New Zealand Stock Exchange the Commission recommended that the Government approve the Securities Transfer (Approval of FASTER System) Order 1998. The order was approved. The extended FASTER system permits the transfer of securities quoted on the NZSE without the need for written transfer forms or certificates of security. We focus on areas where 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. Since October 1997, we have become responsible for the quality of the new investment statements. These are now the primary offering document for securities and they are not registered with the Registrar of Companies. We have also now found it necessary to consider compliance questions about investment advisers under the new Investment Advisers (Disclosure) Act. Offers to the Public We reviewed 36 investment statements. Of these, 26 were amended or replaced following discussions between the offeror and the Commission. We suspended 2 registered prospectuses. We prohibited advertising for securities in respect of 7 advertisements. We issued 8 public warnings, 5 relating to specific schemes and 3 of a more general nature. We asked, or approved the requests of, the Registrar of Companies to inspect the documents of issuers or promoters of securities on 13 occasions. We have commented on all recommendations made by the Registrar in his follow-up reports. We endeavour to act promptly against significant schemes which do not comply with the law, either to secure their discontinuance or to warn the public. Unfortunately we continue to see a proliferation of such schemes, many of them originating from overseas. Investors put themselves at great risk when they remit money offshore without any real knowledge of the scheme or of the people behind it. Many of the schemes are not promoted bona fide. We consider we have played a useful role in publicising the shortcomings of these and other schemes and so helped to avoid losses on the part of investors. However, these types of schemes are increasing in volume and intensity and investors will need to take even greater care in future. We have been surprised at the level of involvement of legal practitioners in some of these schemes. Financial Statements We have reviewed the financial statements of many life insurance companies. A new financial reporting standard is long overdue. We made inquiries into aspects of the financial statements of 11 listed companies. We considered the financial statements of retirement village schemes and their managers, credit unions, friendly societies, building societies and finance companies. The Registrar of Companies referred some 6 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. However, we maintain a continuing dialogue with the Registrar on matters arising from consideration of these financial statements. Share Dealing We completed inquiries into dealing in the shares of 5 listed companies, particularly dealing by insiders and substantial security holders. Three inquiries were continuing at the end of the year. There was no enforcement action against insider traders or substantial security holders in the Courts. No self-enforcement has occurred under the Securities Amendment Act 1988 in the last year. However, the Commission continues to undertake inquiries under its general powers of inquiry and considers that these inquiries, accompanied from time to time by public comment from the Commission, provide a useful incentive for investors to comply with the law. The Commission has for some time recommended to the Ministry of Commerce changes to insider trading law to make it more serviceable. Prohibition of Directors We considered 25 requests from the Registrar of Companies for consent to prohibit persons from promoting, directing or managing a company registered under the Companies Act 1993. This is a time-consuming task for the Commission. We have recommended to the Minister of Commerce that the role of the Commission in the prohibition procedure should be discontinued. Corporations (Investigation and Management) Act 1989 The Act provides, among other things, for companies to be placed in statutory management or for the companies to be declared at risk and for the Registrar of Companies, with our consent, to issue directions to the company. We received two requests for action during the year and these were approved. Requests from Overseas We received 4 requests for the exercise of our statutory powers to obtain information for overseas securities commissions, in particular, the United States Securities and Exchange Commission, the Australian Securities Commission, the Hong Kong Securities & Futures Commission and the Comissáo do Mercado de Valores Mobiliários in Portugal. The Minister of Commerce, acting in accordance with the appropriate statutory authority, accepted our recommendation that we comply with 3 of these requests. The fourth request was dealt with using the more routine inspection procedure, as the matter was also within our own domestic responsibilities. We endeavour to respond promptly and positively to requests of this kind from overseas regulators. The New Year We believe the enforcement work of the Commission is important. We should increase this work. We are continuing our discussions with the Government on funding for this increased effort. In establishing our priorities for the review of securities law and practice we have concentrated on those matters which should represent a first call on our resources, important matters for which we have an explicit statutory responsibility. The Ministry of Commerce has primary responsibility for business law reform, including securities law reform. We confer with the Ministry on all aspects of our law reform work. We are grateful for the help which they give us. Securities Act 1978 The Securities Amendment Act 1996, Securities Amendment Act 1997, Securities Amendment Regulations 1997, and Securities (Fees) Amendment Regulations 1997 all came into force on 1 October 1997. This legislation, with accompanying amendments to the Financial Reporting Act 1993, the Superannuation Schemes Act 1989, and the Unit Trusts Act 1960, introduced a new disclosure regime for offers of securities to the public. The principal changes include the extension of the disclosure requirements of the Securities Act to life insurance companies, superannuation schemes and unit trusts. The new regime introduces the investment statement, a simplified disclosure document, as the primary offering document for securities. The investment statement is designed to provide essential information about securities to the prudent but non-expert investor and to present it in a form which helps comparison between different types of securities. The Investment Advisers (Disclosure) Act 1996 also came into force on 1 October 1997. This requires people providing investment advice, or receiving investment money, to make certain disclosures to clients, about their qualifications and experience, the types of securities on which they advise and the firms they are associated with, their fees and other sources of remuneration and their procedures for handling client money. The Securities Amendment Act (No. 2) 1997 came into force on 28 July 1997. This Act contains a number of amendments to the Securities Act 1978, recommended by the Commission. These amendments relate largely to the operation of the Commission. The Commission was actively engaged in programmes of work to ensure that the new law came into force in an orderly manner, conferring benefits on both issuers of securities and investors, particularly in the areas of public understanding and exemptions. Following the completion of the review of exemption notices, we were able to resume our programme of work on a number of possible amendments to the Securities Act and the Securities Amendment Act 1988. We have recommended a number of amendments to the Government for inclusion in a Business Law Amendment Bill. Some of these amendments have been included in the Bill and some have been deferred pending the completion of the Government's review of the role and functions of the Commission. Others have been included in a consultation paper published by the Ministry of Commerce seeking public comment. We believe all these amendments are important and we hope they will be enacted in the new year. 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. It remains a high priority to complete a review of the Regulations. The review will afford an opportunity to make recommendations, among other things:
The Ministry of Commerce wishes to take responsibility for this review. We are awaiting the Ministry's proposals for this work. We have been involved in discussions with industry groups on the definition of "term life insurance policy" in the new 1997 Regulations and we expect to need to recommend a change in the new year. Financial Reporting We have continued to confer regularly with the Financial Reporting Standards Board of the Institute of Chartered Accountants of New Zealand about financial reporting matters. During the year we commented on 4 Exposure Drafts and Standards released by the Institute. We provided comment to the Institute on the work of the International Accounting Standards Committee. We proposed a work programme on simplified financial statements for use by "the prudent but non-expert investor". The Commission participated in an industry working group established for the purpose of developing an Exposure Draft on financial reporting by life insurance businesses. A draft Financial Reporting Standard was issued by the Board and attracted considerable comment. We hope that a new standard will be approved shortly. The Accounting Standards Review Board approved one standard during the year, bringing the total number of approved financial reporting standards to 19. Issuers of securities are required to comply with these standards and they therefore have the force of law. Securities Amendment Act 1988 We continue to correspond with the Ministry of Commerce on possible amendments to the law relating to insider trading and dealing in futures contracts. We consider that the present law could function more effectively in accordance with its present policy obligations if changes were made. We consider it all the more important that these changes should be made, given that no major review of the law is planned at present. We are currently finalising proposals for possible amendments to Part II of the Securities Amendment Act, relating to disclosure of substantial security holdings in public issuers. We have been consulting with the New Zealand Stock Exchange regarding the final form of our recommendations for reform. Life Insurance Industry Law and Practice
In December we published a discussion paper on Life Insurance. We received a number of responses to our invitation to comment on this paper. We reported to the Minister of Commerce. We understand that the Minister has initiated a full review of the Life Insurance Act 1908.
Review of the Securities Commission The Commission co-operated fully with the Ministry in the course of its review of the role and functions of the Commission. We welcomed this review, the first in the twenty years of the Commission's existence. A third-party review of the Commission was appropriate. The Ministry expects to complete the review in November 1998. International Projects At the invitation of the Asia Pacific Regional Committee of IOSCO, we act as convenor of a Working Group comprising ourselves, the Malaysian Securities Commission and the Hong Kong Securities and Futures Commission, which is responsible for a project on Competition Policy and Securities Markets Regulation. This project is intended to provide the initial steps towards developing a framework for cost-benefit analysis of regulations and regulatory proposals. The Working Group is seeking funding for an analytical study from the Asian Development Bank. We commented to IOSCO on a consultative draft statement of the objectives and principles of securities regulation. Other Comments and Recommendations We have commented on matters of interest to the Commission at the invitation of the Ministry of Commerce, the Reserve Bank, the Law Commission, the Consumers' Institute, the Retirement Commissioner and the High Court Rules Committee. The Commission made submissions to the Commerce Committee of Parliament on one Bill. The Commission commented on proposals from the New Zealand Stock Exchange for amendments to the Listing Rules. Some of these amendments related to the introduction of the new FASTER system for the electronic transfer of securities on the Exchange. With the increasing effects of technology on the securities markets, we have commenced a review of practices relating to electronic offerings and trading of securities. We are looking in particular at the challenges presented to regulators by the growth of advertising for securities appearing on the Internet. We see our objectives as being:
A programme of work on market manipulation was completed. We observed that there were already a number of rules of law which applied to the manipulative practices which we had identified. We concluded that there was no need for us to do further work and we decided not to publish a discussion paper. Self-Regulation The Commission supports self-regulation under competent, independent, and preferably statutory oversight. In the course of exercising our statutory powers we have developed relationships in particular with:
We completed an audit of our procedures for promoting public understanding during the year. We appointed a part-time communications manager. We wished to enhance our performance in this work category. We have seen the following achievements:
Other efforts to increase public understanding of securities law and practice were speeches and presentations to a variety of audiences, and responses to many requests for information, both from within New Zealand and overseas. A brochure, Test Before You Invest, was jointly produced with the Office of the Retirement Commissioner and the Ministry of Consumer Affairs. We shall continue these initiatives in the new year. The Commission was not a party to any action in the Courts during the year. We incurred expenditure on two matters on which Court action may arise in the new year. The Ministry of Commerce commissioned consultants to review and assess the current operational and financial management efficiency of the Commission. The consultants' assessment was that the Commission was effectively managed and that there was a strong management focus on the work programme as a basis for allocating work and establishing priorities. Quality of output and timeliness of delivery were important service attributes that governed the work of the Commission. There also appeared to them to be an awareness at senior levels of overall financial management constraints and issues and this awareness was evident in the prudent management of cash and limited resources. The consultants made certain recommendations which the Commission is in the process of implementing. In particular, they recommended that we upgrade our information systems. We have committed to new systems for installation early in the new financial year. We invited the Government Communications Security Bureau to undertake a review of our security arrangements. The report was generally very favourable. The Bureau has agreed to act as security advisers in the implementation of our new IT system. We are grateful for the Bureau's advice and assistance. We also commissioned a review of our occupational health procedures and changed certain aspects of our operating practices. Three full-time members of staff resigned during the year. We made one full-time and two part-time appointments. There are now two fewer lawyers on the staff. This has reduced our capacity to undertake legal work. This is becoming particularly evident in our work on exemption applications. We are conferring with the Minister of Commerce about supplemental funding sourced from third parties, in particular, applicants for exemption. We expect new fees and charges regulations to be enacted in the new year. We commenced a review of our role and functions in early 1996. In early 1997 the Ministry of Commerce assumed responsibility for this review. The Ministry considered the present operations of the Commission with the assistance of independent consultants and solicited public comment on the effectiveness of the Commission's present role and functions for regulating capital markets in New Zealand. The Minister of Commerce has informed us after studying reports from officials on this work that he considers the Commission to be a cost-effective and efficient regulator of New Zealand securities markets and that the Ministry's proposals are for a minor refocusing of the Commission's functions rather than substantial change. We understand that the Ministry expects to present its final report to the Minister at the end of November 1998. We shall follow the Ministry's deliberations with great interest. Our functions under the Securities Act at present include:
To perform these functions we have a number of powers. These include:
The Commission is required to consider certain matters arising under the Corporations (Investigation and Management) Act 1989 (in particular, directions to "at risk" corporations and declarations of statutory management) and under the Companies Act 1993 (in particular, the prohibition of directors, promoters and managers of companies).
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