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Annual Report 30 June 1998

Title Page

Statement of Purpose

Notable Events

Members

Chairman's Review

Chief Executive's Report

Work Programme 1998/99

Financial Statements

Statement of Objectives

Statement of Service Performance

Report of Audit Office

Staff

Chairman's Review

E H Abernethy - Chairman
The Commission achieved a very high level of output during the year. The report of the Chief Executive sets out the results in detail.
There is increasing demand for the Commission's services. This is caused by several factors including the growing complexity of the securities markets, the speed at which markets develop and change, increasing globalisation of the markets and the greater range of responsibilities placed on the Commission by legislation which came into force during the year.
Complexity and change are significant features in securities markets worldwide and New Zealand is no exception. Promoters increasingly offer a range of savings and investment products to suit a variety of savers' and investors' individual needs and objectives. Enterprises raising capital demand flexibility for their own business circumstances. The availability of a range of diverse products is especially important where savings and investment are to be encouraged and where local entrepreneurs wish to access local markets to expand business. The methods of offering, subscribing and settling securities transactions are developing and changing. The use of electronic communications across national borders is increasing.
The Commission can, and does, act to remove barriers and impediments to such innovation.
Dated and prescriptive legislation can stifle innovation and development of savings and investment products. Legislative change is too slow to accommodate market demands.
The Commission, through its exemption powers, grants exemptions from the operation of the Securities Act in suitable circumstances and often subject to rules about disclosure more appropriate to the particular product being offered. This important function aids the development of the New Zealand securities markets and helps investors by having a better range of investment products available to suit their individual circumstances. The demand for exemptions continues at a high level.
Another growing demand on the Commission's resources is in response to the increasing globalisation of the securities markets. This brings with it the need for co-operation between countries. Co-operation often involves mutual recognition of the rules of different jurisdictions in order to lower transaction and compliance costs for multi-jurisdictional offers and trading in securities between organisations in different jurisdictions. Failure to respond to international practice may result in multi-jurisdictional offers not being made in New Zealand. This can result not only in reduced choices for New Zealand investors but also direct losses where, for example, conversion rights or other benefits cannot be offered locally. It is important that the Commission recognises overseas laws and practices so that overseas offers, such as the recent AMP Society offer in Australia, can be made in New Zealand.
Globalisation brings increasing need for co-operation in obtaining information about the market operations of people or organisations in offshore jurisdictions and in enforcement where frauds or breaches of securities laws are carried out across national borders.
New Zealand relies heavily on overseas investment. The work of the Commission ensures that New Zealand continues to be regarded as a co-operative jurisdiction in securities markets, is properly regulated and that the New Zealand Securities Commission is seen to observe the co-operative principles required by the international markets.
New legislation affecting the securities markets came into force during the year. This legislation for the first time included offering documents of life insurance companies, unit trusts and superannuation funds under the Securities Act as well as the new form of investment statement for all securities. The Commission now has exemption, surveillance and enforcement duties for these products as well as the continuing responsibilities for all existing securities. This new legislation has dramatically increased the range and scope of the Commission's responsibilities and has had the effect of further increasing the demands on the Commission's resources.
The Commission has been the subject of three examinations by outside reviewers over the past three and a half years. These were undertaken to establish the level of resources required by the Commission to carry out its functions, to establish levels of operating efficiency and the sources of funding by the Commission and to determine the role and functions of the Commission. In the past financial year two reviews were completed, one by Coopers & Lybrand at the request of the Ministry of Commerce and the other carried out by the Ministry of Commerce.
Coopers & Lybrand examined the operational and management standards of the Commission. They reported that the Commission was effectively managed and that there was strong management focus on the work programme as a basis for allocating work and establishing priorities. They also referred to the prudent management by the Commission of its limited resources.
The Commission is pleased that its management and allocation of resources has been favourably commented on by outside experts.
The broad conclusions of the Ministry of Commerce review were that the Commission is a cost-effective and efficient regulator of New Zealand's securities markets and that the Commission should be retained broadly in its current form.
The results achieved in the year under review could not have been attained without a great deal of dedication by our staff. A small staff has had to work in an environment subject to a great deal of pressure. Often requests by market participants are required to be responded to within very short time frames. Those requests often require consultation with other parties and skill and judgement in dealing with the requests and drafting the necessary exemptions. The results achieved are a tribute to the time, effort, professionalism and commitment of all staff. They are to be congratulated on a very fine effort.
The programme of work put increased pressure on Commission Members who come from outside professional positions which impose their own demands. Nevertheless, all Members have willingly given their time when called upon. The securities markets are greatly assisted by the dedication of Members to the work of the Commission. During the year Mr Robson's term of appointment expired. We are very grateful for his term of service. The new Member is Mr Franks.
The Commission expects that the demand for its services will remain high in the new financial year. The factors which have impacted on securities markets over the previous financial year, namely, increasing speed and complexity, increasing internationalisation and the increased legislative scope of the Commission's activities, will influence the Commission's work for the foreseeable future.
As in past years the Commission will continue to evaluate competing priorities across the different functions of the Commission.
In setting priorities the Commission balances carefully competing demands for its services. For example, exemptions are an important part of the Commission's work. Their use can lower costs to issuers and result in better information to investors.
Also important is the Commission's role in market surveillance and in taking action in appropriate cases. This function helps to instill confidence that market rules are being enforced and also reduces losses caused by fraud and deceit.
Reform work is also useful to the securities markets generally. Areas that the Commission wishes to work on include easier capital raising for small and medium-sized enterprises, less intervention in wholesale markets, consideration of due diligence rules on securities issues, updated Securities Act and Regulations and other projects designed to free up the New Zealand markets.
Our position in the international securities markets is coming under increasing scrutiny. One reason is as a result of recent steps taken by the International Organisation of Securities Commissions to promulgate principles of securities regulation that are implemented in jurisdictions with high regulatory standards. The New Zealand regulatory regime which relies primarily on disclosure by issuers may not conform with all of those principles in their final form. Investors, however, will judge New Zealand's acceptability as a properly regulated jurisdiction by those international standards. They will form their own judgements about investment here or about the risk premium demanded if investment is made. It has become increasingly important for the Commission to demonstrate that it does have effective powers to monitor and intervene in the case of malpractice and that New Zealand has a credible securities market regulatory structure. While the effects of the adoption of international principles of securities regulation may not be immediately apparent they will have an ongoing effect on investment decisions by investors generally and, in particular, by large mutual and pension funds.
Our credibility and international standing will have to receive a high level of priority in the Commission's work in the years ahead.
The Commission will continue to strive to meet its objectives of fostering capital investment in New Zealand. It is important that savers and investors continue to have confidence in the integrity of New Zealand's capital and securities markets. The Commission plays a vital role by promoting that confidence in the markets and reducing compliance costs.
Signature
E H Abernethy
Chairman