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Annual Report 30 June 2000

IN THIS SECTION:

ENFORCEMENT

AUTHORISATIONS

CONTENTS:

ENFORCEMENT

This is core work of the Commission. We have achieved a significant increase in this work. We committed $0.943 million to it in the year compared with $0.779 million in the 1998/1999 year, an increase of 21 percent.

OFFER DOCUMENTS

Our first priority is the offer of securities to the public. It is here that our efforts can be most effective. Our aim is to encourage the dissemination of high quality offer documents and to stop dishonest offers where we can. We concentrated particularly on viewing the offer documents of collective investment schemes which are widely supported by the general public, superannuation schemes and unit trusts. We have reviewed 123 prospectuses and investment statements of 42 issuers. As a result of this 47 offering documents of 19 issuers have been amended.

We reported publicly on the use of annualised returns in the investment statements of unit trusts and superannuation schemes.

We examined the offering documents for unlisted interests in commercial property schemes. We are concerned about the quality of forecast or promised rates of return and information about the levels of risk. We published a report on our findings.

We also targeted routine financial advertising. It is important to encourage good compliance standards among established financial institutions. It is not often necessary to resort to formal powers of action as the material is normally amended or withdrawn promptly on a voluntary basis.

We asked the Registrar of Companies to inspect the documents of issuers, promoters or investment advisers on 26 occasions. We confer with the Registrar on all proposals for action.

ILLEGAL INVESTMENT SCHEMES - INVESTMENT ADVISERS

The number of schemes promoted to the public which do not comply with securities law has increased. The promoters of many of these schemes promise improbably high rates of return. They originate from a variety of jurisdictions, principally the Bahamas, Grenada and Antigua. They often purport to invest in the so-called "prime bank" market. This market does not exist and people who invest run the risk of losing their money. If they get something back it is likely to be the money of other investors. Nevertheless people are willing to expend their money on these schemes.

We also have seen "financial education" schemes under which investment seminars are held offshore with the promise of great riches for those who take part. It is our impression that the only people who profit from the schemes are the promoters and their agents. In a scheme which we examined the New Zealand agent took 70 percent of the contributor's payment as commission.

It is a matter of increasing concern that there are investment advisers who readily involve themselves in these types of schemes, some of them established in business as investment advisers to the public. We are committed to reducing this type of activity. We issue public warnings. We enlist the support of overseas jurisdictions. We involve the Registrar of Companies and the Serious Fraud Office where we think this may help.

SHAREDEALING

We completed 8 inquiries (4 in 1998/1999) into insider trading and substantial security holding in the shares of listed companies. We published a report on trading in Fletcher Challenge Limited shares in December 1999. The resources allocated to this type of work increased significantly. If we are to ensure that the public has confidence in the equities market, if we are to achieve our outcomes of improved standards of behaviour in securities markets and increased compliance with securities law, we must demonstrate that there are credible procedures and adequate resources for addressing concerns.

We published a report on aspects of the affairs of Max Resources Limited (in statutory management). This followed a lengthy and detailed inquiry and extensive consultation with affected parties. The report covered the accuracy and timeliness of reporting by substantial security holders. It commented on two other matters, the conduct of directors in relation to transactions undertaken by Max in 1996 to 1998 and the quality of the financial statements of Max including the circumstances of the associated audit. We conferred with the criminal law enforcement authorities in Australia and New Zealand during the inquiry.

We received many expressions of concern about cold calls from brokers and other tipsters from overseas. We advise people not to put themselves at risk by entering into transactions on the basis of telephone conversations with strangers. We draw this activity to the attention of the regulatory authorities in the jurisdiction where the brokers are based.

FUNDS MANAGEMENT PRACTICES

We are undertaking a review of funds management practices in New Zealand. We believe that fund managers, investors, the Government and the community will benefit from a fuller understanding of this important industry.

We aim to publish a report in the new year that is comprehensive, clear, authoritative, positive and useful, and which describes standards of best practice and constitutes a cornerstone statement of these.

The report may also indicate areas where there is room for improvement and, in consultation with the industry and the community more generally, make proposals for addressing them.

FINANCIAL STATEMENTS

The Registrar of Companies referred 7 sets of financial statements of issuers to us on the grounds that the auditors' reports were qualified. Generally these did not call for action on our part. However we maintained a dialogue with the Registrar on follow-up action by him.

CORPORATIONS (INVESTIGATION AND MANAGEMENT) ACT 1989

The Act provides, among other things, for the Government to be able to place companies and associated persons in statutory management on the recommendation of the Commission and for the Registrar of Companies to be able to declare companies at risk and, with our consent, to issue directions to the company. IMI Pacific Group Limited and Walakahai Pacific Corporation Limited, and two people associated with the companies, Willard Karaitiana Amaru and John Edward Baylis, were placed in statutory management in December 1999. We also conferred with the statutory managers of Max Resources Limited, particularly during our own inquiry into the affairs of that company.

OVERSEAS REQUESTS

It is essential that securities regulators cooperate with each other. This ensures that the benefits of regulation are available to those who contract in a global market or who routinely engage in e-commerce across national frontiers.

We received a number of requests for information from counterparts overseas. We made many requests ourselves for information from overseas authorities, particularly Australia. We received two requests to exercise our statutory powers to obtain information in New Zealand, on behalf of the Australian Securities and Investments Commission.

OTHER AGENCIES

It is a core aspect of our regulatory effort to cooperate with other agencies involved in the regulation of securities markets, in particular those which are responsible for criminal law enforcement and those which administer programmes of self-regulation.

Prosecutions: We work very closely with the Registrar of Companies on all prosecution matters. Much of the investigation work is undertaken by the Registrar's staff at our request under the authority of section 67 of the Securities Act. We confer with the Serious Fraud Office on all matters which we believe should attract its attention.

Self-regulation: We support self-regulation under competent, independent and preferably statutory oversight. In the course of exercising our statutory powers we have developed relationships with:

NZSE and its Market Surveillance Panel,

NZFOE and its Business Conduct Committee,

Advertising Standards Complaints Board,

local authorities in relation to their venture capital schemes,

New Zealand Thoroughbred Racing and Harness Racing New Zealand,

Investment and Savings Ombudsman,

Banking Ombudsman,

Commerce Commission.

Other: We confer regularly with the RBNZ on the regulation of registered banks and on the business environment in which they operate. We also confer with the Institute of Chartered Accountants of New Zealand (ICANZ) and the New Zealand Law Society where questions arise about their respective members, on other matters of mutual interest and on proposals to make the law more effective.

We value our association with each of these organisations.

AUTHORISATIONS

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

TRUSTEES AND STATUTORY SUPERVISORS

During the course of the year we received 4 and approved 2 new applications for authorisation.

FUTURES AND OPTIONS CONTRACTS

We authorised 11 firms and one individual to deal in futures contracts. Four of these are dealers of the NZFOE, two are introducing brokers for overseas exchanges, three are electricity price futures dealers, one is a fund manager, one is an international bank and one is a nominee company.

ELECTRONIC SECURITIES TRANSFER SYSTEMS

The Commission is empowered to recommend that the Government approve any electronic system for the transfer of securities. We received one request to recommend the FASTER system to be extended to allow electronic transfer of securities that are traded through the NZSE's facility for unlisted issuers.