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2003 Annual Report
ACHIEVEMENTS
MARKET AUTHORISATIONS
Responsibilities
- authorise futures dealers and exchanges
- approve amendments to futures exchange rules
- approve trustees and statutory supervisors
- designate certain substantial security holders
- approve electronic systems for the transfer of securities
Achievements this year
- secured a commitment from the Sydney Futures Exchange (SFE) to maintain current standards of regulation for New Zealand Futures and Options Exchange (NZFOE) dealers until the end of 2003
- approved changes to the rules of the NZFOE
- published a discussion document on regulation of futures dealers
- authorised four futures dealers
- declared certain new products to be futures contracts for the purposes of New Zealand law
- completed a review of authorisations of trustees and statutory supervisors
- adopted a new policy for designating certain substantial security holders
2.4% of expenditure.
New Zealand Futures and Options Exchange
The SFE intends to move the NZFOE's operations to Australia. The Commission
discussed with the SFE and others the implications of this move for the regulation
of futures dealers in this country. We published a discussion document to seek
industry views on this. The industry preferred a self-regulatory model but at present
there does not seem to be an appropriate body to take on this role. The SFE has
agreed to maintain the current level of regulation of NZFOE dealers until such time
as the transition is complete. We approved a technical change to the NZFOE's block
trading rules. The Commission is considering an application from the NZFOE to
make certain rule changes when the move to Australia takes place.
Futures Dealers
The Commission authorised two futures dealers under a new compliance reporting
model which provides an alternative to exchange oversight. These dealers will be
subject to inspections by an independent compliance reporter every six months and
must report to the Commission annually. If this model proves satisfactory it may
form a basis for further authorisations. We approved two other futures dealers.
Declaration
The Commission declared certain
equity options to be futures contracts
under the Securities Markets Act 1988.
The declaration applies to products
called "option collars" offered by an
Australian company. The Commission
authorised that company to deal in these
contracts subject to certain conditions
which restrict dealing to the wholesale
market.
Trustees and Statutory Supervisors
We intend to revoke under section 48(4)
of the Act all existing approvals to act as
a trustee/statutory supervisor. New
approvals will be made under the policy
published in January 2002. Those who are currently approved to act as a trustee/statutory supervisor have been invited to
re-apply, and the Commission is considering their applications. New approvals will
be for a maximum duration of five years. Those approved will be required to report
to the Commission any material changes that affect their approval.
Substantial Security Holder Designations
After public consultation we developed a new policy on designating certain
substantial security holders under section 6 of the Securities Markets Act 1988. The
policy covers banks, financial institutions, sharebrokers, trustee corporations and
nominee companies who hold shares in the normal course of their business. People
designated by the Commission are excused from disclosing certain relevant interests
in securities.
EXEMPTIONS
Responsibilities
- consider applications for exemption from securities law
- review existing exemptions
Achievements this year
- considered 51 new applications for exemption from securities law
- granted 41 exemptions
- developed a class exemption for externally managed group investment schemes
- reviewed 52 exemptions which expired in September 2002 and granted 49 updated and amended exemptions
11.8% of expenditure
The Securities Act empowers us to exempt people from compliance with various provisions of securities law. The power to grant exemptions from the law is very significant. We aim to base all exemptions soundly on the policy of securities law. The Commission sets conditions of exemption to provide alternative compliance procedures so that the spirit of the law, particularly the requirement to provide investors with relevant information on which to base investment decisions, is complied with. Directors and advisers of issuers who are granted exemptions, or who rely on class exemptions, should be aware of this.
We use our exemption power to remove rigidities in the law for traditional investment products and to facilitate offers of new products, and products offered by overseas issuers, so that they are available to the public cost-effectively and without delay. We prefer to grant class exemptions rather than individual exemptions. When time allows we consult publicly, particularly where an application involves significant policy questions. We recognise that an applicant company may incur costs in time and resources for this public benefit and we are grateful for this.
Fifty-two exemptions expired in September 2002. We consulted with parties affected by these exemptions or who had an interest in them. We sought comment on the policy of class exemptions and how they work in practice and received a good number of submissions. We granted several new class exemptions. In some instances we were able to bring a number of earlier exemptions into one class notice. This makes exemptions more accessible and gives consistent treatment to similar issuers.
We endeavour to meet the reasonable needs of market participants when considering exemptions. We wrote to advisers in October 2002 explaining the pressures on both our resources and those of the Parliamentary Counsel Office caused by urgent exemption applications. We warned that we could not guarantee to meet deadlines where applications are made at very short notice for no good reason. We are pleased that issuers and their advisers are now, for the most part, setting more realistic timetables.
We considered 51 new applications for exemption from securities law and granted 41 exemptions. We reviewed 52 existing exemptions and granted 49 updated and revised exemptions. In all 102 new exemptions were granted. This compares with 92 applications considered in 2001/2002 and 78 notices issued. There are 149 exemption notices in force (187 as at 30 June 2002) and at 30 June 2003 there were 11 applications before the Commission. We aim to publish on our website a summary of each exemption granted. These describe the effects of the exemption and the Commission's reasons for granting it. This year we published summaries of 81 exemptions.
LAW REFORM
Responsibilities
- make recommendations for law reform
- review and comment on securities law and practice
Achievements this year
- worked with the Ministry of Economic Development (MED) to complete
- the reforms arising from the Securities Markets and Institutions Bill
- made submissions on
- regulations for directors' disclosure
- review of credit unions law
- a proposed Business Law Reform Bill
- discussion documents about insider trading, market manipulation, substantial security holders, penalties and remedies, and the application of securities trading law
- continued the review of the Securities Regulations
- worked with the MED on investment adviser law reform
- published a statement of broad principles on corporate governance and financial reporting
6.2% of expenditure
The Securities Markets and Institutions Bill was passed, and came into force as three Acts - the Securities Amendment Act 2002, the Securities Markets Amendment Act 2002 and the Takeovers Amendment Act 2002.
Securities Amendment Act 2002
The Securities Amendment Act 2002 amends the Securities Act 1978, primarily to
give the Commission new powers to exercise its statutory functions. These include:
- the ability to meet in divisions of three or more members. Each division is able to exercise the Commission's powers;
- increased powers of inspection. This enables the Commission to undertake its own inspections as well as asking the Registrar of Companies to carry out inspections;
- the power to accept undertakings from issuers of securities or others, and to enforce these undertakings if they are not complied with; and
- the power to require witnesses before the Commission to answer questions even where their statements may be self-incriminating (but with a corresponding privilege against that evidence being used in criminal proceedings).
The Act enables the Governor-General to make regulations recognising securities law regimes in other countries, and exempting offers of securities to the public in New Zealand from the requirements of New Zealand securities law if they comply with the law in the home jurisdiction. Similarly, the Governor-General can make regulations applying New Zealand securities laws in other countries.
Securities Markets Amendment Act 2002
The Securities Markets Amendment Act 2002 renames the Securities Amendment
Act 1988 as the Securities Markets Act 1988 and then amends it. This Act gives the
Commission four main areas of new responsibility. The Act provides for:
- continuous disclosure of information to securities markets by public issuers under the listing rules of registered exchanges with remedies, including court orders or action by the Commission, where this is not done;
- the review of the conduct rules of securities exchanges and new responsibilities relating to exchanges;
- the Commission to take court action seeking civil penalties for insider trading; and
- disclosure by directors and senior officers of public issuers of any trading by those people in securities of these issuers or related issuers. This part of the law will come into force on a date to be determined by the Government.
In the six months since the new law came into force the Commission has used its new powers to carry out inspections, to investigate cases of suspected market malpractice, to accept enforceable undertakings, and to advise on new conduct rules of the NZX.
Securities Regulations
The review of the Securities Regulations is proceeding. Other law reform projects created
timing difficulties and the technical aspects of the review raised complex policy and
drafting issues. Draft amendment regulations will be released for public comment as
soon as possible. We hope that new regulations will be in force before the end of 2003.
Securities Trading Law
We worked with the MED to develop discussion papers on the review of securities
trading law which covered:
- insider trading;
- market manipulation;
- investment advisers;
- substantial security holder disclosure;
- application of securities trading law; and
- penalties and remedies.
The Commission commented on these and other MED discussion papers as well as projects of other organisations.
Financial Reporting
Development of internationally harmonised, high quality financial reporting and
auditing standards, and achieving compliance with those standards, continue to be
important issues world-wide with significant implications for New Zealand. We
made submissions to the Financial Reporting Standards Board of ICANZ on
exposure drafts for new financial reporting standards and guidance on related
financial reporting matters.
Corporate Governance
The Commission published a statement of principles it believes are important to the
debate on corporate governance and corporate transparency. These broad principles,
together with high ethical standards, should underlie the practices of issuers and
other participants in New Zealand's capital markets and when applied should
increase investor confidence in the markets. The principles relate to:
- relevance of international practice;
- importance of disclosure;
- quality of corporate governance;
- financial reporting and audit; and
- regulation and enforcement.
The immediate goal in publishing the principles in November 2002 was to indicate our thinking on certain aspects of corporate governance and financial reporting and to encourage market participants to make voluntary changes to their practices.
In the statement the Commission:
- encouraged New Zealand market participants to improve their corporate governance and financial reporting in line with international best practice;
- encouraged the adoption of standards that are comparable with other developed markets;
- said it will continue to make best possible use of existing law to identify wrongdoing and to take action against breaches of the law;
- said it will identify regulatory gaps and recommend appropriate reform of the law; and
- said it will seek ways to work cooperatively with other regulators to achieve effective monitoring and enforcement of securities law.
Since then ICANZ, the NZX, and other agencies have issued papers on aspects of corporate governance. In June 2003 the Minister of Commerce asked the Commission to take a leadership role in developing an agreed set of principles for corporate governance practices in New Zealand. The Commission believes that, while recognising special aspects of New Zealand's capital markets, it is important to adopt practices which are comparable with neighbouring and other developed capital markets.