Share trading inquiry - Fletcher Forests The Commission has an inquiry underway to determine whether there may have been insider trading ahead of Fletcher Forests' announcement of the sale of cutting rights on 15 January 2003. The matter was referred by NZSE after an unusually high volume of trading on 14 January and an increase in the share price. We understand NZSE is investigating the timeliness of disclosure by the company and whether there was any breach of NZSE's conduct rules. Enforceable Undertakings The Securities Amendment Act 2002 gives the Commission a new power to accept enforceable undertakings. These are voluntary undertakings which can be enforced in court if a breach occurs. We expect these to be a useful tool for the Commission, market participants and investors. An enforceable undertaking can be a flexible remedy to produce an outcome that is in the best interests of investors. It is generally quicker and cheaper than court proceedings. It can involve any action to which the parties agree. The Commission will generally publish enforceable undertakings. Whether an enforceable undertaking is appropriate could depend on: the seriousness of the breach or behaviour; the best interests of investors; whether the person who has committed the breach accepts their culpability; whether the person is likely to comply with the undertaking; whether the person acknowledges that the Commission has reason to be concerned about the breach; the nature of the breach and the regulatory impact of the undertaking compared with other forms of enforcement; and the most efficient and effective use of resources. The enforceable undertaking may set out how the person will: address the conduct the Commission is concerned about; prevent that conduct from reoccurring; and rectify any consequences of the conduct for investors. If a term of an undertaking is breached the court can make an order directing the person to comply with the term; to pay a penalty to the Crown; to compensate any other person who has suffered loss as a result of the breach. The court can make any other order it thinks appropriate. Statement of principles - corporate governance and financial reporting The Commission has published principles it believes are important to the debate on corporate governance and corporate transparency. "These principles, together with high ethical standards, should underlie the practices of issuers and other participants in New Zealand's capital markets," Chairman Jane Diplock said. "Application of these ethical standards and principles 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 regulation and enforcement. Our immediate goal in publishing the statement on 28 November 2002 was to indicate our thinking on certain principles of corporate governance and financial reporting and to encourage market participants to make voluntary changes to their practices. In the statement the Commission: encourages New Zealand market participants to improve their corporate governance and financial reporting in line with international best practice; encourages the adoption of standards that are comparable with other developed markets; says it will continue to make best possible use of existing law to identify wrongdoing and to take action against breaches of the law; says it will identify regulatory gaps and recommend appropriate reform of the law; and says it will seek ways to work cooperatively with other regulators to achieve effective monitoring and enforcement of securities law. The statement is available on www.seccom.govt.nz or on request from our offices phone 64 4 472 9830. Substantial security holder disclosure during takeovers The Commission has recently commented to companies making takeover bids that should have filed substantial security holder notices but failed to do so. Substantial security holder notices provide important information for market participants on the ownership and control of major companies. The Securities Markets Act 1988 (formerly the Securities Amendment Act 1988) requires substantial security holders to notify both the issuer and NZSE when their relevant interests in the issuer increase or decrease by more than 1%. A substantial security holder is a person who has a relevant interest in 5% or more of the voting securities of a public issuer. A relevant interest includes the power to acquire or dispose of a voting security. This is so even if the power can be exercised only after a condition has been fulfilled. Some takeover offers can only succeed if a certain level of acceptances is reached. Acceptances received before that level is reached are therefore conditional. In our view these conditional acceptances are likely to increase the bidder's relevant interest in the target company for the purposes of the Securities Markets Act. Where the relevant interest changes by more than 1% (and the bidder is a substantial security holder) this should be disclosed. The Securities Markets Act provides for public issuers and their shareholders, as well as the Commission, to apply for Court orders to remedy breaches of the Act.

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THE BULLETIN January 2003

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