ISSN 1174-4758
ISSN 1177-7184 (online)
The Quarterly Newsletter of the New Zealand Securities Commission
No.42 January 2008
This issue
Kathryn Rogers
Director Primary Markets
The Commission is investigating a number of the finance companies placed in receivership over the past few months.
“We are working with the receivers and the Registrar of Companies to determine the state of affairs of these companies,” Kathryn Rogers, Director Primary Markets says.
A prospectus for any offer of securities must contain the information required under securities law. This requires the issuer to give investors all information that is likely to be material to their investment decisions.
Prospectuses must be kept upto- date. If a prospectus becomes misleading because of any adverse circumstance, the issuer must amend it, or stop allotting the securities.
“Our investigations seek to establish whether the prospectuses for these companies were materially misleading before they went into receivership,” Kathryn Rogers says.
“If a registered prospectus is misleading in a material way, investors can sue for compensation for loss caused by the misleading statements in, or omissions from, the prospectus.”
Law changes that came into force in October 2006 enable the Commission to go to court to seek compensation for affected investors, for prospectuses registered after October 2006.
The Commission can take this action against each director of the company, and any promoter of the offer. The Commission can also seek civil penalties, and criminal penalties may apply.
“Our investigations will establish whether or not the companies complied with the law in the period before receivership, and whether there may be any prospects for compensation if investors’ losses can be attributed to misleading statements or omissions in the prospectuses.”
“We will take court action for investors if our investigations lead us to conclude that this would be in the public interest and in the interests of investors.”
Concern that many people were apparently unaware of the level of risk they were taking when investing in some finance companies was one factor behind the Commission’s Look Learn Invest campaign late last year.
All investments have risk. Deciding on the level of risk you are comfortable with is an important part of choosing investments that are right for you.
www.looklearninvest.org.nz aims to enable investors to choose investments that suit their needs and meet their goals. Some 4400 people have visited the website.
A brochure Be a smart investor is also available by ringing 04 472 9830 or e-mailing poly.banerjee@seccom.govt.nz
Changes to insider trading and substantial security holder disclosure law come into force on 29 February 2008. On the same day new law on market manipulation and increased disclosure obligations for investment advisers and brokers take effect.
An overview of the new law was published in The Bulletin, No 38, January 2007. This article focuses on the Commission’s powers to enforce the new rules, penalties and compensation.
Insider trading law
From 29 February 2008 it is a criminal offence to knowingly breach insider trading laws. If convicted, an individual is liable for up to 5 years’ imprisonment or a fine not exceeding $300,000, or both. A body corporate is liable for a fine not exceeding $1 million.
There are greater civil penalties for insider trading. The Commission can take cases seeking penalties and compensation to court. The maximum penalty is the greater of:
Market manipulation law
A person who breaches the market manipulation law could be:
The Commission can also go to court for a pecuniary penalty and it can make prohibition and corrective orders.
A prohibition order can be made if a person contravenes or would contravene a market manipulation prohibition or exemption or the general dealing misconduct prohibition. The order may prohibit or restrict any statement or distribution of any document to prevent contravention or further contravention of the law.
A corrective order can direct a person who has breached the law to publish a statement to correct the breach. The order can set out what statement must be published, and how and when it must be published. The Commission can require a person to publish the statement at their own cost.
Before making an order the Commission must give the person:
The Commission must give a person 24 hours written notice before making a prohibition or corrective order and the person can make written submissions within the set time frame. The Commission can give less than 24 hours notice if it needs to act quickly in the public interest.
When the Commission makes an order it must tell the person that the order has been made. It can also tell others about the order.
Criminal offences
A person who knowingly breaches market manipulation law commits a criminal offence. A convicted individual can be given up to 5 years’ imprisonment and a fine of up to $300,000. A body corporate can be fined up to $1 million.
Court orders and injunctions
Any person (including the Commission) can go to court:
Civil remedies
The Commission can go to court to get a pecuniary penalty order for a breach of a market manipulation prohibition or exemption. A pecuniary penalty is payable to the Crown.
The maximum amount of a pecuniary penalty is the greater of:
Anyone can go to court to get a range of other orders if the court is satisfied that a person has breached, or intends to breach, a market manipulation prohibition or exemption or the general dealing misconduct prohibition. The orders can:
Banning orders
A person convicted of a market manipulation offence, or fined for contravening a market manipulation prohibition, is automatically banned for 5 years from:
A court can make a banning order for up to 10 years. It is a criminal offence to contravene a banning order.
Substantial security holder disclosure
Failure to comply with substantial security holder obligations is a criminal offence, subject to a fine of up to $30,000.
Civil penalties of up to $1 million can be imposed by the court on the application of the Commission. The court can also make orders relating to any holding of securities, including orders to forfeit or dispose of securities.
The Commission has administrative powers to prohibit or require correction of substantial securities holder notices.
Investment adviser and broker disclosure
In October 2006 Parliament repealed the Investment Advisers (Disclosure) Act 1996 and brought advisers’ disclosure requirements into the Securities Markets Act 1988.
From 29 February 2008 advisers must give every client a disclosure statement with information about themselves, the products they advise on, and the way they are paid. When advisers fail to comply with the law the Commission can make orders and it can take advisers to court to seek compensation and penalties.
Commission orders
By making a prohibition order the Commission can prohibit or restrict an adviser or broker from making any statement or distributing any documents that would contravene the law or would further contravene the law if there has already been a breach.
A corrective order can direct an adviser or broker who has breached the law to publish a statement correcting the breach. The Commission can set out what the statement must say, and how and when it must be published. It can require the person to publish the statement at their own cost.
A disclosure order can require the person to disclose information to comply with a disclosure obligation or make a corrective statement at their own cost.
If an adviser or broker persistently contravenes the law or persistently engages in misleading conduct the Commission can make a temporary banning order. This can:
A temporary banning order can also be made against a person who has been banned from being an investment adviser or broker overseas.
A temporary banning order prohibits or restricts the person from doing things set out in the order for up to 14 days.
Criminal offences
An adviser or broker commits a criminal offence if they are aware, or ought to be aware, of information that must be disclosed and do not disclose that information. An adviser or broker who makes a disclosure statement that is deceptive, misleading or confusing commits a criminal offence.
The maximum fine for these offences is $100,000 for an individual and $300,000 for a body corporate.
It is also a criminal offence if an adviser or broker advertisement is deceptive, misleading or confusing. The maximum fine is $300,000 and, if the offence continues, a further fine can be imposed not exceeding $10,000 for every day which the offence continues. This also applies to investment product advertisements.
An adviser who recommends that a member of the public invest in securities which have been offered illegally commits a criminal offence if they know, or should know, that the offer is illegal. The same applies to a broker who accepts investment money for an illegal offer. These offences have a maximum fine of $300,000 and a further $10,000 per day if the offence continues.
It is a criminal offence to contravene a Commission order, with a fine of up to $30,000.
Civil remedies
The Commission can seek pecuniary penalty orders from the court for up to $1 million. If the order is made the money is paid to the Crown. An adviser’s client can apply for a civil remedy order if the adviser contravened the disclosure obligations. The person must satisfy the court that if the adviser had complied with the law a reasonable person would not have used the adviser or followed their advice. The court can order a fine of $100,000 for an individual and $300,000 for a body corporate.
The court can ban a person who:
A banning order can ban a person for up to 10 years from:
A banning order can also be made for:
A person convicted of certain criminal offences under the Securities Markets Act or found liable for a pecuniary penalty under that Act is automatically banned for 5 years.
It is a criminal offence to contravene a banning order.
A guide to the new law has been published by the Securities Commission. It covers the disclosure obligations of investment advisers and brokers, changes to insider trading law and substantial security holder disclosure, and new law on market manipulation, as well as the Commission’s enforcement powers.
The guide, New Securities Law for Investment Advisers and Market Participants 2008, is available electronically from www.newsecuritieslaw.govt.nz or in hard copy at no charge from seccom@seccom.govt.nz.
A number of media articles which are advertisements under the Securities Act 1978 came to the Commission’s notice during 2007.
“There seems to be a misunderstanding that an article is not an advertisement unless it is paid for,” Kathryn Rogers, Director Primary Markets, told the New Zealand Advertising Association’s annual conference. “Under the Securities Act it is irrelevant whether or not the published article or advertisement has been paid for.”
“Advertisement”, under securities law, includes any form of communication by or on behalf of the issuer that contains or refers to an offer of securities to the public, or is likely to induce someone to subscribe for the issuer’s securities.
An article written by or for an issuer that has information about, or a pitch for, the issuer’s securities, is an advertisement under the Act, and must meet the requirements for advertisements for securities in the Act and the Securities Regulations 1983. This includes articles written by or for issuers of KiwiSaver schemes if they have information about or a pitch for, the issuer’s KiwiSaver scheme.
Broadly the requirements are that the advertisement:
An advertisement must have a signed regulation 17 directors’ certificate to certify that:
“Articles that result from an issuer responding to questions from a reporter are usually not advertisements,” Kathryn Rogers said.
“However, issuers must ensure that information given to reporters is not misleading, deceiving or confusing and that it is consistent with the registered prospectus.”
An article written by an issuer on an invitation from the news media, or written co-operatively with a reporter, is an advertisement and must meet the requirements for advertising securities to the public.
Two chairmen, Jane Diplock and H.E. Sheikha Lubna Bint Khalid Al Qasimi of the Emirates Securities and Commodities Authority, after signing a Memorandum of Understanding in Dubai on 6 December 2007. The agreement enables the two regulators to cooperate and share information to enforce securities law.
The New Zealand Commission has 11 other bilateral MOUs and is a signatory to the IOSCO Multilateral MOU for cooperation and the exchange of information among 44 regulators. These cooperative networks help counter cross-border securities fraud.
New Secretary General appointed
Greg Tanzer, formerly of the Australian Securities & Investments Commission, took over as Secretary General of IOSCO this month. His appointment was announced in November by Jane Diplock in her capacity as Chairman of IOSCO’s Executive Committee.
“Greg Tanzer has an extensive background in domestic regulation and international regulatory cooperation through his career at ASIC. His leadership of IOSCO’s General Secretariat will be crucial in coordinating and supporting the aims and activities of IOSCO, particularly in helping IOSCO respond to issues posed by today’s fastmoving global markets,” Jane Diplock said.
Task force on subprime crisis
A special IOSCO task force to review the issues facing securities regulators after events in the global credit markets is expected to report in May 2008. The task force will identify any implications for securities regulators from the subprime crisis that could be addressed through current or future IOSCO work.
“Recent events in the credit markets have shown how closely linked the world’s financial centres are and that the issues facing regulators can no longer simply be viewed in a national context,” said Michel Prada, Chairman of IOSCO’s Technical Committee.
The group will consult with regulators and the financial services industry on responses to the crisis, lessons that can be learned, and what further work may be needed by IOSCO.
Principles for Valuation of Hedge Funds
IOSCO has released nine Principles for Valuation of Hedge Fund Portfolios after consulting with industry experts. “The principles seek to ensure that a hedge fund’s financial instruments are appropriately valued and that these values are not distorted to the disadvantage of fund investors,” Michel Prada said. “IOSCO believes that investors will ultimately benefit if hedge funds follow these principles.”
The principles set techniques to strengthen the controls, oversight and independence of the valuation process and emphasise the need for written policies which are implemented consistently and regularly reviewed.
Task force report on private equity
An IOSCO task force report has identified areas where the growth of private equity may pose potential risks to financial markets.
It proposes two pieces of work:
IOSCO will involve the Joint Forum (which includes the Basle Committee on Banking Supervision and the International Association of Insurance Supervisors) as well as the industry and investors in this work.
Comments are invited on this report to www.iosco.org by 20 February 2008.
The Commission has released the terms of reference for its oversight review of NZX for the 2007 calendar year. They are in four parts.
The Commission expects to publish a report by 30 June 2008.