ISSN 1174-4758
ISSN 1177-7184 (online)
The Quarterly Newsletter of the New Zealand Securities Commission
No.47 April 2009
This issue
In the current economic climate more listed companies are looking at options to raise capital to strengthen their balance sheets. For many companies the fastest way to raise capital is by making a placement to institutions. Under the NZX Listing Rules a company can now issue more shares (up to 20% of its shares on issue) by way of a placement, without needing shareholder approval, so long as the new issue is fair and reasonable to the company and its existing shareholders.
One question that placements raise is the effect they can have of diluting the shareholdings of those who can't participate in the placement. It is up to the directors of a company to form a reasonable opinion about the benefits of the capital raising and the possible effects (positive and negative) on existing shareholders, and we have seen directors taking great care in trying to strike the right balance.
One option that can be attractive to directors and shareholders is to use a share purchase plan, in conjunction with a placement, to allow more shareholders a chance to participate in a capital raising. A class exemption granted by the Commission in 2005 has permitted all listed companies to offer shares to existing shareholders by sending a simple document that describes the offer and its pricing and includes a certificate by directors that all price-sensitive information has been disclosed to the market.
Share purchase plans give companies a quick and inexpensive way to extend a placement to retail investors. At present the class exemption allows companies to raise up to $5,000 per shareholder per year using these plans. A very similar exemption is in place in Australia, also with a $5,000 annual limit. Late last year the Commission and our Australian counterpart, ASIC, published discussion documents seeking comments on possible increases in our respective class exemptions. A number of the comments we received suggested there were strong benefits in maintaining parity with Australia, especially given the introduction last year of the mutual recognition regime for trans-Tasman securities offerings.
We expect to settle the policy of our new class exemption very soon. In the meantime the Commission has granted exemptions to individual issuers on the same terms as the existing class exemption, but with annual limits of $12,500 per shareholder.
We have been giving these exemptions a high priority, as share purchase plans are meant to assist issuers to raise capital quickly, and because use of share purchase plans following placements is in the best interests of all investors. In each case the share purchase plan, sometimes in conjunction with a further top-up plan for some larger (non-retail) shareholders, has greatly increased the opportunity for shareholders to subscribe for further shares and avoid any dilution of their holding as a result of the earlier share placement.
On 20 April 2009, Commission staff issued a discussion paper, Staff Paper on Authorised Financial Adviser Competence. The paper outlines current developments and possible approaches to setting the standards of competence which will be required for advisers who are authorised under the new law. The intention is to lay the groundwork for consultation processes and decision making in relation to competence matters.
Director of Supervision Angus Dale-Jones urges financial advisers, their employers, investors, education providers and other interested parties to review the paper and make a submission. "The competence of financial advisers is at the heart of the new Financial Advisers Act so it is critical that all people with an interest in the industry get involved now," he says.
The Financial Advisers Act was passed in September 2008, making the Commission the main regulator of financial advisers. The Commission is working with industry to implement the law, which is due to be implemented by late 2010.
Extensive work has already been completed by industry - and the industry training organisation ETITO - to articulate competence standards for financial advisers. Most significantly, the National Certificate in Financial Services (Financial Advice) (Level 5) was recently registered by the New Zealand Qualifications Authority on the National Qualifications Framework.
Precise competence requirements for prospective authorised financial advisers will be known once the Code Committee has finalised the Code of Professional Conduct, expected by late 2009 or early 2010. The Code will specify minimum standards of competence for authorised financial advisers.
The paper and other information about the new requirements under the Act is now available at www.seccom.govt.nz Submissions on the discussion paper are due by 29 May 2009.
Chairman Jane Diplock participated in the Summit on Employment in February and provided two of the working groups with an explanation of the relevant work the Commission is doing in New Zealand and internationally, which is ultimately aimed at restoring investor confidence in our markets and regulatory environment.
"As the main regulator of securities markets in New Zealand the Commission is able to facilitate, develop and implement changes that will support growth of the capital markets which is a precursor for creating employment," Jane Diplock says. "The Commission is mindful of the need for reform in this area and of the importance of ready access to capital by New Zealand businesses."
The Commission is working with the Government and Capital Markets Development Taskforce on ways to make capital raising easier for companies and to reduce associated costs. The Commission has exemption powers which may facilitate immediate implementation of some recommendations made by the Taskforce. Recently exemptions have been used by a number of companies seeking to raise money from the public.
Following recommendations by the Taskforce we published a consultation document in December 2008 seeking feedback on a proposal to extend the scope of the existing class exemption for share purchase by increasing the amount that can be raised from existing shareholders.
Other legislative work in the interests of developing market liquidity includes a review of securities regulation to simplify and clarify disclosure requirements and a wider review of the Securities Act.
The Securities Disclosure and Financial Adviser Amendment Bill, currently before Parliament, aims to remove unnecessary impediments to capital raising, while ensuring prospective investors have access to the information they need. It would allow businesses listed on the New Zealand Exchange to use a simplified disclosure prospectus when offering securities to the public, reducing the duplication of information.
The Commission recognizes the importance of raising capital domestically and internationally and of ensuring that New Zealand capital markets are attractive to offshore investors. In the current financial crisis it is increasingly important that potential investors offshore -who may provide key investments in New Zealand companies - are reassured about the market and the regulatory environment into which their investments will be placed.
With this in mind the Commission has undertaken work, over the last 18 months, to raise the profile of New Zealand's regulatory framework and capital markets overseas. This has been a joint effort involving both the Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise. While visiting a number of cities in her capacity as Chair of the Executive Committee of the International Organization of Securities Commissions, Jane Diplock has taken the opportunity to speak to several key business and investor audiences promoting New Zealand capital markets as an investment destination which is regulated to international standards.
The Commerce Committee conducted a financial review of the 2007/08 performance and current operations of the Securities Commission.
The Committee congratulates the Chairman and the Commission on its work done along with New Zealand Trade and Enterprise in promoting New Zealand as a well regulated market. It also acknowledges the work of the Securities Commission. It particularly focuses on the issue of finance companies and the Commission's efforts in this area including addressing the level of public understanding of investing. A summary of work done by the Commission regarding finance companies since September 2004 is appended to the report. Their report of 14 April 2009 is available from www.parliament.nz
In April, the Commission banned advertisements by Propertyfinance Securities Limited (PFSL) for a proposed restructure of its moratorium arrangements. PFSL had been advertising its proposed restructure in roadshow presentations to investors and in briefing notes published on its website.
The Commission believes that the roadshow presentations were likely to mislead investors because they set out only the positive aspects of the restructure proposal, and only the negative aspects of the receivership option. By omitting the potential disadvantages to investors of the proposal and the potential advantages of receivership they did not provide balanced information.
PFSL is a finance company that has been in moratorium since December 2007. Before then it had been in receivership since August 2007. The Commission understands it has been developing a proposal to restructure its moratorium since failing to meet a scheduled payment in December 2008.
The proposal involved varying the terms of the existing securities held by debenture holders, which amounted to a new offer of securities under the securities law.
In the Commission's view the offer also does not comply with the law because there is no registered prospectus. Under the law securities cannot be advertised until there is a registered prospectus, except in certain limited circumstances which do not apply in this case.
Moratorium documents are a form of offer documents and are therefore subject to the same rules as other offer documents.
"Investors need to be provided with full information about both the advantages and disadvantages of moratorium and receivership options so they can make informed investment decisions," Chairman Jane Diplock says. "Investors should be provided with full information, including the assumptions directors have made if they say a moratorium will result in better returns and the risks compared with those of receivership."
The PFSL directors have told the Commission that they had received legal advice on the presentation and believed the contents to be true and accurate, however they respect the views and findings of the Commission.
The Commission has alerted investors to what they should consider before voting on a moratorium proposal. This guidance was published in the January 2009 Bulletin and is available on the Commission's website at www.seccom.govt.nz.
The Commission recently announced that it is reviewing reporting on corporate governance by issuers as part of its ongoing Financial Reporting Surveillance Programme (FRSP). It also recently completed and published its findings from Cycle 8 of FRSP.
Reviewing corporate governance disclosure
The Commission is now reviewing reporting by issuers on their corporate governance as part of its ongoing Financial Reporting Surveillance Programme.
"Given the current financial climate, investors need greater assurance that issuers have robust corporate governance arrangements in place. Investors can only have confidence in the market if such arrangements are fully disclosed," Chairman Jane Diplock says. "Good governance is key to a successful, well-managed corporate."
"The Commission's review of corporate governance reporting will assess the current level and quality of disclosure and provide feedback to the market."
The review involves assessing annual report and website disclosures of selected issuers against nine principles covering the core elements of good corporate governance. The principles are set out in a corporate governance handbook for directors, executives and advisers, published by the Commission in 2004.
Disclosure in financial reporting 'satisfactory'
The Commission's recently completed review of financial reports, has found the overall quality of reporting to be 'satisfactory'.
The Commission reviewed reports of 40 issuers which included a mix of listed and unlisted entities. All of the reports were prepared under the New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS). The Commission was prompted to write to 35 issuers to seek clarification on a range of matters.
The main areas identified where disclosure needed improving were:
"Financial report disclosures need to be refreshed each year to reflect issuers' activities and the economic environment. Issuers should not only disclose the numbers but also explain their underlying rationale, including any judgements that management have exercised," Chairman Jane Diplock says.
She says the Commission recognises the challenges faced by issuers in applying the new financial reporting standards. "However, in complying with NZ IFRS, issuers must not overlook the importance of giving a complete and transparent picture of their business and its performance as this is vital to restoring and maintaining investor confidence."
The Commission is pleased with the high percentage of matters that were settled with issuers.
IOSCO has welcomed the statement of the G-20 Leaders as an endorsement of its recent work to close the regulatory gaps in financial securities markets.
Chairman, Jane Diplock stressed that "IOSCO strongly supports the work of the G-20 in developing effective responses to the global financial crisis, and welcomes its endorsement of recent actions taken by IOSCO aimed at enhancing market transparency and underpinning market integrity. IOSCO, as a member of the re-established Financial Stability Board, is committed to providing the necessary sectoral technical expertise to assist it in its enhanced role. Additionally, as an independent standard setter, IOSCO will continue to formulate standards aimed at addressing gaps in securities markets regulation that it identifies."
In recent months IOSCO has undertaken a variety of projects in support of the G-20's stated aims of strengthening transparency and accountability and promoting integrity in financial markets. IOSCO has also been working on policy relating regulation of short-selling and hedge funds and oversight of credit rating agencies.
The Financial Crisis Advisory Group set up in December 2008 by the International Accounting Standards Board and the United States Financial Accounting Standards Board had its fourth meeting in April.
The purpose of this high-level Group is to advise the Boards about standards setting implications of the global financial crisis and potential changes to the global regulatory environment.
Of particular interest to the Group are issues around fair value accounting and mark-to-market and the role they played in the financial crisis; consolidation and de-recognition of assets related to special purpose vehicles; and financial instruments. Questions of financial institutions being encouraged to make greater capital provisions during good times in order to be better resourced in downturns, and whether this might be encouraged by prudential requirements or accounting treatments, have also been strongly debated.
A new standard providing principles and guidance to organisations in setting up compliance programmes was recently published by Standards New Zealand.
Commission's Director of Supervision, Angus Dale-Jones, who was a part of the review Committee that helped form this standard says, "This standard provides useful guidance for anyone subject to regulation. It is particularly timely for financial advisers seeking authorisation as over the next 12 months they will have to put in place systems to deal with the requirements of the Code Committee, as well as with their terms and conditions of authorisation under the Financial Advisers Act."
For more information, and a copy of the standard, see www.standards.co.nz