of interest that meant General Mortgage failed to manage some mortgages in the interests of investors. Those mortgages are now in default and investors' funds appear to be at risk. Mr Rains was the sole director of the borrower as well as the sole director of General Mortgage. He was also the sole shareholder in General Mortgage's parent company and the majority shareholder in the borrower's parent company. General Mortgage did not adequately disclose this conflict to contributors before they invested. General Mortgage and Mr Clinton Rains lodged appeal and judical review proceedings against the Commission's decision in the High Court. These actions were subsequently withdrawn. Investors should make any inquiries about their investments to Crichton Horne & Associates, Christchurch, phone 03 379 7929. "Stay" attempt fails General Mortgage also sought to suspend (or "stay") the Commission's orders pending the appeal, and to stop the Commission from making a media release. This raised an important point of principle for the Commission about the way it can operate, and the effect of our decisions. We opposed the application. We argued that there is a strong public interest in the Commission's enforcement actions. The High Court ruled in the Commission's favour. Justice Wild found that the Commission's orders, including the appointment of a replacement broker, came into effect as soon as they were made and the Court could not stay something that had already happened. The Court said it could prevent the Commission from making a media release, but it declined to do so. The Court noted that the Commission's role is to regulate securities markets, with the aim of ensuring that they are informed and therefore efficient. The Court said it had no doubt that the overall public interest lay in the Commission publicising its orders without delay. The judge added that "Securities markets must be properly informed. And that requires information which is timely, not delayed". The Commission welcomes this decision. The Court recognised that there are competing interests to weigh up when considering publication. On the one hand, publicising enforcement action can have adverse consequences for the person against whom the action was taken. The consequences for the person concerned have to be balanced against the public interest in informing existing and prospective investors of the circumstances of the action. The Commission also considers these factors when deciding whether to publish a decision. The Commission has the power to publicise its decisions, and in most cases we do so. Enforcement actions taken by the Commission can affect investors and their investments. They can also affect other people who might deal with the company or person against whom the action was taken. We believe that investors and other market participants should be told about the Commission's actions. This is consistent with our goal of well informed securities markets. Exemptions from securities law - an option for issuers One of the most significant powers of the Commission is the power to grant exemptions from securities law. It is impossible for the law to take account of every eventuality. The Commission's power to grant exemptions addresses the "one size fits all" nature of the law. It enables the Commission to consider an individual case and apply the spirit rather than the letter of the law. When an exemption is granted, the exemption itself becomes law in that it is a regulation. An exemption granted by the Commission is a privilege which an issuer may choose to use. The cost of that privilege is the legal requirement to comply with any conditions of exemption imposed by the Commission. The Commission takes this power very seriously. Almost every exemption that is granted is subject to conditions. These conditions aim to ensure that the policy of the law is retained. Often the conditions of exemption are imposed so that investors have sufficient information to make an informed decision on whether or not to invest, or can access this information if they want to. Issuers relying on an exemption are expected to comply with the conditions. Most issuers who seek an exemption do so because they cannot for good reason comply with certain provisions of the law, or because the cost of strict compliance is such that it is unlikely that the offer of securities would proceed without an exemption. The Commission aims for cost-effective rules of law, and flexibility in regulatory practice. It uses its exemption power to reduce rigidities in the law and to enable issuers to bring products to the market so that investors have a wider choice of investment opportunities. When people seek exemptions the Commission considers them without delay. We aim to minimise the obstacles for issuers and, within reason, to meet their time frames. No issuer is required to offer securities under a Commission exemption. Where an exemption is available an issuer has the choice of using the exemption or complying with the law in full. In many cases relying on an exemption means substantial savings for the issuer. However, the issuer must comply with the conditions of exemption. In order to protect investors there must be compelling incentives to comply with the conditions of an exemption. For this reason non-compliance in some cases can mean that allotments are void, and investors' money must be returned. The Securities Act does not contain specific penalties for breaches of a condition of exemption. If an issuer does not comply with a condition, the exemption does not apply. The issuer therefore breaches the law if it continues to offer or allot. For instance, if an issuer breaches a condition of an exemption from section 37 of the Act, then no allotment can be made unless there is a registered prospectus. If a security is allotted the issuer is in breach of section 37. Investors' money must be returned. The Commission's class exemptions, which many issuers choose to use, have all been subject to considerable public discussion. Before gazetting an exemption the Commission invites comment on all aspects of the exemption including the conditions. Issuers and their advisers need to be fully aware of their responsibilities when choosing to offer securities in New Zealand under an exemption.

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THE BULLETIN July 2003

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