Disclosure by finance companies The Commission is seeking comments by 25 October 2004 on its discussion paper, Disclosure by Finance Companies. The discussion paper follows a review of debt security disclosure documents from 30 finance companies. This review revealed widespread shortcomings. Finance companies' offer documents, like those of other issuers, need to comply with the Securities Act 1978 and the Securities Regulations 1983. The documents must not mislead investors. In its review, the Commission has seen investment statements and prospectuses that provide a good level of useful information for investors. However, the Commission is concerned that some finance companies are not meeting the minimum requirements of the legislation. Areas of concern to the Commission include: the risk/return relationship, including risk disclosure, principal risks, company activities, related party lending and the use of rating information; ranking of securities, including prior ranking claims; other disclosure issues, including early termination rights, termination charges, and inconsistent information; and advertising, including the prominent disclosure of mandatory information. After consultation on the discussion paper, the Commission will publish a report on its expectations for disclosure by finance companies. Around six months after the report is published, the Commission will assess whether compliance has improved, and take enforcement action as appropriate where it has not. Update from IOSCO Auditor oversight The International Organisation of Securities Commissions (IOSCO) is undertaking a survey on auditor oversight. The survey is to collect information on the current oversight structures and processes for financial reporting and auditing among member jurisdictions. The survey relates to IOSCO's Principles for Auditor Oversight and Principles of Auditor Independence and the Role of Corporate Governance in Monitoring an Auditor's Independence. These are available from IOSCO's website, www.iosco.org. New Zealand is unusual in not having an auditor oversight body which is independent of the audit profession. In Corporate Governance in New Zealand - Principles and Guidelines, published in February 2004, the Securities Commission said that independent oversight of auditors would contribute to confidence in audit quality and particularly in auditor independence. It would also bring New Zealand into alignment with Australia, the United Kingdom and the United States. The Commission has worked with ICANZ and other interested parties to prepare the survey response for New Zealand. Credit rating agencies IOSCO is seeking comments on its report, Code of Conduct Fundamentals for Credit Ratings Agencies. A set of high level principles, designed to protect the integrity and analytical independence of the credit rating process, was published last year. The new report aims to help credit rating agencies apply these principles to their work. The report is available on the Commission's website. Domestic bond markets The Asia-Pacific Regional Committee of IOSCO is conducting two surveys relating to bond markets. One is to assess domestic markets in terms of size, regulation, infrastructure, etc. The other survey seeks to identify any existing restrictions on investing in sovereign local currency bonds and securitised bonds. This work is in preparation for the launch of the Asian Bond Fund II by a group of eleven central banks and monetary authorities in the region, in order to promote the development of local bond markets. The Reserve Bank of New Zealand is a member of this group, known as EMEAP. The Commission has worked with the Reserve Bank on New Zealand's response to both surveys. IOSCO papers Two papers recently published by IOSCO are Principles On Outsourcing Of Financial Services For Market Intermediaries, and Islamic Capital Market Fact Finding Report. These are available from IOSCO's website. International Financial Reporting Standards Exemption The Commission has granted an exemption in preparation for the change to New Zealand equivalents to International Financial Reporting Standards (NZIFRS). The exemption allows issuers to include information in offer documents which is based on accounting policies yet to be adopted. This will enable investors to receive appropriate financial information during the transition to NZIFRS. The Securities Act (International Financial Reporting Standards - Prospective Financial Information) Exemption Notice 2004 was notified in the Gazette on 12 August 2004. It expires on 31 December 2008.   Employee share purchase schemes of unlisted companies The Commission intends to issue a class exemption for employee share purchase schemes of unlisted companies. Comments received on the Commission's discussion paper, issued in August, are being taken into account in drafting the notice. The new exemption will include conditions to ensure adequate information is provided to employees. The Securities Act (Employee Share Purchase Schemes) Exemption Notice 2002, which applies to listed companies, will be unaffected by the new notice.

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THE BULLETIN October 2004

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