New Zealand Securities Commission - The Bulletin: October 2006

(continued from page 1) Investigation into Feltex prospectus and disclosure financial information, directors’ and vendor’s interests, and any breach of banking covenants. We gathered extensive evidence from relevant people and examined relevant documents. The Commission looked at whether: the process undertaken by Feltex ahead of its IPO was thorough; the projected financial information was consistent with the assumptions presented; the projections were consistent with requirements for projections to be reasonable; and the assumptions and other information properly reflected the risks involved. The evidence showed that the prospectus was not misleading, the risks were adequately disclosed, and the assumptions complied with the reasonableness required of projections by FRS-29 (which was the applicable financial reporting standard at the time). The Commission’s jurisdiction also relates to an issuer’s obligations to properly disclose information to the markets under the reporting and continuous disclosure requirements. In the Feltex case we investigated whether: the interests of the directors and the vendor were disclosed; and whether there were undisclosed issues arising from Feltex’s banking covenants at the time of the IPO. No evidence of any breaches of these disclosure obligations was found. The Commission released the findings on the prospectus in a media statement on 25 August 2006. The Commission’s inquiry is continuing. We expect to report publicly when the investigation is complete.	Commission prohibits ads for a Hanover fund The Commission prohibited some advertisements for a new unit trust offered by Hanover Funds Management Limited because they are likely to mislead or confuse investors about the potential returns. The prohibited advertisements for Hanover Protected Investments Global Growth Fund units are those which say the investment: has a 10% potential return; or has a 50% potential return without clearly stating that the possible returns on the investment at maturity are 50% or zero. The investment is structured so that at the end of five years investors will receive their capital back. The return is to be either 50% of the amount invested, or nothing. "The way the returns on these securities are structured is unusual," Jane Diplock said. "Therefore they should be described clearly and precisely to avoid being misleading or confusing. The prohibited advertisements are not sufficiently clear and precise." Hanover cooperated with the Commission and agreed to write to all investors who subscribed to the fund to make sure they correctly understand the returns under the fund. They will be offered their money back. The Commission considered the advertisements were misleading or confusing because: investors may think that the 10% figure means that they would receive a return of 10% each year. This is not the case. There is no annual return for this investment. investors are likely to believe from the advertisements that the return is potentially greater than is actually the case. Even if they receive the 50% return at the end of five years, this equates to less than a 10% annualised return on the investment. They may receive zero return.
Tricom fined for unauthorised futures dealing Tricom Futures (NZ) Limited was fined $10,000 after pleading guilty to a charge of dealing in futures contracts without authorisation by the Securities Commission. The fine was imposed in the Wellington District Court in August 2006 for unauthorised dealing in futures contracts between 27 and 31 August 2005 in breach of the Securities Markets Act 1988. In June 2005 NZX declined Tricom’s application to become a futures and options introducing broker. Tricom requested interim authorisation from the Commission for three weeks while NZX considered a further application by Tricom. The Commission declined the request on 4 July 2005. On 31 August 2005, NZX told the Commission that Tricom was continuing to deal in futures contracts. An inspection by Commission staff found evidence that Tricom had conducted unauthorised dealing in futures contracts until 31 August 2005. Proceedings were brought against Tricom by the Ministry of Economic Development after referral by the Securities Commission to the National Enforcement Unit of the Ministry. This was the first referral by the Commission for a prosecution for violation of section 38 of the Securities Markets Act.
Recent Speeches Speeches by the Chairman and Commission Members are published on the Commission's website at www. seccom.govt.nz. Recent additions are: Trans-Tasman Relations: A Securities Regulator’s View;	Developments in New Zealand’s Securities Markets Regulatory Framework; Corporate Governance and Disclosure: A Securities Commission Perspective; and What’s going on at the Securities Commission.

(continued from page 1)

Investigation into Feltex prospectus and disclosure

financial information, directors’ and vendor’s interests, and any breach of banking covenants. We gathered extensive evidence from relevant people and examined relevant documents.

The Commission looked at whether:

the process undertaken by Feltex ahead of its IPO was thorough;
the projected financial information was consistent with the assumptions presented;
the projections were consistent with requirements for projections to be reasonable; and
the assumptions and other information properly reflected the risks involved.

The evidence showed that the prospectus was not misleading, the risks were adequately disclosed, and the assumptions complied with the reasonableness required of projections by FRS-29 (which was the applicable financial reporting standard at the time).

The Commission’s jurisdiction also relates to an issuer’s obligations to properly disclose information to the markets under the reporting and continuous disclosure requirements.

In the Feltex case we investigated whether:

the interests of the directors and the vendor were disclosed; and whether
there were undisclosed issues arising from Feltex’s banking covenants at the time of the IPO.

No evidence of any breaches of these disclosure obligations was found.

The Commission released the findings on the prospectus in a media statement on
25 August 2006.

The Commission’s inquiry is continuing. We expect to report publicly when the investigation is complete.

Commission prohibits ads for a Hanover fund

The Commission prohibited some advertisements for a new unit trust offered by Hanover Funds Management Limited because they are likely to mislead or confuse investors about the potential returns.

The prohibited advertisements for Hanover Protected Investments Global Growth Fund units are those which say the investment:

has a 10% potential return; or
has a 50% potential return without clearly stating that the possible returns on the investment at maturity are 50% or zero.

The investment is structured so that at the end of five years investors will receive their capital back. The return is to be either 50% of the amount invested, or nothing.

"The way the returns on these securities are structured is unusual," Jane Diplock said. "Therefore they should be described clearly and precisely to avoid being misleading or confusing. The prohibited

advertisements are not sufficiently clear and precise."

Hanover cooperated with the Commission and agreed to write to all investors who subscribed to the fund to make sure they correctly understand the returns under the fund. They will be offered their money back.

The Commission considered the advertisements were misleading or confusing because:

investors may think that the 10% figure means that they would receive a return of 10% each year. This is not the case. There is no annual return for this investment.
investors are likely to believe from the advertisements that the return is potentially greater than is actually the case. Even if they receive the 50% return at the end of five years, this equates to less than a 10% annualised return on the investment. They may receive zero return.

Tricom fined for unauthorised futures dealing

Tricom Futures (NZ) Limited was fined $10,000 after pleading guilty to a charge of dealing in futures contracts without authorisation by the Securities Commission.

The fine was imposed in the Wellington District Court in August 2006 for unauthorised dealing in futures contracts between 27 and 31 August 2005 in breach of the Securities Markets Act 1988.

In June 2005 NZX declined Tricom’s application to become a futures and options introducing broker. Tricom requested interim authorisation from the Commission for three weeks while NZX considered a further application by Tricom. The Commission declined the request on 4 July 2005.

On 31 August 2005, NZX told the Commission that Tricom was continuing to deal in futures contracts. An inspection by Commission staff found evidence that Tricom had conducted unauthorised dealing in futures contracts until 31 August 2005.

Proceedings were brought against Tricom by the Ministry of Economic Development after referral by the Securities Commission to the National Enforcement Unit of the Ministry. This was the first referral by the Commission for a prosecution for violation of section 38 of the Securities Markets Act.

Recent Speeches

Speeches by the Chairman and Commission Members are published on the Commission's website at www. seccom.govt.nz. Recent additions are:

Trans-Tasman Relations: A Securities Regulator’s View;

Developments in New Zealand’s Securities Markets Regulatory Framework;
Corporate Governance and Disclosure: A Securities Commission Perspective; and
What’s going on at the Securities Commission.

THE BULLETIN October 2006