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Briefing Paper for Minister of Commerce Hon Lianne Dalziel

3 November 2005

Background

Introduction

The Securities Commission

The Securities Commission is New Zealand's main regulator of the securities markets. It is an independent Crown entity established under the Securities Act 1978. It has not less than five nor more than ten Members appointed by the Governor-General on the recommendation of the Minister of Commerce. Members are knowledgeable and experienced in industry, commerce, economics, law, accountancy, public administration or securities. At least one Member must be a barrister or solicitor of not less than seven years' practice. Members hold office for a term not exceeding five years and may be re-appointed.

Members of the Commission

The Commission currently has a full complement of 10 Members. Profiles of Members are attached at Annex 1. The Chairman is a full time position. Other Members attend regular monthly meetings and conduct Commission business in divisions which meet as required. Members' workloads are generally 3-5 days per month. Members are appointed by the Governor-General on the recommendation of the Minister of Commerce. Chairman Jane Diplock AO was appointed in September 2001 for a five year term expiring on 2 September 2006. Three other Members appointments expire in May 2007.

Role, functions and powers of the Commission

The legislation relevant to the Commission includes:

Securities Act 1978;
Securities Markets Act 1988;
Investment Advisers (Disclosure) Act 1996;
Securities Regulations 1983;
Securities Act (Contributory Mortgage) Regulations 1988;
Securities (Fees) Regulations;
Corporations (Investigation and Management) Act 1989; and
Crown Entities Act 2004.

The role and functions of the Commission include:

to exercise powers under securities legislation;
to review the law relating to bodies corporate, securities and unincorporated issuers of securities and to recommend changes to the Minister;
to review and comment on practices relating to securities;
to review and comment on securities markets activities;
to advise the Minister of Commerce on securities exchanges' conduct rules and amendments to those rules;
to cooperate with overseas securities commissions;
to promote public understanding of the law and practice of securities;
to provide administrative and support services to the Takeovers Panel; and
to perform any other functions conferred by law.

To perform these functions the Commission's powers include:

to receive evidence as to securities law and practice, with power for this purpose to summon any person to appear before us;
to publish reports and comments;
to exempt persons from compliance with provisions of the Securities Act or Regulations;
to suspend or cancel a registered prospectus;
to suspend or prohibit an investment statement;
to prohibit advertising of any securities;
to approve trustees and statutory supervisors;
to carry out inspections;
to accept enforceable undertakings;
to hear appeals against certain decisions of the Registrar of Companies;
to recommend regulations;
to enforce insider trading and substantial security holder law;
to enforce continuous disclosure law and to make orders requiring disclosure by issuers;
to make orders requiring disclosure by unregistered exchanges;
to require an exchange to provide information and assistance to the Commission;
to administer the law relating to futures contracts;
to recommend approval of electronic systems for the transfer of securities;
to receive financial statements of issuers which do not comply with the Financial Reporting Act 1993;
to approve directions to "at risk" corporations; and
to recommend corporations and associated persons be placed in statutory management.

Resourcing - Vote Commerce

The Commission is funded by Government grant via the Vote Commerce. The Commission also charges fees for exemptions from securities law and authorisations of certain market participants. The Government has increased the Commission's funding in recent years ($4.7 million in 2003-2004, $5.2 million in 2004-2005 and $5.9 million in 2005-2006) to enable the Commission to perform new functions which arise from the Government's legislative programme. The Government also provides a litigation fund for Court actions taken by the Commission. A copy of the appropriation for the current financial year is at Annex 2.

The Commission provides quarterly reports and financial statements to the Ministry of Economic Development as well as presenting its Annual Report to the Minister for tabling in Parliament.

Vision, purpose and objectives

The Commission's vision is "Investors can have confidence in New Zealand's securities markets and the markets increasingly attract investment from New Zealand and overseas".

The Commission's purpose is to achieve the vision by promoting:

the efficiency of New Zealand's capital markets,
the integrity of these markets, and
the cost-effective regulation of these markets.

Objectives over the next four years are planned in seven key areas:

Enforcement - so that bad market practice is seen to be unacceptable and the law is complied with.
Monitoring and market oversight - so that the integrity of and confidence in the markets are improved.
Law and practice reform - so that the regulatory environment is relevant and effective.
Exemptions and authorisations - so that the securities law regimes are tailored to the needs of the markets.
International cooperation and recognition - so that New Zealand's markets and regulatory environment are respected internationally, creating a climate for increased investment and good relationships with overseas regulators.
Public understanding and market presence - so that people understand the law and practice of securities and the Commission's presence in the markets.
Effectiveness - so that the Commission's strategic plan is achieved on time and within budget and resources.

Relationships - the Government and regulatory environment

Registrar of Companies and National Enforcement Unit

The Commission is the principal regulator of New Zealand's securities markets. Some regulatory and enforcement functions are also carried out by other agencies. The Registrar of Companies is responsible under the Securities Act for the vetting and registration of prospectuses. The Registrar also conducts investigative work for the Commission, by conducting inspections under the Securities Act at the request of the Commission.

The Securities Act contains a number of criminal offences. However, the Commission does not have authority to bring criminal proceedings. Where Commission investigations lead to criminal proceedings these prosecutions are brought by the National Enforcement Unit of the Ministry of Economic Development, generally on referral from the Registrar of Companies.

Ministry of Economic Development - Business Law Unit

The Commission has a function to review the law relating to securities and to make recommendations for change to the Minister of Commerce. In practice the Commission focuses its work on recommendations for changes to the law that arise from our enforcement and other practical experience of the securities markets.

The Commission also works closely with Ministry officials on securities law reform projects, providing comment on draft and final discussion papers, regulations, and Bills. The Commission is generally consulted on cabinet papers affecting securities law.

NZX

New Zealand Exchange Limited (NZX), was formerly called the New Zealand Stock Exchange (NZSE). The NZSE demutualised in 2003, forming a limited liability company, NZX. NZX is now a listed company, its shares trading on the New Zealand Stock Market (NZSX) operated by NZX.

Under the Securities Markets Act 1988 New Zealand has a co-regulatory regime for listed securities markets. The legislation includes facility for the registration of securities exchanges and futures exchanges. NZX is currently the only registered securities exchange. The Government approves NZX's conduct rules for listed companies and market participants. The Commission advises the Minister on these rules and on any amendments, which can be disallowed by the Government.

As a registered exchange NZX must operate its markets in accordance with its conduct rules. It is required to provide certain information to the Commission, for instance where it considers there has been a serious breach of securities law or the conduct rules. NZX is also required to cooperate with the Commission in the performance of its functions, and to consult with the Commission before giving waivers from or rulings on any continuous disclosure rules.

For its part the Commission has, under the law, an oversight role of NZX and any other registered exchange. In certain circumstances the Commission can give compulsory directions to a registered exchange requiring it to suspend trading in particular securities, or to take some other action relating to trading in securities. The IMF Financial Sector Assessment Program (FSAP) review in 2003 recommended that the Commission develop a formal oversight plan for NZX. The Government's response to the review noted that the Commission will develop such a plan. The Commission expects to implement this during the 2005-2006 financial year.

To facilitate the co-regulatory relationship the Commission and NZX have signed a memorandum of understanding, which addresses thresholds, procedures, and processes for:

compulsory referrals by the NZX to the Commission (disciplinary actions, significant contraventions of the NZX's Conduct Rules or securities and takeovers law);
discretionary referrals to the Commission arising from the NZX's oversight of trading activity, in particular, in relation to insider trading, disclosure failures and market manipulation. Unusual movements in share price and volume are normally a trigger for this;
the referral of matters from the Commission to the NZX relating to compliance with the NZX's Conduct Rules or the application of those rules;
consultation on waivers from continuous disclosure;
procedures relating to the Commission's power to give directions to the NZX; and
procedures to consult on new NZX Conduct Rules and amendments to these rules.

Takeovers Panel

The Takeovers Panel is a separate body from the Securities Commission. However, one of the Commission's functions is to provide administrative and support services to the Panel. The Panel purchases staff resources and facilities from the Commission under an agreement reviewed annually.

Other Agencies

The Commission works with other public and regulatory agencies. These include the Reserve Bank, Commerce Commission, Serious Fraud Office, Office of the Auditor General, Retirement Commission, Ministry of Consumer Affairs, Advertising Standards Authority, Banking Ombudsman, Law Commission, the Government Actuary and Enterprise New Zealand Trust.

The Commission, along with the Registrar of Companies, Serious Fraud Office, Reserve Bank, Government Actuary, Takeovers Panel, and Commerce Commission, meet several times a year as the Financial Regulators Coordination Group to discuss current issues and to share information. A multilateral MOU has been developed to assist information sharing among members of the group.

Industry groups

The Commission maintains links and consults with industry groups, including the Investment Savings and Insurance Association, Institute of Chartered Accountants of New Zealand, Institute of Directors, Trustee Corporations Association, Financial Planners and Insurance Advisers Association, Financial Services Federation, Bankers Association, New Zealand Law Society, New Zealand Shareholders Association, and Listed Companies Association.

Market participants

The Commission's regulatory work ultimately concerns and affects three groups of market participants - investors, intermediaries, and issuers of securities. The Commission deals with all three groups in the exercise of its functions, including enforcement work, processing exemption or authorisation applications, and promoting public understanding through its communications and educational programmes.

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