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Briefing Paper for Minister of Commerce Hon Lianne Dalziel

3 November 2005

International Relationships

International Organisation of Securities Commissions (IOSCO)

IOSCO is a global forum for securities regulators and is recognised as the international standard setter for securities regulation. Some 175 regulatory and self-regulatory agencies, regulating over 90% of securities markets world wide are members of IOSCO. IOSCO's General Secretariat, based in Madrid, services IOSCO's Executive Committee, Presidents Committee (i.e. the annual meeting of all members), Technical Committee, Emerging Markets Committee, and four regional committees. IOSCO works in five areas:

multi-national disclosure of information including harmonisation of international accounting and audit standards;
regulation of secondary securities markets;
regulation of market intermediaries and their products;
enforcement and exchange of information across national borders; and
investment management.

Among IOSCO's important initiatives are its Objectives and Principles for Securities Regulation (IOSCO Principles) and a Multilateral Memorandum of Understanding (IOSCO MOU). These aim to raise the standards of regulation of securities markets and to enable the exchange of enforcement-based information between regulators. After intense scrutiny the Commission was in 2004 accepted as a signatory to the IOSCO multilateral MOU which enables cooperation between signatories to combat international fraud and to effectively enforce securities law. This has raised New Zealand's reputation internationally as a good international corporate citizen. Being part of the MOU has already increased the number and quality of cross border interactions, especially with the United States.

New Zealand chairs the governing body of IOSCO

The Commission has been an active member of IOSCO, and of its Asia Pacific Regional Committee, for many years. Chairman Jane Diplock was elected chair of IOSCO's Executive Committee, the governing body of the organisation, in May 2004 for a two year term. This is a prestigious appointment for New Zealand and followed the Commission's election two years previously as one of nine elected members of the Executive Committee. The Commission hosted a meeting of the Asia Pacific Regional Committee in February 2004, the first time an IOSCO meeting had been held in this country, and is to host meetings of the Executive, Technical and Emerging Markets Committees in Wellington in February 2006.

New Zealand has benefited from the Commission's involvement with IOSCO in the development of domestic securities policy and legislation. The Commission's acceptance as a signatory to the IOSCO MOU has increased the number of jurisdictions with which the Commission can cooperate to enforce securities law.

Australian Securities and Investments Commission

The Commission has a close relationship with the Australian Securities and Investments Commission (ASIC) including a bilateral agreement to exchange enforcement-related information. Prior to her appointment Chairman Jane Diplock was the New South Wales Regional Commissioner and National Director, Infrastructure and Planning at ASIC. The two commissions hold joint meetings twice a year on matters of mutual interest including the proposed trans-Tasman mutual recognition regime for offers of securities and interests in managed investment schemes. This will allow a New Zealand issuer to extend an offer being made in New Zealand to investors in Australia without complying with most of the substantive requirements of Australian law - and vice versa. The aim is to remove unnecessary regulatory barriers to trans-Tasman securities offerings, and thereby:

facilitate investment between the two countries,
enhance competition in capital markets,
reduce costs for business, and
increase choice for investors.

Other overseas securities regulators

As well as being a signatory to the IOSCO MOU the Commission has bilateral MOUs with securities regulators in Australia, China, Hong Kong, Indonesia, Malaysia, Papua New Guinea, Sri Lanka, Taiwan and the United States of America. It has just signed a MOU with the Israel Securities Authority. These MOU's facilitate the exchange of information between the Commission and its counterparts in these countries.

Other overseas bodies

Chairman Jane Diplock is a member of the Trans-Tasman Leadership Forum. From time to time the Commission is in contact with other international bodies affecting securities markets including the Financial Stability Forum, OECD, International Accounting Standards Board, and IMF and World Bank relating to the Financial Sector Assessment Program (FSAP). The Commission was deeply involved in the securities regulation aspects of the FSAP of New Zealand in November 2003. The FSAP report identified some areas to be addressed which are noted on page 17.

Securities Markets

Primary and secondary markets

It is convenient to divide securities markets, from a regulatory perspective, into primary and secondary markets. The primary market for securities involves the offer and issue by companies and other issuers of their own securities. This includes public and non-public offerings of shares, debt securities, units in unit trusts, superannuation and life insurance products, and interests in syndicates and other participatory schemes. The secondary market is the subsequent trading of securities, whether on regulated exchanges or elsewhere.

The primary market is regulated under the Securities Act. This Act applies to any offer of securities to the public for subscription. Non-public offers of securities are not subject to this law. The regulatory regime is largely disclosure-based. It requires compulsory disclosure of all material matters about the issuer and the securities in a prospectus registered with the Registrar of Companies. An investment statement is also required. This contains information about the offer in plain English in a prescribed question and answer format. The investment statement aims to assist prudent but non-expert investors to decide whether or not to invest and enable them to compare different investment offers. The investment statement must be given to prospective investors before they invest.

The secondary market is regulated under the Securities Markets Act 1988. For the most part this legislation applies only to securities traded on registered exchanges. The Securities Markets Act currently includes rules about:

registration and oversight of securities exchanges;
insider trading laws;
continuous disclosure laws;
directors' and officers' disclosure;
substantial security holder disclosure; and
futures dealing.

The Securities Legislation Bill, which was before Parliament when the House rose for the election campaign, amends this legislation in a number of ways which are noted below.

Intermediaries

Intermediaries, including investment advisers, sharebrokers, financial planners, and other promoters or marketers of financial products, are involved in both the primary and secondary markets. At present New Zealand has a disclosure-based regulatory regime for investment advisers and brokers in the Investment Advisers (Disclosure) Act 1996. Proposed amendments to this disclosure regime, aimed at improving disclosure and enforcement, are contained in the Securities Legislation Bill.

Investment advisers and brokers are not required to be licensed under New Zealand law, with the exception of sharebrokers, who must be licensed by a District Court under the Sharebrokers Act 1908; and futures dealers, who must be authorised by the Commission under the Securities Markets Act 1988. The Financial Intermediaries Task Force, set up by the Minister of Commerce in 2004 considered the possible regulation of financial intermediaries, sought public input on the issue, and reported its recommendations on 29 July 2005.

The listed securities markets

NZX, the only registered securities exchange, operates 3 securities markets:

NZSX - the New Zealand Stock Market. This is the main board of NZX, and is the principal equities trading market in New Zealand;
NZAX - New Zealand Alternative Market. This was set up in 2003 and has less stringent listing rules than the NZSX. It is designed for developing companies and companies with non-traditional structures, such as co-operative companies. NZAX issuers can raise capital more cheaply under exemptions granted by the Commission in 2003;
NZDX - the New Zealand Debt Market. This market trades corporate and government bonds and fixed income securities.

Futures Markets

There are 2 authorised futures exchanges, the New Zealand Futures and Options Exchange (NZFOE) and the Sydney Futures Exchange (SFE). NZFOE is a wholly owned subsidiary of SFE. Since May 2004 all trading of NZFOE products is conducted by the SFE in Sydney.

NZX derivative products can be traded on an SFE market, the NZFOX. At present two products are available. The FoX15 futures contract is an index futures contract based on the NZSX15 index. NZSX share options were recently designated by the Commission as futures contracts under the Securities Markets Act.

Futures dealers must be authorised by the Commission. Participants of SFE or who are approved by NZX as NZFOX Participants can deal in futures contracts under class authorisations granted by the Commission in 2004. Other dealers must be individually authorised. The New Zealand futures market is mainly a wholesale market. There is an emerging market for foreign exchange trading, including foreign exchange futures trading, among retail investors, particularly in parts of Auckland.

Unregistered securities markets

The Securities Markets Act applies to trading on registered securities exchanges. No one can call their securities market a "stock exchange" or "securities exchange", or state or imply that a market is regulated under New Zealand law unless that person is registered as an exchange.

If these prohibited actions are avoided a securities market may operate without being registered under the Act. However, the Minister of Commerce has the power to declare that any body corporate is prevented from operating a market without being registered. The Minister can do that if satisfied that the result of not doing this is likely to be detrimental to:

the integrity or effectiveness of securities markets in New Zealand; or
the confidence of investors in securities markets in New Zealand.

The previous Minister of Commerce, Hon Pete Hodgson, earlier this year considered whether Unlisted, an unregistered trading platform, should be required to register and decided against this at present.

Collective Investment Schemes

Interests in collective investment schemes - including interests in unit trusts, superannuation, and life insurance - are securities under New Zealand law. Primary offers of these products to the public are regulated under the Securities Act. In addition, specific legislation for the formation and governance of some schemes is found in the Unit Trusts Act 1960, the Life Insurance Act 1908, the Trustee Companies Act 1967 (in respect of Group Investment Schemes), and the Superannuation Schemes Act 1989. These Acts all include restrictions on the operation of such schemes, but there is no licensing of funds managers.

A small number of unit trusts have securities listed on the NZSX market.

Other participatory schemes can offer securities to the public under the Securities Act, and must appoint a statutory supervisor, which must be a statutory trustee corporation or a person approved for the purpose by the Commission. These include forestry and agricultural syndicates, limited partnerships, and some property interests (such as some interests in retirement villages, until the Retirement Villages Act comes into force). The Securities Act only regulates the offer of securities by these schemes, and does not prescribe the legal form or organisation of the schemes.

Unlisted debt - finance companies, banks, corporate bonds

The Reserve Bank is the main regulator of registered banks under the Reserve Bank of New Zealand Act 1989. Registered banks are also subject to the Securities Act when they offer securities (including bank accounts) to the public. Registered banks are exempt from the prospectus and trustee requirements of securities law. Investment statements are not required for any call debt securities.

There is a growing market for other debt securities, particularly term deposits and debentures offered by finance companies.

Issuers who offer debt securities to the public must appoint a trustee, which has to be a statutory trustee corporation or a person approved by the Commission to act as a trustee for debt securities. Typically debt security trust deeds include lending ratios and other prudential controls. Other than the trustees there is no prudential regulation of non-bank debt issuers.

Other issuers of debt, such as building societies and credit unions, are also subject to the Securities Act, and also to their own industry-specific legislation.

Scams

Investment scams take large sums away from New Zealand's securities markets. Much Commission resource is taken up by enforcement relating to scams and, more recently, education work about investment scams. Of particular concern are affinity fraud schemes, which are promoted among religious and social groups, and which rely on the trust within the group for their success. These are often Ponzi schemes or "prime bank" schemes, promising highly unlikely returns with little or no risk.

Overseas brokers who cold call New Zealanders with enticing offers of shares in little known United States companies are of concern. Sometimes these companies do not exist, and the offer is entirely fraudulent. In other cases the shares are sold to New Zealanders, mostly small business owners, at inflated prices which subsequently collapse. "Follow up" calls about worthless shares purchased several years ago are occurring. These are part of the same scam, but many people are duped a second time. In all cases it is impossible for the New Zealand investor to get their money back. The Commission carried out an education campaign earlier this year targeting small businesses to help people avoid these share scams. A media release Don't be a Gullible Kiwi - a share scam and how it works, which describes the scams perpetrated by overseas brokers, is at Annex 3. Recently the scam has taken a new twist with the fraudster using the names and details of genuine companies in the USA and other places. We are repeating our Don't be sucked in by share scams media campaign during November.

The Commission works with the Serious Fraud Office to increase awareness of investment fraud.

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