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Briefing Paper for Minister of Commerce Hon Lianne Dalziel

3 November 2005

Current Public Issues

Enforcement

Tranz Rail insider trading case

The Commission filed its first case for insider trading, under new law which allows the Commission to bring court action in the public interest, on 13 October 2004 in the Wellington High Court (media statement at Annex 4). Subsequently two defendants, Richwhite and Midavia, filed a statement of defence and a request for further and better particulars. In December 2004 one defendant, Michael Beard, the former managing director and chief executive officer of Tranz Rail, settled with the Securities Commission. This was a good outcome. Subsequently a settlement was reached with Mark Bloomer former CFO of Tranz Rail. (News releases on these are at Annex 5.) Two other overseas defendants are still challenging jurisdiction. The High Court decision on jurisdiction and other procedural questions involving Richwhite and Midavia's case are awaiting appeal.

Provenco insider trading case

An insider trading case was filed against Provenco Group Limited, formerly Advantage Group Limited, and three of its directors on 17 December 2004. This case was recently settled when the defendants agreed to pay the following sums: Provenco $300,000, Mr Bradley $150,000, Mr Gordon $130,000 and Mr Wolfenden $42,000. These sums each represent an amount for compensation, a component for penalties, and a contribution to the Commission's costs. The Commission is pleased with this settlement, although the defendants contend that they had good defences to the claims made against them. It is a good outcome for investors and for the markets. It demonstrates that effective action can be taken against suspected insider trading. Effective enforcement of securities law is important for investor confidence and for the integrity of the markets more generally. There is always a litigation risk in insider trading cases and the Provenco case is a good result, particularly as it was settled in a timely manner. (News releases Annex 6)

Access Brokerage

The Commission is conducting an inquiry into events surrounding the collapse of Access Brokerage Limited last year. The focus is on the regulatory and market issues arising from this situation, rather than on specific events at Access Brokerage.

Under the Securities Markets Act 1988 NZX is the frontline regulator, responsible for operating its markets in accordance with its conduct rules. NZX is investigating whether, as a result of the collapse of Access Brokerage, there have been any breaches of its conduct rules and if so, will take action in respect of those breaches. NZX is also reviewing client funds accounting at all NZX Firms and intends to review its conduct rules about client funds accounting.

The Commission is the statutory regulator with oversight of securities markets and registered exchanges. This includes oversight of the performance by NZX of its regulatory functions. The Commission's inquiry is essential to demonstrate an effective co-regulatory system. This oversight, together with the steps being taken by NZX, will provide the public with confidence in the actions being undertaken to guard against failures like Access Brokerage in the future.

NZX has filed a Statement of Case with NZX Discipline, the independent body set up to consider alleged breaches of NZX Discipline Rules. NZX alleges breaches of its rules by Access Brokerage and its Principal, Mr Peter Marshall. This matter is on-going, The SFO has filed criminal charges against Mr Marshall, alleging 13 counts of false accounts and 2 counts of making a false statement as an officer of Access Brokerage.

In September 2005 the BNZ and Ferrier Hodgson, the liquidator of Access Brokerage, commenced civil proceedings against NZX, seeking recovery of money paid by BNZ to Access clients following the collapse of the broking firm. The NZX denies liability. These cases are continuing.

Finance companies

In 2004 the Commission expressed concern about the quality of disclosure in the offer documents of many finance companies. It published a discussion paper on how offer documents could provide more useful and complete information to help investors gauge the quality and risk of finance companies securities. In April 2005 the Commission published a report setting out its expectations for disclosure by finance companies under the Securities Act and Regulations. This took into account comments received on the discussion paper. The Commission is reviewing a sample of finance companies' disclosure documents this year as part of its market monitoring work. Any breaches of the law will be raised with the company concerned and the Commission will take enforcement action when appropriate.

BT - litigation

Early in 2003 the Commission was advised that a significant Australian Issuer, BT Funds Management, had for some time been in breach of an exemption notice under which it was offering securities to a large number of New Zealand investors. The consequence of the breaches, which involved failures to file certain documents with the Registrar of Companies, was that allotments of the securities were void under the Securities Act, and BT was obliged to return investors' money, plus interest of 10% per annum.

The Commission began an inquiry which ultimately showed that around 11 other overseas issuers were in a similar position. Work undertaken in the course of this inquiry also showed that relief under the Illegal Contracts Act was probably not available to these issuers.

The Securities Act was amended in April 2004 to provide a streamlined mechanism for these issuers to apply to the High Court for relief orders, validating allotments of securities that had been issued in breach of the exemption notices. BT, now owned by Westpac, commenced proceedings under this legislation in September 2004. To date the High Court has made mandatory relief orders under the law. These apply only to investments where the investors did not object to orders being made. BT is likely to apply to the Court in the near future for relief orders in respect of the small number of investors who did object to orders being made. Under the law the Commission is served with all papers in these proceedings, and has a right to appear. The litigation has generated little publicity to date, but this may change once orders are sought in respect of the objectors' investments.

Similar cases have been commenced by a few other Australian issuers, though involving fewer investors. These are continuing.

Law Reform

Securities Legislation Bill

This Bill was introduced in November 2004, and has been through the Commerce Select Committee process and was before the House prior to the election. The Bill amends the Securities Markets Act, the Securities Act, and the Takeovers Act. In particular the Bill includes:

new insider trading law, similar to Australian law, and including civil and criminal penalties;
market manipulation laws to prohibit practices on registered exchanges that create a false impression of trading, price movement or market information;
strengthened investment adviser disclosure laws, including enforcement by the Commission;
simplified and revised substantial security holder law;
provisions allowing the Commission to take enforcement action seeking civil penalties for breaches of securities law.

Financial Intermediaries Task Force

This task force was established by the Minister of Commerce in 2004 to consider possible regulation of financial intermediaries. It published its report in July 2005. The Commission welcomed the report and is keen to see progress with reform in this area.

Securities Act Review

The final stage of the Government's announced four-stage securities law reform programme is underway. The Commission has been participating in officials' working groups and industry advisory groups established for this project.

Securities Regulations

The Commission and the Ministry of Economic Development have been reviewing the Securities Regulations 1983. These contain the detailed rules for offer documents and prospectuses. A main aim of the review was to simplify compliance by generally aligning the financial reporting rules for prospectuses with those of the Financial Reporting Act. This work has been delayed because of a legal impediment to these regulations incorporating by reference financial reporting standards. An amendment to the Securities Act to fix this is included in the Securities Legislation Bill.

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