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Briefing Paper for Minister of Commerce Hon Lianne Dalziel

3 November 2005

Market regulation

Regulation of futures dealers - NZX/SFE/non exchange

When NZX announced the development of its NZFOX futures market in September 2003 it also announced that it sought to take frontline responsibility for the regulation of all futures dealers in New Zealand. This was welcomed by the Commission.

However, late in 2004 the Commission was advised that NZX has decided not to undertake this responsibility in respect of certain classes of dealers. This excluded group is likely to include those who are predominantly foreign exchange futures dealers, among others. This is a growing market in New Zealand. The Commission is currently in discussion with NZX to better define the scope of NZX's intended regulatory role in this area.

It is likely that the decision by NZX not to regulate parts of the futures industry will increase the resource demands on the Commission in this area.

Much of the difficulty in this area arises from uncertainty among market participants about the precise scope of New Zealand's futures dealing regime, in particular as it affects foreign currency products. The Commission intends to publish a discussion paper very shortly, which will propose that the Commission declare certain products to be futures contracts. This should ensure more consistent regulatory treatment for similar products and should help to reduce uncertainty about the application of the futures dealing law.

International

International Accounting Standards

New Zealand intends to adopt international accounting standards by 2007, with an option for companies to "early adopt" from 2005. There are a number of transitional questions arising for issuers of securities. The Commission is addressing these through exemptions already granted and through practice notes setting out the Commission's expectations regarding disclosure of certain financial information during the transition period to international accounting standards.

FSAP recommendations for New Zealand

In late 2003 an IMF team undertook a Financial Sector Assessment Program review of New Zealand. The detailed assessment of New Zealand's observance with the IOSCO Objectives and Principles of Securities Regulations was published in January 2005. The IMF has recommended a number of specific actions. These recommendations are in Annex 7. Some of these are being implemented in the Securities Legislation Bill.

Other recommendations include:

a formal plan for oversight of the NZX by the Commission;
amendments to securities laws to allow the Commission or the Minister to require changes to be made to the conduct rules of a registered exchange;
additional resources for the National Enforcement Unit for prosecution of securities offences;
more resources to review disclosure documents, possibly including coordinated reviews among the Registrar of Companies, NZX, and the Commission;
a Code of Conduct for the Securities Commission as it grows larger;
ongoing standards for regulated securities and futures exchanges, also for trading systems;
independent oversight of ICANZ's interpretation of audit standards;
amendments to the securities laws to provide for greater regulation of operators of collective investment schemes;
legislation for more comprehensive regulatory oversight of intermediaries; and
a comprehensive crisis management plan for securities markets.

New Zealand's response is that the recommendations concerning collective investment schemes and market intermediaries will be considered in the Government's review of the Securities Act. The Commission is working to implement the recommendation regarding a formal oversight plan for NZX. The Commission published a Code of Ethics in 2004, and is developing risk management and control policies.

IOSCO

The Commission is of the opinion that IOSCO's work in promoting and helping jurisdictions to adopt the IOSCO Principles of Securities Regulations and to join the IOSCO MOU is vital in improving regulation of securities markets worldwide. The Commission will continue to work with IOSCO at both the Executive and Regional Committee levels.

Investors

The interests of investors are at the heart of much of the Commission's work. Enforcement and surveillance of the primary and secondary markets contributes to markets with integrity where investors have all the information they need to make informed investment decisions. Exemptions give investors a wider range of investment choices and reduce costs for issuers. Other work by the Commission is specifically aimed at investors.

Public warnings about dubious offers and scams

An example is the 22 December 2004 release about Geared Equities (Annex 8). Warnings are issued to the news media and published on the website www.seccom.govt.nz to draw public attention to offers of securities that do not comply with the law. Cold calling overseas boiler rooms have taken many millions of dollars from New Zealanders with offers of worthless shares. The Commission's recent campaign to alert small businesses to this scam raised public awareness through the news media, distribution of brochures, and a dedicated website www.sharescams.org.nz. The Commission is repeating this campaign in November and continues to warn people not to do business with people from overseas who are known to them only by telephone.

Education projects

The Commission's education work is divided into projects which aim "to help New Zealanders make better investment decisions". Last year a project warning religious and ethnic groups about affinity fraud was completed. The case in Rotorua of the Papple couple who defrauded people in the Mormon church was an example of this type of fraud. The Commission has an ongoing project to reach young people with information about investing by sponsoring work by Enterprise New Zealand Trust. In October and November 2004 the Commission successfully carried out a Protect Yourself From Fraud campaign in the western Bay of Plenty jointly with the Serious Fraud Office. We expect to repeat this campaign in another part of the country in 2006. The campaigns to alert small businesses to the activities of telephone share scams have been referred to above. We also intend to undertake an educational project for financial intermediaries when the Securities Legislation Bill is passed.

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