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Briefing Paper for Minister of Commerce Hon Lianne Dalziel

3 November 2005

Annex 7 - FSAP Recommendations

Extract from FSAP Report

Table 3. Recommended Action Plan to Improve Observance of the IOSCO Objectives and Principles of Securities Regulation

Principle 4

To facilitate understanding of this relatively complex regime, each statutory regulator and SRO should include on its website a common, comprehensive and easy-to understand description of the regulatory framework indicating the respective roles of each regulator and how they work together.

To enhance understanding of the new and upcoming reforms, the regulators should work with market intermediaries, public issuers and their advisers to develop bilateral industry-regulator education initiatives, such as case studies, so that regulatory staff can learn from the practical experience of these market participants and their advisers, while they in turn can gain insight into staff's interpretation of the new standards.

Principle 5

If SC and TP staff numbers increase further, the SC and TP should develop a written Code of Conduct that incorporates or cross-references the standards of behaviour staff and members are expected to meet, including standards relating to conflicts of interest and personal dealings in securities or other investments that may present a conflict. An appropriate level of monitoring (e.g. through annual attestations of compliance with the Code and, possibly, spot checks on disclosures relating to securities transactions) by a designated ethics officer, who can also serve as an information resource for staff, should also be introduced. To facilitate transparency, this Code of Conduct should be made publicly available.

Principles 7, 8, 25 and 26

The government should amend the securities legislation to include comprehensive, high level principles for regulated securities and futures exchanges. While existing legislation already includes some standards, it does not expressly establish standards relating to an exchange operator's operational capability, integrity and fitness to exercise SRO-type functions (Principle 7) and operate a fair, orderly, transparent and efficient market.

The SC should develop a formalized oversight plan for regulated exchanges providing for risk assessment criteria and periodic inspections that take into account best practices for SROs and exchanges. There should be public disclosure summarizing the objectives of the oversight plan and of the key findings of such reviews.

Securities legislation should be amended to authorize: (1) the SC to direct, or recommend to the Minister that the Minister direct, a recognized securities exchange to amend some or all of its conduct rules; and (2) authorize the Minister to make such a direction on the SC's advice. (Principles 7, 8 and 26)

NZX should adopt a broader definition of "independence" (applicable to the individuals constituting the Special Division of its disciplinary body, deciding matters involving NZX in its capacity as a listed company), or disciplinary functions in respect of NZX should be transferred to an independent body, such as the SC.

Principle 9

The reforms in the remedies and penalties Section of the Cabinet Paper, Investment Advisers, should be implemented as soon as possible.

Principle 10

The RC should devote additional resources to ensure that the National Enforcement Unit can act promptly and effectively to prosecute offences in relation to securities matters.

Principle 14 (also Principle 3)

More resources should be devoted to the review of disclosure documents, so that the appropriate regulator or regulators can implement risk-based review systems enabling them to conduct comprehensive reviews of issuers' disclosure records. This might involve exploring coordinated review processes among the RC, NZX and SC to determine whether there are further opportunities to take advantage of each regulator's expertise, reduce potential duplication of effort and/or facilitate the identification of issues that potentially require enforcement action.

NZX-listed companies should be required to notify NZX (in confidence) when they rely upon the exemption to make timely disclosure of material developments, thereby enabling NZX to spot-check appropriate reliance on the exemption and facilitating NZX's monitoring of trading to ensure that persons with superior information do not engage in insider trading.

The government should amend the Financial Reporting Act to provide for more timely disclosure of financial information by unlisted public issuers. An appropriate standard might be a four month deadline, plus a requirement to make a preliminary announcement of results within 60 days of year-end.

NZX should make Listed Companies' news releases available simultaneously to its paying subscribers and the general public.

Principle 15

The government should amend the companies' legislation to provide additional alternatives to shareholder self-help remedies.

The government should amend the securities legislation to require substantial securityholders, directors and officers to file their notices of transactions in a central electronic register, thereby ensuring that an adequate historical record of such notices can be easily accessed by the public and regulators.

Principle 16

Given the reliance placed on external auditors in New Zealand's securities regulatory system, the government should ensure that ICANZ's interpretation of audit standards is subject to oversight by an independent body acting in the public interest. NZX should amend its Listing Rules to require immediate disclosure of the resignation, removal or replacement of an external auditor.

Principles 17-20

The securities legislation should be amended to provide for: (1) the appointment of a trustee or statutory supervisor to oversee the conduct of contributory mortgage brokers (or provide for direct regulatory oversight); (2) high level minimum entry and ongoing standards concerning CIS operators' honesty and integrity, competence, financial capacity, internal controls, powers and duties; (3) general conflict of interest standards for CIS operators and their trustees or supervisors; (4) minimum standards for CIS operators to provide periodic and timely reports to trustees or statutory supervisors (or to the appropriate regulator, if directly supervised by a regulator), including a requirement to immediately report material contraventions of any regulatory requirement or requirement specified in a trust deed or similar document; (5) minimum requirements for trustees or statutory supervisors to conduct periodic inspections of CIS operators and make timely reports to the SC of any material contraventions by CIS operators of regulator requirements or requirements under the trust deed or similar document; (6) the suspension or prohibition of any CIS operator by the SC; and (7) the issuance of directions by the SC to a trustee or statutory supervisor that does not appear to be fulfilling its responsibilities and, in more serious situations where investor protection is jeopardized, to remove a trustee or statutory supervisor and replace such person with the SC's appointee.

Principles 21-24

The government should enact legislation providing for more comprehensive regulatory oversight of market intermediaries. Policy options could include:

A licensing regime that incorporates minimum entry standards relating to the integrity, financial capacity, competence, operational capability, internal controls and supervisory systems; involves a comprehensive assessment by a securities regulator or SRO of these standards; provides for periodic and timely reporting by market intermediaries to the regulator or SRO in respect of their continued ability to meet these standards; and provides for a risk-based ongoing oversight program carried out by a securities regulator or SRO.

Alternatively, a regime that requires market intermediaries to meet the standards listed above on an ongoing basis, requires market intermediaries to provide periodic reports to the regulator or SRO and permits the regulator to take effective enforcement action if the standards are not met might be a less costly regulatory option that would make it easier for the regulator to detect problems at an early stage than does the current regime.

Principle 24

Securities regulators and SROs, as a group, should develop a comprehensive crisis management plan for dealing with the potential failure of market intermediaries.

Principles 27-29

The government should amend the securities legislation to specify high level standards for regulated exchanges' trading systems and rules with respect to transparency of trading (Principle 27); the prohibition, deterrence and detection of market manipulation and other unfair trading practices (Principle 28); and proper management of large exposures, default risk and market disruption (Principle 29).

Principle 28 (also Principle 9)

The government's proposal to introduce comprehensive prohibitions on market manipulation and insider trading and enhance penalties and enforcement powers should be implemented as soon as possible.

New Zealand Authorities' response

The New Zealand authorities consider the FSAP mission's findings and recommendations helpful, and note that, in many areas, work is already under way to further improve observance of the IOSCO Principles.
The authorities note the FSAP team's endorsement of the forthcoming law reforms relating to the introduction of comprehensive prohibitions on market manipulation, insider trading and enhanced penalties and enforcement powers.
The authorities welcome the constructive technical recommendations designed to improve New Zealand's observance of the IOSCO Principles, and will give consideration to them. The team's suggestions with regard to regulatory oversight of market intermediaries and collective investment schemes will be considered in the proposed reviews of the relevant legislation to be undertaken in the near future.
The authorities note the recommendation that legislation be amended to specify standards for regulated exchanges' rules with respect to trade transparency, unfair trading practices, management of large exposures, default risk and market disruption.
The authorities consider that the broad public interest test in the current legislation provides flexibility for these things and others to be considered when approving exchange rules, and is preferable to a prescriptive approach.
The Securities Commission has decided to develop a formal oversight plan for regulated exchanges this year and has informed NZX. It is most likely that details of this plan, once settled, will be published. The oversight plan will cover some of the matters identified by FSAP as appropriate "ongoing standards" for regulated exchanges and the Commission expects to report on its oversight actions.

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