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BRIEFING PAPER FOR MINISTER OF COMMERCE
HON SIMON POWER

20 November 2008

INTRODUCTION

The Securities Commission is an independent Crown entity established under the Securities Act 1978. It is New Zealand's main regulator of the securities markets.

Our purpose is to strengthen investor confidence and foster capital investment in New Zealand by promoting the efficiency, integrity and cost-effective regulation of our securities markets. The efficiency and integrity of capital markets - and of the financial sector as a whole - is fundamental to investor confidence, underpinning the sustainability of New Zealand's economic development.

In recent years the Commission's responsibilities have expanded to include enforcement, market supervision and now oversight of financial intermediaries. The enactment in September of the Financial Advisers Act and the Financial Service Providers (Registration and Dispute Registration) Act positions us as a financial services regulator, with a broad remit spanning market participants, intermediaries, investors and consumers.

CURRENT PUBLIC ISSUES

The current international market turmoil demands a multi-faceted regulatory response to restore investor confidence, to boost industry professionalism and to sustain the domestic and international reputation of New Zealand's financial system. Our immediate priorities are:

bringing into operation the regime for supervision of financial advisers
enforcement related to finance companies and mis-selling of financial products
law reform to facilitate capital raising in New Zealand regarding
- Capital Market Development Taskforce recommendations
- mutual recognition arrangements.

These matters are outlined below along with other current related issues.

Supervision of financial advisers

The financial advisers legislation was passed at the end of September and a key focus for us is to bring into operation the regime as soon as possible. Early implementation of the financial advisers legislation is important to restore investor confidence. Timely implementation will also mean that investors are able to obtain sound financial guidance when the two year Government deposit guarantee scheme is lifted in late 2010. Sufficient funding to implement this has not yet been appropriated.

The financial advisers legislation places the Commission and other agencies involved in an ideal position to strengthen the financial services regulatory framework, build partnerships with industry to promote professional behaviour, and overhaul strategies to educate and protect consumers. It offers Government an ideal opportunity, given recent events in world markets, to reinforce its commitments to strengthening the financial system and consumer protection.

The objective of enhancing professionalism is underpinned by the need to implement high standards of competence across the financial services sector, particularly with financial advisers who represent, for investors and consumers, the most visible face of the finance sector. The effective setting of competence standards, assessment of adviser competence (knowledge based and "on-the-job") and delivery of training require effort by the tertiary education network. Initiatives are now required by the relevant industry training organisation to help re-align capacity in the public and private training sectors to swiftly deliver to the financial services industry.

Over 2009 the policy framework for the financial advisors legislation will be developed in close partnership with the financial services industry.

Enforcement

Finance companies and mis-selling of financial products

Mis-selling of financial products and poor advisor conduct is becoming evident in our enforcement work. One of the Commission's main enforcement priorities is investigating the finance companies that have collapsed or frozen repayments since June last year. We are working with the Registrar of Companies, the receivers of the finance companies, and other agencies to determine the state of affairs of these companies and whether civil or criminal action should be taken. In particular, we are assessing whether the companies misled their investors or failed to disclose material information. If they did, the directors can face criminal penalties of imprisonment or substantial fines.

Every offer of securities to the public, including finance company debentures and notes, must have a registered prospectus and an investment statement. A prospectus must be kept up to date. If it becomes misleading because of any adverse circumstance, the issuer must amend it or stop allotting the securities.

If a prospectus is false or misleading in a material way, or if the securities have otherwise been offered or allotted in breach of the Securities Act, the issuer and its directors can face criminal penalties of imprisonment or substantial fines. In May 2008 the Minister of Commerce agreed to allow prosecutions to be funded from the Commission's litigation fund. Previously the litigation fund had been available for civil actions only, and the National Enforcement Unit (NEU) of the Ministry of Economic Development had taken Securities Act prosecutions. The Commission and the Registrar now allocate Securities Act prosecutions between the Commission and the NEU.

Also, law changes in force since October 2006 enable the Commission to go to court to seek compensation for affected investors for prospectuses registered after that date. We can also seek civil penalties in some circumstances. These actions can be taken against each director of the company, and any promoter of the offer. The Commission's litigation fund will be topped up from the Tranz Rail settlement providing significant resources to take actions under the new law.

Investors can also sue for compensation for loss caused by false or misleading statements. The Commission is continuing to investigate whether there may be any prospects for compensation if investors' losses can be attributed to misleading statements or omissions in the prospectuses.

The Commission cannot protect people against genuine investment risk. However, some of the finance company collapses raise serious questions as to whether directors were giving investors an accurate picture of their financial situation and the risks of investing with them, or even, in some cases, whether there was fraudulent behaviour.

As well as conducting its own investigations, the Commission has assisted the Companies Office to gather evidence for its prosecutions of the directors of Five Star Finance Limited, Five Star Debenture Nominee Limited, Bridgecorp and National Finance 2000 Limited. Also, in respect of Bridgecorp, the Companies Office laid additional more serious charges against executive directors Rodney Petricevic and Robert Roest at the request of the Commission after we had conducted further investigations.

Tranz Rail settlements

The Commission is in the final stages of its distribution of the $29million settlement of its case on insider trading against Tranz Rail. The Commission had sought direction from the High Court regarding such distribution and the Court's order included payment of the Commission's costs, amounting to $2 million. This money will go to the Commission's litigation fund to be available for future enforcement work.

Law reform

Capital Market Development Taskforce

An immediate priority for the Commission will be to provide advice to the Minister and MED on any recommendations made by the Capital Market Development Taskforce, which intends shortly to make recommendations to Government, aimed at facilitating fund raising by listed issuers. The Taskforce has brought forward its reporting date in response to current global financial conditions and the effect of these on New Zealand firms, and the Commission sees a prompt response to the work of the Taskforce as a high priority.

Disclosure under the Securities Regulations 1983

The Commission is also responsible for recommending any changes needed to the existing disclosure requirements under the Securities Regulations 1983. We anticipate that changes will need to be made in the short term to disclosure requirements for deposit takers, in line with new prudential rules to be administered by the Reserve Bank. We understand that the introduction of the Government deposit guarantee scheme has brought forward plans for the introduction of these new prudential rules, and recommendations may need to be made early in the new year.

Securities Act review

The Commission is currently contributing to the ongoing review of the Securities Act, which incorporates reviews of trustee responsibilities and supervision, supervision of funds managers, and disclosure rules for securities offerings. We are also working with the Ministry of Justice on reforms to New Zealand's anti-money laundering laws. It is proposed that the Commission will undertake a supervisory role in relation to compliance with AML requirements by some financial service providers.

Mutual recognition arrangements

A current priority is to explore opportunities for New Zealand to enter into further mutual recognition arrangements to deepen and strengthen the capital markets. Our work will explore further potential arrangements with Australia's securities regulator (ASIC), as well as with regulators in key Asian markets. The Chairman's role as Chairman of the Executive Committee of the International Organisation of Securities Commissions (IOSCO) will be instrumental in achieving this, as well as facilitating effective cross-border law enforcement.

Working closely with IOSCO's other two main committees, the Technical Committee and Emerging Markets Committee, the Chairman is playing a leadership role in the evolution of IOSCO's work in shaping the future regulatory architecture in response to the global financial crisis.

Independent audit oversight

The Commission is of view that there needs to be effective independent audit oversight in New Zealand, ie oversight that is independent of the accountancy profession. Related to this is the issue of whether key overseas jurisdictions will recognize the audit oversight regime in New Zealand in the future. In the case of the EU we have been advised that if New Zealand does not develop, or confirm its intention to develop, within certain time-frames, a regime that meets the EU equivalence requirements, New Zealand auditors will not be able to participate in the audit of New Zealand incorporated entities listed in EU jurisdictions, without the imposition of additional conditions.

Market regulation

In response to the global financial crisis the Commission is closely monitoring the NZX's supervision of capital ratio and client fund requirements for broker dealers on the NZX to ensure that, in the event of the collapse of a broker-dealer, client funds are protected.

Work has commenced on the Commission's fourth annual oversight review of the NZX.

In light of recent market events investigations are underway for potential civil and criminal proceedings against board members and senior management of certain companies for breaches of market manipulation and secondary market disclosure laws.

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