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BRIEFING PAPER FOR MINISTER OF COMMERCE
HON SIMON POWER

BACKGROUND

The Commission

Members of the Commission

Members of the Commission are appointed by the Governor-General on the recommendation of the Minister of Commerce.

The Commission currently has a full complement of 10 Members. The Chairman is a full time position.

Other Members attend regular monthly meetings and conduct Commission business in divisions which meet as required. Members' workloads are generally 3-5 days per month.

Under the Financial Advisers Act 2008 a Commissioner of Financial Advisers is to be appointed as an additional Member of the Commission. The Ministry of Economic Development is currently considering nominations and expressions of interest for this position. It is expected to be a full time role.

Members hold office for a term not exceeding five years and may be re-appointed. Chairman Jane Diplock AO was reappointed in 2006 for a second five year term which will expire on 3 September 2011. One Commission Member's term will expire in August 2009, while the terms of four others will expire during 2010, of which two will be completing a second term.

Profiles of Members are included in the Appendix.

Role and powers of the Commission

The legislation relevant to the Commission includes:

• Securities Act 1978
• Securities Markets Act 1988
• Securities Regulations 1983
• Securities Act (Contributory Mortgage) Regulations 1988
• Securities (Fees) Regulations 1998
• Financial Reporting Act 1993
• Corporations (Investigation and Management) Act 1989
• Crown Entities Act 2004
• Financial Advisers Act 2008
• Financial Service Providers (Registration and Dispute Resolution) Act 2008.

The role of the Commission can be broadly described as follows:

• Surveillance and enforcement - monitor and enquire into suspected breaches of relevant law and intervene in the interests of investors so that high standards of conduct are expected in the markets and the law is complied with
• Oversight and supervision - undertake oversight of registered exchanges (ie NZX) and supervision of financial advisers to encourage - in partnership with industry - voluntary compliance with professional requirements, and to maintain integrity and improve confidence in the market
• Law and practice reform - review and recommend changes to the law to ensure that the regulatory environment is relevant and effective
• Exemptions and authorisations - use exemption powers based on the policy of the law while responding to the needs of the market and authorise market participants (such as trustees and futures dealers) so that opportunities for New Zealand investors are increased
• International cooperation and recognition - promote internationally New Zealand's markets as well regulated to create a climate for increased investment, and foster good relationships with overseas regulators
• Public understanding - promote understanding of the law and practice of securities.

To carry out this work the Commission's powers include:

• to receive evidence and summon any person to appear before us, and to summon documents
• to carry out inspections
• to publish reports and comments
• to exempt persons from compliance with provisions of the Securities and Financial Reporting Acts or Regulations
• to suspend or cancel a registered prospectus
• to suspend or prohibit an investment statement
• to prohibit advertising of any securities
• to approve trustees and statutory supervisors
• to accept enforceable undertakings
• to hear appeals against certain decisions of the Registrar of Companies
• to recommend regulations
• to enforce insider trading, market manipulation and substantial security holder law
• to enforce continuous disclosure law and to make orders requiring disclosure by issuers
• to make orders requiring disclosure by unregistered exchanges
• to require an exchange to provide information and assistance to the Commission
• to administer the law relating to futures contracts
• to recommend approval of electronic systems for the transfer of securities
• to enforce investment adviser disclosure law
• to authorise, suspend and ban financial advisers (expected to be in place by 2010)
• to receive financial statements of issuers which do not comply with the Financial Reporting Act 1993
• to approve directions to 'at risk' corporations
• to recommend corporations and associated persons be placed in statutory management.

Resourcing - Vote Commerce

The Commission is funded by Government grant via Vote Commerce. The Commission also charges fees for exemptions from securities law and authorisations of certain market participants. Government appropriations for the Commission for 2008/09 are $7.3million ($6.5 million in 2006/07 and 2007/08). The Government also provides a litigation fund for Court actions taken by the Commission.

With the Commission's increased functions which have recently evolved and the new role related to financial advisers legislated for this year, the Ministry of Economic Development is conducting a base line review of funding to ensure that we have the required resources to carry out the functions now required of us under legislation. The expanded responsibilities for the Commission arising from the Financial Advisers Act have necessitated the baseline review looking afresh at the Commission's entire infrastructure. The doubling of staff numbers, the likely opening of an Auckland office, and the need for computer systems to deal with the authorisation and monitoring of financial advisers require this agency to reshape significantly. Importantly, much of this will be funded on a "user-pays" basis with industry fees and/or levies being introduced.

Implementation of the Financial Advisers Act has funding implications beyond the Securities Commission, and other commerce related agencies (the Registrar of Companies for the registration infrastructure and the Ministry of Consumer Affairs for the dispute resolution framework). Additional funding to support the tertiary education system in realigning its capacity is important because the new professional adviser framework depends on competency assessment and training becoming available across the country.

The Commission provides quarterly reports and financial statements to the Ministry of Economic Development (MED) as well as presenting its Annual Report to the Minister for tabling in Parliament.

Relationships - the Government and regulatory environment

Registrar of Companies and National Enforcement Unit

The Commission works closely with other agencies that have related regulatory and enforcement functions. The Registrar of Companies is responsible under the Securities Act for the vetting and registration of prospectuses. The Registrar also conducts investigative work for the Commission by conducting inspections under the Securities Act at the request of the Commission.

The Securities Act contains a number of criminal offences. Until earlier this year the Commission was not funded to take criminal proceedings. Where Commission investigations led to criminal proceedings these prosecutions were brought by the National Enforcement Unit of the Ministry of Economic Development on referral from the Registrar of Companies or the Commission. However, in May 2008 the Minister of Commerce agreed to allow prosecutions to be funded from the Commission's litigation fund which had previously been available for civil actions only. The Commission and the Registrar now allocate Securities Act prosecutions between the Commission and the National Enforcement Unit.

Ministry of Economic Development - Business Law Unit

The Commission has a function to review the law relating to securities and to make recommendations for change to the Minister of Commerce. In practice the Commission focuses its work on recommendations for changes to the law that arise from our enforcement work and other practical experience of the securities markets.

The Commission also works closely with Ministry officials on securities law reform projects, providing comment on draft and final discussion papers, regulations, and bills drawing from our enforcement and other practical experience of the securities markets. The Commission is consulted on cabinet papers affecting securities law.

NZX

Under the Securities Markets Act 1988 New Zealand has a co-regulatory regime for listed securities markets. The legislation provides for the registration of securities exchanges and futures exchanges. The New Zealand Exchange Limited (NZX) is the front line regulator. The Securities Commission overseas this regulatory activity.

NZX is currently the only registered securities exchange and following demutualization is a listed company on its own exchange. The Government approves NZX's conduct rules for listed companies and market participants. The Commission advises the Minister on these rules and on any amendments.

The Commission conducts an annual oversight review of NZX's performance as a front-line regulator. This review has occurred for the past three years. The Commission has made recommendations to NZX, NZX Discipline and the NZX Discipline Special Division. Among the recommendations these have addressed NZX Discipline's exercise of its discretion whether to publish decisions which identify market participants who have breached the Participant Rules; and the NZX Discipline Special Division's formalising of its procedures. Our recommendations have also resulted in the NZX ensuring that attachments to issuer announcements (such as annual reports) are made available on the public website. The Commission is satisfied that NZX, NZX Discipline and the NZX Discipline Special Division have responded appropriately to Commission recommendations as a result of these reviews.

In certain circumstances the Commission can give compulsory directions to a registered exchange requiring it to suspend trading in particular securities, or to take some other action relating to trading in securities.

To facilitate their relationship the Commission and NZX have signed a Memorandum of Understanding, which addresses thresholds, procedures, and processes for:

• compulsory referrals by the NZX to the Commission (disciplinary actions, significant contraventions of the NZX's Conduct Rules or securities and takeovers law)
• discretionary referrals to the Commission arising from the NZX's oversight of trading activity, in particular, in relation to insider trading, disclosure failures and market manipulation. Unusual movements in share price and volume are normally a trigger for this
• the referral of matters from the Commission to the NZX relating to compliance with the NZX's Conduct Rules or the application of those rules
• consultation on waivers from continuous disclosure
• procedures relating to the Commission's power to give directions to the NZX
• procedures to consult on new NZX Conduct Rules and amendments to these rules.

Takeovers Panel

The Commission has provided administrative and support services to the Takeovers Panel in accordance with the Securities Act and under a Memorandum of Understanding. Under revised arrangements that were fully implemented from 1 September 2008, the Panel has become responsible for its staff. The Panel continues to co-locate with the Commission, making a contribution towards the administrative and support services it shares with the Commission. Once it has secured extra funding, the Panel will relocate to separate premises. The separation is currently planned for 1 July 2009.

Other agencies

The Commission works with other public and regulatory agencies. These include the Reserve Bank, Commerce Commission, Serious Fraud Office, Office of the Auditor General, New Zealand Trade and Enterprise, Ministry of Foreign Affairs and Trade, Retirement Commission, Ministry of Consumer Affairs, Advertising Standards Authority, Banking Ombudsman, Law Commission, the Government Actuary and Enterprise New Zealand Trust.

The Commission, along with the Registrar of Companies, Serious Fraud Office, Reserve Bank, Government Actuary, Takeovers Panel, and Commerce Commission, meets several times a year as the Financial Regulators Coordination Group to discuss current issues and to share information. A multilateral MOU has been developed to assist information sharing among members of the group.

Also, the Chairman has been meeting monthly since March 2008 with the Registrar of Companies, the Director of the Serious Fraud Office, and the Establishment Director of the Organised and Financial Crime Agency of New Zealand to co-ordinate finance company enforcement action.

Public education

The Commission recognizes the importance of raising the general level of financial literacy among New Zealanders and is keen to see this addressed by Government in a coordinated manner. We have been working with other government agencies from our perspective of financial education around investing.

We are also continuing work undertaken over a number of years with Enterprise New Zealand Trust, sponsoring elements of the Trust's financial work in schools with the aim of developing a generation that will be financially aware and invest confidently. However, the Commission is concerned that delays in the development of relevant unit standards are hindering uptake of financial studies papers by schools.

Industry groups

The Commission maintains links and consults with industry groups, including the Investment Savings and Insurance Association, New Zealand Institute of Chartered Accountants, Institute of Directors, Trustee Corporations Association, Institute of Financial Advisers, Financial Services Federation, Bankers Association, New Zealand Law Society, New Zealand Shareholders Association, and Listed Companies Association.

Market participants

The Commission's work ultimately concerns three groups of market participants - investors, intermediaries, and issuers of securities. It does so in the exercise of its functions, including enforcement work, processing exemption or authorisation applications, and promoting public understanding through its communications and educational programmes.