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BRIEFING PAPER FOR MINISTER OF COMMERCE
HON SIMON POWER

International relationships

International Organisation of Securities Commissions (IOSCO)

The Commission has been an active member of the International Organisation of Securities Commissions, IOSCO, and of its Asia Pacific Regional Committee, for a number of years. Chairman Jane Diplock was re-elected chairman of IOSCO's Executive Committee, its governing body, in May 2008 for a third two-year term.

IOSCO is recognised as the global policy forum and standard setter for securities regulation. Its members total 109 securities regulators and a number of affiliate organisations. Member jurisdictions regulate over 95% of securities markets world wide.

Among IOSCO's important initiatives are its 30 Objectives and Principles for Securities Regulation (IOSCO Principles) which are promoted for full implementation in each member jurisdiction with the aim of raising the standards of regulation of securities markets globally. Through a Multilateral Memorandum of Understanding (IOSCO MMOU), IOSCO facilitates exchange of information and cooperation for cross border enforcement. New Zealand is a signatory to the MMOU.

New Zealand has benefited from the Commission's involvement with IOSCO in the development of domestic securities policy and legislation. The Commission's acceptance as a signatory to the IOSCO MOU has increased the number of jurisdictions with which the Commission can cooperate to enforce securities law. It has used the forum to promote and garner respect for New Zealand's regulatory framework and capital markets.

The Commission works with the Ministry of Foreign Affairs and New Zealand Trade and Enterprise to arrange speaking opportunities for the Chairman when travelling internationally to IOSCO meetings to promote New Zealand's regulatory framework and capital market to investor and business audiences.

Australian Securities and Investments Commission

The Commission has a close relationship with the Australian Securities and Investments Commission (ASIC) including a bilateral agreement to exchange enforcement-related information. The two commissions regularly meet to discuss matters of mutual interest consistent with the Closer Economic Relations accord.

In July 2008 the Australian and New Zealand governments brought into force the arrangement on mutual recognition of securities offerings. This aims to make it easier and more cost effective for businesses to raise capital across the Tasman and provide more choices for investors while ensuring their interests are protected. Consistent with the Single Economic Market programme we will be exploring further opportunities for mutual recognition with Australia, as well as with other markets, for the purposes of strengthening and deepening our capital markets.

Other overseas securities regulators

The Commission has bilateral MOUs with securities regulators in Australia, China, Dubai, Hong Kong, Indonesia, Israel, Japan, Jordan, Malaysia, Papua New Guinea, Sri Lanka, Taiwan, United States of America and United Arab Emirates,. These MOUs facilitate the exchange of information between the Commission and its counterparts in these countries.

Other overseas bodies

Chairman Jane Diplock is a member of the Trans-Tasman Leadership Forum. From time to time the Commission is in contact with other international bodies affecting securities markets including the Financial Stability Forum, OECD, and the International Accounting Standards Board.

Securities markets

Primary and secondary markets

It is convenient to divide securities markets, from a regulatory perspective, into primary and secondary markets. The primary market involves the offer and issue of securities by companies and other issuers. This includes public offerings of shares, debt securities, units in unit trusts, superannuation and life insurance products, and interests in syndicates and other participatory schemes. The secondary market is the subsequent trading of securities, whether on regulated exchanges or elsewhere.

The primary market is regulated under the Securities Act. This Act applies to any offer of securities to the public. Non-public offers of securities are not subject to this law. The regulatory regime is largely disclosure-based. To offer securities an issuer must have a registered prospectus disclosing all material matters about the issuer and the securities on offer and an investment statement which contains information about the offer in plain English.

The secondary market is regulated under the Securities Markets Act 1988. This Act applies to:

• registration and oversight of securities exchanges
• insider trading laws
• market manipulation laws
• continuous disclosure laws
• directors' and officers' disclosure
• investment adviser disclosure
• substantial security holder disclosure
• futures dealing.

The listed securities markets

NZX operates three securities markets:

• NZSX - the New Zealand Stock Market. This is the main board of NZX, and is the principal equities trading market in New Zealand
• NZAX - New Zealand Alternative Market. This was set up in 2003 and has less stringent listing rules than the NZSX. It is designed for developing companies and companies with non-traditional structures, such as co-operative companies. NZAX issuers can raise capital more cheaply under exemptions granted by the Commission in 2003
• NZDX - the New Zealand Debt Market. This market trades corporate and government bonds and fixed income securities.

Futures markets

The only active authorised futures exchange is the Sydney Futures Exchange Limited (SFE ). The New Zealand Futures and Options Exchange Limited (NZFOE) which is a wholly owned subsidiary of SFE is authorised but no longer operates. NZX derivative products can be traded on the SFE market.

Futures dealers must be authorised by the Commission. Participants of SFE or who are approved by NZX as Futures and Options Participants can deal in futures contracts under class authorisations granted by the Commission. Other dealers must be individually authorised.

Unregistered securities markets

The Securities Markets Act applies to trading on registered securities exchanges. No one can call their securities market a "stock exchange" or "securities exchange", or state or imply that a market is regulated under New Zealand law unless that person is registered as an exchange. However this does not stop any trading platform from operating, although the Minister of Commerce has the power to prevent a body corporate from operating without registration. There are a number of unregulated trading platforms operating including Unlisted.

Collective investment schemes

Interests in collective investment schemes - including interests in unit trusts, superannuation, and life insurance - are securities under New Zealand law. Primary offers of these products to the public are regulated under the Securities Act. In addition, specific legislation for the formation and governance of some schemes is found in the Unit Trusts Act 1960, the Life Insurance Act 1908, the Trustee Companies Act 1967 (in respect of Group Investment Schemes), and the Superannuation Schemes Act 1989. These Acts all include restrictions on the operation of such schemes, but there is no licensing of fund managers. A small number of unit trusts have securities listed on the NZSX market.

Other participatory schemes can offer securities to the public under the Securities Act and must appoint a statutory supervisor which must be a statutory trustee corporation or a person approved for the purpose by the Commission. These include forestry and agricultural syndicates, limited partnerships, and some property interests. The Securities Act regulates only the offer of securities by these schemes and does not prescribe the legal form or organisation of the schemes.

Unlisted debt - finance companies, banks, corporate bonds

The Reserve Bank is the main regulator of registered banks. Registered banks are also subject to the Securities Act when they offer securities (including bank accounts) to the public. Registered banks are exempt from the prospectus and trustee requirements of securities law. Investment statements are not required for any call debt securities.

The Reserve Bank will also now have prudential regulation of non-bank deposit takers following legislation enacted in September 2008. Finance companies offering debt securities, usually debentures, are also subject to securities legislation and the Commission is undertaking a number of investigations against failed finance companies.

Issuers who offer debt securities to the public must appoint a trustee which must be a statutory trustee corporation or a person approved by the Commission to act as a trustee for debt securities. Typically, debt security trust deeds include lending ratios and other prudential controls. Other issuers of debt, such as building societies and credit unions, are also subject to the Securities Act and also to their own industry-specific legislation.

Intermediaries

Intermediaries, including investment advisers, sharebrokers, financial planners, and other promoters or marketers of financial products, are involved in both the primary and secondary markets.

The Securities Markets Amendment Act 2008, which came into force in February, strengthened the disclosure obligations for financial advisers. Advisers are required to give their clients a disclosure statement with information about themselves, the products they advise on and the way they are paid. If they fail to comply the Commission can make orders and can take advisers to court to seek compensation and penalties.

The recently passed Financial Advisers Act 2008 will require financial advisers to meet standards for competence, professional conduct and disclosure and make them accountable for the quality of advice they give to clients. The Commission's responsibilities will include authorising financial advisers who advise on more complex ('category 1') products such as securities, real estate and futures contracts, and administering a Code of Conduct. The Commission will be able to require advisers to meet their obligations.