Statement of Intent 2006 - 2009

Chairman's overview

A milestone along the way of this development was the 2003 assessment of New Zealand's financial sector, including the regulatory framework, by the IMF and World Bank. The FSAP team of experts measured our regulatory framework and its operation against the Objectives and Principles of Securities Regulation published by the International Organisation of Securities Commissions (IOSCO).

In general New Zealand was given a good report but a number of shortcomings were noted. One of these was the lack of regulation of financial intermediaries, and another was that the legislative process for registration of an exchange did not establish standards for an exchange which has the functions of a self-regulatory organisation. The FSAP team recommended that the Securities Commission have an oversight plan for regulated exchanges, and that the plan and key findings of review under the plan are made public.

Progress has been made on these and other identified gaps. Work continues on how financial intermediaries should be regulated in this country. The Commission is reviewing the NZX's performance of its regulatory role, and has published the terms of reference of this review. Various legislation currently before the House is addressing other matters.

The Minister of Commerce and the Australian Treasurer recently signed a revised MOU reaffirming both countries' commitment to coordination of trans-Tasman business law and reducing impediments to trans-Tasman commerce. This sets new priority areas for trans-Tasman business law coordination and acknowledges the objective of a trans-Tasman single economic market.

The Ministers also signed an agreement underpinning a regime for mutual recognition of securities offers. This removes regulatory barriers for issuers wanting to offer in both New Zealand and Australia. Only one prospectus will be needed in most cases. The Commission welcomes this regime which will encourage investment between Australia and New Zealand, reduce costs for business, and increase the choice for investors.

On the regulatory front, the Commission and the Australian Securities and Investments Commission (ASIC) have instituted regular joint meetings and have long had a close relationship at an operational level.

During the last few years the Commission has become more actively involved on the international scene, particularly in the work of IOSCO. Chairman Jane Diplock also chairs the Executive Committee of IOSCO which takes all decisions and actions necessary to achieve the objectives of the Organisation. This has served to put New Zealand on the world financial map and to promote our securities markets as markets in which investors can have confidence.

We are a signatory to the IOSCO Multilateral Memorandum of Understanding (MMoU) on sharing information for enforcement purposes between regulators. This has been of direct assistance to New Zealand in taking enforcement actions, and has also increased our workload as we fulfil our obligations to other regulators seeking information from this country. This cooperation is vital as financial markets and international fraud no longer have boundaries or borders.

New Zealand also supports IOSCO in its programmes to encourage countries to adopt the IOSCO Principles of Securities Regulation (which will raise the standard of regulation world-wide) and to increase the number of jurisdictions that have signed the MMoU (which enables exchange of information to counter cross-border fraud).

Much has been achieved in the past five years. The regulatory framework in New Zealand has been strengthened and legislation will be passed soon to fill more of the identified gaps, so that it can become a system of world class. More work is required to bring us to international standards in various areas, particularly the regulation of financial intermediaries.

Work is progressing on the co-regulatory arrangement between the Commission and the NZX.

New Zealanders have yet to fully recognise that the law is only the minimum when it comes to the behaviour of companies and their directors. As a country we need to create a culture in which business strives to operate in line with international best practice, not merely to not breach the law. We also have to rise to the challenge of adopting international financial reporting standards over the next few years. The Commission will continue to seek to raise standards of corporate governance and financial reporting in the future.

On the international scene it is important to continue, and to hasten, the work of IOSCO in bringing a consistent standard of regulation of securities markets and building a network of jurisdictions that can cooperate to combat international fraud.

Another area where New Zealand and most other jurisdictions fall short is financial education. The investing public is a vital part of the securities markets. We need to increase our efforts to build a generation of well-informed investors who feel confident about becoming involved in the securities markets.

The aims of all the Commission's work are to benefit investors and business alike by the existence of vibrant securities markets that are transparent, well-regulated, and attractive to investors.

The past five years have seen a great deal of work done to establish the legal basis on which to build a securities regulatory framework that is equal to the best in the world, and is recognised internationally, while being appropriate to the New Zealand situation. Important steps have been taken to develop that framework but much more needs to be done.

To build on the work to date, the Commission has developed a strategic plan for the next three years. The plan is based on six key result areas - enforcement, monitoring and market oversight, law and practice reform, exemptions and authorisations, international cooperation and recognition, and public understanding of the law and practice of securities and the Commission's presence in the markets.

The first purpose of the Commission's statement of intent is to set out the results to be achieved over the next three years, and how we will measure our achievements. It describes the environment we operate in, the people we work with, and the particular challenges we face. It also explains the main strategies we have adopted to achieve our stated objectives and thereby contribute to the outcomes, and how we will measure our achievements.

The second purpose is to present publicly our forecast financial statements and forecast statement of service performance for the next 12 months.

This statement of intent sets the broad parameters and measures for our work for the next three years. Supporting this we have a detailed strategic plan developed under our key result areas.

Progress is monitored continually and reported monthly to the Commission, and quarterly to the Minister of Commerce and the Ministry of Economic Development. Each year we report against the forecast financial statements and forecast statement of service performance in our annual report to the Minister of Commerce which is tabled in the House of Representatives.

The Commission will report against this statement of intent in its annual report for the year to 30 June 2007.

Jane Diplock AO
Chairman

Who we are and what we do

The Securities Commission is New Zealand's main regulator of investments. The Commission is established under the Securities Act 1978 which determines its powers and functions. The Commission is an independent crown entity in terms of the Crown Entities Act 2004.

For details of other legislation the Commission works with see http://www.seccom.govt.nz/about/laws.shtml.

For a summary of the Commission's powers and functions see http://www.seccom.govt.nz/about/#5.

The Commission's vision is that investors can have confidence in New Zealand's securities markets so that the markets increasingly attract investment from New Zealand and overseas.

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 Commission's work contributes to robust and vibrant capital markets in which investors, both domestic and overseas, can have confidence. This in turn is important for New Zealand's sustainable economic development.

The outcomes we seek in our key result areas are:

• Enforcement - that bad market practice is seen to be unacceptable and the law is complied with, thereby contributing to the integrity of New Zealand's securities markets;
• Monitoring and market oversight - that the integrity of, and confidence in, the markets are improved;
• Exemptions and authorisations - that the regulatory environment is relevant and effective;
• Law reform - that the securities law regime is tailored to the needs of the markets;
• International - that New Zealand's markets and regulatory environment are respected internationally, creating a climate for increased investment and good relationships with overseas regulators;
• Public understanding - that public understanding of the law and practice of securities and the Commission's presence in the markets is increased.

The outputs chosen by the Commission to help achieve these outcomes are described in Part 2 of this statement of intent, under the statement of forecast service performance.

The Commission promotes high ethical standards in New Zealand's securities markets. If the Commission is to succeed in this, and thereby strengthen confidence in the integrity of the New Zealand capital markets, it is essential that people have confidence in the integrity of the Commission itself.

The Commission has adopted a code of ethical standards and behaviour that it expects of its Members and staff. The code of ethics is published at http://www.seccom.govt.nz/about/code-of-ethics.shtml.

The Securities Commission has not less than 5 or more than 10 Members appointed by the Governor-General on the recommendation of the Minister of Commerce. Members hold office for a term not more than five years, but may be reappointed.

One member must be a barrister or solicitor of not less than seven years' practice. Members are chosen for their knowledge of, or experience in, industry, commerce, economics, law, accountancy, public administration or securities.

Currently there is a full complement of Members. The Chairman, Jane Diplock, works full time. The other nine Members are part time, attending one full Commission meeting per month and taking part in meetings of divisions (which have the full powers of the Commission) as required to handle the business of the Commission.

For names and profiles of current Commission Members see http://www.seccom.govt.nz/about/index.shtml.

The Commission currently has 39 staff. They include 15 lawyers, four accountants, a general manager, two investigators, two communications staff, two international officers, two library and information staff and 11 support staff. Five work full time for the Takeovers Panel, and several staff work part time for the Panel.

We work in a flexible structure which enables us to form cross-disciplinary teams to address particular matters.

In broad terms we divide our work into categories relating to the primary markets (i.e. the offers of new securities made to the public) and secondary markets (i.e. the trading of securities). We also give priority to processing applications for exemptions from securities law and authorisations under securities law.

The Minister of Commerce is the responsible minister, and the Ministry of Economic Development is the monitoring department in relation to the Commission. The Commission acts independently of government and others except as required by the Securities Act 1978 or the Crown Entities Act 2004. There are no matters on which the Commission is required to consult or notify the responsible minister before exercising its statutory functions and powers. However, we work with the minister and ministry as described in paragraph 3.6.

The Commission's other stakeholders include:

• investors;
• securities markets participants (i.e. issuers of securities, brokers, futures dealers, market analysts, stock and futures exchanges, investment advisers, financial intermediaries, debt security trustees and statutory supervisors of participatory securities);
• advisers to market participants (lawyers, accountants and auditors);
• other New Zealand regulators and enforcement agencies (i.e. the Companies Office, Takeovers Panel, Reserve Bank of New Zealand, Serious Fraud Office, Commerce Commission, New Zealand Police);
• overseas regulators;
• employees;
• Parliamentary Counsel Office;
• the general public;
• the news media;
• suppliers of goods and services.

The environment we work in

As the main regulator of investments in New Zealand, the Commission has oversight of both the primary securities market and the secondary securities market.

The primary market covers investments offered to the public for the first time. These include shares, debentures, bonds, term deposits, superannuation schemes, unit trusts and other managed investments, and contributory mortgages. An issuer who offers these securities must do so in offer documents (usually a registered prospectus and an investment statement) which comply with the law. The purpose of the law is to provide the prospective investor with sufficient information to compare one investment with others and to make an informed decision on whether or not to invest.

The Commission's role relating to the primary markets is to enforce the law regarding offers of securities and advertising for securities, and to intervene if an offer is misleading, deceptive, or confusing. It can request that documents be amended and can ban offers from the market. The Commission can report publicly on behaviour or circumstances it considers worthy of comment. The Registrar of Companies also has certain enforcement powers relating to the primary markets.

The secondary market is where securities are traded e.g. on a stock exchange or futures exchange. Participants in these markets have to comply with the rules of the exchange and with the law. The Commission has powers to investigate, and take legal action on, various types of misbehaviour in the secondary markets, e.g. trading by "insiders" who have information that is not known to other shareholders.

Currently New Zealand has only one registered stock exchange, the NZX. The Commission and the NXZ have co-regulatory roles relating to the exchange under the Securities Markets Act 1988. The NZX is the front line regulator concerned with breaches of the rules of the exchange and the Commission is the statutory regulator concerned with breaches of the law.

A co-regulatory regime has the advantage of giving responsibility at the front line to those who are closest to the market, and adding public accountability to this by the oversight and statutory enforcement powers of a public regulator. As well as the existing regime for securities markets the government plans other co-regulatory arrangements in the financial sector. Good working relationships between the Commission and co-regulators are essential to the effectiveness of any co-regulatory regime. The Commission is committed to this form of regulation and to maintaining effective working relationships with its co-regulators.

The government is conducting several reviews that will affect the regulatory regime for securities markets. While the detailed design of future regulatory regimes has not yet been finalised, the general directions for reform have been made public by the government. In particular:

• financial intermediaries - in 2005 cabinet agreed in principle to a co-regulatory framework for financial intermediaries involving the Securities Commission and industry-led approved professional bodies;
• financial products and providers - the government is reviewing the wider law relating to offers of securities, and the regulation of managed funds, superannuation and life insurance, and other financial products. Officials are considering the adoption of a co-regulatory model for regulating trustee companies and statutory supervisors which involves the Commission, as well as a role for the Commission in the regulation of funds managers;
• Financial Action Task Force recommendations - the government is reviewing changes needed to secure compliance with New Zealand's obligations to combat money laundering and terrorist financing. The Commission may have a supervisory responsibility for financial institutions in the securities sector.

New Zealand has strong economic ties with Australia and is currently working with that country towards a single economic market. The government has recently entered into a revised MOU with the Australian government aimed at improving the trans-Tasman business environment. The two governments have also signed an agreement which commits to removing unnecessary regulation and costs of offers of securities made in both countries. This not only removes barriers and costs for issuers, but also broadens the choice of investments for investors. A vital part of providing these benefits is that the Commission and ASIC work closely together so that regulatory standards are consistent and duplication of work is kept to a minimum.

Securities markets are global. Transactions take place instantly around the world. This brings enormous benefits for both business and investors. It is important for New Zealand to benefit from globalisation of the markets. To do this it must be seen to have a securities regulatory framework that is on a par with international standards and best practice. This will help attract international investors to our markets.

The globalisation of the securities markets also provides opportunities for international financial fraud. To combat this regulators must be able to work together across traditional jurisdictional boundaries. These issues are being addressed by IOSCO, particularly through the IOSCO MMoU to which the Commission is a signatory.

In accordance with our independent statutory functions and powers, we work with the Minister of Commerce and the Ministry of Economic Development on policy, regulatory matters, law reform, and appropriations. We report to these authorities on our achievements under our output agreement and in our annual report.

Under the Securities Markets Act we have a co-regulatory role with the NZX over the markets operated by that exchange. NZX is currently the sole registered exchange in New Zealand.

We also work with other government agencies including the Registrar of Companies, Reserve Bank of New Zealand, Serious Fraud Office, Commerce Commission, Retirement Commission, Police, and State Services Commission, as appropriate and in accordance with our statutory functions and powers.

We work with overseas securities regulators and agencies in accordance with the IOSCO MMoU, bilateral MOUs and applicable law.

We also work with a variety of industry organisations and professional bodies.