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Trans-Tasman environment

New Zealand has strong economic ties with Australia and is currently working with that country towards a single economic market. The Government has a memorandum of understanding (MOU) with the Australian Government aimed at improving the trans-Tasman business environment.

The two Governments have an agreement which commits to removing unnecessary regulation and costs of offers of securities made in both countries. This mutual recognition of securities offerings will remove barriers and costs for issuers and broaden the choice of investments for investors. This regime is likely to commence within the next 12 months. A vital part of providing these benefits is that the Commission and the Australian Securities and Investments Commission (ASIC) work closely together so that regulatory standards are consistent, duplication of work is kept to a minimum, and issuers can easily understand and operate in the mutual recognition environment. The Commission, the Registrar of Companies and ASIC have settled protocols for cooperating to regulate the new regime and are preparing guidance materials for Australian and New Zealand issuers wishing to use the mutual recognition regime.

International environment

Securities markets are global. Transactions take place instantly around the world. This brings benefits for both business and investors.

New Zealand is a small capital market, distant from many financial centres. Our markets benefit from greater international participation, which brings increased opportunities for New Zealand investors and for capital raising by New Zealand firms.

As a small market New Zealand is very exposed to trends and events affecting world markets. The latter half of the financial year has seen uncertainty in global capital markets following the sub-prime mortgage situation in the United States. New Zealand markets are inevitably affected by this as they are by other economic trends and events. However, the New Zealand market has not had a large direct exposure to the sophisticated collateralised debt and asset-backed financial instruments that are of concern to market participants in the United States in particular.

Securities regulators internationally are assessing the lessons to be learnt from the sub-prime situation. This work is being led by the Technical Committee of the International Organisation of Securities Commissions (IOSCO). The New Zealand Securities Commission, as a member of IOSCO's Executive Committee, is supporting this work and will assess any findings for relevance to the New Zealand market. These findings may or may not require a regulatory response in New Zealand.

This country has undertaken significant reforms since 2000 and since the FSAP inspection in 2003. These changes have brought our regulatory regime and market infrastructure close to international best practice. It is important that these changes are communicated to key institutions and investors internationally, especially in times of market uncertainty.

Since 2004 the Chairman of the Commission has also chaired the Executive Committee of the IOSCO. This has significantly raised the profile and standing of New Zealand in the international regulatory community. We work to maintain our good standing through continuing contributions to many aspects of IOSCO's work, internationally and regionally. We in turn use this as an opportunity to promote New Zealand as an attractive and well regulated place to do business and to invest.

The Commission also uses our position within IOSCO to promote the New Zealand markets to a wider international audience. We work with the Ministry of Foreign Affairs and Trade and with organisations such as NZTE to identify specific opportunities, in New Zealand and abroad, to raise awareness about developments in the New Zealand markets and to inform overseas investors and firms of the high standards of regulation and compliance in New Zealand.

IOSCO is the international standard setter for securities regulation. The Commission is a member of the Executive Committee, IOSCO's governing body, and Chairman Jane Diplock is about to complete her second two-year term as Chairman of that Committee. This enables New Zealand to take part in IOSCO's work to raise standards of securities regulation.

The global nature of the securities markets also increases 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 Multi-lateral Memorandum of Understanding on Cooperation and Exchange of Information (IOSCO MMoU), to which the Commission is a signatory.

Cross border cooperation is a vital part of successful enforcement of securities laws. Many firms operating in the New Zealand markets are overseas owned. There are high levels of overseas investment in this country. It is very much in the national interest to support effective international cooperation through multilateral and bilateral agreements. As Chairman of IOSCO's Executive Committee Jane Diplock sponsored the development of a strategic plan for IOSCO which includes promoting the IOSCO MMoU. Under the plan all member regulators are committed to joining the MMoU by 2010. For many jurisdictions this requires changes to domestic laws to permit and facilitate cooperation with other regulators.

The Commission is part of the IOSCO MMoU Screening Group, which vets applications for admission to the MMoU. We encourage non-signatories to take the necessary steps to reach the standards required to be accepted as signatories. The IOSCO strategic plan was agreed in 2005 and regulators of 47 countries are now signatories. A further 15 countries have committed to joining (5 in 2005).This brings the total to 62 (54%) of eligible members, more than halfway towards the 2010 goal.

The Commission also negotiates and settles bilateral MOUs with some jurisdictions, either to recognise a special relationship with the jurisdiction (e.g. Australia) or as part of our encouragement to the jurisdiction to join the IOSCO MMoU.

FSAP

New Zealand's financial sector, including the regulatory framework, was assessed by the IMF and World Bank in 2003. The FSAP experts measured New Zealand's regulatory framework and its operation against international standards.
In general New Zealand was given a good report but a number of shortcomings were noted including:

• the legislative process for registration of an exchange did not establish standards for an exchange which is also a self-regulatory organisation; and
• the lack of regulation of financial advisers.

Some of the shortcomings, including matters relating to exchanges, were already being addressed in the Government's programme of reforms, and have now taken effect. (See Co-regulatory Environment on page 8). In 2006 the Ministry of Economic Development published a discussion paper proposing reforms for the regulation of financial intermediaries. Reforms are underway to address the regulation of financial advisers and other matters in the FSAP report. The Commission is helping with this and our commitments to it are included in this statement of intent under the Law and Practice Reform Output (page 16).

Who we are and what we do

Commission Members

Commission Members are appointed by the Governor-General on the recommendation of the Minister of Commerce. They are usually appointed for five years, and may be reappointed. Members are chosen for their knowledge and experience of the securities markets. One Member must be an experienced lawyer.

Currently there are nine Members, one Member having completed 11 years' service in April 2008. A new Member is expected to be appointed shortly to bring the Commission to full strength. The Chairman, Jane Diplock, works full time. The other nine Members attend one full Commission meeting per month and meet in divisions as required to handle the business of the Commission. Divisions have the full powers of the Commission. Profiles of Commission Members are published at www.seccom.govt.nz/about/.

Staff

We estimate 52 staff on 30 June 2008 including lawyers, accountants, investigators and support staff. We work in cross-disciplinary teams to deal with particular matters. Six people work full time for the Takeovers Panel, and several staff work part time for the Panel.

Nature and scope of our functions and intended operations

The nature and scope of our functions and operations are defined by the Securities Act 1978 which establishes the Commission. They include:

• to keep under review the law relating to bodies corporate, securities and unincorporated issuers of securities and to recommend changes to the Minister of Commerce
• to keep under review practices relating to securities and to comment on these
• to cooperate with overseas securities commissions
• to keep under review securities markets activities and to comment on these
• to advise the Minister of Commerce on conduct rules proposed by securities exchanges
• to promote public understanding of the law and practice of securities
• to provide administrative and support services to the Takeovers Panel
• to perform any other function conferred by law.

To perform these functions we have a number of powers. These include:

• to receive evidence as to securities law and practice, with power to summons people and documents and to carry out inspections
• to ban misleading and illegal offer documents and advertisements
• 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 enforce disclosure obligations of investment advisers and brokers and to make orders requiring disclosure by investment advisers and brokers
• to require an exchange to provide information and assistance to the Commission
• to accept enforceable undertakings
• to publish reports and comments
• to make orders requiring disclosure by unregistered exchanges
• to exempt persons from compliance with provisions of the Securities Act or Regulations under the Act
• to authorise certain market participants
• to recommend law reform
• to hear appeals against certain decisions of the Registrar of Companies.

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

Classes of output

The Commission has two classes of output:

• performance of securities market functions (Vote Commerce) in the Appropriations; and
• Securities Commission litigation fund.

Outcomes, objectives/impacts and outputs

In relation to the performance of securities market functions class of outputs, the Commission has identified five outcomes that will benefit the New Zealand securities markets. The outcomes are:

• High standards of conduct are expected in the markets and the law is complied with;
• The regulatory environment is relevant and effective;
• Securities law regimes are tailored to the needs of the market;
• New Zealand's markets and regulatory environment are respected internationally;
• People understand the law and practice of securities.

The Commission contributes to, or impacts on, these outcomes through its short and medium term objectives. These objectives are measurable and will determine the Commission's work during the term of this statement of intent. The work will be delivered via the Commission's outputs which align with the functions for which the Commission is funded through the Vote Commerce.

The Securities Commission litigation fund contributes to the achievement of our enforcement objectives and the associated outcome.

Future developments

The Government is considering major reforms to securities law (see The Legislative Environment on page 8). These are likely to significantly increase the work of the Securities Commission. Some of these reforms are likely to be in place during the period of this Statement of Intent. Others will not take effect until later, but the Commission is planning for these so it will be ready to fulfil its future roles.

In anticipation of this the Commission decided to amend its outputs to meet the possible requirements of Government and to alert the Minister to the anticipated costs of any additional responsibilities it may be required to assume.

In the short term the main factor that needed to be considered was an expanded supervisory role relating to trustees and financial advisers.

We considered that this should be addressed by changing the old Monitoring and Market Oversight output to Oversight and Supervision which would encompass the Commission's existing oversight work in respect of NZX and the new supervisory role. Current market monitoring work (surveillance) would be combined with enforcement in one output as shown in the table.

Input by the Commission will also be required to the work of the inter-agency project on Anti Money Laundering and Countering the Financing of Terrorism (AML/CFT). The Government is undertaking reforms to strengthen New Zealand's anti money laundering laws to achieve compliance with the Financial Action Task Force recommendations. One of the aspects of compliance is that institutions which are subject to regulatory requirements are supervised by an appropriate agency. It is proposed that the Commission will have a role as the AML supervisor for certain institutions in the financial sector. We anticipate that dedicated funding will be needed for this role. With this in mind we have tentatively added a Money Laundering Output which would contribute to the inter-agency AML/CFT Objectives and Outcomes.

This chart shows the previous situation.

This shows the revised outputs.