Government’s vision for Securities Law Reform legislationCommerce
Carlton Hotel, Cnr Mayoral Drive & Vincent Street, Auckland
March 28, 1:50 pm
Good afternoon and thank you for the invitation to speak here today. I have been asked to speak about government’s programme of securities law reform and the impetus behind the reform programme.
Since 1978, New Zealand has had a framework of securities regulation based on the disclosure of information to investors and the market. These rules have contained disclosure of financial and other information about investment products, disclosure of substantial security holders of their interests in public issuers, disclosures by investment advisers and brokers and liability for insider trading.
The legislative framework in New Zealand has been relatively light handed in comparison to our major economic trading partners and some have tended to take pride in this difference, citing lower compliance costs as the benefit. In addition, the legislation has been primarily based around the interests of companies rather than investors, with a focus on private enforcement.
In today’s global context this point of difference runs the risk of undermining confidence in our capital markets, particularly that of international investors.
Lower compliance costs will produce little benefit if there is a lack of confidence in New Zealand’s capital markets. Although many of the factors that led to the international crisis in confidence in corporate governance following the collapse of Enron and others are not present in New Zealand, international investors will be looking to our regulatory framework for comfort in terms of an objective assessment of the security of their investment.
The government’s securities law reform programme is therefore focussed on achieving a number of goals, all of which seek to promote confidence and participation in New Zealand’s financial markets. These goals include:
To ensure the interests of investors are appropriately protected;
To ensure that New Zealand businesses have opportunities to seek capital in a cost-effective manner without unnecessary compliance costs;
To ensure that transaction costs are minimised for consumers and businesses in domestic and international markets. (This involves considering what possible reductions in transaction costs can arise from coordination with international standards and principles, and in particular coordination with Australian securities law);
To ensure that markets, businesses and consumers have access to and use information that enables them to conduct business effectively and make informed investment decisions;
To ensure that New Zealand’s international connections enhance and increase opportunities for investment and business growth;
To ensure regulation promotes accountability and responsibility in business practice (i.e. regulation prescribes accountability and ensures that investors have the information they need to hold people accountable);
To ensure that there are robust financial market institutions.
To ensure that the regulatory framework is sufficiently flexible and durable to encompass future change in the nature of securities products and market characteristics.
As I have said, the government is conscious that, in this area, it is critical to achieve policy goals in the most cost effective way. Compliance with the regulatory impact and business compliance cost framework, has proved to be an effective mechanism and a positive discipline on the machinery of government.
A four-step programme of reform relating to securities law has been developed to put the objectives for securities law into practice.
The introduction of the Takeovers Code
The first part of the Government’s reform programme was completed in 2001 with the introduction of the Takeovers Code.
The Government had two objectives for the introduction of the Code. The first was to align our takeovers regime with international best practice giving international and domestic investors greater confidence in our market. The second, to give greater confidence to minority investors, by providing rules that govern their treatment in takeover situations.
The Securities Markets and Institutions Bill
The second part of the law reform programme is also completed with the Securities Amendment Act 2002, the Takeovers Amendment Act 2002 and the Securities Markets Amendment Act 2002 being enacted on 1 December 2002, in the form of the Securities Markets and Institutions Bill.
Consideration of current New Zealand securities law highlighted the fact that our law was not consistent with international norms in many areas, particularly continuous disclosure and the regulatory environment for securities exchanges. As there is a trend towards increasing international co-ordination of financial market regulation, we have to recognise there is a cost in differing from international standards.
The Securities Markets and Institutions Bill was developed in order to address these concerns. The public policy objective of the Bill was to increase the effectiveness and the efficiency of the law governing securities markets and regulatory institutions and to bring it in line with international best practice. Many of the changes that were part of the Bill will have been discussed in more detail this morning, however, in summary it
Placed obligations on directors and officers to disclose securities dealings at the time they occur;
Implemented a continuous disclosure regime providing statutory backing for exchange listing rules;
Implemented a mechanism for mutual and unilateral recognition of overseas securities offering documents;
Expanded the role of the Securities Commission to include it as a civil public enforcement agency for insider trading;
Gave the Commission and the Takeovers Panel additional powers so as to increase their effectiveness and flexibility in exercising their monitoring and enforcement powers;
Provided for Securities Commission oversight over securities exchanges;
Established an effective co-regulatory framework for securities markets in New Zealand. This includes a rule approval structure and ownership cap for securities exchanges to ensure an adequate regulatory structure for any new exchanges that operate in the New Zealand market; and
Placed obligations on exchanges to provide information and assistance to the Commission.
Many of you will be aware that the directors and officers disclosure obligations are not yet in force. These provisions will come into force by Order in Council once regulations on the form and detail of disclosure, and possible exemptions from the regime, have been drafted and consulted on with the public. I am expecting to release a public discussion paper on these issues next month.
The Review of Securities Trading Law
The third part of the reform programme, the securities trading law review, is currently underway and it is anticipated that the Government will make announcements on the policy decisions relating to this review in the middle of this year. It is anticipated that a draft Bill will be released for public consultation in early 2004. So key stakeholders and practitioners will have another opportunity to comment on the proposed changes before the Bill is introduced to the House of Representatives. The review considers:
A first principles review of insider trading law;
Whether or not more comprehensive market manipulation law should be introduced in NZ;
Whether or not the current penalties and remedies for securities trading law are sufficient;
Improvements to the way in which NZ securities trading law applies to entities and financial products;
Improvements to the substantial security holder regime; and
Improvements to the Investment Adviser (Disclosure) Act 1996 that governs disclosures made by financial intermediaries.
There has been much discussion about the fact that by implementing the continuous disclosure regime, the Government has predetermined the outcome of the insider trading part of the review of securities trading law review. It is true that the continuous disclosure and insider trading regimes should complement each other. However, the Government was faced with the decision of implementing a best practice continuous disclosure regime at the earliest practicable date, and then moving on to the reform of insider trading law, or choosing to delay implementation of the regime until the work on insider trading was completed.
In my view, it would have been inappropriate to delay reform in this area. While I have an open mind on the most appropriate regime to govern insider trading, it will be important for the continuous disclosure and insider trading regimes to complement each other.
The Review of the Securities Act and other issues:
The fourth part of the reform programme includes the review of the Securities Act and other issues, and will begin later this year. The review will consider a first principles look at the way in which offerings of securities are made as well as other issues such as the possible licensing of financial intermediaries, transfer of securities, verification and monitoring of securities, reviews of the Unit Trust Act 1960 and contributory mortgages.
Both the Securities Markets and Institutions Bill and the anticipated Securities Trading Law Reform Bill move us towards achieving an effective, consistent and cohesive package of securities laws. The review of the Securities Act 1978 will be the final part of this law reform programme and addresses all other areas of securities law which were not considered in the other two reviews. Although this reform programme is designed to improve the regulatory framework for securities law there is also further work in the government’s reform programme that is targeted at making it easier for small and medium enterprises to access capital and to reduce compliance costs.
Officials are currently implementing a work programme agreed under the Memorandum of Understanding on Business Law Co-ordination. This includes work on a mutual recognition regime for securities offerings. It is hoped that this will reduce compliance costs for New Zealand businesses wishing to offer securities in New Zealand and Australia markets and increase investment options for New Zealand investors, while continuing to protect their interests.
The Business Law Reform Bill is also currently awaiting approval from the House Business Committee. Unfortunately it has hit a snag in the shape of one New Zealand First MP who has been withholding his party’s support for the introduction of the Bill [will update on progress]. The Bill includes a number of amendments to the Securities Act 1978 that will make it easier for companies, in particular small and medium sized enterprises, to raise capital. In particular the Bill:
Relaxes the restrictions that currently constrain the offer of shares to qualified investors. It extends the exemption for close business associates and relatives of the issuer to close business associates and relatives of directors. It also provides a new exemption from disclosures under Part II of the Securities Act for offers that are made to persons who are experienced in investing money, as well as an exemption for those experienced in the particular business to which the offer relates;
Extends the exemption from prospectus requirements for small employee superannuation schemes to all employee superannuation schemes, whatever their size;
Allows people to provide advertisements which seek expressions of interest on the offer, without an offer being required to be produced (such offers must state that no money is being sought and that no applications will be accepted unless the subscriber has received an investment statement).
This allows issuers to assess the level of public support for proposed issues of securities before incurring the expense of preparing the prescribed disclosure documents.
Business Law Coordination
Another business law coordination issue that I would now like to comment on is how we look at overseas models, in particular Australian models, when undertaking commercial law reform.
First of all, I would like to dispel the myth that we uncritically adopt overseas regulatory models, or even that there is a presumption that if other countries have regulated in a particular area, we should also do so. When we look at proposals for new regulation, we take a two-stage approach.
We begin by focusing on whether there are problems or gaps in our current regulation and then ask whether a regulatory regime of the kind under consideration is desirable in New Zealand. This involves a zero-based policy analysis of whether such a regime is desirable, and in particular whether the benefits of regulating are likely to outweigh the costs, with no presumption whatsoever that intervention is inherently desirable, or that what has been done overseas will be appropriate in New Zealand. Of course we look to overseas experience – that is an important source of information about different approaches, and their costs and benefits. But the goal is to have the most appropriate legal and regulatory regime for New Zealand, and the benefits of coordination with other countries is just one factor in this decision.
If the conclusion at the first stage is that regulation is appropriate, the next task is to design a model to implement that decision. There is no point doing this from scratch and therefore we do look at international models in some detail. For many years those models were principally British.
But that has become less appropriate over time, in the light of social and economic change in both countries, and the ever-increasing impact of EU regulation on UK laws and institutions. Today, we tend to look to Australia, a country in our region and with much greater similarity and economic links to NZ.
We therefore tend to start with the Australian model and depart from it only where there are identifiable benefits from doing so which outweigh any costs. That being said, we do consider other models where there are good reasons to do so- for example the Companies Act 1993 and the Personal Property Securities Act 1999 were both based on Canadian models. Even where we do use an Australian model, there will always be changes to ensure that the legislation operates appropriately in NZ. In no case can we simply "pick up" another country's model and plant it within a New Zealand context.
For example, the approach to regulating securities exchanges that was adopted in the Securities Markets Act 2002 differs from the Australian approach, which is to regulate all securities trading facilities. In this case the Government did not adopt the Australian approach as it was likely to hinder the development of smaller, more innovative markets, potentially affecting the ability for small or start-up businesses (whose shares are often traded on less formal systems) to raise capital. While a system of exempting exchanges, could have provided some relief for these exchanges, it would require prima facie compliance and impose additional compliance costs. Because of the small size of the companies operating in the New Zealand market we believed the costs of the Australian regime were too burdensome to apply to New Zealand conditions.
Why the presumption that we should start with Australian models, at the second stage? First Australia will always be a useful benchmark when considering regulatory reform because of the significant social, economic and institutional similarities between our two countries. There are ever increasing linkages between the two economies, including increasing numbers of companies seeking to raise funds in trans-tasman capital markets.
Firms and investors participating in both markets will face reduced transaction costs if the substantive requirements of the law are the same, or differences are minimised.
The other benefit of looking to Australian securities law and international practice comes from the interplay between: the critical role of laws and institutions in promoting investor confidence, and the relative size and importance of our capital markets, seen from the perspective of an overseas investor. Objective consistency with international norms also means there is no need for foreign investors to go into details – they can take the regulatory regime for granted, and focus on the commercial issues. They have many other investment opportunities, at home and abroad, in more familiar regulatory environments. Why invest time and money in learning about the regulatory environment in a small distant country that will never make up a significant part of a global investment portfolio? Objective consistency with Australia means that investors who understand and have confidence in the Australian regime need not make significant additional inquiries, before investing in New Zealand. Obvious differences, on the other hand, mean that further work is required to understand and evaluate those differences – for some investors, this will be enough of a hurdle to see New Zealand drop off the list of places to invest.
An increased focus on the relevance for New Zealand of global norms and of Australian law does not mean that we should simply be passive "takers" of regulatory regimes designed by others. One of the main ways that we can innovate is by engaging more actively in law reform processes that may influence our domestic regulation. This means more active participation in regional and multilateral coordination processes, and in Trans-tasman dialogue on business law reform. Examples of this in the Trans-tasman context include cross membership of the New Zealand and Australian Takeovers Panels and work underway on a mutual recognition regime with Australia for securities offerings. The Securities Commission’s appointment to the Executive Committee of IOSCO will be another way for New Zealand’s influence to be felt.
In conclusion, I have enjoyed my first 7 months as Minister of Commerce, and relished the opportunity it has given me to influence the law reform process in this important area. And that is despite the fact that the Building Act review is now one of my new responsibilities under the Commerce portfolio. I regard it simply as a further challenge, the result of which will see confidence restored to the building industry.
I am firmly of the belief that for any reform programme to be successful, it must be a partnership between the government and the relevant stakeholders. I want to thank those of you who have participated in discussions and made submissions on the reform programme to date, and encourage you to continue to contribute to our work in this area.