Feltex inquiry published

The Commission has published its inquiry into the IPO Prospectus of Feltex Carpets Limited and the company’s compliance with financial reporting and continuous disclosure obligations.

Jane Diplock AO
Chairman

The inquiry found that:

the IPO prospectus was not misleading in any material particulars;
Feltex failed to disclose certain material information to the market concerning changes to its banking facility agreement with ANZ in October 2005;
Feltex failed to disclose the breach of its banking covenants and did not properly classify its debt in its 31 December 2005 half-year financial statements; and
the work undertaken by Ernst & Young New Zealand in its review of Feltex’s 31 December 2005 half-year financial statements failed to meet the required standards.

“Careful attention to continuous disclosure and financia reporting is vital to allow investors to make informed decisions about holdings in listed companies,” said Chairman Jane Diplock. “This becomes all the more important when a company is facing difficult circumstances.”

Matters arising from the Commission’s findings have been referred to the Registrar of Companies, the Accounting Standards Review Board, and the New Zealand Institute of Chartered Accountants.

The Commission obtained documents and heard evidence from people including former directors and management of Feltex, and representatives of Ernest & Young and ANZ.

The Feltex report is available on the Commission’s website and in hard copy. Call 04 472 9830 or e-mail seccom@seccom.govt.nz.

Landmark year

2006-2007 was a landmark year for investors and the securities markets, Chairman Jane Diplock said in the Commission’s annual report which was tabled in the House of Representatives on 16 August.

Important milestones were:

the settlement of the Tranz Rail insider trading case which signalled that the law will be enforced and poor behaviour in the markets will not be tolerated;
the second annual review of NZX which showed that investors can have confidence in NZX’s performance as a registered exchange; and
the passing of new law on insider trading, market manipulation, and investment adviser disclosure, which will improve the transparency of the New Zealand markets.

View the annual report at www.seccom.govt.nz or telephone 04 472 9830 for a hard copy to be sent to you.

Reminder - new securities law

Do you give investment advice? If so, you need to be familiar with law passed in October 2006 that will come into force soon.

Regulations relating to new securities law on insider trading, market manipulation and substantial security holder disclosure are expected to be approved later this year. There will also be changes to disclosure required by investment advisers.

Register at www.newsecuritieslaw. govt.nz to be alerted to the date these will come into force and the effects they will have.

New powers for trustees

Colin Beyer,
Acting Chairman

Changes to law to strengthen the position of trustees of finance companies came into force on 21 September 2007. The changes will help trustees perform the supervisory roles in the interests of investors.

The Commission met with all finance company trustees before proposing the changes. Many of the changes are already in the Trustee Corporations Association guidelines and in some trust deeds. However, other deeds did not contain all the powers trustees need.

“It is important that trustees have up-to-date and reliable information about the companies they supervise,” said acting Chairman Colin Beyer.

The changes ensure that all trust deeds provide trustees with robust powers to get the information they need to carry out their duties in the interests of investors.

The changes automatically become part of all finance company trust deeds (including existing deeds).

Under the new clauses, finance companies must:

provide regular reports to the trustee about the issuer’s financial position and to regularly certify compliance with the trust deed; and
keep the trustee informed of matters relevant to the trustee’s duties; and
have the borrowing group’s half-yearly financial statements audited or, if that requirement is waived by the trustee, have them reviewed; and
provide the trustee with copies of the borrowing group’s annual and half-yearly financial statements; and
consult the trustee on the appointment of auditors and inform the trustee if an auditor resigns or declines appointment or reappointment; and
include specific conditions in the terms of appointment of auditors, which will give auditors responsibilities vis-à-vis the trustee.

The new clauses will also give the trustee power to:

appoint an independent auditor to audit the financial statements of the borrowing group; and
appoint an expert to assist the trustee to determine the true financial position of an issuer, and recover the fees and expenses from the issuer.

Finance companies say they comply

All but one of 67 finance companies said that their current prospectuses complied with the law and were not false or misleading, when asked to report to the Commission by 31 August 2007.

The exception, Five Star Consumer Finance, later went into receivership.

The Commission wrote to all finance companies to remind them of their ongoing obligation to keep their prospectus, including the financial information, up-to-date at all times while offering securities.

“Investors need the information from finance companies to be up-to-date and accurate, so that they can assess the risks and returns of the investment before they make decisions about investing,” said acting chairman Colin Beyer. “If there has been a material adverse change they must not take any further investment money until the prospectus has been amended.”

The Commission can require a finance company to correct any information in the investment statement, prospectus or advertising if it is not up to standard. If necessary the Commission can take the offer off the market until any breaches are remedied.

However, the Commission cannot step in to stop a finance company failing or take action against a finance company that fails. Where appropriate possible breaches of securities law are referred to the Registrar of Companies to consider prosecution.

Be a smart investor

Choosing investments that are right for you makes you a smart investor. The Commission will shortly launch a new website www.looklearninvest.org.nz to help people make better investment decisions.

“Generally higher promised returns indicate higher risks,” Chairman Jane Diplock says. “People need to know exactly what risks they are taking.”

Issuers are obliged to explain the risks and other aspects of an investment in their investment statements and prospectuses. However, it is also important that investors know how to use this information to decide whether or not an investment is right for them.

The website will answer questions such as:

What kinds of investments are available?
What does risk have to do with investing?
Why is my personal financial situation important when I plan to invest?
What fees will I have to pay?
What should I expect from an investment adviser?

Independent audit oversight

A call for independent audit regulation and oversight in New Zealand was sent recently to the Minister of Commerce, Hon. Lianne Dalziel, by the Commission and representatives of Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.

The Commission and these firms believe independent audit oversight is needed to bring New Zealand into line with international best practice. New Zealand has fallen behind other jurisdictions in this regard.

Currently audit oversight is carried out by the New Zealand Institute of Chartered Accountants (NZICA), the professional body that most New Zealand auditors belong to. Where the oversight role is undertaken solely by a professional body it lacks the crucial elements of perceived independence and objectivity. Such an arrangement does not have the capability and credibility to engage with other regulators and participate in international audit regulator forums such as the International Forum of Independent Audit Regulators (IFIAR).

New Zealand is a very small part of the global capital markets. It cannot afford to ignore these issues and continue to act in a way that differs from jurisdictions that are major players in the capital markets.

The Minister has asked Ministry of Economic Development officials to progress this issue.

Exemption review complete

The Commission has completed its 5-yearly review of class exemptions. Most exemptions have been renewed on the same terms with minor changes. However, in a few cases the Commission decided that more substantive changes were required to particular exemption notices.

They include:

Securities Act (Building Societies) Exemption Notice 2002

The exemption has been amended to allow a prospectus relating to building society shares to contain similar disclosures to those required in a short form prospectus for equity securities. The terms of the exemption is consistent with the existing exemption granted to the Canterbury Building Society under the Securities Act (Canterbury Building Society) Exemption Notice 2004, with some modifications. The schedule to the exemption notice has also been amended to reflect name changes of building societies named in that schedule.
Securities Act (Contributory Mortgage Brokers) Exemption Notice 1983

The exemption notice has been amended to resolve the conflict between the exemption notice and the Securities Act (Contributory Mortgage) Regulations 1988. Consistent with regulation 12(1)(a) of the Securities Regulations 1983, the exemption notice provided, amongst other things, that no advertisement may state the amount of the assets or net assets of any person or persons, other than total assets (in which case the amount of total liabilities must also be stated with equal prominence) or net assets of the mortgagor or the guarantor. However, the Contributory Mortgage Regulations require the value of certain assets to be stated in any valuation report provided to contributors. The amendment clarifies that those values may be stated in an advertisement in respect of interests in a contributory mortgage, as well as any other statement about assets required by the Contributory Mortgage Regulations.

The notice has also been amended to clarify ambiguities in the nature of the guarantee provided by a guarantor. The exemption notice was unclear on whether statements may be made about the assets of a guarantor of the obligations of the contributory mortgage broker (or other person) in relation to the interests in a contributory mortgage, as compared solely to statements about the assets of a guarantor of the obligations of the mortgagor to repay the loan for which a mortgage of land was granted. The amended definition of guarantor clarifies and extends the exemption notice so that it will apply in all such instances.
Securities Act (Overseas Employee Share Purchase Schemes) Exemption Notice 2002

The only amendment is the revocation of clause 10 of the Securities Act (Overseas Employee Share Purchase Schemes) Exemption Notice 2002, which required a report to be provided to the Commission each year relating to securities offered under an issuer’s employee share purchase scheme.

New exemptions

The Commission has created a new class exemption for public offerings made by companies listed on, or applying to be listed markets operated by New Zealand Exchange Limited.

The Commission is also working on making substantive changes to its class exemptions on residential property developments, real property proportionate ownership schemes, and rights, options, and covertible securities. The work on these is ongoing and new notices should be published in November. For further information on the proposed amendments go to www.seccom.govt.nz for Update of Project Report.

Recent Speeches

The Chairman gave a regulator’s perspective at the IASC Foundation’s Conference on International Financial Reporting Standards (IFRS), in Singapore in August.

Jane Diplock spoke of the need for one set of global accounting standards and IOSCO’s work to support IFRS. She also took part in a panel discussion chaired by Sir David Tweedie, Chairman of the International Accounting Standards Board.

Jane Diplock spoke in October at the World Federation of Exchanges 47th General Assembly & Annual Meeting in China on Regulation - Mutual Recognition and Cross–border Issues.

This speech focused on the importance of the IOSCO Principles of Securities Regulation.

Closer relations with ASIC

The Minister of Commerce, Hon Lianne Dalziel (centre) and Commission Member Cathy Quinn with Tony D’Aloisio, Chairman of the Australian Securities and Investments Commission in Wellington earlier this month. Mr D’Aloisio became ASIC Chairman on 13 May 2007 after several months as a Commissioner.

He was previously Managing Director and Chief Executive Officer at the Australian Stock Exchange. This was the first meeting between the New Zealand Commission and ASIC since Mr Tony D’Aloisio became Chairman. The meeting agreed to closer operational cooperation including on the imminent regime for mutual recognition of securities offerings and financial reporting.

Vietnam securities officials visit New Zealand

Vietnam’s capital markets are growing rapidly and the financial regulatory regime is in the midst of significant reform.

A delegation led by the Vietnam State Securities Commission (SSC) made a study mission to New Zealand from 18-22 July 2007. Officials from the SSC, the Ho Chi Minh stock exchange, and the Ministry of Finance of Vietnam were keen to learn about New Zealand’s regulatory experience.

As well as meeting the Commission, the group’s study programme included meetings with NZX and a major brokerage firm in Wellington.

Review of ICP Biotechnology Limited

The Commission’s review of ICP Bio Technology Limited found no evidence in breaches in continuous disclosure requirements or alleged insider trading by former director Dr Earl Stevens.

The review followed an anonymous complaint about ICP Bio alleging that it had mislead the investors and that shares of ICP Bio may have been subject insider trading by Dr Stevens.

The Commission reviewed:

continuous disclosure relating to ICP Biotechnology Limited’s revised projected revenue and EBITDA forecast for June 2007 financial year, announced to the market on 4 May 2007; and
allegations of insider trading by Dr Stevens concerning the sale of 1,000,000 shares on 18 April 2007 by his family trust.

No further action will be taken against ICP Bio in relation to these matters.

Financial Reporting Programme – Cycle 5

The Commission has reviewed the financial reports of 40 issuers with balance dates from 31 March 2006 to 30 September 2006. This review included 12 financial statements prepared in accordance with NZ IFRS and 28 prepared under previous NZ GAAP.

The Commission’s review covers compliance with Financial Reporting Standards and other sources of NZ GAAP to assess the overall quality of financial reporting.

Sixteen reports had matters that prompted the Commission to write to the issuer for more information. In some cases the Commission asked issuers to revise or enhance disclosures in future financial statements.

Key issues identified in the application of NZ IFRS included:

presenting the correction of prior period errors as transition adjustments;
incorrect labeling of comparatives; and
the treatment of GST in the preparation of the cash flow statement.

The application of previous NZ GAAP raised key issues on the treatment of an item as a fundamental error and reviewing investments for impairment.

The Commission has been pleased with the cooperation from issuers and their willingness to improve the quality of their financial reporting. It will continue its Financial Reporting Surveillance Programme.