Statement of Intent 2007-2010

This Statement of Intent

This statement of intent:

• sets out the main objectives the Securities Commission will achieve over the next three years and how those achievements will be measured; and
• presents publicly the Commission's forecast financial statements and forecast statement of service performance for the next 12 months.

Medium-term information

The information in this section relates to the financial years 2007/08, 2008/09 and 2009/10. This section has key background information about the Commission, how it contributes to Government's goals, and the environments in which it operates. It sets out the nature and scope of the Commission's functions and intended operations, the outcomes to which we contribute, the objectives we seek to achieve, and the main measures of achievement.

The Securities Commission

The Commission is New Zealand's main investment regulator. The investments we regulate are securities which include shares, debentures, bonds, term deposits, superannuation schemes, unit trusts and other managed investments, contributory mortgages and futures contracts.

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.

Government's Goals

The Commission contributes to the Government's economic transformation goals through:

• cost-effective regulation to raise the integrity of the markets and increase investor confidence thereby attracting overseas capital which enables firms to become more globally competitive;
• promoting closer economic relationships with Australia by settling regulatory procedures for trans-Tasman mutual recognition of securities offerings which will provide new opportunities for business and investors;
• contributing to law reforms that will create a world class regulatory infrastructure for New Zealand's capital markets that will attract investors and enable New Zealand firms to be globally competitive;
• encouraging New Zealand issuers to achieve international best practice in corporate governance and financial reporting;
• sponsoring investment education in schools to enable young people to become confident investors in the securities markets.

The environments we work in

The environments the Commission works in

National environment - New Zealand's securities markets
As the main regulator of investments 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 give the prospective investor sufficient information to compare one investment with another 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.

We can:

• request that documents be amended;
• ban offers from the market;
• report publicly on behaviour or circumstances we consider investors and market participants should be alerted to.

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's role relating to the secondary market is to use its powers:

• to investigate various types of misbehaviour in the secondary markets, e.g. trading by "insiders" who have information that is not known to other shareholders;
• to take legal action where appropriate; and
• to work with and oversee NZX under the statutory co-regulatory framework.

Co-regulatory environment
Currently NZX is the only registered stock exchange in New Zealand. The Commission and NZX have co-regulatory roles relating to the exchange under the Securities Markets Act 1988. 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.

The Commission gives the Minister of Commerce advice on NZX's rules and oversees NZX's performance of its regulatory role. This co-regulatory regime has addressed the matter of standards for exchanges which are self-regulatory organisations raised by the 2003 Financial Sector Assessment Programme (FSAP) by the IMF (See FSAP ).

A co-regulatory regime has the advantage of giving front line responsibility to those who are closest to the market, and adds public accountability to this by the oversight and statutory enforcement powers of a public regulator.

Legislative environment
The Government has conducted several reviews on the regulatory regime for securities markets. In particular reforms relating to:

• financial intermediaries;
• financial products and providers; and
• Financial Action Task Force recommendations.

• registration of financial service providers;
• regulation of non-bank deposit-takers;
• trustee supervisory model;
• consumer dispute resolution and redress;
• institutional arrangements for prudential regulation; and
• financial advisers - a new regulatory framework.

The Cabinet papers are published on www.med.govt.nz. The Commission has had extensive input to these reviews and will continue to provide advice to the Ministry of Economic Development on the development of detailed policy and drafting of legislation.

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 and duplication of work is kept to a minimum. The Commission, the Registrar of Companies and ASIC are preparing protocols for cooperating to regulate the new regime.

International environment
Securities markets are global. Transactions take place instantly around the world. This brings 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.

The International Organisation of Securities Commissions (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 in her second two-year term as Chairman of the Executive Committee. This role raises New Zealand's international profile as a well-regulated market, attractive to international investors. It enables New Zealand to take part in IOSCO's work to raise standards of securities regulation worldwide.

The globalisation 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.

Government reforms
Over the last six years the regulatory framework for securities has changed significantly as the Government has carried out its programme of reforms. These have given the Commission new powers and functions as shown in the table.

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 intermediaries.

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 7). In 2006 the Ministry of Economic Development published a discussion paper proposing reforms for the regulation of financial intermediaries. 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 13).

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 is a full complement of 10 Members. 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 have 43 staff. They include lawyers, accountants, a general manager, investigators, communications, international, library and support staff. Seven people work full time for the Takeovers Panel, and several staff work part of their time for the Panel. We work in a flexible structure which enables us to form cross-disciplinary teams to address particular matters.

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 and substantial security holder law
• to enforce continuous disclosure law and to make orders requiring disclosure by issuers
• 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.

Outcomes, objectives and outputs
The Commission has identified six outcomes that will benefit the New Zealand securities markets.

It will contribute to these outcomes through its short and medium term objectives. These 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 Commission is funded for the performance of securities market functions as part of the Vote Commerce. This funding is specifically given for the Commission to undertake the following functions:

The Commission has adopted these functions as its outputs.

The relationships between these terms (outcomes, objectives, outputs and functions) are shown in the chart.

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