30 November 2004
New laws to strengthen markets
Commerce Minister Margaret Wilson today introduced to Parliament a bill designed to strengthen the laws on insider
trading and other financial market misconduct.
"The Securities Legislation Bill will build confidence in New Zealand securities markets and attract the capital
investment New Zealand needs to achieve its growth aspirations," Margaret Wilson said.
"The Securities Markets Act 1988 does not provide effective insider trading laws. Current laws are complex, difficult to
enforce and its trading prohibition clauses are relatively easy to avoid. No one has been found liable for insider
trading since the act came into effect. When coupled with research showing an enforceable insider-trading regime can
increase market liquidity, the need to beef up our insider trading legislation becomes very apparent.
"This Securities Legislation Bill broadens the definition of insiders prohibited from trading. It introduces criminal
remedies for insider trading as well as increasing civil penalties. Increased penalties under this bill focus more on
the harm insider trading causes to the wider market, not just the impact it has on particular companies."
New market manipulation laws will prohibit practices that create a false impression of trading activity, price movement
or market information. The Securities Commission and the Takeovers Panel will be provided with a comprehensive range of
penalties and remedies to help enforce breaches of the law.
Disclosure rules will also be tightened under the bill. Simplified substantial security holder disclosure will make it
easier for the market to understand the trading activities of those with significant voting rights in a public issuer.
It will be mandatory for investment advisers and brokers to disclose more information to clients before giving them
investment advice or receiving money. The Securities Commission will responsible for ensuring advisers comply with the
law.
The bill is the third part of a four-stage securities law reform programme that began with the introduction of the
Takeovers Code in 2001.
“We want to deter misconduct in our markets," Margaret Wilson said. "When investors see that we are serious about
deterring, detecting, and punishing this sort of behaviour, New Zealand becomes a more attractive investment
destination."
Questions, Answers
What consultation with the business community has been carried out on these changes?
Public discussion documents on each major aspect of the bill were released over the last two and half years. The
business community was a significant contributor to policy through its response to those documents. An early draft of
the bill was also released earlier this year for targeted consultation with the business and legal communities most
affected by the bill. Again, responses received through that process played a major part in finalising the bill for
introduction.
What else does the Bill do?
Aside from the insider trading, market manipulation, and investment adviser provisions, the bill:
Improves the law relating to substantial security holder disclosure. The bill simplifies the regime so mandatory
disclosure requirements apply only to listed, voting securities by class. This will make for easier to understand
disclosures, and so promote an informed market by ensuring that the identity and trading activities of persons who may
control or influence significant voting rights in a public issuer are known
Introduces new offences where investment advisers recommend illegal offers of securities and or advertise in a
misleading way
Achieves consistency and cohesion in the penalties and remedies available for breaches of securities and takeovers law.
Empowers the Securities Commission to be a fully effective enforcement agency for securities law.
The bill extends the Commission’s brief so that it has a consistent enforcement role for all securities laws including
the ability to apply for civil remedies and compensation on behalf of public issuers and persons who have suffered loss
as a result of contraventions of the law; standing to apply for any Court orders that may be given under securities
laws; and the ability, for breaches of those laws, to apply for a Court order to prohibit or disqualify a person from
being a director or taking part in the management of a company. Clarifies the application of the law to ensure that
securities and takeovers laws apply to entities and securities market participants that the public would expect to be
regulated.
For example, the bill: Defines the territorial scope of investment adviser law to adviser or broker services or
advertisements received or given in New Zealand, while allowing for appropriate exemptions or exceptions; and Removes
the $20 million threshold requirement from the definition of “specified company” in the Takeovers Act 1993 to give
greater certainty about whether a takeover is governed by the Takeovers Code.
How does the policy in the bill fit with the work of the Task Force on the Regulation of Financial Intermediaries
appointed earlier in November?
The bill addresses investment adviser and broker disclosure law – the matters that should be made known to an investor
prior to receiving investment advice. The Task Force’s brief is much wider; including considering what might be an
appropriate occupational regulatory framework for all financial intermediaries. Changes to adviser disclosure law will
be relevant to the Task Force’s work, but not at all determinative. The Task Force has been asked to take account of the
bill’s proposals in formulating recommendations to government.
Does the Securities Commission insider trading action against Tranzrail executives undermine the need for changes to
that law?
No. Current insider trading law, based on the insider’s relationship with the public issuer, is complex, difficult to
enforce, and leaves opportunities to avoid the prohibition. New Zealand’s insider trading law would be better targeted
at the threat that insider trading poses to market integrity and confidence in the market, rather than a breach of duty
owed to a company.
This change in focus was well supported by public submissions. Studies have shown that a more effective and better
enforced insider trading regime can assist with market liquidity. What is market manipulation?
Market manipulation refers to practices involving the creation of a false impression of securities trading activity, or
price movement, or market information. Prohibiting such behaviour reduces the risk that investors (in particular,
minority investors) may receive misleading or poor quality information about the value of businesses and the value of
the shares they hold.
The introduction of a strong market manipulation regulatory framework consistent with international standards will
encourage investment in New Zealand’s securities markets.
ENDS