18 February 2005
Clerk of the Committee
Commerce Select Committee
Select Committee Offices
SECURITIES LEGISLATION BILL
I am pleased to enclose 20 copies of the Listed Companies Association Inc.‟s submission on the
Securities Legislation Bill.
The Listed Companies Association Inc. is supportive of the overall proposals for law reform set out in
the Bill, particularly with respect to insider trading laws, but has identified a number of areas where it
considers clarification is required. The Association is however particularly concerned about the
proposed removal of the exemption from the current insider trading regime for directors and officers
of public issuers who trade in accordance with an approved procedure that complies with the Insider
Trading (Approved Procedure for Company Officers) Notice 1996. The removal of the exemption will
leave directors and officers of public issuers exposed to insider trading liability every time they trade
securities they hold, and the Association urges the retention of the exemption.
By way of background, the Listed Companies Association Inc. is an independent, voluntary, non-profit
organisation of New Zealand Exchange listed organisations. Its main purposes are:
To help each listed company further the long term interests of its shareholders by working for
a fair, adequate and efficient regulatory system;
To assist those responsible for listed companies to maximise the benefits of listing and to
make the requirements that come with that status appropriate and reasonable to comply with;
To promote confidence in and growth of business and capital markets in New Zealand.
The Association wishes to appear before the Commerce Select Committee in support of its submission.
I can be contacted on 04 498 9095 to facilitate this.
LISTED COMPANIES ASSOCIATION INC.
SUBMISSION TO THE COMMERCE SELECT COMMITTEE ON
THE SECURITIES LEGISLATION BILL
The Listed Companies Association Inc. (“Association”) is supportive of the overall proposals for law
reform set out in the Securities Legislation Bill (“Bill”), particularly with respect to the insider trading
and substantial security holder disclosure laws set out in the Securities Markets Act 1988.
The Association agrees that confidence, and therefore investor participation, in New Zealand‟s
securities markets is adversely affected by the perception that persons who have non-public price
sensitive information are able to take advantage of that information to the detriment of other market
participants. While the Association does not necessarily agree with the Minister of Commerce‟s
justification for the reforms on the basis that no one has been successfully sued for breach of New
Zealand‟s current insider trading laws, the current provisions which define insider trading by reference
to an individual‟s or entity‟s informational relationship with a listed company/insider are difficult to
apply at the margin and are not consistent with the purposes of the legislation. Given the complexity
of the proposed legislation, this submission concentrates on the new insider trading regime.
The Association also welcomes the proposal to prohibit practices which present a misleading
impression of market activity or market information, and to clarify the disclosure of substantial
security holder information. In each case the Association believes the proposals will ensure the
market is better informed and participants will be more confident in the information that is generally
The Association does not wish to make any submissions on the detailed reforms of the law relating to
investment advisors or brokers, other than the proposal to remove the exemption from the disclosure
requirements that previously applied to an issuer‟s employees. The Association supports the initiative
to ensure investors using the services of an adviser or broker are provided with sufficient information
to enable them to make investment decisions on an informed basis, and to clarify the territorial
application of the requirements.
The Association‟s submissions with respect to the proposed amendments to the Securities Act 1978
relate to the new provisions dealing with use of self-incriminating evidence gathered by the Securities
Commission using its investigatory powers under the Act.
The Association does not have any submissions with respect to the proposed amendments to the
Takeovers Act and Takeovers Code.
The Association considers that, in future, it would be helpful for the Ministry of Economic Development
to issue a policy statement simultaneously with a new Bill, which clearly states the policy reasoning
behind each of the proposed reforms.
Proposed Insider Trading Reforms
Ambit of Prohibition
The Association supports the proposed change in respect of the application of insider trading
restrictions from principal officers, employees and substantial security holders of issuers (and those
who receive inside information or „tips‟ from them) to persons generally who have non-public price
sensitive information concerning an issuer. The Association considers that investor confidence in New
Zealand‟s securities markets is adversely affected by any concern that persons are trading with an
unfair information advantage. The proposed amendment removes the anomaly that persons receiving
information, a sufficient number of steps along the chain from a company or an “insider”, are free to
trade on the information they receive.
However, the extension of the insider trading prohibition to a potentially much wider group of persons,
and the extreme penalties that are a consequence of breaching the Act, mean that the definitions of
“material information” and “generally available to the market” are extremely important.
In particular it is imperative that there is no ambiguity in these terms. The definitions of those terms,
which are currently used in the Securities Markets Act, were developed in connection with a listed
entity‟s continuous disclosure obligations and while appropriate for that purpose are more difficult to
apply in the insider trading context.
In that regard, a listed entity can be expected to have better knowledge of the matters that are likely
to have significance in an assessment of the value of its securities than market participants to whom
the definitions will be applied in the insider trading context. An issuer is likely to have a sufficiently
close relationship with brokers and larger investors to understand the matters that are likely to
influence “persons who commonly invest” in securities, while market participants may find it more
difficult to do so. Further, a company can be expected to have a close appreciation of the information
concerning its securities that has been released to the market or that is circulating in the market
about it. This is not true of market participants generally.
There are a number of exceptions in the NZX Listing Rules to the basic continuous disclosure
obligation e.g. for partially completed negotiations or an incomplete proposal, that mean the exact
ambit of “material information” and “generally available to the market” has not been critical to listed
issuers. Since these exceptions are not embodied in the proposed insider trading provisions in the Bill,
the ambit of the definitions in the insider trading context needs to be precisely defined.
The Association therefore submits:
The concept of a “reasonable person” used in the proposed section 3(1) is ambiguous. While
a reasonable person may expect information to affect the price of a security, a reasonable
issuer or reasonable expert investor may expect that the same information has already been
incorporated into the price of a security. The Association is concerned that, with the benefit
of hindsight, a court could interpret the “reasonable person” test such that non-material
information is regarded as material for the purposes of the insider trading regime;
The difference (and therefore significance) between the terms “price” and value” used in the
proposed section 3(1) is not clear. Further guidance as to the distinction would be of
It is not clear what the interrelationship between clauses (1) and (2) of the definition of
“material information” in the proposed section 3 is. That is, what circumstances are covered
by subsection (1) that are not covered by subsection (2) and vice versa. It is noted that the
Australian Corporations Act makes it clear that the equivalent of subclause (1) of the
proposed definition in the Bill is satisfied if (and only if) the equivalent of subclause (2) is
satisfied. It is difficult to imagine an example of information that would fall into category (1),
that would not fall within category (2), information that is reasonably expected to materially
affect a security‟s price or value would as a matter of course affect an experienced investor‟s
decision whether to acquire or dispose of a security. It is not clear from the commentary to
the Bill why a different approach has been proposed in the Bill;
The concept of a “reasonable period for dissemination” in the definition of “generally
available to the market” in the proposed section 4 is not clear. Since bidding activity is
required to embody information into a market price, traders need certainty of the point at
which they are entitled to participate in the market otherwise their information will not be
reflected in market prices and an inefficient market will be created;
The inclusion of the word “likely” in the proposed section 4(1)(b) seems unnecessary. The
test should be whether the relevant information can be readily obtained or not – the concept
of likelihood is not relevant;
The Association recommends that the Committee clarify the definitions of “material information” and
“generally available to the market”, given the significant civil and criminal penalties proposed to be
introduced by the Bill.
The Bill proposes to remove the current element of an insider trading offence that requires non-public
price sensitive information to have been obtained through a specified chain of contacts from a
company or its designated insiders. As this broadens the category of persons covered by the insider
trading prohibitions, it is important that exemptions to the regime are not drafted unnecessarily
restrictively and that current exemptions are not removed, to ensure that legitimate market activity is
maintained. In that regard:
The exceptions and defences set out in the proposed sections 9-10D do not include the
current exception for company directors and officers provided in section 8 and operative
pursuant to the Insider Trading (Approved Procedure for Company Officers) Notice 1996. The
Bill does not provide for an equivalent regime to operate after its enactment. It is not clear
from the commentary to the Bill why the exemption in section 8 is being removed, and the
Association is not aware of any issues with respect to the operation of approved trading
regimes by listed issuers. The Association would be extremely concerned at the removal of
the current exemption, as company directors and officers will be left with no capacity to trade
securities without the risk of a subsequent action for prohibited conduct. This runs contrary
to NZX‟s corporate governance best practice recommendations that directors and executives
should maintain a shareholding in an issuer. The Association recommends that the existing
section 8 be reinstated and the Insider Trading (Approved Procedure for Company Officers)
1996 Notice be retained;
The proposed section 9A is limited to disclosure required by an enactment. In the
Association‟s view it should also extend to a disclosure required by a regulatory authority as
is provided in the Australian Corporations Act;
Given the significance of broker and investor research in the New Zealand securities market,
it is important that the ambit of the independent research and analysis defence set out in the
proposed section 10A is clear and unambiguous. It is not obvious to the Association exactly
what conduct is provided for under that section. This creates a risk that legitimate and
appropriate research activity will be stifled, potentially leading to a reduction in the
information available to investors to make informed investment decisions and a less efficient
The proposed section 10C provides a defence in respect of the exercise of “fixed price delivery
options”. As the term is not defined it is unclear whether the range of options and rights
issued by companies in New Zealand, particularly executive remuneration arrangements are
covered by this term. The Association recommends that the term be defined in a way that
encompasses the broad range of securities currently on issue and which may be issued in the
Admissibility of Evidence
The proposed section 43S to be inserted into the Securities Markets Act appears to relax the usual
rules of evidence that apply in judicial proceedings. In particular the clause allows a court to receive
any evidence in civil or criminal proceedings even if it would not otherwise be admissible. The
Association is not aware of any analysis as to why such a provision is necessary in the context of
securities legislation, and in particular in the context of criminal proceedings where it represents a
significant erosion of a defendant‟s rights. The Association considers that the justification for the
provision should be clearly demonstrated before the provision is enacted.
The Association supports the introduction of new offences for market manipulation which should serve
to strengthen the integrity of the New Zealand financial market.
Substantial Security Holder Disclosure
The Association supports the substantial security holders‟ disclosure provisions which enable the
market to clearly identify substantial security holders.
The Bill proposes that a “relevant interest” will arise where a holder has the power to vote or to
control the voting of securities as a result of a market or persons‟ “practice”. The Association
understands that the intention of this provision was to ensure that equity swaps were covered by the
substantial security holder disclosure requirements. The Association is concerned that the reference to
the term “practice” is vague. It would be helpful if the Securities Commission could issue further
guidance as to the scope of this term.
Director and Officer Disclosure
Although the Bill does not seek to amend the director and officer disclosure provisions contained in the
Securities Markets Act, the Association would like to take this opportunity to comment on the burden
those requirements have imposed on listed companies.
Listed companies that operate equity incentive schemes, dividend reinvestment plans, employee share
purchase plans or which have a significant number of employees who fall within the definition of
“officer”, incur significant costs in complying with the detailed disclosures required in respect of
directors‟ and officers‟ security transactions. The Association asks that the extent of the disclosure
requirements be re-considered.
In particular, the Association would request that consideration be given to creating exemptions for
specific types of security transaction, for example the allotment of non-tradable options or issue of
shares under dividend reinvestment plans, where the potential for insider trading is reduced.
Investment Adviser Disclosure Requirements
The Bill removes the exemption from the investment adviser disclosure requirements for an issuer‟s
employees who give “investment advice”. The Association believes there are circumstances where
the exemption should be maintained. For example, employees may in the course of their employment
provide information to research analysts and brokers who are well acquainted with those employees
and the capacity in which such information is being provided. Similarly an issuer‟s employees may
give information regarding an issuer‟s equity incentive schemes to participants in those schemes. It
would impose undue compliance costs on issuers if disclosure statements were expected to be
provided in these situations. It would be helpful if the provisions of the Bill could be clarified in this
regard and if necessary appropriate exemptions created.
Securities Act Amendments
Use of Evidence
The Association notes that the Bill proposes to repeal Section 69U of the Securities Act and replace it
with a new provision. The Securities Act obliges a person to appear before the Securities Commission
and to answer questions and/or to provide documents or information (section 69D). Section 69T
suspends the usual privilege against self-incrimination relating to such answer/documents
/information. The current section 69U provides that such incriminating evidence obtained by the
Securities Commission using its special investigatory powers can only be used in extremely limited
circumstances (essentially proceedings in respect of the falsity of the testimony). The abrogation of
the privilege against self-incrimination was justified on that basis. However, in the proposed section
69U the limitation on the Securities Commission‟s use of self-incriminatory statements is significantly
reduced. In particular:
The limitation will apply only to “oral” statements, therefore the Securities Commission will be
able to use all other self-incriminating testimony acquired under section 69D;
The limitation is effectively only available where the person does not give evidence in
subsequent criminal proceedings or proceedings for a pecuniary penalty order by the
A similar regime for the collection and use of evidence is included in the Serious Fraud Office Act, and
in that case was justified on the basis of the difficulty of investigating and prosecuting serious and
complex commercial fraud. However, the Association is not aware of any analysis that demonstrates
how and why the considerations under that legislation are applicable to proceedings under the
Securities Act and the Securities Markets Act. The Association considers that such a justification
should be presented before the provision is enacted.
In any event the Association does not see any justification for such evidence being available for use in
respect of civil proceedings (including for a pecuniary penalty order and a declaration of
contravention) as this would go significantly beyond the usage of such evidence provided for in the
Serious Fraud Office Act.
Listed Companies Association Inc.
18 February 2005