11. The Takeovers Act 1993 has been enacted for 8 years and Part I of the Securities Amendment Act 1988 has been in force for 13 years. During this time there have been sophisticated developments in financial products. Further, the way in which these products, issuers of these products and markets are defined and treated by regulators has also developed and changed.

12. While previously securities trading law was for the most part confined to issuers that were listed on a public market and equity securities, increasingly there is a trend internationally for legislation to cover a wider range of issuers and financial products.

13. This may be a result of the fact that the global securities and futures industry is changing rapidly and exchanges are facing increasing competition from each other and from independent low cost trading systems, which bypass traditional exchanges.

14. Technological advances have lowered the entry barriers to establishing new exchanges and this has led to widespread emergence in recent years of alternative and proprietary trading systems which are executing trades outside traditional exchanges, between large participants at low cost and competitive speed. Examples include screen based trading systems owned and operated as independent businesses by non-self-regulatory organisations and automated trading systems which consist of internal trade crossing systems operated by large intermediaries.

15. Further, overseas markets are rapidly integrating by linking together trading, clearing and settlement functions into a single transaction chain. They are also integrating across product lines by combining stock and futures products into a single organisation and developing alliances with other exchanges.

16. The range of securities and futures products available to investors and issuers is also expected to expand, especially in the fixed income and derivatives areas.

17. All of these trends mean that it is difficult to define the "public market", as the concept of a market is changing dramatically. As technology advances, the threats to the traditional exchange "public market" structures will only increase and the types of financial products will continue to develop. Further, there may be more alliances and possible mergers as exchanges try to compete in the global market. For this reason careful consideration needs to be given as to how we define which entities and products our securities law should apply to. The application of our securities trading law needs to be flexible in order to move with new developments.

18. This part discusses the application of:

Takeovers Law;
Insider Trading Law;
The Continuous Disclosure Regime; and
Market Manipulation law.

Application of the Takeovers Act 1993

19. The Takeovers Act 1993 applies to "specified companies". A "specified company" is a company registered under the Companies Act 1993¹ that is either a "public issuer" or has fifty or more members or shareholders and $20 million or more of assets.

20. A "public issuer" means a company that is party to a listing agreement with a stock exchange, or a company that is not party to a listing agreement with a stock exchange but was a party to a listing agreement with a stock exchange at any time during a period of 12 months before any date or occurrence of any event referred to in the Code.

21. Several issues have been raised with the current application of the Takeovers Act 1993:

Should the $20,000,000 asset threshold be removed or more guidance given in the legislation as to when and how assets are to be valued?
Should more guidance be given in relation to the term "shareholders"?
Should companies listed on the New Zealand Stock Exchange's new capital market be excluded?
Should the Act capture listed issuers whose debt securities only are quoted?
Should the Act cover listed issuers who only issue equity warrants over equity securities issued by other companies? and
Should listed unit trusts be covered?

22. These issues are discussed below in relation to which entities the Takeovers Act should cover and then in relation to which financial products should be covered.

To Which Entities Should the Takeovers Act 1993 Apply?

Application to Unlisted Companies

23. Submissions on the Takeovers Code and the Takeovers Amendment Bill raised problems with the two-part test for non-listed companies in the Takeovers Act 1993. One of the problems identified was that the definition gives no guidance as to the relevant time for determining whether the asset threshold has been met or on what basis the assets should be valued. This may mean that it is difficult for a non-insider to determine whether or not the $20,000,000 threshold has been met.

24. Some commentators have submitted that reference should be made to the most recent financial statements of the company, prepared in accordance with the Financial Reporting Act. However, these may not be publicly available if a company is not required to register its financial statements under the Financial Reporting Act. Further, even if there is a requirement to register, the issuer may not have complied. Thus, a "hostile" acquirer would have no way of knowing whether the Code applies.

25. One way of resolving the problem with the asset test would be to remove it from the definition of "specified company", leaving the 50 shareholder test as the only test for a non-listed company. This, it may be argued, is more consistent with the principles of the Takeovers Code of equal treatment and participation. It is the number of shareholders and their ability to participate that is a more relevant consideration as to whether shareholders should have protection of the Takeovers Act rather than an asset threshold.

26. Section 606 of the Australian Corporations Act applies Australian takeover law to unlisted companies with 50 or more members. There is no additional asset threshold.

27. It appears that the second part of the definition of "specified company" was added to the Takeovers Bill at a late stage by a supplementary order paper in order to provide a higher threshold for unlisted companies. If the intention of the Act is to apply the Code to a smaller number of unlisted companies of a larger size, then an asset test of $20,000,000 may ensure that only these will be caught. Further, removing the asset test will lead to more companies being captured under the definition and additional compliance costs for these companies. This compliance cost needs to be balanced against the uncertainty of the definition.

Shareholders

28. As stated above the definition of "specified company" in the Takeovers Act 1993 covers any company with 50 or more members or shareholders and $20,000,000 or more of assets. The definition of "code company" in the Takeovers Code includes a company with 50 or more shareholders and $20,000,000 or more of assets.

29. It has been argued that there is uncertainty as to how the term "shareholder" accounts for persons whose interests are represented on the share register by nominee or trustee companies. For example, where a trustee holds shares for 50 members of a staff share purchase scheme is there one shareholder or 50?

30. It has been suggested that it may be helpful if the term "shareholder" was defined in the Takeovers Act 1993 to give more clarity.

31. The term shareholder is defined in section 96 of the Companies Act 1993. This section states:

"In this Act, the term "shareholder" in relation to a company means-
(a)	A person whose name is entered in the share register as the holder for the time being of one or more shares in the company;
(b)	Until the person is entered in the share register, a person named as a shareholder in an application for the registration of a company at the time of the registration of the company;
(c)	Until the person's name is entered in the share register, a person who is entitled to have that person's name entered in the share register under a registered amalgamation proposal as a shareholder in an amalgamated company".

32. It may be useful to use a similar definition in the Takeovers Act 1993 to define shareholders.

33. It has also been suggested that the Takeovers Act should not apply to unlisted companies with more than 50 shareholders, where a large number of the shareholders hold a small percentage of the shares. For example, where a number of employees of the company hold a small percentage of the shares under an employee share scheme. The Act could combine relatively small shareholdings for the purpose of calculating the number of shareholders. This would be possible only where the company was effectively "closely held" by the dominant shareholders, for example, where less than 5 persons hold 95% of the shares.

34. On the other hand it could be argued that all shareholders in companies with 50 or more shareholders should have the protection of the Takeovers Act. Furthermore employee share schemes are usually implemented by the majority holders who would have been aware that by implementing the scheme, the Takeovers Act may apply.

New Capital Market Issuers

35. It has also been suggested that companies listed on the New Zealand Stock Exchange's New Capital Market should not be covered by the Takeovers Act. The reason given for excluding New Capital Market companies from the Act is that in a company's start-up phase, there may be significant changes of ownership and these companies need flexibility in order to grow. In many cases although these companies may be widely held, they may not meet the asset test. This issue will be important if a decision is made to remove the asset test from the definition of specified company.

36. The alternative view is that there are no justifiable policy reasons for excluding New Capital Market ("NCM") listed companies. These companies are listed, can be widely held, and the fact that they are new is not sufficient justification for removing from their shareholders rights of equal treatment and participation. Significant changes of ownership are not likely because securities held by "New Capital Market Associates" are subject to selling restrictions, these can be released as to one third of the securities on each anniversary of the latter of the issue or acquisition date or completion of the key transaction. "NCM Associates" includes directors and officers of the NCM Issuer, persons with a relevant interest in 20% or more of the equity securities of the NCM issuer and their respective "Associated Persons". It can also be argued that if New Capital Market companies are exempted, then all small listed companies should be exempted for similar reasons.

To Which Financial Products Should the Takeovers Act 1993 Apply?

Equity Warrants and Debt Securities

37. There seems to be general agreement that the Takeovers Act 1993 should cover companies incorporated in New Zealand whose voting securities are quoted on a stock exchange. However, there is debate as to whether the Takeovers Act should cover those listed companies whose debt securities or equity warrants only are quoted.

38. While the Takeovers Act is quite specific where it refers to the type of company that is covered, it contains oblique references to types of securities to which the Takeovers Code may apply. The Takeovers Act contains no definition of "takeover" and provides a very general indication of the types of transactions the Takeovers Code might cover.

39. Under section 20(1), the Takeovers Panel is required to consider a number of objectives as the objectives for the code, including:

"(c)	Assisting in ensuring that the holders of securities in a takeover are treated fairly."

40. Among other things, Section 21 requires the Panel to consider whether the Code should provide:

"(b)	that in a takeover, the specified company and its security holders should be fully informed:
(c)	that in a takeover, offers should be made to all security holders, that the consideration offered should be the same for all security holders, and that all security holders should have the same opportunity for acceptance."

41. "Security" is defined in section 2 of the Takeovers Act, to mean, in relation to a specified company:

"(a)	An equity security within the meaning of section 2 of the Securities Act 1978, whether or not the security carries voting rights:
(b)	A debt security within the meaning of section 2 of the Securities Act 1978 which carries the right to vote at any annual or general meeting of the specified company:
(c)	A participatory security within the meaning of section 2 of the Securities Act 1978 which carries the right to vote at any annual or general meeting of the specified company,-
and includes a security that is convertible, at the option of the security holder, into a security of the type referred to in paragraph (a) or paragraph (b) or paragraph (c) of this definition."

42. Takeovers law regulates the change of control of companies. Changes in control of companies are effected by changes in control of the voting rights. For this reason it has been argued that there is good reason to exclude from application of the Act entities whose voting securities are not quoted. Entities which only have debt securities or equity warrants over shares in other companies quoted are usually wholly owned special purpose vehicles. For this reason it is contended that the shareholders of these closely held companies do not need the protection of the Code as they have complete control of the company. These companies would often not be covered by paragraph (b) of the definition of "specified company" if they were not listed.

43. Further, it has been argued that the holders of the quoted securities issued by such issuers do not derive benefit from the Takeovers Code as they could not participate in a Code offer. The Code requires partial offers to be made to holders of voting securities, being "equity securities" that confer voting rights. A full offer must be made to holders of all classes of equity securities of the target company. "Equity Security" is defined in Rule 2 of the Code:

to mean any interest in or right to a share in, or in the share capital of, a company (whether carrying voting rights or not); and
includes an option or right to acquire any such interest or right unless that option or right is exercisable only with the agreement of the issuer; but
does not include redeemable securities that are redeemable only for cash.

44. Holders of debt securities with no voting rights and no right to convert into shares have no control over the company, nor any such expectation of control. Their contractual rights will normally relate to the other benefits conferred by holding their security, for example rights to receive interest and principal. They may also have rights in relation to the appointment of a trustee. The holder of an equity warrant will have a contractual right to the delivery of the underlying security and the benefits attached. They are unlikely to have any interest in the control of the issuer of the warrant beyond this. Until they exercise their warrant, they are unlikely to have any interest in the underlying security. Therefore, the warrant will not be an "equity security" of the issuer of the underlying security, so a bidder in a full offer would not be required to make an offer to warrant holders. For these reasons the definition of equity security in the Code seems appropriate.

45. However, in some cases there may be contractual terms inhibiting the right of the shareholder to dispose of its shares in the company, for example if the debt securities are convertible into shares in the parent, or if the parent guarantees repayment of the securities.

46. The Takeovers Act could be amended to exclude from the definition of public issuer, companies which do not have any equity securities (within the meaning of section 2) quoted on a stock exchange and to which paragraph (b) of the definition "specified company" does not apply, provided the quoted securities are not also equity securities in a specified company. It is unlikely that this will create any problems with the Code. As mentioned above, holders of these securities are not covered under the Code currently.

Unit Trusts

47. A number of submissions on the Takeovers Code and the Takeovers Amendment Bill suggested that the application of the Takeovers Act be extended to cover unit trusts, in particular listed unit trusts.

48. Many people find it inconsistent that the acquisition of shares in a listed investment company is subject to the takeover provisions but the acquisition of units in a listed unit trust, which performs substantially the same activities is not. It has been argued that although a unit is legally very different from a share, some of the rights attached to units often approximate rights to shares. Unit holders are often in similar commercial position to shareholders with respect to returns on their investment. Further, together the manager and the trustee perform functions similar to those performed by directors of a company.

49. For this reason it has been suggested that securities and investment products should be regulated in a neutral way to avoid "regulatory arbitrage" and corresponding inefficiencies. Unit holders should have the same opportunity to participate in a takeover of a unit trust and have the right to share in a premium for control as shareholders.

50. Opponents to the extension of takeovers legislation to unit trusts contend that although a unit trust could be a target in a takeover offer, there are significant differences in the structure of unit trusts established under the Unit Trusts Act 1960 and companies incorporated under the Companies Act 1993. These differences may indicate that under the current legal framework, listed unit trusts should not necessarily be regulated in the same way as listed companies.

51. The following key differences have been identified:

Unit trusts are investment vehicles established so investors can pool their money for investment in assets. Companies can also be used for this purpose, but unit trusts are less likely to be used as a business vehicle in the way that companies are. In practice, these distinctions can be narrowed and some unit trusts closely resemble companies in their business and practices.
The control of a company is effected by changes in ownership and control of the voting securities. This control is evidenced by an ability to appoint and dismiss the board of directors. While the Manager of a unit trust performs a similar role to the board of directors of a company the unit holders do not have the same ability to appoint and remove the manager. Sections 18 and 19 of the Unit Trusts Act 1960 require a resolution of a holder or holders of 75 percent of the value of the units on issue to remove a manager of a unit trust. The shareholders of a listed company may remove a director by ordinary resolution, that is a resolution approved by a simple majority of the votes of those shareholders entitled to vote and voting.² This is a much lower threshold.
Another means of acquiring control of the assets of a unit trust would be to acquire the management contract or acquire the manager itself. Unit holders are unlikely to have any say in either of these matters.

52. The takeover provisions in the Australian Corporations Act (section 604) have been extended to apply to relevant interests in the interests of listed managed investment schemes registered in the jurisdiction as if the schemes were listed companies.

53. This extension of the application of Australian takeovers law to managed investment schemes coincided with a change to the legal framework for Australian unit trusts. Significant changes were made that included the removal of the requirement for a trustee and the change in role of a manager to a "responsible entity".

54. Under the Australian regime members of a listed managed investment scheme now have greater powers to control the appointment and removal of the responsible entity. Under section 601FL of the Corporations Act, the appointment of a new responsible entity on the voluntary retirement of the incumbent must be approved by ordinary resolution of the members. Under section 601FM, the members of a listed managed investment scheme may remove the responsible entity by ordinary resolution. An ordinary resolution is one passed on a show of hands or on a poll, passed by at least 50% of the votes cast by members entitled to vote on the resolution.

55. Similar policy reasons for extending or not extending the Takeovers Act to listed unit trusts might also apply to unlisted unit trusts and to group investment funds and other contributory schemes involving the issue of participatory securities.

Questions for Submission

Should the $20,000,000 asset test for unlisted companies remain in the Takeovers Act? If so, how can it be clarified (for example by stating the time at which and the method by which the assets must be calculated)?
Should there be more guidance given for the term "shareholder" in the Takeovers Act 1993? If so, should the definition be similar to that given for shareholders in section 96 of the Companies Act 1993?
Should relatively small shareholdings be combined for the purpose of calculating the threshold? If so, how?
Should the companies listed on the New Zealand Stock Exchange's, New Capital Markets be excluded from the Takeovers Act? If so, why?
Do you think the Takeovers Code should apply to listed companies which have no equity securities (within the meaning of section 2 of the Takeovers Act) quoted, and which do not fall within paragraph (b) of the definition of "specified company"?
Should the application of the Takeovers Act be extended to listed unit trusts and/or unlisted unit trusts and/or group investment schemes and/or other issuers of participatory securities? If it should be extended to unit trusts does there need to be any amendment made to the Unit Trusts Act 1960?

Application of Insider Trading Laws

56. This section considers which entities and financial products any potential insider trading regime should apply to.

57. The current prohibition against insider trading is found in Part I of the Securities Amendment Act 1988 and only applies to transactions in securities of public issuers.

58. A "public issuer" means:

"(a)	a person who is party to a listing agreement with a stock exchange; or
(b)	a person who was previously a party to a listing agreement with a stock exchange, in respect of any action, event or circumstance to which this Act applied while the person was a party to a listing agreement with a stock exchange."

59. The application of the Act follows closely the recommendation the Securities Commission made in its Insider Trading Report in December 1987.³

60. This section considers the application of insider trading by entity and financial product. When considering the application of insider trading law it is also important to consider the rationales behind any insider trading regime implemented (see paragraphs 44 to 68 in the Reform of Securities Trading Law: Volume One: Insider Trading: Fundamental Review discussion document). The rationales chosen for an insider trading regime play an important role when considering which entities and financial products the law should apply to. For example, the market efficiency principles will be more focused on the impact on the market and the fiduciary duty rationale on relationships between individuals.

The Application of Insider Trading Law by Entity

61. International jurisdictions have taken a variety of approaches in determining which entities their insider trading prohibitions should apply to. These include:

Application to listed entities only;
Application by reference to jurisdiction;
Application by defining issuers;
Application to transactions through or by intermediaries; and
Application to all issuers.

Application to Listed Entities

62. All jurisdictions that regulate insider trading apply the prohibition to entities whose securities are listed on the national stock exchange. In part this is because these issuers are normally subject to continuous disclosure requirements contained in legislation or under the rules of the exchange. These disclosure requirements result in a general expectation that all material price-sensitive information will have been disclosed to the exchange (made public) where required. The extension of insider trading provisions to securities of unlisted companies may be more problematic, as it is usually not possible to avoid a breach of the insider trading provisions with respect to these companies as there are not the same disclosure mechanisms available.

63. It has also been argued that the market fairness and efficiency rationales for prohibiting insider trading are concerned with the impact only on the "public markets":

"On one view, the legislation should be confined to on-market transactions and those off-market transactions that can affect public markets, for instance where the securities involved are publicly tradeable (even if traded off-market) or create an indirect interest in tradeable securities. Also, as the insider trading provisions could cover any transaction involving professional intermediaries, as in some overseas law, given the linkage to, and possible impact on, public markets"⁴

64. It can, however, also be argued that the market should be extended beyond the "public market" to the wider informal market on the basis of the market efficiency rationale. This extension could be justified on the basis that if conduct that the public considers wrong relates to a wider range of issuers and products and hence a wider market, then that will discourage investment in these products. It recognises that investment should be encouraged and protections for investors provided in relation also to this wider, informal market.

65. Some international insider trading regimes restrict the application of their insider trading law to transactions on-market and off-market transactions in quoted securities effected through intermediaries.⁵ Others apply the prohibition to transactions in listed securities, whether on-market or off-market.

66. If the application of insider trading law is restricted to transactions on-market it could be argued that the insider trading prohibition is not effective, as it would not prevent an insider from benefiting from trading on inside information by private arrangement and, therefore, would not prohibit the conduct considered wrong under all of the insider trading rationales.

67. Once the rationales behind a regime have been determined and the legislation applied to certain entities and products, it is important to consider the inter-linkages behind the application and the penalties or remedies imposed. As there is more likely to be a direct counter-party to an off-market trade, civil remedies may be deemed a more appropriate remedy, while criminal penalties may be more appropriate for on-market trades where all the counter-parties are not easily identifiable and the damage is to an easily identified market.

68. Some countries which apply their prohibitions to on and off market transactions alter their penalties and remedies for insider trading breaches, depending on whether the transaction has occurred on-market or off-market. The United States prohibition applies to all on-market and off-market transactions. However, the United States Securities and Exchange Commission ("SEC") powers to impose civil penalties apply to trading "on or through the facilities of a national securities exchange or through a broker or dealer". Parties to off-market face to face transactions have civil remedies.

69. The SEC may obtain up to four times the profit gained by an insider by obtaining dis-gorgement of any profits and a civil monetary penalty of up to three times the profit gained or loss avoided. These funds are held for the benefit of those adversely affected by the activity, primarily those who have suffered out of pocket losses in contemporaneous trading. The total amount of damages awarded in private civil litigation cannot exceed the profit gained or loss avoided in the transaction. Also, the amount of damages recoverable under private civil litigation is reduced by any amount obtained by the SEC relating to the same transaction.

Application by Reference to Jurisdiction

70. Another way of defining the application of insider trading law is by reference to the jurisdiction of the issuer and the place where the relevant activity takes place. Specifically, if the prohibition is only to apply to listed issuers the prohibition could cover securities of issuers that are listed on a New Zealand stock exchange and also those listed on overseas exchanges which have a "New Zealand" connection, for example, an issuer that is established in New Zealand, or is carrying on business in New Zealand. If the prohibition is to apply to securities in unlisted entities, it could also be applied by reference to a New Zealand connection.

71. The Australian regime follows this approach. Under the Corporations Act, the insider trading provisions apply to:

"(a)	acts and omissions within this jurisdiction in relation to Division 3 financial products (regardless of where the issuer of the products is formed, resides or located and of where the issuer carries on business); and
(b)	acts and omissions outside this jurisdiction (and whether in Australia or not) in relation to Division 3 financial products issued by:
	(i)	a person who carries on business in this jurisdiction; or
	(ii)	a body corporate that is formed in this jurisdiction."⁶

72. The application to activities anywhere in the world in relation to securities of issuers established in New Zealand may be appropriate if the insider trading prohibitions are seen to provide protections and encourage investment in the wider markets for securities of New Zealand based entities and not just the public market in New Zealand. It could remove the possibility of New Zealand being a place of incorporation to avoid the application of insider trading laws. On the other hand, it could be argued that this is a matter for regulation by the country in which the relevant market is situated.

73. The application of the law to activities in New Zealand in relation to entities wherever they may be established could be seen to protect the New Zealand market for securities generally. The extension to issuers carrying on business in New Zealand may be too wide if that is the only New Zealand connection in the transaction.

74. If the prohibition is to cover transactions in securities of listed issuers not conducted on a stock exchange based in New Zealand (off market transactions), or to securities of unlisted issuers, then difficult issues can arise as to the extra-territorial effect of the legislation. These issues arise in relation to transactions conducted by security holders operating out of New Zealand, either privately, or on the stock exchanges of other countries.

75. Where a listed issuer does not have a listing in another country, there may be good reason for New Zealand's insider trading laws to apply to protect the integrity of the New Zealand market. However, where the issuer has a listing in another country that regulates insider trading law, the application of New Zealand law becomes more complex.

76. This is an important issue in the New Zealand market where there are many "overseas listed issuers" whose home exchange is not the New Zealand Stock Exchange. For example, a shareholder in an Australian company listed on the Australian Stock Exchange, who sells shares while in Australia, will be subject to the insider trading provisions of the Corporations Act 2001. If the company has a secondary listing on the NZSE, the shareholder would also be subject to the Securities Amendment Act 1988.

77. If the application of insider trading law is to be limited to issuers listed on a New Zealand stock exchange, and the law covers both on and off market transactions, it may be appropriate to specify the territorial effect of the law. It could be limited to acts and omissions inside New Zealand where no other insider trading law applies.

Extension to Other "Issuers"

78. Another way of applying the prohibition would be to apply the regime to those issuers which have reporting requirements. This approach is based on the idea that as these issuers have to comply with reporting requirements there is a public expectation that material price sensitive information should be made available to the market and that this market should be protected for market efficiency and fairness reasons.

79. An example of this approach is the Ontario Securities Act 1990. The insider trading provisions contained in the Ontario Securities Act 1990 apply to trading in securities in reporting issuers. A "reporting issuer" under the Ontario Act is similar to an "issuer" under the New Zealand Financial Reporting Act 1993.

80. The New Zealand prohibition could be extended, for example to persons who are issuers within the meaning of section 4 of the Financial Reporting Act 1993. As issuers under the Financial Reporting Act, these entities are already required to make a certain amount of public disclosure by registering financial statements each year. This would apply the prohibitions to:

(a)	every person who has, whether before or after the commencement of this Act, allotted securities pursuant to- An offer for which, or but for an exemption granted by the Securities Commission pursuant to section 5 of the Securities Act 1978, an investment statement or a registered prospectus, or both, is or was required under that Act (other than an offer of a unit in a unit trust); or An offer required to be contained in a prospectus required to be registered under the Companies Act 1955. -whether or not the securities allotted are securities of the same type as the securities offered;
(b)	Every manager of a unit trust (within the meaning of section 2 of the Unit Trusts Act 1960) in which securities have been allotted, whether before or after the commencement of this Act, pursuant to an offer of securities to the public within the meaning of the Securities Act 1978;
(c)	Every person who is a party to a listing agreement with a stock exchange in New Zealand and who has issued securities which are quoted on such an exchange;
(d)	Every insurer (within the meaning of section 13 of the Accident Compensation Act 1998);
(e)	Every registered bank (within the meaning of section 2(1) of the Reserve Bank of New Zealand Act 1989) that has allotted securities to the public within the meaning of the Securities Act 1978.

81. References to securities that have been issued or allotted would be taken as references to securities that have not been cancelled, redeemed, forfeited, or in respect of which obligations owing under them have not been discharged.

82. The inclusion of registered banks solely by reason of their registration may not be warranted. If they had only offered debt securities to the public they would be caught only by paragraph (d) of the definition of "issuer" and not by paragraph (a). As there is little secondary trading in debt securities issued by registered banks, there may be no expectation or need to apply insider trading provisions to all registered banks.

83. It could be argued that as there is not a formalised, centralised method of disclosing price sensitive information on a continuous basis the insider trading prohibitions should not be extended to these issuers. There may be three reasons for this: first there is no expectation that disclosure will have been made. Second, in the absence of a reporting regime, it is not appropriate for insider trading prohibitions to be imposed because there will be too great an uncertainty as to whether certain information has or has not been disseminated widely enough. Finally, extending the regime to these smaller issuers of securities could impose disproportionate compliance or regulatory costs.

84. If the prohibition is to be extended to such issuers, then the continuous disclosure requirements could be extended to cover these issuers. This could provide a formalised and possibly centralised method of disclosing price sensitive information on a continuous basis.

85. Alternatively it can be argued that the application of insider trading legislation should not be confined in this way. In Australia information or material can be publicly available without first having to consult a centralised system. The issue in Australia is whether a reasonable time has elapsed to enable dissemination of the information to occur. Many regimes do not rely solely on a centralised method of disclosure alone for the basis of whether an insider trading regime should or should not apply to an entity (although often release to an exchange may be a useful starting point).

86. If the prohibition is extended to these issuers then arguably it should apply to all securities issued by them.

87. Another method of applying insider trading law to unlisted issuers could be to apply insider trading regulation to those issuers that would qualify as "specified companies" in terms of the Takeovers Act. This would include listed companies and larger unlisted companies.

Application by Reference to Transactions through or by Intermediaries

88. The prohibition could be extended to transactions in securities of unlisted issuers conducted by or through an intermediary.

89. For example, the insider trading provisions contained in the United Kingdom Criminal Justice Act 1993 apply where the acquisition or disposal in question occurs on a regulated market, or where the person dealing relies on a professional intermediary or is acting as a professional intermediary.

90. This approach could be justified on the basis that if an intermediary is involved, then the transaction is taking place on an informed market and there should be prohibitions on insider trading in the interests of market efficiency and fairness on this market. Although there may be no centralised system of continuous disclosure for the relevant issuer, because a professional intermediary is involved, the parties can assume that an intermediary would have access to the publicly available information. The price negotiated should therefore take into account all publicly available non-confidential information.

91. An intermediary could be defined as a person in the business of buying or selling securities on their own account or on the account of others. Persons employed by an intermediary to carry out that activity would also be included.⁷ Where the activity was incidental to another activity, or occasional, then that would not be sufficient to make a person an intermediary.

92. This approach, however, would not cover all types of public markets, as electronic trading systems increasingly allow for direct access to markets by traders both with and without a nominal intermediary taking responsibility for the trading.

Extension of Prohibition to All Issuers

93. The prohibition could cover all issuers of securities. This approach could be justified on the basis of both the fiduciary/misappropriation and the market fairness and efficiency rationales.

94. Under the fiduciary/misappropriation theory the approach would be justified on the basis that insider trading law logically applies to all issuers who have the requisite relationship. If the concept or definition of "market" is considered wide enough to cover the informal market of financial products then the market fairness/market efficiency theories would also be justified.

95. Extending the prohibition to all issuers would apply the law to "closely held" issuers. Where continuous disclosure is required of these issuers there would be an expectation of public disclosure. However, where there is no expectation of continuous or any public disclosure by these issuers the issue would not be whether the information has or has not been publicly released but whether the information was known to the counter-party. Parties to these transactions should be in the position to know whether the counter-party is an insider and to negotiate full disclosure where appropriate. These parties will have remedies under the Contractual Remedies Act 1979 and may not need insider trading law to provide a remedy. Another option would be to apply the prohibition to transactions and securities of all issuers to give private civil remedies to those who have suffered loss, however, state enforcement could be reserved where there is a wider "market" and a requirement for the issuer to disclose information publicly. The prohibition could apply to transactions in securities of issuers whose securities are traded in "established markets". This may create problems in defining an "established market".

96. The Australian Financial Services Reform Act 2001 applied the insider trading laws to all issuers of shares and debentures, derivatives and managed investment products and to some superannuation products. Financial products that are able to be traded on any financial market will also be covered.⁸ This is part of the Australian approach to regulate functionally similar products in a consistent manner and to consider the market as the wider market of investment and financial products.

97. If the prohibitions are to apply to all issuers in this way, it would be necessary to define the relevant "New Zealand" connection. For example, by reference to the establishment of the issuer in New Zealand or the transaction or part thereof taking place in New Zealand.

98. Further, if the prohibition is to extend to all financial products then it needs to be extended to all issuers of these financial products on the basis that these issuers should be regulated in a similar way. It should be noted that this would result in increased compliance costs for some issuers.

Questions for Submissions

Which approach/approaches should be taken to the application of our insider trading legislation:

Application to listed issuers; and/or
Application by reference to jurisdiction; and/or
Application by defining issuers; and/or
Application to transactions through or by intermediaries; and/or
Application to all issuers.

If the insider trading prohibitions should apply to listed issuers only, should they apply to:

on-market transactions only; or
all transactions in quoted securities only; or
all transactions in all securities.

Should insider trading law apply to:

acts and omissions in New Zealand in relation to issuers no matter where incorporated;
acts and omissions outside New Zealand in relation to issuers listed on a New Zealand Stock Exchange or incorporated or carrying on business in New Zealand.Should issuers with their primary listing on other specified exchanges that are covered by the insider trading law of another jurisdiction be excluded.

Should the application be extended to transactions in securities of issuers whose securities are traded in "established markets"? If so, how should "established markets" be defined?

The Application of Insider Trading Law by Reference to Type of Security

99. Currently the New Zealand insider trading prohibition applies to securities. "Security" as defined in section 2 of the Securities Amendment Act 1988 means

"any interest or right to participate in any capital, assets, earnings, royalties, or other property of any person; and includes-

Any interest in or right to be paid money that is, or is to be, deposited with, lent to, or otherwise owing by, any person (whether or not the interest or right is secured by a charge over any property); and
Any renewal or variation of the terms or conditions of any existing security".

100. The meaning of "security" is extended in section 4 of the Act to include:

"Any form of beneficial interest in a security:
The power to exercise any right to vote attached to a security:
The power to control the exercise of any right to vote attached to a security:
The power to acquire or dispose of a security:
The power to control the acquisition or disposition of a security by any person:
Any power which may exist or arise at any time under any trust, agreement, arrangement, or understanding relating to a security to-

Exercise the right to vote attached to a security; or
Control the exercise of the right to vote attached to a security; or
Acquire or dispose of a security; or
Control the acquisition or disposition of a security by any person."

101. Section 6A of the Securities Act 1978 is also relevant. It applies to offers to the public of previously allotted securities that are not required to be made in compliance with the Securities Act 1978. This section implies into every offer of a security to which the section applies that, except to the extent disclosed for the purposes of the offer, the offeror has no information in relation to the original allotter that is not publicly available and that would, or would be likely to, affect materially the price of the security if it were so disclosed.

102. As a general rule the Securities Act 1978 will require disclosure of all "material matters relating to the offer of securities", in relation to offers of securities made to the public.

103. This section examines the application of Australian insider trading law by reference to type of security and then more specifically considers whether New Zealand insider trading law should be applied to:

Unquoted securities of listed issuers;
Derivatives;
Superannuation;
Insurance;
Unit trusts/Group Investment Funds;
Other forms of Trust; and
Other participatory securities

The Australian Regime: Application by Reference to Type of Security

104. The types of financial products to which Australian insider trading law applies are defined as "Division 3 financial products" in section 1042A of the Corporations Act 2001.

105. Division 3 financial products in 1042A is defined to mean:

(a)	securities; or
(b)	derivatives; or
(c)	managed investment products; or
(d)	superannuation products, other than those prescribed by regulations made for the purposes of this paragraph; or
(e)	any other financial products that can be traded on a financial market.

106. In effect there may be only a small difference between what the insider trading regime covered before the commencement of the Financial Services Reform Act 2001 in March 2002 and what it covers now. Essentially, the main difference is that insider trading law in respect of futures (now derivatives) and superannuation interests will all be in the same place and treated in a similar manner as the law applied to securities provisions in the old Division 2A of Part 7.11 of the Corporations Act.

107. The other difference is the inclusion of subparagraph (e) in the definition "...any other financial products that are able to be traded on a financial market".

108. The word "securities" where used in the definition of Division 3 financial products means a share in a body or a debenture in a body. It also includes the legal and equitable rights in such shares and debentures and an option to acquire a security by way of issue.⁹ A body is defined as a body incorporate or unincorporate.¹⁰

109. The term "financial product" was given an elaborate definition by the Financial Services Reform Act. However, as "Division 3 financial products" are given a separate meaning in the insider trading provisions, it is uncertain what the inclusion of paragraph (e) in that definition will mean.

110. The prohibitions on trading when in possession of inside information apply whether or not the securities are listed or able to be traded on any market. The prohibitions on communicating inside information apply to division 3 financial products able to be traded on a financial market.¹¹

Unquoted Securities of Listed Entities

111. It has been argued that the insider trading law should not apply to securities of listed issuers that are not quoted on the stock exchange. This is because the relevant connection is said to be between the security and the market and not the issuer and the market. The point most commonly arises in relation to issuers who have debt securities or equity warrants quoted, but whose equity securities are not quoted. These unquoted securities are likely to be closely held. Because of this there is likely to be a limited market for the securities, and the application of the insider trading law to these securities cannot be justified on the market fairness or market efficiency theories.

Derivatives (Futures)

112. New Zealand's insider trading laws do not apply to derivatives, unless they are securities of a public issuer.

113. It could be argued that the insider trading laws should apply to all futures traded on the public futures market in New Zealand. This could be justified on the market fairness/market efficiency theories.

114. It can also be argued that insider trading law should apply to derivatives over securities to which insider trading laws apply and also to derivatives over equity indices. This is because insider trading could take place through an insider taking a position in these derivatives. This could also be justified for the reason that similar products are tradeable on the NZSE and the New Zealand Futures and Options Exchange ("NZFOE"), and to be consistent, the insider trading prohibitions should apply to futures over equities and equity indices traded on the NZFOE.

115. Part 8.7 of the Australian Corporations Act, before recent amendments by the Financial Services Reform Act 2001, contained provisions regulating insider trading in futures contracts. The prohibitions applied to dealing in a futures contract concerning a body corporate, that is, a futures contract that relates to the securities of a body corporate, or that relates to the price of such securities, or the price of a class of securities including such securities.¹²

116. The prohibitions used the "person connection approach" applying to persons who are connected with a body corporate having inside information in relation to a futures contract concerning that body corporate. The prohibition also applied to a person receiving inside information in relation to a futures contract directly or indirectly from another person where the first person is aware or ought reasonably to be aware that the other person is precluded from dealing in the futures contracts. The prohibitions prevented dealing in futures contracts and also communicating the inside information to others if the person knows or ought reasonably to know that the other person will make use of information for the purpose of dealing in the futures contract.

117. The Financial Services Reform Act 2001 has amended the Corporations Act so that it applies to derivatives as they applied to securities and managed investment products and some superannuation products. These provisions are substantially the same as those contained in Division 2A of Part 7.11 of the Corporations Act 2001. One significant change in this approach will be that insider trading law will apply to derivatives over commodities. The "person connection" approach will also no longer apply to insider trading in futures contracts.

118. There has been discussion in Australia on whether it is appropriate for insider trading law to apply to derivatives over underlying commodities.

"One argument for extending the insider trading provisions to exchange-traded derivatives over commodities is that permitting people to trade while in possession of inside information could distort the efficient price discovery mechanism of commodities markets and generate uncertainty about whether parties are trading on the basis of price sensitive information."¹³

119. Another argument is that the insider trading prohibition should not be extended beyond derivatives of equities, for the reason that the prohibition on insider trading of derivatives over equities supports the prohibition on the insider trading of the underlying equities themselves. However, to extend the insider trading provisions to derivatives over commodities would prohibit a person from buying or selling derivatives over a commodity when in possession of confidential price-sensitive information concerning the commodity, although that person could still lawfully buy or sell the physical commodity itself. In consequence, the insider trading prohibition would apply to the derivative, but not to the underlying asset.

120. The opposing argument is that undesirable trading is possible in the commodities derivative market. For example, a person with confidential price sensitive information concerning a very large transaction about to occur in a commodity that would affect the value of futures contracts over that commodity. For this reason it is argued that the insider trading provisions should apply.

Superannuation

121. Although there is no prohibition on transfers of interests in superannuation schemes, in practice interests are not usually transferred other than by way of security. This is because superannuation schemes are by definition established for the purpose of providing retirement benefits to beneficiaries who are natural persons.¹⁴ The potential for insider trading in interests in superannuation schemes is less likely, therefore, than in shares in a listed company.

122. Because there is little or no secondary market, the application of insider trading laws to interests in superannuation schemes could not easily be justified on a market efficiency/market fairness theory. However, it could be argued that if insider trading activity is perceived to exist in relation to superannuation interests this could prevent people from wanting to invest and, therefore, damage the efficiency of the wider, financial market and discourage superannuation saving.

123. There is a possibility for a member of a defined contribution scheme who has inside information relating to the assets of a scheme to take advantage of that information. Where a scheme has different portfolios, a member could switch portfolios in order to avoid a loss or make a gain. The other members could be disadvantaged by this activity depending on how the switch was funded. If the relevant portfolio is "balanced" immediately, then the other members may not be disadvantaged. In this case the member might also "tip" the scheme's manager. However, if the fund is "balanced" over a longer period, the other members may be disadvantaged.

124. A member with inside information about an asset in the fund could withdraw from a fund and thereby benefit by withdrawing before a decline in value. Other members would be disadvantaged depending on how the withdrawal was funded. If from cash, then other members would have a proportionally greater interest in assets that are worth less.

125. There may be little opportunity for insider trading in relation to interests in defined benefit schemes. In these schemes, a member's benefit is determined by reference to length of service and salary. However if a member has inside information relating to the value of the assets of the scheme, then they could time their withdrawal to take advantage of the information. For example if the value of the scheme was to fall, resulting in a shortfall of assets to meet benefits payable, the insider may avoid a loss.

126. In Australia, the Financial Services Reform Act 2001 will apply insider trading provisions to certain superannuation products.

Insurance

127. Most insurance policies are contracts for a fixed sum. Therefore there is no scope for insider trading, even on transfer. The one exception may be insurance bonds which are unitised investments, giving the holder an interest in an underlying asset. The same issues in relation to switching funds, entry and withdrawal as mentioned in relation to superannuation schemes above would apply to these policies. Also, these are more likely to be transferred.

Unit Trusts/Group Investment Funds and Other Participatory Securities

128. Insider trading is possible with group investment funds and unit trusts. These are unitised investments which are unallocated interests in a trust's assets. Usually these are transferable. For this reason, it is arguable that insider trading law should apply to interests in unit trusts and other group investment funds in the same way it applies to shares in companies. A unit holder with inside information about assets of the trust could also benefit by switching funds within a trust or by acquiring or disposing of units. Note that Part I of the Securities Amendment Act 1988 currently applies to listed unit trusts.

129. Similar arguments could be made for other participatory securities, especially if there is a secondary market for those securities.

Other Forms of Trust

130. The extended definition of "security" includes "any form of beneficial interest in a security". Thus, the provisions would catch an insider who acquired the securities through a trustee and the insider retained a beneficial interest in an identifiable security.

131. However, the definition of security may not catch transactions through trusts where the insider does not have a beneficial interest in a particular security. For example, if a trustee holds securities on an unallocated basis for a number of beneficiaries, then the extended definition may not apply although an insider could acquire an interest in securities in this way. This situation arises where a nominee or trustee provides portfolio services.

Questions for Submission

Should insider trading law apply to unquoted securities of issuers that have a listing agreement with a registered stock exchange?
How and to what extent should insider trading law apply to derivatives? If so, should the law apply to all derivatives or just to derivatives traded on a public exchange in New Zealand? Should the insider trading law apply to derivatives where the underlying asset is not covered by insider trading law?
How and to what extent should the insider trading law apply to interests in superannuation schemes? If so, should it apply to entry and/or withdrawal and/or switching between funds?
How and to what extent should insider trading law apply to insurance policies? If so, which type?
How and to what extent should the insider trading law apply to units in unit trusts, interests in group investment funds and other participatory securities?
How and to what extent should insider trading law apply to unallocated beneficial interest in securities held by trustees?

Application of Continuous Disclosure Law

132. The Securities Markets and Institutions Bill will implement a statutory continuous disclosure regime on public issuers within the meaning of section 2 of the Securities Amendment Act. These provisions impose a requirement to disclose "material information".

133. While it is important that any statutory continuous disclosure regime complements any insider trading regime developed, the two areas of regulation do not need to be perfectly aligned as each regime is designed to solve a different problem. Continuous disclosure involves an obligation to disclose information to the market, whereas insider trading involves an obligation to refrain from trading when aware of certain information.

134. The imposition of statutory continuous disclosure requirements on issuers whose securities are quoted on a New Zealand based stock exchange would seem to be generally accepted in New Zealand. Even though the current requirements of the New Zealand Stock Exchange are listing rules and not statutory based, publicly listed issuers are used to complying.

135. It has been argued that certain classes of unlisted issuers should also have to disclose under the continuous disclosure regime. The reason given for including such issuers is that there is no reason to differentiate between unlisted and listed issuers if the purpose is to protect the public through disclosure of information. Requiring these unlisted issuers to disclose would ensure that there is a mechanism by which price sensitive information can be disclosed. It would provide a source of information for persons intending to transact in securities of the relevant issuer. It is also useful to company insiders, by providing an avenue to disclose the price sensitive information in order that the insider may trade.

136. The disadvantages of imposing these requirements on other issuers are that there is currently no formal method of disclosure and that it may be necessary to provide for such a centralised system in order to make disclosure simple and cost effective. As there would be an increase in compliance costs it has been suggested that the requirement should only apply to "public" or "widely held" unlisted companies, defined by reference to a certain shareholding spread or that have made an offer to the public.

137. Possible options would be to place the requirement to make continuous disclosure on entities that have issued securities pursuant to an offer to the public, to which the Securities Act 1978 applied. These issuers would already be required to file copies of their financial statements on an annual basis with the Registrar of Companies under the Financial Reporting Act 1993. It could be argued that as there is a certain expectation that some information in relation to these companies will be made public, a more general obligation to disclose on a continuous basis could be imposed. However, there is currently no centralised system for such disclosure.

138. Another option may be to expand the Registrar of Companies' office database to create a disclosure system similar to the Canadian SEDAR system or to require all issuers to whom the law applies to maintain a publicly available internet site.

139. The continuous disclosure requirements in the Australian Corporations Act extend to issuers of "ED Securities", short for "enhanced disclosure securities" - see Corporations Act 2001 s.111AD.

140. Section 111AF(1) of the Corporations Act states that:

"Securities (except debentures) in a class of securities of a body are ED securities if:
(a)	a disclosure document in relation to securities in that class has been lodged with ASIC under Chapter 6D; or
(b)	securities in that class have been issued pursuant to the disclosure document; and
(c)	after an issue of securities in that class pursuant to the disclosure document, 100 or more persons held securities in that class; and
(d)	securities in that class have been held by 100 or more persons at all times since the issue of securities referred to in paragraph (c)."

141. Securities issued as consideration for certain offers in off-market takeover bids, and in certain compromises and arrangements are also ED Securities.

142. Section 674 of the Corporations Act deals with listed securities and provides that:

Obligation to disclose in accordance with listing rules
(1)	Subsection (2) applies to a listed disclosing entity if provisions of the listing rules of a listing market in relation to that entity require the entity to notify the market operator of information about specified events or matters as they arise for the purpose of the operator making that information available to participants in the market.:
(2)	If:
	(a)	this subsection applies to a listed disclosing entity; and
	(b)	the entity has information that those provisions require the entity to notify to the market operator; and
	(c)	that information:
		(i)	is not generally available; and
		(ii)	is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity;
	the entity must notify the market operator of that information in accordance with those provisions.

143. Section 675 deals with disclosure by unlisted entities and entities that are a listed disclosing entity that does not have listing rules relating to continuous disclosure. Section 675(2) provides that:

(2)	If the disclosing entity becomes aware of information:
	(a)	that is not generally available; and
	(b)	that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity; and
	(c)	either
		(i)	if those securities are not managed investment products-the information is not required to be included in a supplementary disclosure document or a replacement disclosure document in relation to the entity; or
		(ii)	if those securities are managed investment products-the information has not been included in a Product Disclosure Statement, or a Supplementary Product Disclosure Statement, a copy of which has been lodged with ASIC; and
	(d)	regulations made for the purposes of this paragraph do not provide that disclosure under this section is not required in the circumstances;
	the disclosing entity must, as soon as practicable, lodge a document with ASIC containing the information

144. The Financial Services Reform Act 2001 introduced further provisions establishing a regime for ongoing disclosure of information in relation to financial products for which product disclosure is required. Disclosure is required of material changes or significant events that should have been specified in the statement. Disclosure must be made to persons who were "retail persons when they acquired the product and who should have been given a product disclosure statement for the end product".

Questions for Submissions

Should the continuous disclosure regime apply to unlisted issuers? If so, to which unlisted issuers should the requirement apply? How should these unlisted issuers make disclosure?

Application of Market Manipulation Law

145. Options for the type of market manipulation law that we might adopt are discussed in the Reform of Securities Trading Law: Volume Two: Market Manipulation Law discussion document.

146. In considering whether or not to introduce market manipulation law, we must also consider to what issuers this law might apply.

147. By definition, market manipulation regulation is aimed at protecting the efficiency and integrity of the market. For more discussion of the rationale behind implementing market manipulation law, see the market manipulation document at paragraphs 46 to 63.

148. For the purposes of the discussion of the application of the market manipulation law, we need to consider which markets the laws should protect. If the laws are considered to be appropriate, then it is logical that they should apply to issuers whose securities are traded in the public market, that is on any stock exchange registered in New Zealand. It is also arguable that they should apply to other similar markets, for example the futures market, which are public markets so the same rationales should apply. Market manipulation might also occur in "wholesale" markets for example the market for bonds or government stock.

149. It could also be argued that the regulation should be extended to the informal market, perhaps by extension to the trading in securities of issuers that have issued securities pursuant to an offer made under the Securities Act 1978, that is, issuers within the meaning of the Financial Reporting Act. There may be a problem with enforcing the law in these more informal markets, as the manipulation would be difficult to identify where there is no centralised market for which there is a record of trades that have occurred. Both disclosure and trading based practices rely on other market participants trading on the basis of misleading information. Such conduct is likely to be undertaken only where there is a centralised price discovery system which records trading prices and volumes and bids and offers placed.

150. It could be argued that the requirements should be extended to all transactions in securities. However, given the private nature of many of these transactions the scope for market manipulation must be less and the means of detecting it very difficult. However, general prohibitions on false or misleading conduct may apply in situations other than trading in financial markets.

151. The Australian Financial Services Reform Act 2001 generally retained the market manipulation provisions of the Corporations Act 2001 in their previous form and extended their scope as appropriate to apply to trading in financial products on a financial market. Provisions which refer to price use the expression the price "for trading in financial products on a financial market". Section 1041H, which gives rise to civil liability, prohibits misleading or deceptive conduct in relation to a financial product or a financial service, so is capable of applying in situations other than trading on a financial market. Section 1041E prohibits false or misleading statements and may also apply in situations other than trading on a financial market. The other provisions generally apply to conduct that affects financial products that are traded on a financial market in Australia.

152. The trend in other jurisdictions is for market manipulation provisions to apply to a wide range of financial products.

153. The United Kingdom market abuse regime is set out in the Financial Services and Markets Act 2000. Market abuse is defined as behaviour which occurs in relation to qualifying investments traded on a prescribed market. Section 118(3) of the Act allows the Treasury to prescribe markets and qualifying investments. At least eight markets have been designated as prescribed markets, including the London Stock Exchange, futures and options exchanges and exchanges for a number of commodities such as metal and petroleum. Investments traded on these markets are designated qualifying investments.

154. The European Council, in its proposal for a directive on insider dealing and market manipulation, states that the proposed regime will apply to any financial instrument, which is defined as:

Transferable securities;
Units in collective investment undertakings;
Money-market instruments;
Financial-futures contracts, including equivalent cash-settled instruments;
Forward interest-rate agreements;
Interest-rate, currency and equity swaps;
Options to acquire or dispose of any instrument falling in these categories, including equivalent cash-settled instruments. This category includes in particular options on currency and on interest rates; and
Derivatives on commodities.

155. The United States, on the other hand, has separate market manipulation regimes applying to securities and to commodities and futures contracts. The relevant legislation is the Securities Exchange Act 1934 and the Commodity Exchange Act. These laws are enforced by separate agencies, the Securities Exchange Commission and the Commodity Futures Trading Commission.

Questions for Submissions

If you are of the view that further market manipulation provisions should be introduced, to what entities, products and markets should they apply?
Should a general prohibition on misleading or deceptive conduct in relation to securities have a wide application? If so, how should it apply?

Please consider the discussion document Reform of Securities Trading Law: Volume Two: Market Manipulation Law when considering these questions.

¹The company must be registered under Part II of the Companies Act 1993, or reregistered under the Act in accordance with the Companies Registration Act 1993. The Takeovers Act 1993 does not apply to bodies corporate incorporated outside New Zealand.

²Section 105(2) Companies Act 1993.

³The Commission at paragraph 7.5 of that report stated that they were mainly concerned about dealings that affected the public market. They suggested the proposals would be appropriate in respect of insiders of all companies but would not object to a proposal to limit the application to insiders of companies that are listed on the New Zealand Stock Exchange. They did not limit the proposals to transactions on the exchange or to securities that are listed on the exchange.

⁴Companies and Securities Advisory Committee Insider Trading Discussion Paper 2001 para 2.96.

⁵For example, the United Kingdom Criminal Justice Act 1993. Also, note that in the United States, while the criminal insider trading laws apply to all on-market and off-market trading and securities, the Security and Exchange Commission's statutory power to impose civil penalties only applies to trading on or through the facilities of the National Securities Exchange or from or through a broker or dealer. This emphasises the role of the SEC in protecting the integrity of the impersonal market place. The purpose of the United Kingdom provision is to exclude from the scope of criminal liability a truly private deal executed off-market and without the involvement of a market professional.

⁶Section 1042B of the Corporations Act.

⁷Refer section 59 United Kingdom Criminal Justice Act 1993, United States Securities Exchange Act 1934, s3 paragraphs 4 and 5.

⁸Previously, different insider trading provisions applied to derivatives and some superannuation products. These are now to be covered by one regime, which will also apply to "financial products able to be traded on a financial market" as defined.

⁹Section 761A Corporations Act 2001.

¹⁰Section 9 Corporations Act 2001.

¹¹Section 1043A Corporations Act 2001.

¹²Section 1251 Corporations Act 2001.

¹³Companies and Securities Advisory Committee Insider Trading Discussion Paper 2001.

¹⁴Definition of "Superannuation Scheme" section 2 Superannuation Schemes Act 1989.

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Printed: 25/11/2009