Part I: Factors Contributing to the Need for the Review
22. The environment of our securities market is changing. There are a number of factors impacting on the environment in which the New Zealand sharemarket operates. As well as the government's objective of promoting confidence in the market, these factors are significant when considering the reasons for reviewing the current law as it applies to market manipulation.
Developments in Technology1
23. While the use of information technology is not the cause of offences under market manipulation regimes, developments in technology have increased the opportunities for both information and trading base offences.
24. Since the various laws applicable to market manipulation were passed, there have been vast changes in information technology. The impact of these changes on securities markets must be taken into account in looking at the need to review the law.
25. Markets have always made use of technological advances that increase market efficiencies and enhance information flow. In their time, the telegraph, telephone, and ticker tape all changed the manner and pace of securities trading.
26. The pace of these advances has accelerated in the last few years. Computer hardware and software have become much more sophisticated, resulting in markets that are more efficient and transparent and better able to handle increased trading volumes.
27. The impact of the new technologies has been widespread, throughout all segments of the securities industry, including investors. An individual investor with a computer and a modem now has access to a vast amount of up to date information. Investors who choose to do so are now able to transact business via the Internet.
28. Stock exchanges have established web sites that provide access to information that may be useful to investment advisers and their clients. These web sites may inform advisers and their clients about the investment opportunities in specific countries. Through hyperlinks on a foreign stock exchange's web site, an adviser or client may access the web sites of issuers and financial institutions, including research materials.
29. As technologies continue to develop, the regulatory framework must evolve to keep pace with the developments. New technology provides new opportunities for both disclosure based and trade based manipulation. To be able to deal with this, the regulatory framework needs to be broad and flexible. This review will allow the consideration of the appropriateness of the current law and its ability to keep pace with new technology.
International Issues
30. As well as the advances in technology discussed above, there have been economic and regulatory reforms which have changed the environment in which financial markets operate. These changes have led to integration in securities markets and an increase in cross border trading.
31. Developments which have been made possible by these changes include:
- The technological ability to transact quickly and across borders;
- Freeing up regulation relating to financial markets;
- Removal of regulatory impediments to cross border transactions;
- Increasing international financial market regulatory co-ordination, for example, through the OECD and IOSCO; and
- The development of linkages and alliances between financial market institutions, both domestically and internationally, as they seek to increase their global market share.
32. These trends may encourage governments to have regulations similar to other jurisdictions for a number of reasons:
- Investors and sellers operating in a number of international jurisdictions may be deterred from operating in a market where the regulatory requirements are significantly different from those imposed elsewhere, because of the transaction costs involved. These costs may be particularly large in relation to smaller markets, where smaller pools of capital often make the transaction costs of understanding a different regime less attractive to investors as costs are less likely to be recovered. New Zealand is a small and distant market in international terms and a judgement needs to be made as to whether we can afford to be different in terms of the level of protection we provide to market shareholders;
- With the international interest in mergers and alliances of exchanges, and governments entering into agreements and forming trading partnerships with other countries, there is also a pressure to enter into agreements that may involve closer co-ordination or mutual recognition of our laws with other countries; and
- With international developments there comes a trend for countries to move towards, and to agree to, sets of international principles and norms. Compliance with international principles may satisfy investors that a country has a market of integrity that meets international standards, where investors have adequate protections and rights and the laws are enforced. Establishing compliance with these standards not only encourages investment by overseas investors but also may prevent domestic investors from going elsewhere where they may have greater confidence in the integrity of another market.
33. New Zealand has a high level of overseas investment. For New Zealand to attract foreign investment a credible regulatory regime is needed. New Zealand must be able to reassure international sellers and buyers that New Zealand has a market of integrity with fair rules that are adequately enforced.
34. The convergence of securities regulation internationally also implies the increasing convergence of the nature and role of securities market regulators. Cross-border trading, multiple listings and globalised markets have created difficulties in enforcement of securities laws as national boundaries become blurred making it difficult to determine in which jurisdiction a transaction has taken place, and adding to problems of monitoring and investigation.
35. This has increased the need for international co-operation between regulators in detecting, investigating and prosecuting securities breaches. In particular, New Zealand regulators will need to be able to investigate offences that occur in more than one country (including New Zealand), offences occurring outside of New Zealand but that breach New Zealand law and offences that occur in New Zealand and breach another country's law.
36. These issues will be relevant for any market manipulation law introduced. The question which must be considered is the need for a body to enforce the law, with the ability to co-operate with regulatory bodies overseas.
Co-Ordination with Australia
37. In 2000 the New Zealand government signed a Memorandum of Understanding on Co-ordination of Business Law with Australia. The MoU reflects the desire of the Australian and New Zealand governments to deepen the trans-Tasman relationship within a global market, through increased co-ordination of business law, thereby creating a mutually beneficial trans-Tasman commercial environment.
38. In view of our obligations under the MoU and the obvious advantages of co-ordinating New Zealand and Australian securities law, the Ministry of Economic Development will give particular attention to the Australian law relating to issues raised in this discussion paper.
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