Securities Markets and Institutions Bill: Regulatory Impact and Business Compliance Cost Statement
[ Last Updated 8 December 2005 ]
Regulatory Impact Statement
Statement of the Problem and the Need for Action
Submissions from members of the public indicated that the current law, particularly in the area of insider trading, was not working effectively. In addition, the law does not conform to international standards or best practice in many areas, particularly, continuous disclosure and the regulatory environment for securities exchanges. This lack of comparability can affect both international and domestic confidence in the market. Finally, the current regulatory institutions do not have the necessary or most appropriate powers to support the law.
Public Policy Objective
To ensure the integrity of New Zealand's securities markets and the institutions that support those markets. Market integrity is increased by public confidence in the effectiveness and the efficiency of the law and institutions.
Statement of Options for Achieving the Desired Objectives and Net Benefits of the Proposals
No feasible non-regulatory options have been identified for achieving the objectives, as in order to achieve confidence in securities markets, there must be an effective and efficient regulatory framework.
The regulatory option has been modelled on Australian law, unless there are compelling reasons not to do so. This approach is consistent with the goal of closer co-ordination of New Zealand and Australian business law as reflected in the Memorandum of Understanding on Business Law Co-ordination signed by the New Zealand and Australian governments in Auckland in August 2000.
The following regulatory option is proposed to achieve the objectives identified:
- The implementation of a statutory continuous disclosure regime and the requirement that directors disclose securities dealings at the time they occur. This will act as a deterrent to insider trading, counter the distortion of the market through rumours and enable investors to make informed investment decisions;
- Placing obligations on securities exchanges to assist and inform the Securities Commission. This will ensure the Commission has information to enable it to adequately investigate breaches of the law. It will also provide a signal to the market that obligations exist between the Commission and exchanges regarding the exchange of information;
- Imposing new requirements for the approval of the rules of securities exchanges and allowing for the implementation of percentage ownership limits on exchanges, as well as providing the Securities Commission with an explicit power of oversight over securities exchanges. This will allow the Commission to effectively monitor exchange rules and activity, and will also signal to the market that there is an effective co-regulatory system for securities exchanges in New Zealand;
- Establishing the Securities Commission as a public civil enforcement agency for insider trading and continuous disclosure. This will act as a deterrent to breaches of insider trading law and the continuous disclosure regime. Further, unlike a private individual, the Commission will not be dissuaded by the time or cost involved in taking an action and so will be more likely to take proceedings where it is in the public interest to do so
- Giving the Securities Commission a power to issue directions to a securities exchange. This will enable the Commission to direct a securities exchange to undertake any action that the exchange is able to undertake in relation to a listed entity. It will also send a further signal to the market that the Commission has the necessary powers of enforcement to ensure an effective system of co-regulation with securities exchanges
- A mechanism in the law to enable the implementation of mutual recognition agreements which recognise overseas regulatory requirements for cross-border, or where appropriate, unilateral, offers of securities. This will allow for a reduction in compliance costs associated with cross-border offers; and
- Amendments to the provisions governing the operation of the Securities Commission and the Takeovers Panel so as to increase their effectiveness and flexibility in exercising their monitoring and enforcement functions. This will increase the flexibility of the Commission and Panel to exercise their monitoring and enforcement functions and allow them to function more efficiently and effectively.
Consultation
The Ministry of Economic Development has released two public discussion documents relating to matters contained in the Bill. An insider trading discussion document was released in September 2000. The measures relating to continuous disclosure, directors duties, obligations on securities exchanges and the role of the Securities Commission in insider trading arise out of that consultation.
A discussion document on a review of the functions of the Securities Commission and the Takeovers Panel was released in May 2001. Most of the proposals relating to the powers and functions of the Securities Commission and Takeovers Panel arise out of this consultation.
The Treasury, the Ministry of Justice, Te Puni KÅkiri, the Department of Prime Minister and Cabinet, The Ministry of Foreign Affairs and Trade, the State Services Commission, the Securities Commission, the Takeovers Panel, the New Zealand Stock Exchange and the Market Surveillance Panel have been consulted on the proposals. Expert legal advice was also obtained on some of the proposals.
Business Compliance Cost Statement
Source of Compliance Costs
The following requirements are likely to increase compliance costs for some securities market participants:
- The requirement for public issuers, directors and officers to comply with new disclosure rules;
- The requirement for the approval of the rules of securities exchanges and greater Securities Commission oversight of those exchanges;
- New obligations on securities exchanges to provide information to and assist the Securities Commission; and
- The need for businesses or investors to seek advice about their rights in relation to the new powers of the Securities Commission and the Takeovers Panel.
The following proposal is likely to reduce compliance costs for some market participants:
- A legislative framework that will allow for the implementation of mutual recognition agreements for cross-border offers of securities.
Parties Affected
Public issuers, directors and officers will be affected by the requirement to comply with new disclosure rules.
The New Zealand Stock Exchange and any other securities exchange that may commence operations in New Zealand will be affected by the new securities exchange rule approval requirements, greater Securities Commission oversight of exchanges and new obligations to provide information to and assist the Securities Commission.
Businesses and investors who participate in securities markets will be affected by the need to seek advice in relation to the new powers of the securities market regulators.
Businesses wishing to make cross-border offers of securities and investors who invest in those securities will be affected by the framework which will allow for implementation of mutual recognition agreements for offers of securities.
Quantitative/Qualitative Estimates of Compliance Costs
Public issuers are currently required to provide disclosure to the NZSE under the NZSE listing rules. Therefore, additional compliance costs associated with the continuous disclosure regime should be minimal. The costs are likely to be restricted to public issuers developing an understanding of the new regime.
Compliance costs are also likely to be negligible for directors of public issuers who are already required to disclose their interests, and minimal for other directors and officers. Disclosure will be required in a simple prescribed format that will require key relevant information only.
The additional costs associated with securities exchanges co-operating with the Securities Commission under the new co-regulatory system should also be minimal as, to a large extent, these costs are already incurred under the current self-regulatory system.
There will be financial costs to exchanges associated with cost-recovery for the rule approval regime. The Securities Commission has estimated that the cost of initial approval of the New Zealand Stock Exchange's rules will be approximately $200,000. It is anticipated that this would be an indicative figure for all new rule approvals. There will also be some costs to exchanges associated with developing rules to be approved. However, these costs should be marginal, as any exchange falling within the scope of the new requirement would inevitably already have rules for the conduct of its market.
The additional costs to businesses and investors in identifying their rights in relation to the new powers of the regulatory bodies are estimated to be minimal. It is expected that issuers and investors would usually seek legal advice about their rights when dealing with the Securities Commission and Takeovers Panel, regardless of any change to their powers.
The potential reduction in compliance costs associated with the framework to allow for the implementation of mutual recognition agreements for cross-border offers of securities cannot yet be quantified, as the nature of any agreement has not been concluded. However, the costs associated with the additional requirements for trans-Tasman offers do give an indication of the potential cost savings for those issuers. There are two main areas of compliance:
- The requirement to produce documentation and the associated legal fees. The estimated cost of additional advice and documentation for a cross-border offer into New Zealand is NZ$10,000 to NZ$15,000. The cost of additional advice and documentation for a cross-border offer into Australia is estimated to be higher than this because current Australian exemption notices are not as comprehensive as New Zealand exemptions.
- The requirement to file prospectuses. The filing fee for prospectuses in New Zealand is NZ$320. The fee in Australia is A$1,800.
Longer Term Implications of Compliance Costs
In the longer term, it is expected that the additional costs identified will decrease as businesses, securities exchanges and investors become familiar with the new requirements and structures.
It is also expected that the potential reduction in compliance costs identified will become clearer over time as mutual recognition agreements are negotiated with other countries.
Risks Associated with Estimates
The potential reduction in compliance costs identified will only occur if mutual recognition agreements are negotiated between countries.
No risks are identified with the other estimates of compliance costs.
Compliance Cost Issues Identified in Consultation
Consultation was undertaken with the Securities Commission, the New Zealand Stock Exchange and legal experts on the scope of the application of any new co-regulatory framework for securities exchanges. This consultation highlighted the compliance costs that would be placed on smaller, non-traditional securities exchanges if the framework applied widely to all exchanges. On the basis of this consultation, and to avoid unnecessary compliance costs, the bill includes a narrower application of the framework.
No other specific compliance cost issues were raised in the course of consultation.
Overlapping Compliance Requirements with Other Agencies
There are no overlapping compliance requirements with other agencies.
Steps Taken to Ensure Compliance Costs Are Minimised
Steps have been taken generally to ensure that rights under the law are clear, reducing any compliance costs that could be associated with uncertainty about new requirements. In addition, many of the proposals are based on provisions in Australian law. The availability of precedents should provide greater certainty in the interpretation of provisions.
Proposals have also been included to reduce the costs associated with cross-border securities market activity, specifically, provision has been made for mutual recognition of regulatory requirements for securities exchanges and offers of securities.
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