REVIEW OF SECURITIES TRADING LAW: SUBSTANTIAL SECURITY HOLDER DISCLOSURE

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1 OFFICE OF THE MINISTER OF COMMERCE The Chair CABINET ECONOMIC DEVELOPMENT COMMITTEE REVIEW OF SECURITIES TRADING LAW: SUBSTANTIAL SECURITY HOLDER DISCLOSURE PROPOSAL 1 The purpose of this paper is to seek agreement on a number of improvements to the substantial security holder disclosure regime as established by the Securities Markets Act It, along with its accompanying papers on Investment Advisers, Insider Trading, Market Manipulation, Penalties and Remedies and Application and Overview, form the wider Review of Securities Trading Law. EXECUTIVE SUMMARY 2 The substantial security holder regime, established by the Securities Markets Act 1988 ( the Act ), provides that persons who control five per cent or more of securities in a public issuer must disclose that fact to the issuer and to the exchange on which they are registered. Disclosure of the identity of these interest holders acts as a deterrent to insider trading and market manipulation, and ensures that investors and public issuers can make informed investment decisions. 3 The regime is fundamentally sound; however, some minor problems have been identified. This paper recommends a number of changes to the regime to resolve these issues. In particular, it recommends amendments to: clarify the application of the regime to non-issued voting securities and collective investment schemes; change the exemption criteria under the Act; and require disclosure by class or type rather than total voting security. In addition, there are a number of other amendments recommended to improve clarity and consistency and to reduce compliance costs. 4 The proposed recommendations contained in this paper, and the other five accompanying papers will form the Securities Trading Law Reform Bill. I anticipate a draft of the Bill will be submitted to the Cabinet Legislation Committee by 30 April 2004, after targeted consultation is carried out on the Bill in late 2003/early 2004 and prior to its introduction into the House. BACKGROUND 5 The Securities Markets Act 1988 was enacted primarily in response to the 1987 Stock Market crash. The purpose of the substantial security holder regime is to create greater transparency by requiring disclosure of substantial security interests in public issuers. This disclosure also identifies those that are entitled to exercise, or control the exercise of, significant voting rights in a public issuer.

2 2 6 Disclosure of the holder of a security and the transactions entered into deters insider trading and secret dealings in potential takeover bids, as the dates of any trading can be checked against the dates at which material information enters the public domain. In addition, these disclosures ensure that public issuers and investors are kept informed as to the ownership and control of holdings in the public issuer, and can make more informed investment decisions. In the words of Sinclair J, the regime is designed to: ensure that a public issuer, its members, the Stock Exchange and the investing public at large are kept informed as to the ownership of voting securities in a public issuer and as to the identity of those who are, or may be, in a position to control the company. In particular it is aimed at restricting secret dealing in shares for a takeover advantage. 1 7 This disclosure regime, combined with the continuous disclosure regime and the directors and officers disclosure obligations contained in Part 2 of the Act, ensure that investors have sufficient information to make accurate judgements about where to invest. This allows the market to work more efficiently as resources are more effectively channelled into appropriate investments. PROBLEM DEFINITION 8 There are very few problems with the regime it has lasted largely unchanged for close to fifteen years. However, with a wider review of the Act underway, it is appropriate to consider improving several aspects of the regime that have been identified as potentially problematical: Submissions received on a Securities Commission discussion document released in 1994, and a Ministry of Economic Development document released in 2002, indicate there are aspects of the regime that need clarification. In particular, the application of the regime to non-issued voting securities and to collective investment schemes; Submissions received on a Securities Commission discussion document released in 2001 indicate that the exemption requirements to the regime are superfluous; The Takeovers Code came into force in 2001, and the three Acts that were part of the Securities Markets and Institutions Bill were enacted on 1 December These were substantial reforms and we need to ensure that the substantial security holder disclosure regime is consistent with other parts of the securities disclosure regime where appropriate, and with any changes made as a result of the accompanying papers; and In light of the Memorandum of Understanding on the Co-ordination of Business Law with Australia, it is appropriate to consider whether it is possible to achieve greater consistency between trans-tasman regimes. COMMENT Relevant Interests 9 The rationale behind the regime is to require those with the ability to significantly influence a public issuer to declare themselves as such. The regime determines that this point of influence occurs when a person acquires five per cent or more of the securities in a public issuer. The regime requires persons who control this five per cent to disclose this fact 1 Brook Investments Ltd (in vol liq) v Paladin Ltd 490 NZPD (21 July 1988)

3 3 to the public issuer and the exchange they are registered on. Any change to this holding of one per cent or more must also be disclosed. 10 Section 5 of the Act sets out the test for determining which interests are relevant for the purposes of the regime. The basic rule is that a person will have a relevant interest in a security if they are the holder of that security, have the power to control the voting or disposal of the security, or have an ability to control the security (now or in the future) in this manner via trusts, nominee companies, family members and so on. 11 The United Kingdom, the United States, Hong Kong, Australia and several Canadian Provinces take two general approaches to defining when a person has sufficient influence over any given securities to have those securities count towards a substantial holding. Canada, Hong Kong and the United Kingdom define an exhaustive list of associated persons of a security holder, whose interests are included when determining the interests of the security holder. Australia and the United States create a purposive test that includes control via potentially unenforceable arrangements or understandings. New Zealand s present test fits within the latter category, and in my opinion, is more appropriate given that it includes a much wider range of circumstances that appropriately require disclosure and provides the ability to look at whether there is control within any given situation. A list approach faces the risk that the people the legislation is intended to cover will adopt strategies to ensure they fall outside its scope. 12 The following specific issues have been identified in relation to relevant interests and the relevant interest test: Voting securities versus actual votes 13 In the New Zealand regime, the trigger for disclosure is crossing the five per cent relevant interest threshold. This five per cent threshold refers to the total number of voting securities, including interests that do not carry direct rights to vote immediately, and incorporating beneficial and future interests. That is, virtually all interests that ultimately accrue to the person, regardless of their current legal status. This contrasts with the corresponding Australian provision, and with the New Zealand Takeovers Code. Both these regimes focus instead on current voting rights. A small minority of submissions argued that the New Zealand substantial security holder regime should also adopt an approach based on control of current voting rights in order to achieve consistency. A secondary argument is that disclosure would be simpler without the need to consider the broader concept encompassed by the voting securities concept. 14 The current concept of voting securities should be maintained as it encompasses a broader scope of relevant interests, including security holdings that will arise in the future. Knowledge of future security holdings can be relevant to investors and their investment decisions. Investors may take different actions if they know when and how people may gain control of an issuer in the future. Adopting the actual votes approach would eliminate disclosures of this sort. Although co-ordination with Australia is desirable where possible, I believe divergence in this area is justified. Other than this area of additional disclosure required in New Zealand, the New Zealand and Australian regimes are broadly comparable.

4 4 15 Problems that arise in relation to the confusion around disclosure of differing or future voting entitlements can be adequately addressed through other changes to the Act, 2 without eliminating a potentially crucial aspect of the regime. Parties Acting in Concert 16 There is a slight gap in the law where parties act together for a common purpose. The Act currently covers the exercise of joint powers over the same security, and persons that are under the control of, or accustomed to act in accordance with the wishes of, another person. However it does not cover the situation where two distinct and equal parties reach a common understanding ("parties acting in concert"). It is possible that persons in this situation may be covered by the wide-ranging provisions dealing with control that may arise in the future, but the argument is somewhat tenuous and understandings of this sort are difficult to prove. I therefore recommend the adoption of a provision incorporating parties acting in concert into the regime. Provisions for Disregarding Relevant Interests 17 Since the definition of relevant interest is quite broad in scope, it is inevitable that some persons will fall within the technical meaning of the Act yet clearly be outside its intended spirit. Existing exceptions include such institutions as banks, share-brokers, bare trustees and proxy voters. The actual ability for these persons to exploit the securities is minimal, as in reality they are subject to the overriding control of, and accountability to, others. These concerns have been addressed by specific statutory exemptions for certain categories of person. However, some of the wider categories of exemption contain, in addition to the substantive criteria, a further requirement that the Securities Commission designate the specific body as exempt. 18 The Securities Commission released a discussion paper on this designation power in 2001 and received 14 submissions. The Commission and a majority of submitters believe that it is an unnecessary and superfluous power. In practice it seems to be that a Securities Commission designation is little more than a rubber stamp in relation to bodies that clearly fit within the criteria. I agree that it is an inappropriate power, and for the sake of clarity and a desire to avoid redundant provisions, the Securities Commission designation power should be removed. 19 However, there are other categories that are more problematical. Nominee companies and trustees have a much greater potential for abuse and require greater control. In these situations the Securities Commission has adopted a series of undertakings that must be given by nominee companies in order to be designated as a body not required to report. However, anecdotal evidence suggests that once these undertakings have been given, the Commission again rubber stamps the exemption application. It will be more efficient for criteria similar to the Securities Commission criteria to be adopted as law themselves, along with any further appropriate criteria. 20 I recommend the removal of the Commission s designation power. Bodies that fall within the statutory categories or criteria will be automatically exempt. For the more problematical categories that currently require applicants to meet further criteria set by the Commission, I recommend including additional criteria within the regime proper. These 2 See discussion of multiple classes or types of security at paras 25-29, and of future-arising securities at paras 30-33

5 5 additional criteria would include either blanket exemptions for particular categories, specific standards to meet, or undertakings to be given for other bodies to gain exemption. 21 The Commission would retain its general power of exemption under the Act to deal with unique situations. This approach will prevent potential abuse of the regime and also place less of a burden on the Commission than its current designation power. Exclusion of Directors 22 In addition to the established exemptions, there is a clear need for an additional amendment in order to address concerns in relation to directors. The Act currently states that where a number of persons have a joint right to exercise control over a security, each person is considered to have that right. On a literal interpretation, the directors of a company with a five per cent security holding should individually disclose that interest because, as directors, they jointly have the ability to exercise control over the company s assets, including its securities. Furthermore, if a director as a private individual has a separate holding of the same security, that private holding would be added to the company s holding for the purposes of disclosure. 23 This interpretation does not appear to reflect the intention of the legislature. Following this section literally would lead to repetitive disclosures with no benefit to the market. For this reason I believe the Act must be amended so as to remove any doubt that only a company must disclose substantial security holdings, and not its individual directors. Multiple Classes or Types of Security 24 Under the Act, a relevant interest of five per cent or more is calculated with reference to the total voting securities, and does not take into account situations where there is more than one class or type of security in the same public issuer. For example, Fletcher Challenge Ltd had separate classes of security such as forestry and building. The fact that some classes or types may attract differing voting rights complicates any calculation a substantial security holder must make to determine whether the five per cent threshold of voting securities has been crossed. This is compounded where the voting rights of a class or type are not fixed, but rather determined by some other mechanism. For example, voting rights of Fletcher shares were formerly determined by the performance of the individual arm of the business during the previous year. Even where the calculation is relatively simple, there is the potential for deliberate evasion, or even a simple mistake, by some security holders. 25 Although more disclosures would be required, requiring disclosure with respect to the total of the class or type, as opposed to the total number of voting securities, would provide for far greater ease of calculation, and hence reduce compliance costs and the potential for deceit or mistake. It also ensures that the market receives a better idea of the activities of any particular substantial security holder. Furthermore, in some respects it may be more relevant to the market for security holders to disclose in this differentiated manner as it may provide more useful information about specific aspects of a public issuer s business. 26 As an alternative, the Securities Commission advocates a dual disclosure method, where disclosure is to be made with reference to class or type, and overall voting rights, with disclosure required at five per cent of the total or five per cent of the class or type. As some classes or types of securities provide rights to vote only in particular circumstances, while others give rights to vote on matters affecting the issuer as a whole, the Commission

6 6 argues that disclosure would allow the market to know who is in potential positions of authority in respect of an issuer as well as in each class or type. 27 However, it is mathematically impossible to have a five per cent interest in the whole without at least a five per cent interest in one or more of the parts. Therefore all persons who would be required to disclose a five per cent interest as a whole will already have disclosed for their class or type of interest. No extra persons will be required to disclose on a dual disclosure model. Furthermore, disclosure notices do not require particulars of the circumstances when voting rights may be exercised, hence anyone seeking to determine who is in potential position of authority in respect of an issuer as a whole will need to consult external sources anyway. Any notice purporting to disclose the overall voting rights of a class or type of securities may also be questionable as the voting rights may vary with reference to external factors that may further vary with time. Any prudent person seeking to rely on these notices would have to determine the respective weight of each class or types' voting rights with reference to the current ratio anyway. Finally, a dual disclosure model will impose additional compliance costs as two separate calculations would be required. The difficulties in determining the overall total outlined above would again be applicable. 28 I therefore recommend that the legislation be amended to require multiple classes or types of voting securities to be disclosed with respect to a five per cent threshold of interests within that class or type, rather than with respect to the total voting securities. "Future-Arising" Securities 29 Interests that will arise in the future in already-issued voting securities are captured under the broad relevant interest definition. This includes options for securities already on issue. However, not included are interests in rights that are not presently voting securities, but will become voting securities in the future. For this reason, convertible securities securities that presently exist but do not attract voting rights until "conversion" are expressly incorporated into the regime. However, other rights (for example, contractual or equitable rights) to not-yet issued voting securities ("future-arising" securities) do not fall under the relevant interest definition, and have no corresponding express provision. 30 It is inconsistent to distinguish on this technical basis. Furthermore, disclosure of substantial interests in future-arising voting securities fits a substantively similar rationale as disclosure of interests that will arise in the future of issued securities. Knowledge of substantial holdings that may arise in the future provides useful signalling information to the market about future voting interests, and may alter the perceived value of the securities of a public issuer. The holders of substantial amounts of such rights may also have the ability and incentive to engage in undesirable behaviour. I therefore recommend the Act be amended so as to include future-arising voting securities as part of the disclosure requirements. Disclosure of Future-Arising Securities 31 Difficulties may arise in calculating the five per cent threshold in relation to interests that arise in the future (such as by convertible securities or options), as some of these types of security do not have a fixed rate of conversion, but are calculated with reference to external factors. Some convertible securities even carry rights for the issuer to effectively veto conversion. Furthermore, a survey of filed substantial security holder notices illustrates a level of confusion. Notices do not consistently include future-arising securities in the calculations, hence the percentages of various holders are calculated with reference to

7 7 different numbers of total securities. This results in some public issuers having security holdings totalling in excess of one hundred percent 32 Disclosing the number of securities that will arise in the future in relation to the number of voting securities currently on offer is difficult and can be misleading. I recommend substantial security holders be required to disclosure relevant interests in each class or type of future-arising security separate from disclosures in current voting securities. Disclosure would be in relation to the class or type of security. As for multiple classes or types of voting rights, this may produce more disclosure notices, but should be offset by the greater ease of calculation. This method also provides a more accurate picture of who is in control of the company. Applicability of the Disclosure Regime to Collective Investment Schemes 33 A collective investment scheme involves investors pooling their money, which is then invested on their behalf by the manager of the scheme. There is a considerable amount of confusion about the application of the substantial security holder disclosure regime in relation to disclosure by and disclosure in such schemes. Disclosure of Interests in the Manager of Collective Investment Schemes 34 The managers of such schemes are usually wholly owned special purpose vehicles. Typically they are either offshore companies, or wholly owned subsidiaries of other companies. As the manager in this scenario is not a public issuer, any holders of securities in the manager (either the owner-company or holders of foreign shares) do not have to disclose their interests in the manager. 35 However, in order to offer a scheme of this sort the manager makes a listing agreement, and hence technically falls within the public issuer definition and any voting securities held in the manager must be disclosed. However, disclosures of non-listed interests in the managers of such schemes are not the object of the regime. The goal of the regime is the disclosure of interests that carry with them some degree of control. It is the scheme as a whole, and not the individual manager that will have control, therefore disclosure of interests in the manager does not serve any useful purpose and should not be required. This point is also discussed in the accompanying Application and Overview paper, recommending disapplying the regime generally to non-quoted securities of public issuers. Disclosure in Collective Investment Schemes 36 Securities held by such schemes are within the ambit of the Act. There are, however, doubts as to whether the regime should apply. In a collective investment scheme, investors pool their money in order to spread it across several investments, thus reducing investor risk. While these schemes do invest, and may do so in excess of the five per cent threshold, the primary purpose is usually not to gain control of a company or a significant role in its affairs. Hence there is less need for the market to be aware of the activities of such investment schemes. Australia has adopted a position whereby its disclosure regime does not apply to schemes of this sort. 37 There are, however, opposing arguments that suggest collective investment schemes should be included. The main argument is that although such schemes are typically passive, there does not seem to be a practicable way to ensure that is true in all cases. Insiders of such schemes are privy to a considerable amount of information that is not available to the public and a blanket exception could be abused. Furthermore, there is

8 8 growing debate in Australia, the United Kingdom and the United States regarding the responsibility of institutional security holders to protect client investments through active participation in investments. 38 In light of these concerns I therefore recommend no change be made to the requirements for disclosure of collective investment schemes but that the Act clarify that the regime does not apply to disclosure in the manager of collective investment schemes Miscellaneous Other Legislative Concerns 39 The substantial security holder regime contains the various disclosure requirements and the duties of public issuers. It also grants the Court jurisdiction and remedial powers in relation to the regime. Although there are few problems with these sections in practice, some are redundant. There are, for example, five subsections 3 giving the form of notice for differing types of holder that could be consolidated. Some of the old transitional provisions could be removed and changes should also be made where necessary to clarify the regime and make it consistent with the rest of the Securities Markets Act. 40 The proposals also attract some transitional issues. Disclosure by class or type and of future-arising securities will necessitate a transitional provision requiring disclosure by all affected security holders (substantial security holders in companies that issue different types or classes of securities) on the date of commencement. This would ensure that the market is not misled or confused through difficulties in tracking changes in interest with two different systems. Regulations 41 Although the last update of the Regulations only occurred in 1997, and are widely understood and supported, some changes are necessary in order to reflect the suggested changes outlined in this paper. Furthermore, minor amendments to the form of notice may be required to reflect a greater focus on the class or type distinctions, and on future-arising securities. Penalties and Remedies 42 The accompanying Penalties and Remedies Cabinet paper recommends that the penalties and remedies for breaches of the regime be amended and extended. CONSULTATION 43 In preparing this paper, the following government departments and agencies were consulted: the Department of the Prime Minister and Cabinet, the Treasury, the Ministry of Justice, the Department of Courts, Te Puni Kokiri and the Securities Commission. 44 The Ministry of Economic Development released a discussion document on substantial security holder disclosure in November It was sent to approximately four hundred people, companies and organisations. It was also available on the Ministry website. Nine submissions were received. The Securities Commission also released discussion documents in 1994 and 2001 that canvassed some of the issues discussed in 3 Sections 20(2), 20(4), 21(2), 21(4), 22(2)

9 9 this paper. The submissions received on these discussion documents were considered in drafting this paper. FISCAL IMPLICATIONS 45 Some of the proposals in this paper and the accompanying papers will result in additional functions and powers for the Securities Commission. This will require additional funding for the Commission as discussed in the Application and Overview paper. HUMAN RIGHTS AND BILL OF RIGHTS IMPLICATIONS 46 Overall the proposals in this paper do not appear to be inconsistent with the New Zealand Bill of Rights Act 1990, or the Human Rights Act However, if any issues do arise, officials from the Ministry of Economic Development and Ministry of Justice will work together to ensure that the legislation is consistent with the Bill of Rights Act. A final view as to whether the proposals will be consistent with the Bill of Rights Act will be possible once the legislation has been drafted. LEGISLATIVE IMPLICATIONS 47 Changes are required to the Securities Markets Act 1988 and to the substantial security holder regulations in order to implement these recommendations. It is proposed that these changes, along with the other recommended changes to securities trading law discussed in the attached Cabinet papers will form the Securities Trading Law Reform Bill. REGULATORY IMPACT AND COMPLIANCE COST STATEMENT 48 A Regulatory Impact Statement for the proposals outlined, along with a Business Compliance Cost Statement, has been prepared and is attached as an appendix to this paper. The identified sources of costs include transitional costs involved in becoming familiar with the modified requirements, including obtaining professional advice where necessary, and for certain affected parties recalculating and disclosing their holdings under the new system. Long-term costs will tend to decrease. Although more disclosures will be made, the requirements are simpler to understand and the disclosure calculations easier. Public issuers and the stock exchange will also face slight compliance cost increases as more disclosures will be made and must be filed. However the cost of this will be minimal. 49 Based on the information provided in the attached RIS/BCCS, the Business Compliance Costs Unit considers that the disclosure of information is adequate, and the level of analysis is appropriate given the likely impacts of the proposal. PUBLICITY 50 Once Cabinet has reached a decision on this paper and the other accompanying papers on the review of Securities Trading Law, I will release a press statement to signal to the public the Government s policy decisions in this area. Targeted consultation will then be undertaken on a draft of the Bill later this year so that members of the public with expertise in the securities law area will have another chance to comment on the proposals. RECOMMENDATIONS 55 It is recommended that the Committee:

10 10 1 Agree to leave the following provisions of the substantial security holder regime unchanged: 1.1 The relevant interest definition; and 1.2 The requirements for disclosure of interests held by collective investment schemes; 2 Agree to include parties acting in concert within the relevant interest definition; 3 Agree to remove the requirement for Securities Commission designation for bodies to gain exemption from the regime's requirements, and include additional criteria to be determined by regulation; 4 Agree to amend the Act so as to exclude directors from disclosing separately the interests of the company of which they are a director; 5 Agree to require disclosure of interests by class or type of security, rather than total voting securities; 6 Agree to include future-arising voting securities as part of the disclosure regime; 7 Agree to exclude disclosure of interests in managers of collective investment schemes; 8 Agree to minor amendments necessary for legislative clarity and consistency; 9 Agree the transitional provisions will include a requirement for disclosure by all affected substantial security holders on the date of commencement; Hon Lianne Dalziel Minister of Commerce

11 REGULATORY IMPACT STATEMENT Background Owing to the technical nature of the proposals, a general glossary follows: classes of securities different classes of securities of the same type in a public issuer (e.g. the old Fletcher Challenge forestry and building shares); collective investment scheme a pooled fund that is invested on behalf of its participants, by a manager which is typically a discrete company; future-arising security a right to a security that may be issued in the future, ie. a right that does not currently exist as a voting security; public issuer a party to a listing agreement with a registered exchange, (typically, but not always, a company) that issues securities to the public; relevant interest in regards to a security, ownership of the security, the power to control the voting or disposal of the security, or the ability (now or in the future) to control the security in this way via a trust, nominee company, family members etc.; security any interest or right to participate in any capital, assets, earnings, royalties, or other property of any persons, e.g. an equity security (share) or a debt security (debenture); substantial security holder a person with a relevant interest in 5% or more of (currently) the total voting securities of a public issuer; voting security a security of a public issuer that confers a right to vote at meetings of members or shareholders of that public issuer. Statement of the nature and magnitude of the problem and the need for Government action The substantial security holder regime (established by the Securities Markets Act 1988) works reasonably well in its present framework, and can conceivably continue in a functional manner. However, there are potential problems in certain narrow aspects of the regime. These are: Difficulties when disclosing interests in public issuers that issue more than one class or type of security, as it can be difficult to determine the respective weighting of each class or type in order to calculate the total number of securities, hence problems arise in calculating the percentage of that total; Inconsistencies in requiring disclosure of interests that may arise in the future in already-existing securities, but not of future-arising securities; The requirement for the Securities Commission to designate a person as exempt from the regime is superfluous, as in practice designation is contingent upon meeting statutory and (in some cases) set Commission criteria, rather than the Commission actually considering each individual case; The uncertainty regarding collective investment schemes owing to confusion surrounding securities in the scheme (require disclosure) and securities in the manager (technically required, but often ignored as an irrelevant unintended requirement); and The penalties and remedies associated with the regime are inconsistent with the other parts of the Securities Markets Act. For example, the Securities Commission lacks the ability to require someone in breach to disclose, or take a civil penalty action under the Act. Statement of the public policy objective(s)

12 To deter insider trading and other manipulative practices, while ensuring that investors and public issuers can identify substantial security holders and hence make informed investment decisions. In particular, disclosure obligations are clear, consistent and easy to understand, and require disclosure only of relevant information so as to minimise compliance costs to business. Statement of feasible options (regulatory and/or non-regulatory) that may constitute viable means for achieving the desired objective(s) Status Quo A substantial security holder must immediately disclose their interest to the issuer and the market. Further disclosures are required upon a change of holding greater than 1%, and when a person ceases to hold an interest greater than 5%; Interests in future-arising securities are not required to be disclosed; The regime requires a person to meet certain statutory criteria in order to gain exemption, then be approved by the Commission through the Commission designating it as such through a notice in the Gazette. Certain categories of person must meet further criteria set out by the Commission before being designated. The Commission also has a further general power of exemption; Substantial interests in collective investment schemes must be disclosed, as must (technically) any securities in the manager of such a scheme; Only the public issuer can require disclosure to be made by its security holders who are in breach of the disclosure requirements; the Securities Commission cannot; and Breaches of the regime are addressed through a variety of Court orders, e.g. prohibiting the exercise of voting rights in securities or forfeiture of securities. Maintaining the status quo is not appropriate as it will not further the policy objective. Alter the Relevant Interest Definition Narrow the relevant interest definition to focus on the actual votes underlying a security, rather than the security itself. This would reduce the range of disclosures required. Although this would aid clarity, some interests that are relevant (especially interests that arise in the future) would not be disclosed. This would not further the policy objective, therefore this option was discarded. Preferred Option: Amend the Securities Markets Act 1988 The fundamental requirement of disclosure of five per cent interests would remain unchanged, however, the following changes would be incorporated: Clarifying the status of collective investment schemes, excluding securities in non-listed managers of such schemes while making clear that securities of the schemes themselves are included; Including interests in future-arising securities as a part of the regime; Requiring disclosure with regard to the total of an individual class or type of security, rather than the overall total of voting securities, including requiring present and future voting rights to be disclosed separately; Removing the unnecessary Securities Commission designation power and providing general exemptions for those that fall within specified legal criteria, and maintaining the general power of exemption for special cases;

13 Giving the Commission the power to require those in breach to disclose or correct disclosure; Introducing a civil penalties regime for breaches of the requirements with actions brought by the Commission; and As a transitional provision, require disclosure under the new requirements by all substantial security holders in the 16 public issuers of affected securities. Statement of the net benefit of the proposal, including the total regulatory costs (administrative, compliance and economic costs) and benefits (including non-quantifiable benefits) of the proposal, and other feasible options Securities Market The proposed changes will give the market more relevant information, greater confidence that all disclosures are being made where appropriate, and reduce the likelihood of market deception. Investors should therefore have greater faith in investing capital, and do so more efficiently. New investors may also be more willing to enter the market. Some substantial security holders will face increased costs as disclosure will be required in a wider range of circumstances. There will also be a one-off cost for all substantial security holders in the 16 public issuers of affected securities in requiring transitional disclosure under the new requirements. However, some costs will be reduced by removing irrelevant interests from the disclosure requirements and by improving the exemption system. Public issuers will be able to undertake actions with more confidence as they will have a better idea of the identity of their substantial security holders. General Economy An effective and enforced substantial security holder regime will increase confidence in the New Zealand financial market. The benefits to investors and companies that stem from this will flow through to general economic activity. Statement of consultation undertaken The proposals were contained in a Ministry of Economic Development discussion document released to the public in November The Securities Commission also released discussion documents relating to the issues in 1994 and In addition, the following government departments and agencies were consulted: the Department of the Prime Minister and Cabinet, the Treasury, the Ministry of Justice, Te Puni Kokiri and the Securities Commission. The majority of submissions supported the thrust of the proposals, although there were some minor differences in the technical methods suggested. A small minority favoured narrowing the relevant interest definition. The Securities Commission separately argued for a dual disclosure regime, requiring disclosure by both class and with regard to the overall total. This was rejected as the difficulties for calculating totals would remain. BUSINESS COMPLIANCE COST STATEMENT The source of any compliance costs

14 The major compliance costs will be one-off transitional costs involved in becoming familiar with the new system, especially obtaining professional advice where necessary (substantial security holders). Secondly, recalculating holdings in the securities of the 16 affected companies (certain substantial security holders). A further cost is processing extra disclosure notices (the NZSE and public issuers). There will, however, be cost reduction in the actual calculation of percentage holdings under the new system (substantial security holders in the 16 affected companies). The parties likely to be affected, by sector and size of firm At 24 April 2003, 16 of the 214 public issuers issued securities that will be affected by the changes. Approximately 61 of the current 525 substantial security holder notices related to affected securities. It is impossible to determine numbers of existing security holders that will be newly subject to the regime. Quantitative (if possible) or qualitative estimates of compliance costs (both in aggregate and upon individual firms, persons) Depending on the nature and complexity of a security holding, individual security holders may need to seek professional advice before completing the modified requirements. The costs of complying with the regime, such as form-filling (estimated at $50.00-$100.00) will essentially remain unchanged, although costs will reduce in the calculation process owing to greater simplicity. However, existing security holders that are now within the the regime will only see these costs as an increase. Conversely, the compliance costs for new investors will be reduced as the system will be easier to understand. The compliance costs of filing more notices by public issuers and the stock exchange will be minimal. The longer term implications of the compliance cost for business are they one-off costs? Will they be reducing over time? Costs will decrease for most in the long term the cost of disclosure will be less than the present regime as the requirements are easier to understand and the calculation simpler. However, security holders newly subject to the regime will face increased costs as they must disclose. An assessment of the risks associated with any estimates and the level of confidence that can be placed on the compliance cost assessment The estimates come from market participants with experience in this area, and can be accorded a high degree of confidence. The key issues relating to compliance costs identified in consultation No issues were raised in consultation. Any overlapping compliance requirements with other agencies There are overlapping compliance requirements with the directors and officers disclosure regime. A substantial security holder who is also a director or an officer will be required to disclose twice. However, although these disclosures arise out of the same security holding, the purpose and nature of the two sorts of disclosure are quite different and cannot be readily combined. The steps that were taken to ensure that compliance costs were minimised

15 Any changes to the legislation will be well publicised and explained. A minimum of three months will be allowed for those affected to understand the changes to the regime before the amendments come into force.