Tougher securities law won't stem investor losses

By Michael Coote

Friday 29th November 2002

"Securities markets bill to boost investor confidence" runs the self-promoting headline of the glad tidings published on the Securities Commission's website.

Immediate excitement is generated in those needing a boost to their morale if they have been sitting on losses from international equities. But their hopes are likely to be dashed. The bill passed in Parliament is of the locally applicable smacky-handy type.

Indeed, intones Lianne Dalziel, minister of commerce and market control, "The Securities Markets and Institutions Bill will build confidence by increasing the effectiveness and efficiency of the law governing New Zealand's securities markets and regulatory institutions. It also brings New Zealand more in line with Australian practice ...

"It provides an effective balancing of the rights of companies and investors, and reassures both international and domestic investors that the New Zealand market is a market of integrity that conforms with international best practice."

So there we have it. Convergence on the Oz model of how to go about running a stock exchange. The act comes into effect on December 1, building confidence no doubt as an early Christmas present for the Securities Commission. Implementation date is intended to fit in with the restructuring day of the New Zealand Stock Exchange on December 31.

The commission comes out a winner in the act. True, it does not get quite the powers of the US Securities & Exchange Commission (SEC) or the Australian Securities & Investments Commission (ASIC) to rip the wings from butterflies but at least a good start has been made in netting lepidoptera.

The commission will become a civil enforcement body for insider trading and continuous disclosure. Let's not forget that neither the SEC nor ASIC protected investors from an Enron or an HIH Insurance collapse despite their draconian powers.

Government agencies can never remove risk from markets, although they do create secure, publicly funded employment for their staff, so perhaps have some social justification. But investors can take some heart from the notion that the local equivalent of the stockmarket cops has been armed with at least one steel-capped boot to sink into errant listed ribs.

Continuous disclosure, once introduced into the local market, will add some thrills to life down this end of the world. New Zealand has seen it in force recently on three dual listings that have had to comply with it to meet ASX rules. The usual pattern seems to be that trading is suspended and, when renewed, the share price crashes. Bargains result.

Information will become a dangerous commodity under the new bill. "Exchanges are obliged to assist and inform the Securities Commission of known or suspected significant contraventions of the law and other matters," it says.

Thus the legal onus is on exchanges to go ratting to the commission on what they might merely suspect to be irregular. As for what is significant, one presumes the courts can be left to define that given the exchanges will be terrified of the legal liabilities of judging for themselves.

It is a fair bet professional indemnity insurance premiums will go through the roof for stockbrokers now that mere suspicion is sufficient to dob them in. Investors as well can expect to have their doors kicked in should they fall under the evil eye.

In case anyone thought the newly empowered commission was a soft touch, heed the warning that "increases in penalties under the Securities Act 1978 [will] bring them into line with other domestic and international business law penalties."

So before you call your stockbroker, check with your lawyer first. And he had better check with his before he places your order.

Will any of this make markets safe in New Zealand? Not likely, to judge by what has gone on in the US and Australia. The upshot will be that compliance costs increase transaction costs.

The government will smile at the extra GST it collects and, as with rotting homes, smirk that any future sharemarket scandals are a media beatup, given it has done so much at the legislative level to save people from themselves.

Somehow New Zealanders have yet to be weaned from the belief there ought to be a law against whatever they dislike. In the meantime, they will invest and lose money and look for someone else to blame.

Laws do not do what personal integrity achieves. But they do keep lawyers in trade and off the dole queue, which is what gratuitous legislation for safety of various types ultimately foists on society.

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