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Review of the Securities Regulations 1983 (Stage One). Discussion document. Published jointly with the Ministry of Economic Development. [2000] NZSecCom 6 (5 July 2000)

Last Updated: 4 November 2014

Review of the Securities Regulations 1983

(Stage One)

Discussion Document

July 2000
CONTENTS:

INTRODUCTION

• Background
• The Securities Regulations 1983
• Developments in securities market structure and products
• Need for review

SCOPE AND PROCESS OF THE REVIEW

• Scope of the review
• Process and timeframes
• Submissions sought

PROPOSALS FOR CHANGE

• Modernisation, increased flexibility and technological neutrality
• Clarification and simplification of definitions and substantive provisions
• Financial information
• Removal of duplication of definitions in the Act and Regulations
• Removal of obsolete references

SPECIFIC PROPOSALS

• The Securities Regulations 1983
• The Schedules to the Securities Regulations
  • Common Amendments
  • First Schedule amendments
  • Third Schedule amendments
  • Schedule 3D amendments
  • Amending an investment statement
  • Fourth Schedule amendments
  • Seventh Schedule amendments
  • Eighth Schedule amendments

INTRODUCTION

Background

1. The Securities Act 1978 ("the Act") was enacted in New Zealand in the wake of a series of financial collapses, notably of the Securitibank group of companies in 1976, that left many investors with substantial losses. People had invested in Securitibank without the benefit of a registered prospectus or equivalent disclosure document.
2. It was decided in the aftermath of these losses to introduce wide-ranging disclosure legislation that would apply to all persons seeking to raise funds from the public, replacing the narrow disclosure requirement set down at that time in the Companies Act.
3. The Act provided for the enactment of Regulations to give fuller and more detailed effect to the policy of the Act. The Securities Regulations 1983 ("the Regulations") were consequently enacted.

The Securities Regulations 1983

4. The Act regulates offers of securities to the public in New Zealand. The Regulations set out the content requirements for prospectuses, investment statements and advertisements that contain offers of securities to the public.
5. The Schedules to the Regulations set out the information required in prospectuses depending upon the type of security that is being offered, as well as the information required in investment statements. The Schedules originally covered only three specific types of securities - equity, debt and participatory securities. Since their implementation, they have been broadened to include unit trusts, superannuation schemes and life insurance policies, and extended to prescribe the content requirements and restrictions of investment statements.
6. The Schedules also prescribe the matters to be included in a trust deed for debt securities and in a participation deed for participatory securities.

Developments in securities market structure and products

7. The Securities Act and the Securities Regulations have now been in force for more than 21 years and 16 years respectively. During that time, it has become apparent that there are a number of ambiguities in the law. Also, there have been sophisticated developments in financial products that leave commercial and other fundraisers uncertain as to the requirements of the law. The structuring of the products and the methods by which they are offered continue to develop, often very quickly.
8. The principal international trends include:
   • Product convergence

Financial institutions have broadened their traditional business base to offer a wide range of products. For example, many banks now offer unit trusts or life insurance.

• Globalisation

Increasingly, securities are offered to New Zealanders as part of a global offering.

• Regulatory convergence

International regulatory bodies often encourage national regulators to adopt the same or comparable regulations across jurisdictions. In some respects this is a reaction to globalisation.

• The information technology revolution

Rapid advances in information technology have enhanced the process of globalisation. They have increased the quantity of information available, but the quality of the information may vary enormously.

• Product innovation

The last 15 years have been characterised by a high rate of innovation in financial products, particularly in lightly regulated regimes such as New Zealand. This is driven by commercial forces as much as deregulation. One result of this is that products often do not fall neatly into a single category.

Need for review

9. These factors create a challenge for regulators. Regulation needs to be flexible and technologically neutral to accommodate new financial products and technology. In a rapidly changing environment, it is to be expected that regulations will need to be periodically revised so as to maintain efficiency.

SCOPE AND PROCESS OF THE REVIEW

Scope of the review

10. The review of the Regulations will be conducted in two stages. This discussion document seeks comment on proposals arising out of Stage One of the review. Stage One involves a technical review of the Regulations. There are many areas where the Regulations are outdated, complex and repetitive. The changes proposed in Stage One are intended to simplify and modernise the Regulations by making changes that can be implemented simply and quickly to reduce compliance costs for issuers and simplify offer documents for investors, without departing from the fundamental policy objective of the Regulations.
11. That fundamental objective is to provide effective disclosure, in an appropriate format, of:
    • information that is likely to assist a prudent but non-expert person to decide whether or not to subscribe for a security; and
    • information that is likely to assist more sophisticated analysis of the value of the securities by those who have the skills to do so and whose views will drive market prices.

The two principal offer documents are intended to achieve these objectives in distinct but complementary ways. The investment statement should provide the key information prescribed in Schedule 3D to the Regulations, while the registered prospectus should disclose all material information, including the information prescribed in the Regulations.

12. This document has been developed taking into account suggestions for changes to the Regulations received from various stakeholders. A number of stakeholders have also made suggestions for changes that on reflection we consider fall within the scope of Stage Two of the review and these will be considered in that context. Examples of these areas include the overall relationship between matters included in prospectuses and investment statements, issues relating to employer superannuation schemes, short form prospectuses, term life insurance policies and half yearly financial statements for collective investment schemes including unit trusts. Moreover it has not been possible to consider questions that arise primarily under the Act, for example, the definition of such words as issuer, manager and promoter.
13. Stage Two of the review will re-examine the way in which the Regulations implement the policy of the Act. It will involve an assessment of the costs and benefits of different methods of regulating offer documents and advertisements for securities, taking into account developments that have occurred in the environment in which securities markets operate since the Regulations were developed. The aim of Stage Two of the review will be to develop rules that efficiently and effectively implement the policy of the Act.

Process and timeframes

14. The Ministry of Economic Development and the Securities Commission are working in partnership on this project. This discussion document has been prepared by the Ministry and the Commission to raise suggestions for the purposes of discussion and to obtain views from the public. Any proposals in it have not been endorsed by the Government or the Commission and do not represent Government or Commission policy.
15. The Securities Commission is an independent statutory body. Its functions include to keep under review the law relating to securities and to recommend changes. In participating in the preparation of this discussion paper it is acting in accordance with this function, and it invites public comment on the matters raised in the paper in accordance with section 70(3)(a) of the Securities Act 1978.
16. The Ministry and the Commission are seeking written submissions on this document. Submissions should arrive no later than the close of business on Friday 25 August and should be directed to:

Bronwyn Turley
Securities Regulations Review
Competition and Enterprise Branch
Ministry of Economic Development
33 Bowen Street
PO Box 1473
Wellington

Phone: (64 4) 470 2331
Fax: (64 4) 471 2658

Email: bronwyn.turley@med.govt.nz

Enquiries may be made in the meantime to Bronwyn Turley or to:

Kathryn Rogers
Securities Commission
Level 12, Reserve Bank Building
2 The Terrace
PO Box 1179
Wellington

Phone: (64 4) 472 9830
Fax: (64 4) 472 8076
Email: kathryn.rogers@seccom.govt.nz

17. Submissions on this discussion document will be considered before decisions on the proposals are made.
18. It should be noted that the contents of submissions provided to the Ministry and the Commission in response to this discussion document will be subject to the Official Information Act 1982. If the Ministry or the Commission receives a request for information contained in a submission, we would be required to consider release of the submission, in whole or in part, in terms of the criteria set out in the Act.
19. If you would like us to withhold information included in comments on this paper would you please let us know. Any request to withhold information will be considered in accordance with the Official Information Act 1982.

Submissions sought

20. We are particularly interested in receiving comments on the desirability, practicality and workability of the outlined proposals for change. In particular, we would like your views on the following issues in relation to the particular proposals:
    • Do you think that the proposed change will be beneficial in the sense that it will make the Regulation/Clause simpler and easier to apply, while maintaining an appropriate level of disclosure?
    • Do you think the amendment will result in a Regulation/Clause that will work well in practice?
    • Can you identify any potential issues that would affect the workability of the Regulation/Clause if it were amended as proposed?
21. Also, we would welcome your suggestions as to any amendments not already mentioned in this paper that are within the scope of this review.

PROPOSALS FOR CHANGE

22. The Ministry and the Commission have developed proposals for change to the Regulations based on experience of their operation and suggestions received from stakeholders. The proposals are characterised by a number of key themes, which are discussed below. This is followed by a detailed description of the proposals for change.

Modernisation, increased flexibility and technological neutrality

23. As outlined earlier, the Securities Regulations need revising in light of the considerable changes in the capital markets environment since the Regulations were originally implemented. The current Regulations contain some outdated terminology. Some of the underlying assumptions about the nature of securities offered and the entity offering the securities are no longer always appropriate. In some areas the Regulations operate to restrict the use of electronic technology or electronic commerce.
24. It is important that investors are provided with information that is both accessible and appropriate for the investment. It is also important that the Regulations do not operate to restrict the growth of electronic commerce as it applies to capital markets. These factors are important as they contribute to the efficiency of capital markets. In order to achieve this efficiency, the proposals include changes to make the Regulations more flexible in a constantly changing environment, while maintaining appropriate disclosure to investors.

Clarification and simplification of definitions and substantive provisions

25. In places, it is unclear how the Regulations should be applied. Where practicable, unclear definitions and substantive provisions will be amended to ensure they effectively and clearly implement the policy of the provision. Increased clarity in the Regulations will reduce uncertainty and associated legal costs for issuers. It will also help to ensure that investors receive consistent and appropriate information in offer documents.

Financial information

26. As a general principle, we think there should be no fundamental difference in the information content between financial statements presented in offer documents and financial statements presented to shareholders in an annual report. Both sets are historical but aid users in making decisions about the future. In the case of financial statements in offer documents the decision is whether to invest or not to invest. In the case of financial statements in annual reports, the decision may be whether to sell or hold. Users of financial statements are making investment decisions at a specific point in time based on historical information that will affect their future. If specific future oriented information is considered to be important to investors, this should be prescribed as prospective financial information.
27. It is therefore proposed, as a general principle, that financial statements required by the Regulations should be prepared in accordance with the Financial Reporting Act 1993 as if they required registration under that Act. This will mean that financial information disclosed in offer documents will continue to reflect Generally Accepted Accounting Practice ("GAAP") as it develops over time. Also, it should assist investors and analysts if concepts and terminology are used consistently in relation to disclosure under the Securities Regulations and disclosure under the Financial Reporting Act.
28. In applying that general principle, certain key points of difference between the current prescription and GAAP arise. These differences and our proposals for dealing with them are discussed in this paper. Our basic premise in this regard is that Regulations should not provide ad hoc financial reporting requirements if the decision is to move towards compliance with GAAP. Currently, Regulations provide for disclosure, not measurement or recognition, of transactions. Our preference is to make our views and concerns known to The Institute of Chartered Accountants of New Zealand ("ICANZ") through our comments on exposure drafts of accounting standards and by working with ICANZ on matters which we consider to be important. Having said this, we do not discount the possibility that the Regulations may call for disclosure of additional or alternative information to that required by GAAP in order to achieve the objectives of securities regulation, and it may be necessary to provide explicitly for this in the Regulations.

Removal of duplication of definitions in the Act and Regulations

29. There is currently considerable duplication of definitions in the Securities Act and in the Regulations. At one time the drafting philosophy was to repeat definitions so that the subordinate legislation could be read in a meaningful way on its own. However, that philosophy has not been consistently applied in the Regulations. Some definitions are not replicated, and of those that are some are identical and some differ. This can be confusing.

There seem to be two approaches to dealing with this:

• to review the definitions and where necessary make particular alternative arrangements for dissimilar definitions; or
• to revoke all replicated definitions that are identical.

We welcome your views.

30. A number of stakeholders have also raised specific issues in relation to particular definitions that appear in both the Act and the Regulations. The Ministry, in consultation with the Commission, will consider these issues in the context of its work on the Business Law Reform Bill to be introduced in 2001.

Removal of obsolete references

31. There are a number of areas in the Regulations where obsolete references are made. These include references to companies registered under the Companies Act 1955 and some transitional provisions.

It is proposed that these references will be revoked.

SPECIFIC PROPOSALS

The Securities Regulations 1983

Regulation 2(1)

32. Regulation 2(1) sets out the definitions of terms used in the Regulations. There are several proposals for change to definitions in this Regulation.
    1. Some definitions in the Regulations are also in the Act. These include: associated persons, Commission, company, contributory mortgage, debt security, equity security, holding company, interest in a superannuation scheme, issuer (although the extended definition effect of section 6(7) in the Securities Act will need to be considered in any proposal for change), life insurance company, life insurance policy, manager, participatory security, promoter, superannuation scheme, superannuation trustee, trust deed, unit, unit trust and unit trustee.
       • We propose to review or revoke these definitions as discussed in paragraph 29 above.

The term "trading exchange" and its definition, and paragraph (a) of the definition of the term "holding company", are obsolete.

• We propose to revoke them.

2. If the decision is to adopt GAAP, all accounting terms used in the Regulations should be defined by reference to GAAP.
   • This will affect the following definitions: current assets, current liabilities, fixed assets, and non-current liability.
   • We propose to define the term "accounting period", which is not defined in GAAP, by reference to the Financial Reporting Act 1993.
   • If GAAP is adopted as proposed, the definition of the term "investment" will become obsolete. We propose to repeal it also.
   • We note that the definition of the term "intangible assets" may require review in light of any amendment to the provisions of the Regulations in which it appears.

100. The definition of "immediate relative" refers to the "spouse" of a person but not to de facto or same sex partners. There does not appear to be any reason for this distinction, although it does give certainty in that a person is either married or they are not. Presumably the intent of the provision is to capture close personal relationships with persons in whose economic welfare one is likely to have a strong interest, which could equally apply to de facto and same sex partners.
     • It is proposed that the definition of "immediate relative" be extended to include de facto and same sex partners, subject to review to ensure that the definition can be expected to apply with reasonable certainty.

4. The term "qualified audit report" in the Regulations includes an auditor's report that is not qualified but refers to an uncertainty which, in the opinion of the auditor, is fundamental. This definition is not consistent with the Auditing Standards, which do not require an auditor to issue a qualified audit report for a fundamental uncertainty that is adequately disclosed in financial reports. It has been suggested that the term "modified audit report" be used to refer to audit reports that refer to a fundamental uncertainty.

We think that information that an issuer is facing a fundamental uncertainty, for example, a going concern uncertainty, is important information to investors and should be brought to their attention. We think the fact that a qualified audit report was issued is important information for investors. This is so particularly where the full financial statements are not readily available to investors, for example, in the case of historical summary financial information. However, we do not think that it is useful for the Regulations to specify new terminology to describe such audit reports.

• It is proposed that no change be made to the term.

5. The term "returns" in the Regulations, in relation to a security, includes payments of any kind, whether in the nature of capital, income, benefits or otherwise.

The definition of "returns" in the Regulations is similar in concept to the idea of a "distribution" under the Companies Act 1993. Because the Companies Act 1993 relies on a solvency test and no longer requires capital to be maintained before distributions are made, a distribution may include a return of the amount invested as well as a return on the amount invested. This means that for certain entities, the notion of "capital maintenance" is no longer as relevant as it was in the past.

There is no definition of "returns" in GAAP. However, in financial terminology, "return" normally relates to money earned on an investment and does not include a return of all or part of the amount invested. Further complications arise when promoters or issuers express returns to investors in percentage terms and include a return of the investment, or part of it, in expressing that percentage rate of return. We think that this has the potential to confuse or mislead.

• We propose that the Regulations include a definition of the term "rate of return". We are interested in receiving comments on how this should be formulated and whether this would be helpful.

6. The term "life insurance company" in the Regulations is wider than the definition in GAAP and does not require an issuer of life insurance policies to come under the Life Insurance Act 1908. This means that those entities which are not "life insurers" as defined in GAAP but which issue life policies would not need to comply with FRS-34 "Life insurance business".
   • This issue may need to be kept under review to bring the two definitions closer together, and we welcome any comments on it.
7. The term "group" in the Regulations is defined differently than in GAAP. GAAP defines "group" to comprise "the investor, subsidiaries, in-substance subsidiaries and associates" (SSAP-8 and SSAP-17).

In the First Schedule, "group" refers to the "issuing group" which is defined as "the issuer of the securities and all subsidiaries of the issuer at the specified date" (Regulation 2(1)). The term "subsidiary" has the same meaning as in section 2(1) of the Financial Reporting Act 1993.

The above definition would, it appears, exclude associates from the consolidated financial statements that are required to be disclosed by the Regulations. In addition, it would require all subsidiaries at the specified date to be consolidated. ED-84 "Consolidating investments in subsidiaries" proposes to prohibit an investor from consolidating temporarily controlled subsidiaries (i.e. those subsidiaries that the investor is obligated to or plans to relinquish control within one year). This is not a current requirement of SSAP-8. Deferring to GAAP would mean that in future, not all subsidiaries of an issuing group would necessarily be consolidated.

In the Second Schedule, "group" refers to the "borrowing group" which is defined as "the issuer of the securities and all guaranteeing subsidiaries at the specified date" (Regulation 2(1)).

This definition, which includes a guaranteeing in-substance subsidiary, would, however, exclude all non-guaranteeing subsidiaries, non-guaranteeing in-substance subsidiaries and associates, although the debt issuer's investments in non-guaranteeing subsidiaries and associates are recognised as such in the financial statements of the borrowing group. Clause 32 of the Second Schedule also explicitly excludes the use of the equity method of accounting. The effect of this is to exclude the equity accounted results of associates in the consolidated financial statements of the borrowing group. The definition of borrowing group may make it difficult for some debt security issuers to use GAAP financial statements for prospectus purposes.

In the Third Schedule, the financial statements are those of the "scheme". "Scheme" is defined as "the arrangement or scheme to which the security relates" (Regulation 2(1)).

There is no equivalent definition of a "scheme" in GAAP. The closest definition would be the definition of "entity" which means "any legal, administrative or fiduciary arrangement, organisational structure or other party" (SAAP-8 and FRS-34). In practice, in many cases, the scheme's financial statements are extracts from a reporting entity's financial statements (for example, the manager's financial statements) in respect of that scheme. We may need to do more work on this.

• At this stage, we consider that the definition of "group" for each of the schedules should be retained. The requirements of GAAP should apply to each of the "groups" as defined in the Regulations, as if it were a group as defined in GAAP.
• Having said that, we welcome comments on the following points:
  • How should investments in non-guaranteeing subsidiaries be treated for the purposes of the Regulations?
  • Does clause 4 of the Second Schedule, which relates to guarantors that are not part of the borrowing group, provide for adequate disclosure? In particular, should full financial statements of a guarantor that is not a guaranteeing subsidiary be disclosed? Should the requirements be any different where the guarantor is the issuer's parent company?

8. The term "equity method of accounting" in the Regulations is defined by reference to GAAP. Currently, there is an exposure draft ED-81 which proposes to make changes to the manner in which equity earnings from associates are disclosed in financial statements. ED-81 proposes that the investor recognise the complete equity earnings from the associate in its pre-tax operating surplus "above the line". These proposals are inconsistent with the requirements of the Schedules which require the disclosure of investment revenue from "associated bodies corporate" "above the line" and other surpluses or deficits that result from using the equity method of accounting "below the line".

We understand that there is also a proposal by accounting standard setters to abandon the use of the equity method of accounting.

• This issue may need to be reviewed depending on the outcome of the GAAP proposals.

1. The Regulations require realised gains and losses to be distinguished from unrealised gains and losses. GAAP does not require such a distinction. For example, Regulations require, where material, the disclosure of the amount of foreign exchange gains or losses recognised in the Statement of Financial Performance, distinguishing between realised and unrealised gains and losses. GAAP does not require the realised component to be distinguished from the unrealised component where foreign exchange gains and losses are to be credited/debited to the Statement of Financial Performance.

A similar requirement exists in Schedule 3A (unit trusts) and Schedule 3B (life insurance policies) and Schedule 3C (superannuation schemes) which requires realised net gains or losses on investments to be distinguished from unrealised net gains and losses on investments. The Commission has given an exemption to superannuation schemes from having to distinguish between the realised and unrealised components on the basis that FRS-32 "Financial reporting by superannuation schemes" does not require such a distinction. FRS-34 "Life insurance business" also does not require the components of the net gains and losses on investments to be distinguished between realised and unrealised.

• Should the regulations defer to GAAP in this matter?

10. Financial Reporting Standards apply where the application is of material consequence to the users of the financial report. As we understand the position this includes prospective investors in the reporting entity. Each Financial Reporting Standard provides that it "shall apply to all financial reports where such application is of material consequence. A statement, fact, or item is material if it is of such a nature or amount that its disclosure, or the method of treating it, given full consideration of the circumstances applying at the time the financial report is completed, is likely to influence the users of the financial report in making decisions or assessments".

In the Regulations, there is no overall materiality criterion. In instances, the Regulations do include the words "where material" in relation to specific disclosure requirements. It is assumed that, in all other instances, disclosures should be made whether or not material. It is possible that the adoption of GAAP will mean that some disclosures will not be made where the items are not material.

• Should the Regulations defer to GAAP in this matter?

Regulation 2(2)

33. Regulation 2(2) defines the circumstances in which a body corporate is "associated with another body corporate" for the purposes of the Regulations. This definition is inconsistent with GAAP.
34. Regulation 2(2) states that a body corporate is associated with another body corporate if the other body corporate:
    • has adopted (in any statement in the registered prospectus) the equity method of accounting in relation to its holding of equity capital in the first-mentioned body corporate; or
    • holds not less that one-fifth, but not more than one-half, of the equity capital of the first-mentioned body corporate; and "associated body corporate" has a corresponding meaning.
35. In GAAP "associate" means an investee, not being a subsidiary of the investor, in respect of which both the following conditions are met:
    • the investor is in a position to exercise significant influence over the investee; and
    • the investor intends to retain its interest in the investee as a long-term investment (SSAP-8).
36. In ED-81, "associate" is an investee (not being a subsidiary of the investor or joint venture entered into by the investor) over which the investor has capacity to exercise significant influence.
37. The definition in GAAP depends on significant influence, not necessarily on equity ownership and focuses on the substance of the relationship. Part (a) of the definition in Regulations would therefore, in essence, be the same as the definition in GAAP to the extent that equity accounting is applied to the associate. However, part (b) would not be the same since GAAP does not set equity ownership criteria for determining an associate.
38. We know of no policy grounds to retain the 25% equity ownership criterion for determining an associate. It is suggested that the definition defer to GAAP. To retain the definition in the Regulations when financial statements are required to comply with GAAP in other respects may require issuers to rewrite group financial statements where the issuer has a 25% equity ownership in another entity but has no significant influence or vice versa. Using the definition in GAAP will also ensure that financial statements for prospectuses will be comparable to the issuer's historical financial statements. We also understand that there is a proposal to abandon the equity method of accounting by standard setters. If so, the definition in the Regulations will need to be able to accommodate any alternative proposal.
    • Should the circumstances in which a body corporate is associated with another body corporate be defined by reference to GAAP? If so, we think that the definition in GAAP should apply only for the purposes of the financial information requirements of the Regulations, and that the current definition should continue to apply for other purposes where equity ownership is the more relevant criterion. Do you agree?

Regulation 2(3)

39. Regulation 2(3) defines the circumstances in which a body corporate is "related to another body corporate" for the purposes of the Regulations. This definition, which essentially reflects that in the Companies Act 1993, is inconsistent with GAAP.
40. Regulation 2(3) states that a body corporate is related to another body corporate if:
    • the other body corporate is its holding company or subsidiary; or
    • there is another body corporate to which both bodies are related by virtue of paragraph (a);

and "related body corporate" has a corresponding meaning.

41. GAAP states that parties are considered to be related if one party has the ability, directly or indirectly, to control or exercise significant influence over the other party in making operating, investing and financing decisions to the extent that one of the parties might be prevented from fully pursuing its own separate interests. Parties are also considered to be related when they are subject to common outside control or significant influence. In considering each possible related party relationship, attention should be directed to the substance of the relationship and not merely to the legal form (SSAP-22, FRS-30, FRS-32).
42. The definition in GAAP relates to significant influence and focuses on the substance of the relationship. It is suggested that the term "related to another body corporate" be defined by reference to GAAP. This will ensure that financial statements for prospectuses are comparable to the issuer's subsequent historical financial statements.
    • Should the circumstances in which a body corporate is related to another body corporate be defined by reference to GAAP? If so, we think that the definition in GAAP should apply only for the purposes of the financial information requirements of the Regulations, and that the current definition should continue to apply for other purposes where equity ownership is the more relevant criterion. Do you agree?

Regulation 5(2)

43. Regulation 5(2) requires that, where a valuation is included or referred to in a registered prospectus, the prospectus must state the method and date of the valuation and the identity of the valuer. It has been suggested that this Regulation should also prescribe disclosure of any relationship between the valuer and the issuer, or the valuer and any property which is the subject of a transaction involving the issuer or any person associated with the property.
    • We think this is important information and propose to amend Regulation 5(2) accordingly. Do you agree?

Regulation 5(4)

44. Regulation 5(4) requires a statement of assumptions where prospective financial information is included in a registered prospectus. It is suggested by respondents that this should be extended to require the prospectus to contain other information required by the relevant Financial Reporting Standard applicable to prospective financial information, that is, FRS-29.
45. FRS-29 requires the information to be presented as a prospective statement of financial performance and a statement of accounting policies. It may also include a prospective statement of movements in equity, prospective statement of financial position and prospective statement of cash flows. Regulations require the disclosure of a prospective statement of cash flows under certain circumstances.
46. FRS-29 prescribes the type of information that must be disclosed in each of those statements where disclosed. The prescription for the prospective statement of cash flows in FRS-29 is in condensed form and does not fully reflect the information required by Regulations to be included in that prospective statement, that is, the likely receipt and proposed use of the offer of the securities.
47. We think it would be useful for Regulations to require compliance with FRS-29 where prospective financial information is included in a registered prospectus. In other words, we think that a combination of profit and loss and cash flow information would be desirable. We also think that information about the likely receipt and proposed use of the offer of the securities is useful and should continue to be prescribed, although not necessarily in a forecast statement of cash flows.
    • We think that it is important that FRS-29 should have statutory effect in respect of offer documents. This can be achieved either by prescribing in Regulations or, alternatively, by amending the Financial Reporting Act to empower the Accounting Standards Review Board to make standards in respect of prospective information which are applicable to all issues. We prefer the latter option. Do you agree?
48. We note that the Accounting Standards Review Board has approved FRS-29 under the Financial Reporting Act 1993:
    • for the purposes of the Public Finance Act 1989, to apply to the Crown and all departments, Offices of Parliament and Crown entities; and
    • to apply to local authorities.

The Board has also given a direction under the Financial Reporting Act that FRS-29 has authoritative support within the accounting profession in New Zealand.

Regulation 7A(4)

49. Regulation 7A(4) requires that matters specified as required under an italicised question in Schedule 3D for inclusion in an investment statement must appear under that question. Some stakeholders have commented that it is currently unclear whether this allows for cross-referencing between items under different headings.
50. Part of the purpose of the investment statement is to assist the prudent but non-expert investor to evaluate investments by enabling him or her to comprehensively compare different investment products by comparing the responses to identical questions. For this reason it is important that all information necessary to answer a question appears under that question heading.
51. Having said that, we also think investment statements should disclose the prescribed information as clearly and comprehensibly as possible. Judicious use of cross-referencing might make the document easier to read and comprehend by reducing repetition. It can be confusing if the same thing is said in different ways in different contexts.
    • We would be interested in receiving comment as to whether this Regulation could or should be amended to allow cross-referencing, without compromising the goal of comparability. We consider that cross-referencing should be permitted, subject to Regulation 8, but that it should be limited to cross-references within the prescribed information, and not to any additional information that the issuer chooses to include in the investment statement, nor to any other document including the registered prospectus. We welcome your comments.

New Regulation 7B

• It is proposed that a new regulation be inserted under the "Investment Statements" heading setting out that nothing in this Part of the Regulations limits the provisions of Part II of the Regulations, which relate to the content of advertisements.

52. The intention of the new regulation is to clarify that an investment statement is an advertisement for the purposes of the Regulations and to make this Part of the Regulations consistent with Regulation 6, which relates to the content of prospectuses.

Regulation 9

53. Regulation 9 provides that an advertisement must not contain any information, sound, image, or other matter that is inconsistent with any registered prospectus or disclosure statement referred to in it. We think it is important that an advertisement is consistent with all other offer documents relating to the same securities, whether or not other documents are actually referred to in the advertisement.
    • We propose to amend Regulation 9 to provide that an advertisement must not be inconsistent with any registered prospectus, disclosure statement or investment statement relating to the same offer.

Regulation 11

54. Regulation 11 sets out restrictions on statements about guarantees in advertisements. The Regulation does not contain some of the requirements contained in the similar provision for investment statements that may assist an investor in clarifying the nature of the guarantee.
    • It is proposed that this Regulation be amended so that some of the requirements in Clause 10 of Schedule 3D relating to investment statements are included.
55. Specifically, the insertions of two additional requirements in a statement is proposed:
    • whether or not the guarantee is subject to conditions; and
    • if the guarantor and the issuer are associated persons, a statement to that effect.
56. Questions have also been raised with us about the manner in which Regulation 11 applies to third party assurances of withdrawal or redemption prices for unit trusts. We think that the same public policy questions arise as for the guarantee of debt securities.
    • We think the Regulations should be clear on this. Do you agree?

Regulation 12

57. Regulation 12 sets out restrictions on statements about assets and advertisements. It is not clear how this Regulation applies to a unit trust or collective investment scheme in respect of which the issuer is the manager. This should be clarified. In addition this Regulation restricts the ability of issuers to communicate in an investment statement information in half yearly financial statements which is already published in the registered prospectus. We do not think this restriction is necessary.
    • We suggest that Regulation 12(1)(c) be amended to refer to these in addition to the most recent audited consolidated financial statements.
58. We have also considered whether it may be desirable to revoke Regulation 12 entirely on the basis that the matters covered in this Regulation would be adequately addressed under Regulation 8 relating to misleading information. We are not confident that Regulation 8 would be adequate to deal with this type of situation in practice.

Regulation 13

59. Regulation 13(1) sets out restrictions on statements in advertisements about authorised or issued capital of a company registered under the Companies Act 1955. This Regulation is now obsolete and it is therefore proposed that it will be revoked.
60. Regulation 13(2) may still be relevant to issuers that are bodies corporate other than companies incorporated under the Companies Act 1993. However, the reference in Regulation 13(2) to a company registered under the Companies Act 1955 is also obsolete.
    • We propose to revoke these references.

Regulation 14

61. Regulation 14 prescribes particular statements as to whether debt and participatory securities are secured or unsecured. It has been suggested that similar requirements should apply to other classes of securities also, because it is important for investors to know whether or not their investment is secured and if so, the nature and ranking in point of that security.
62. Conversely, it has also been suggested that Regulation 14 be revoked on the basis that Regulation 8 is sufficient to regulate statements and inferences about security.
    • We are interested in any comments on the alternatives proposed above.

Regulation 17(2)

63. Regulation 17(2) sets out who must sign a certificate in respect of an advertisement before it can be distributed. Difficulties currently arise when directors are unavailable to sign off on advertisements as there is no ability in this Regulation for a director to authorise an agent or officer to sign on his or her behalf.
    • It is proposed that the Regulation be amended to allow the directors to authorise another person to undertake the certification requirement on their behalf, while they remain personally liable. We welcome comments.

Regulation 17(3)(a)

64. Regulation 17(3)(a) sets out the content restrictions of an advertisement that does not require a signed certificate from the director/s before it is distributed. The references to postal address, telephone number and telex number in this Regulation are technologically specific and do not include other, more recent, forms of communication.
    • It is proposed that this Regulation be amended to allow for contact information to be provided without restricting the medium or method of communication. Do you agree?

Regulation 17(6)

65. Regulation 17(6) imposes liability on publishers, broadcasters or exhibitors in relation to an advertisement where there is no signed certificate from the directors before the advertisement has been distributed. It has been suggested that such liability is unfair and inappropriate. However, it is our experience that liability on the part of the advertiser is not of itself sufficient to ensure compliance with the Regulations, and we do not think that publishers, broadcasters and exhibitors should be absolved from liability entirely.
    • It is proposed that publishers, broadcasters and exhibitors should be liable under this Regulation where they have actual knowledge that the advertisement does not comply with the law. We welcome your comments.
    • We also propose to consider the definitions in Regulation 2(1) of the terms "broadcasting stations", "diffusion service", "exhibitor", "operator" and "publisher" in this context.
66. This proposal should also mean that the Regulations will align more closely with the policy proposal for the Electronic Transactions Bill with respect to internet service providers (ISP).

Regulation 18

67. Regulation 18 requires that, if a prospectus or advertisement states or implies that a person is, or intends to become, a member or shareholder of the issuer, it must also state whether that person guarantees the securities being offered.
68. It has been interpreted to mean that a guarantee statement must accompany every mention of a shareholder of the issuer, which can be repetitious. Conversely, others have considered that it is necessary only to make the required statement once regardless of its context or prominence in the document. We consider that there should be a "balance of prominence" between references to shareholders and guarantee statements in the context of the document as a whole. We think that issuers can achieve the right balance by bearing in mind the general prohibition against information that is likely to deceive, mislead or confuse in Regulation 8.
    • We do not propose to amend Regulation 18. Do you agree?

Proposed new Regulation 20A

69. Occasionally an issuer will state or imply in an offer document or advertisement that the Securities Commission or the Registrar of Companies has somehow approved or endorsed the document or the offer itself. The Securities Commission has no power or mandate to approve offers or offer documents, and no role in vetting offer documents prior to the offer. Any exemption from provisions of the Securities Act or Regulations granted by the Commission in no way confers or implies approval. Similarly, acceptance of an offer document for registration by the Registrar of Companies does not imply approval or endorsement. While it seems clear that such a statement or implication would breach Regulation 8 (misleading information), we think it is desirable that the Regulations include an express prohibition that would clear up any uncertainty or misconception that issuers may have in this matter.
    • We propose a new Regulation 20A which provides that no registered prospectus or advertisement shall state or imply that the advertisement or prospectus, or the offer, or the securities have been in any way approved or endorsed by the Securities Commission or the Registrar of Companies. We welcome comments on this proposal.

Regulation 21

70. Regulation 21 sets out restrictions on statements about the rate or rates of interest that may be earned by holding securities. Some users of the Regulations find it difficult to apply and interpret in practice, particularly as it relates to the incidence of taxation in Regulations 21(2) and (3).
    • We are considering revoking regulations 21(2) and (3) on the basis that the matters contained in it might be adequately covered by Regulation 8 (which prevents false or misleading statements in advertisements). In addition, we think that there may be good reason to extend the policy of clause 21(1) to apply to statements of returns or earnings generally. We welcome your comments.

Regulation 22

71. Regulation 22 restricts the use of the description "mortgage debentures" to describe securities. There appears to be little, if any, use of mortgage debentures and the restriction does not appear to be necessary.
    • It is proposed that this Regulation be revoked.

Regulation 23

72. Regulation 23 sets out restrictions on statements about listing of securities on the New Zealand Stock Exchange. This Regulation is significant as it is of profound importance to the investor to know whether there will be a market for the securities on offer.
    • We would be interested in comment on the following alternative proposals for this Regulation.
    • It has been suggested that this Regulation could be revoked as the intent of the provision, to prevent inaccurate statements about listings, is adequately covered by Regulation 8 which prohibits advertisements that deceive, mislead or confuse with regard to any particular that is material to the offer of securities contained in the advertisement; or
    • The Regulation currently only applies to statements about listings on the New Zealand Stock Exchange. The intent of the Regulation is for information regarding listing to be disclosed because this could be an important consideration for potential investors. This reasoning suggests that it would be appropriate for the Regulation to apply to listings on any stock exchange worldwide. The Regulation would be amended to apply generally to listings on any stock exchange. It would not require the present prescribed statements but would require a statement regarding listing that has been approved by that stock exchange.
      • Should this Regulation also apply to other forms of trading mechanism?

Regulation 27

73. Regulation 27 specifies the required form of a declaration of non-disclosure for the purposes of section 67(3) of the Act. Section 67(3) is now repealed.
    • It is proposed that this Regulation be revoked.

Regulation 28

74. Regulation 28 contains transitional provisions. With the exception of 28(3), the provisions are no longer necessary.
    • It is proposed that 28(1) and 28(2) be revoked.

The Schedules to the Securities Regulations

Common amendments

Clause 1(4) of the First, Second and Third Schedules

75. Clause 1(4), which is repeated in the first three schedules, requires a prospectus to state the price or other consideration to be paid for the securities being offered. In a number of recent issues, exemptions from this provision have been sought so as to allow a mechanism for arriving at a price to be set out, rather than the price itself. It has been suggested that the Regulations should provide for "open priced offers" so that issuers would not need to seek an exemption. This suggestion, and open pricing generally, raises issues that the Commission wishes to review.
    • In the meantime, we invite your comments on whether this clause should be amended.

Clause 3 of the First and Second Schedules

76. These clauses require disclosure of details of incorporation and registration of the issuer. It does not require disclosure of the statute under which the issuer was registered. We think that the statute under which the issuer is currently registered, whether in New Zealand or overseas, is at least as relevant as the statute under which it was incorporated.
    • We propose that clause 3(1) should also require disclosure of the statute or other authority by or under which the issuer is registered at the time of the offer.
77. Clauses 3(2) and 3(3) are identical in the First and Second Schedules. They are transitional provisions that are no longer necessary.
    • It is proposed that they be revoked.

Clause 5 of the First and Second Schedules and clause 2 of the Third Schedule

78. Clause 5, which is identical in the First and Second Schedules, and clause 2, which is an equivalent provision in the Third Schedule, require disclosure of information about the directors, manager (where appropriate) and advisors of the issuer. These requirements differ from the equivalent requirements in Schedules 3A to 3C, which are more flexible and better reflect today's market conditions. In particular, the more recent Schedules specify information required about criminal convictions, prohibition as a director and any history of being placed in statutory management or receivership. These are not included in the first three Schedules.
    • It is proposed that these clauses be amended to conform better with clause 2 of Schedule 3A, clause 4 of Schedule 3B and clause 3 of Schedule 3C.

Clause 5A of the First and Second Schedules

79. Clause 5A, which is identical in the First and Second Schedules, requires disclosure of certain modifications, exceptions or limitations on the powers of the board of any issuer that is a company. Currently clause 5A requires an issuer to specify limitations imposed by the Companies Act 1993 as well as those imposed by the company's constitution. This seems unnecessary, as Companies Act restrictions will be common to all companies.
    • It is proposed that this clause be amended to require only those limitations imposed by the company's constitution (or in the case of an issuer not incorporated under the Companies Act 1993, any limitations imposed under either the incorporating legislation or the constitution of that body).

Clause 7(2) of the First Schedule, clause 6(2) of the Second Schedule and clause 4(3) of the Third Schedule

80. Clauses 7(2), 6(2) and 4(3) require a brief description of the activities of the members of the issuing or borrowing group during the previous five years. It has been suggested that the term "principal fixed assets" in this clause is restrictive in that there are intangible or other assets outside the ordinary meaning of "fixed assets" which may be material and require disclosure. It is suggested that the term "principal assets" be used in this context.
81. It has also been suggested that these clauses should also require disclosure of whether the assets are subject to obligations in favour of other persons that affect its control over its residual rights (e.g. whether the issuer has given third party licence rights, charged the asset or entered into an assignment).
82. Alternatively, it has been suggested that these clauses be repealed on the basis that clauses 7(1) of the First Schedule, 6(1) of the Second Schedule, and 4(1) and (2) of the Third Schedule should provide sufficient disclosure.
    • We welcome your comments on these suggestions.

Clause 8 of the First Schedule, clause 7 of the Second Schedule, clause 6 of the Third Schedule and Schedule 3A, clause 5 of the Schedule 3B and Schedule 3C

83. These clauses require disclosure of a summary financial statement for the issuing or borrowing group. There is currently no relevant Financial Reporting Standard on summary financial information although work is underway to develop such a standard.
    • It is suggested that this provision be revisited when a relevant standard has been issued.

Clauses 9 and 10 of the First Schedule and Clause 7 of the Third Schedule

84. It is suggested that clause 10(1)(c) of the First Schedule, and the equivalent provision in the Third Schedule, clause 7(5), give rise to unnecessary compliance costs to compile the information in relation to a statement of cash flows for cash flows forecast to occur within 12 months from the specified date.
    • We are currently reviewing clauses 9 and 10. In the meantime, we suggest that clause 10(1)(c) be amended to require a prospective statement of cash flows for a period ending on the next balance date. Where that period is less than one year, we propose to also require a prospective statement of cash flows for the year that follows.
85. Requiring the periods to coincide with the balance dates will ensure that they will be more comparable with future historical financial statements.

Clause 11(1)(b) of the First Schedule, clause 8(1)(b) of the Second Schedule and clause 10(1)(b) of the Third Schedule

86. These clauses prescribe disclosure in respect of an acquisition of a subsidiary or business. It has been suggested that the reference in these clauses to "total tangible assets" should be replaced with "total assets excluding goodwill".
87. It has also been suggested that the use of total tangible assets is outdated and that total tangible assets often do not reflect the total asset value of the company. This is particularly the case when a company with mainly intangible assets buys a very small tangible asset based subsidiary and must comply with this section. With the rise of e-commerce this is becoming more common.
88. However, we consider that the term "total assets excluding goodwill" does not reflect the intent of the Regulations which is to exclude all intangible assets, not just goodwill.
    • We believe there may be grounds to change this policy. We welcome your comments.
    • More generally, we are interested in your views on the circumstances in which disclosure of an acquisition or business should be required, the appropriate nature of such disclosure and the effectiveness more generally of clause 11 of the First Schedule and the equivalent clauses in subsequent Schedules.

Clauses 11(2)(c) and 11(3)(f) of the First Schedule, clauses 8(2)(c) and 8(3)(f) of the Second Schedule, clauses 10(2)(b) and 10(3)(e) of the Third Schedule, clauses 9(2)(b) and 9(3)(e) of the Schedule 3A, clauses 7(2)(b) and 7(3)(e) of Schedules 3B and 3C

89. These clauses require disclosure of five year summary financial information for businesses or subsidiaries acquired. It has been suggested that this requirement can be difficult for issuers where no historical financial information is available.
90. We acknowledge that this is a difficult area. However, the Commission has granted a number of exemptions in the past where the required financial information has not been available and issuers have provided alternative best available information. It has been suggested that "best available information" should become the prescribed standard.
    • However, in order to ensure that an issuer does in fact disclose the "best available information", we propose that the Regulation should not be changed during Stage One and that the Commission continue to provide exemptions where appropriate.

Clause 11(3)(g) of the First Schedule and clause 8(3)(g) of the Second Schedule

91. Clauses 11(3)(g) and 8(3)(g) require that, where a statement of financial position is not required, the net tangible asset backing per unit of the securities being offered is required. It has been suggested that the use of net tangible asset backing in these clauses is not an accurate indicator of financial stability.
92. While we think that Regulations should not differentiate between the value of tangible and intangible assets to an issuer, the requirement to disclose net tangible asset backing per share is widely accepted in the market. We do not think any change is required. An alternative is to require the total assets per unit of securities to be disclosed as well.
    • We would appreciate comments on this point.

Clauses 15(4) and 16(2) of the First Schedule and clauses 13(2) and 14(2) of the Third Schedule

93. These clauses require disclosure of the nature of material transactions by the directors or promoters of the issuer. The format of disclosure of directors' interests or equivalent in the Schedules differs and we are interested in achieving compatibility. However, we regard this disclosure as important and believe it does need to be explicitly dealt with in the Regulations.
    • We would welcome comments on ways to achieve this compatibility.
94. In addition to the clauses identified above, this issue needs to be looked at in relation to other classes of securities. There is a conceptual division between those securities which are the ultimate risk takers in the business, contrasted with investors who have a defined return which they should receive except in the event of default or insolvency. It has been suggested that the first group should be entitled to a level of disclosure as to the interests of directors/managers to enable them to evaluate whether they are subject to unusual levels of "agency risk".

Clauses 23, 34 and 36 of the First Schedule, Clauses 16, 27 and 29 of the Second Schedule and clauses 21, 31 and 33 of the Third Schedule

• General

95. These clauses require disclosure of the financial information specified in the respective Schedules. This disclosure is not always consistent with GAAP.
    • It is proposed that these clauses be amended to require financial statements in accordance with GAAP.
    • Interim financial statements
96. Currently, interim financial statements that are included in a registered prospectus for equity, debt and participatory securities are required to comply with the requirements of the Securities Regulations, except that they need not be audited (section 37A(1A)(d)(ii)). However, interim financial statements that are included in a registered prospectus for unit trusts, superannuation schemes and life insurance policies are required to be prepared as if they required registration under the Financial Reporting Act 1993, except that they need not be audited (clause 16(3) of Schedule 3A, clause 12(3)(b) of Schedule 3B and clause 12(2)(b) of Schedule 3C). Interim financial statements contained in short form prospectuses are required to comply with the requirements of the Financial Reporting Act, except that they need not be audited.

As FRS-24 "Interim financial statements" "does not apply to interim financial statements included in or accompanying a registered prospectus as these will need to comply with the Securities Act and Regulations" (para 2.5), these requirements effectively require interim financial statements to be in full form rather than in condensed form.

97. The Commission has previously considered whether interim financial statements required by the Regulations should comply with the Financial Reporting Act, that is, with GAAP. If FRS-24 "Interim financial statements" forms part of GAAP, interim financial statements drawn up for offer document purposes will comply with FRS-24. FRS-24 provides for a minimum level of disclosure and the information required is less extensive than the information that is contained in an annual financial report.
98. The Commission's view has been that the disclosures required by FRS-24 are adequate for prospectus purposes provided that the disclosures required by the proposed FRS-24 are supplemented by the requirement to:
    • disclose any material change in any item between the most recent audited financial statements of the issuer and the interim financial statements; and
    • disclose all material related party transactions in the period between the date of the most recent audited financial statements and the date of the interim financial statements.
99. The disclosure proposed above would still be in respect of the "issuing group" the "borrowing group" and the "scheme" as defined in the Regulations.
100. To effect the changes, the following provisions relating to interim financial statements would need to be amended to require the interim financial statements to comply with the Financial Reporting Act:
     • clause 23 of the First Schedule, clause 16 of the Second Schedule and clause 21 of the Third Schedule in respect of a statement of financial position;
     • clause 34 of the First Schedule, clause 27 of the Second Schedule and clause 31 of the Third Schedule in respect of a statement of financial performance;
     • clause 36(b) of the First Schedule, clause 29(b) of the Second Schedule and clause 33(b) of the Third Schedule in respect of a statement of cash flows; and
     • Regulation 4(2)(e).
101. It is possible that section 37A(1A)(d)(ii) of the Securities Act 1978 may also need to be amended.
     • The Commission would work with the Institute of Chartered Accountants of New Zealand in developing proposals to amend FRS-24 so that it applies to interim financial statements that are drawn up for prospectus purposes and includes the two additional proposals.

Clauses 24-33, 35, 37-38 of the First Schedule, clauses 17-26, 28, 30-32 of the Second Schedule and clauses 22-30, 32, 34 of the Third Schedule

102. These clauses set out the financial information required by the preceding clause in each of the Schedules. These clauses will become unnecessary when disclosure in accordance with GAAP is required.
     • It is therefore proposed that these clauses be revoked.

Clause 39 of the First Schedule, clause 33 of the Second Schedule

103. These clauses require disclosure of the times and places where various documents relevant to the issue of securities may be inspected. These clauses contain obsolete references to memoranda and articles of association.
     • It is proposed that these references be revoked as they are now obsolete.

Clause 42(1) of the First Schedule, clause 36(1) of the Second Schedule and clause 38(1) of the Third Schedule

104. These clauses require an auditor's report and specify what must be stated in that report. It has been suggested that these reports will not necessarily provide useful information where audited financial statements are prepared in accordance with GAAP. It has been suggested that these clauses be amended to align more closely with the audit report in Schedule 3A.
105. Even if the proposal is to adopt GAAP for prospectus purposes, it may not be possible for the existing requirements to be eliminated, at least from the Second and Third Schedules, as there is no equivalent definition of "borrowing group" and "scheme" in GAAP.
     • It is proposed that no change be made for the time being. Do you agree?
106. As a further point, under current requirements the auditor's report must contain a statement that any prospective financial information "must be properly compiled on the footing of the assumptions made or adopted by the issuer".
     • We are interested to receive comments on whether auditors should also be required to comment on the reasonableness of those assumptions.

Clause 6(7) of Schedule3A, clause 5(7) of Schedules 3B and 3C

107. These clauses specify where summary financial information is not required. The reference to "subclause 1(b)" in each of these clauses is a drafting error.
     • It is proposed that these references be replaced by a reference to subclause 1.

First Schedule amendments

Clause 14(1)(a)

108. Clause 14(1)(a) relates to methods of appointment of directors under the Companies Act 1955.
     • This clause is obsolete and it is proposed that it be deleted.

Clause 14(1)(b)

109. Clause 14(1)(b) requires disclosure of methods of appointment of directors specified in a company constitution that are materially different from those set out in the Companies Act 1993. This clause does not require information about removal of directors, although this information is likely to be useful for investors.
     • It is proposed that this clause be amended so that statements about both appointment and removal of directors are required and possibly also information about the process by which directors retire.
110. This clause also required a prospectus to repeat restrictions of appointment that are set out in the New Zealand Stock Exchange's Listing Rules, which are both publicly available and applicable for all listed companies.
     • We would be interested in any comment about whether this clause should also be amended to clarify that differences need not be specified to the extent they are consistent with the New Zealand Stock Exchange's Listing Rules, or for that matter with the rules of other similar organisations such as overseas stock exchanges.

Clause 14(2)

111. Clause 14(2) requires disclosure of any rules of the issuer relating to the retirement age of directors.
     • It is proposed that this clause be revoked as retirement ages are no longer enforceable as a result of the Human Rights Act 1993.

Clause 15(5)

112. Clause 15(5) relates to rules of an issuer within the meaning of the Companies Act 1955.
     • This clause is obsolete and it is proposed that it be revoked.

Third Schedule amendments

Clause 6(6)(ab)

113. Clause 6(6)(ab) requires disclosure of any item of such incidence or size that it is necessary to explain the performance of the Group. The reference to the "Group" in this clause is inconsistent with the rest of clause 6, which refers to the "Scheme".
     • It is proposed that the reference to "Group" in this clause be replaced with a reference to "Scheme" to ensure consistency with the rest of the clause.

Clause 13(2)

114. Clause 13(2) requires disclosure of the nature of material transactions by the manager of the issuer. This clause is prescriptive, detailed and lacks flexibility.
     • It is proposed that this clause be replaced with an equivalent provision to that in clause 11(2) of Schedule 3A. Clause 11(2) is less prescriptive and allows greater flexibility. In this regard, see also the comments in paragraphs 93 and 94 above.

Clause 18

115. Clause 18 requires disclosure of all the terms of the deed of participation relating to the scheme. It has been suggested that disclosing all the terms of the deed does not enable the prudent but non-expert investor to identify the significant terms of the deed.
     • It is proposed that this clause be amended to be consistent with the descriptions required by clause 4 of Schedules 3A and 3C and require disclosure of the principal terms of the trust deed. We welcome your comments on this proposal. In particular, do you think that it is sufficient to refer generally to the "principal terms of the deed", or is it preferable to specify the terms that must be disclosed, along the lines of clause 13 of the Second Schedule?

Clause 35

116. Unlike the equivalent provisions in other Schedules, this clause does not refer to the constitutional documents under which the participatory securities are created. This may be because clause 18 currently requires disclosure of all the terms of the deed of participation in the prospectus.
     • In light of our proposed amendment to clause 18, we propose to amend clause 35 to include the constitutional documents.

Schedule 3D amendments

Clauses 3(1) and 3(2)

117. Clauses 3(1) and 3(2) require disclosure of the name and address of the issuer and of any promoters. The applicable definition of promoter includes directors of the promoter, but the definition of issuer does not include directors. The effect of these clauses is that the directors of a promoter must be included but the directors of the issuer need not be. It has been suggested that the identity of the directors of the issuer is important information.
     • It is proposed that clauses 3(1)(a) and 3(2)(a) be amended to include any directors of the issuer. We welcome comment. Also, is there any other information which should be disclosed in an investment statement that is not currently required? Do these give rise to any special questions about the circumstances in which it may be necessary to amend an investment statement?

Clause 5(1)(b)

118. Clause 5(1)(b) requires disclosure of the person to whom and place at which payments for the securities may be made. It is unclear how this clause will apply when payments are made by electronic transfer rather than at "a place".
     • It is proposed that this clause be amended to incorporate situations where payment can be made by electronic transfer.

Clause 20

119. Clause 20 requires a statement of the information that is required to be, or will be, available on request from the issuer. Commentators argue that, as currently worded, this clause does not limit the type of information available on request from an issuer. In particular it could cover information that is not relevant to the offer of securities.
     • It is proposed to clarify that this clause relates to information about the issuer or securities that is material to the offer.

Amending an investment statement

120. The Regulations currently contain no explicit provision for amending an investment statement if information contained in it changes during the offer period. Many commentators consider that if an amendment is required a new investment statement should be issued.
     • We are interested to receive comments on whether it is desirable to provide in the Regulations for amendments to investment statements and if so on appropriate methods of doing so without compromising the objectives of the investment statement.

Fourth Schedule amendments

121. The Fourth Schedule sets out the requirements for a director's statement for an advertisement pursuant to Regulation 17(2). The requirements of (c)(iii) of this Schedule include a statement that the advertisement does not contain any matter that is inconsistent with a prospectus or disclosure statement.
     • It is proposed that this be amended to include a reference to an investment statement.

Seventh Schedule amendments

Clause 4(1)

122. Clause 4(1) requires mandatory annual meetings for participatory schemes. We have received comment to the effect that participatory schemes often undertake few transactions during the period of a year and that this clause be amended to enable members of the scheme to waive the requirement for an annual meeting. We think this matter needs to be examined in the context of the governance and reporting arrangements generally of collective schemes.
     • However we would be interested in receiving comment on this suggestion.

Eighth Schedule amendments

123. The Eighth Schedule sets out the form of a non-disclosure declaration required by section 67 of the Act. Section 67(3) has been repealed.
     • It is proposed that this Schedule be revoked as it is now obsolete.

SCHEDULE OF PROPOSALS FOR COMMENT

• For your convenience, we have listed below the particular proposals or questions on which we are seeking your comments.
• The proposals or questions have been numbered consecutively in the order in which they appear in the Discussion Document. The paragraph numbers referred to below, for example "Paragraph 32", are the paragraph numbers in the Discussion Document.
• To assist us in compiling and analysing submissions, we would be grateful if you would use the question numbers below in your submission.
• We would prefer to receive submissions in electronic form. If you would like to respond electronically, please contact Bronwyn Turley at the Ministry of Economic Development or Kathryn Rogers at the Securities Commission and we will send you a copy of this schedule either by e-mail or on disk. Our contact details are on page 9 of the Discussion Document.

The Securities Regulations 1983

Paragraph 32

Regulation 2(1)

Paragraph 32(a)

1. We propose to review or revoke definitions in Regulation 2(1) that duplicate definitions in the Act, as discussed in paragraph 29 of the Discussion Document. We welcome your comments.
2. We propose to revoke certain obsolete definitions.

Paragraph 32(b)

If the financial information requirements of the Regulations are to conform with GAAP, definitions of accounting terms in Regulation 2(1) will be affected as follows:

3. We propose to define the following definitions by reference to GAAP: current assets, current liabilities, fixed assets, and non-current liability.
4. We propose to define the term "accounting period", which is not defined in GAAP, by reference to the Financial Reporting Act 1993.
5. If GAAP is adopted as proposed, the definition of the term "investment" will become obsolete. We propose to revoke it also.
6. We note that the definition of the term "intangible assets" may require review in light of any amendment to the provisions of the Regulations in which it appears. Do you have any comments?

Paragraph 32(c)

7. We propose to extend the definition of "immediate relative" to include de facto and same sex partners, subject to review to ensure that the definition can be expected to apply with reasonable certainty. Do you agree?

Paragraph 32(d)

8. We propose to make no change to the term "qualified audit report". We welcome your comments.

Paragraph 32(e)

9. We propose that the Regulations include a definition of the term "rate of return". We are interested in receiving comments on how this should be formulated and whether it would be helpful.

Paragraph 32(f)

10. The term "life insurance company" is defined more widely in the Regulations than in GAAP. This issue may need to be kept under review to bring the two definitions closer together, and we welcome any comments on it.

Paragraph 32(g)

11. At this stage, we propose to retain the definition of "group" in respect of each of the Schedules. The requirements of GAAP should apply to each of the "groups" as defined in the Regulations, as if it were a group as defined in GAAP. Do you agree?
12. Having said that, we welcome comments on the following points:
    1. How should investments in non-guaranteeing subsidiaries be treated for the purposes of the Regulations?
    2. Does clause 4 of the Second Schedule, which relates to guarantors that are not part of the borrowing group, provide for adequate disclosure? In particular, should full financial statements of a guarantor that is not a guaranteeing subsidiary be disclosed? Should the requirements be any different where the guarantor is the issuer's parent company?

Paragraph 32(h)

13. The "equity method of accounting" issue may need to be reviewed depending on the outcome of the GAAP proposals. We welcome comments.

Paragraph 32(i)

14. Should the regulations defer to GAAP in the matter of realised / unrealised gains and losses?

Paragraph 32(j)

15. Should the Regulations defer to GAAP in the matter of a materiality criterion?

Paragraphs 33-38

Regulation 2(2)

16. Should the circumstances in which a body corporate is associated with another body corporate be defined by reference to GAAP? If so, we propose that the definition in GAAP should apply only for the purposes of the financial information requirements of the Regulations, and that the current definition should continue to apply for other purposes where equity ownership is the more relevant criterion. Do you agree?

Paragraphs 39-42

Regulation 2(3)

17. Should the circumstances in which a body corporate is related to another body corporate be defined by reference to GAAP? If so, we propose that the definition in GAAP should apply only for the purposes of the financial information requirements of the Regulations, and that the current definition should continue to apply for other purposes where equity ownership is the more relevant criterion. Do you agree?

Paragraph 43

Regulation 5(2)

18. We think the suggested information is important and propose to amend Regulation 5(2) accordingly. Do you agree?

Paragraphs 44-48

Regulation 5(4)

19. We think that it is important that FRS-29 should have statutory effect in respect of offer documents. This can be achieved either by prescribing in Regulations or, alternatively, by amending the Financial Reporting Act to empower the Accounting Standards Review Board to make standards in respect of prospective information which are applicable to all issues. We prefer the latter option. Do you agree?

Paragraphs 49-51

Regulation 7A(4)

20. We would be interested in receiving comment as to whether this Regulation could or should be amended to allow cross-referencing, without compromising the goal of comparability. We propose that cross-referencing should be permitted, subject to Regulation 8, but that it should be limited to cross-references within the prescribed information, and not to any additional information that the issuer chooses to include in the investment statement, nor to any other document including the registered prospectus. We welcome your comments.

Paragraph 52

New Regulation 7B

21. We propose to add a new regulation under the "Investment Statements" heading which provides that nothing in this Part of the Regulations limits the provisions of Part II of the Regulations, which relate to the content of advertisements. We welcome comments.

Paragraph 53

Regulation 9

22. We propose to amend Regulation 9 to provide that an advertisement must not be inconsistent with any registered prospectus, disclosure statement or investment statement relating to the same offer. Do you agree?

Paragraphs 54-56

Regulation 11

Paragraphs 54-55

23. We propose to amend Regulation 11 so that some of the requirements in Clause 10 of Schedule 3D relating to investment statements are included. Do you agree?

Paragraph 56

24. We think the Regulations should be clear as to their application to third party assurances of withdrawal or redemption prices for unit trusts? Do you have any comments?

Paragraphs 57-58

Regulation 12

25. We propose that the application of this Regulation to a unit trust or collective investment scheme where the issuer is the manager should be clarified. Do you have any comments?
26. We propose that Regulation 12(1)(c) be amended to refer to half yearly financial statements in addition to the most recent audited consolidated financial statements. Do you agree?

Paragraphs 59-60

Regulation 13

27. We propose to revoke obsolete references to the Companies Act 1955.

Paragraphs 61-62

Regulation 14

28. We are interested in any comments on the proposed alternatives for amending or revoking Regulation 14.

Paragraph 63

Regulation 17(2)

29. We propose to amend this Regulation to allow the directors to authorise another person to undertake the certification requirement on their behalf, while they remain personally liable. We welcome comments.

Paragraph 64

Regulation 17(3)(a)

30. We propose to amend this Regulation to allow for contact information to be provided without restricting the medium or method of communication. Do you agree?

Paragraphs 65-66

Regulation 17(6)

31. We propose that publishers, broadcasters and exhibitors should be liable under this Regulation where they have actual knowledge that the advertisement does not comply with the law. We welcome your comments.
32. We also propose to consider the definitions in Regulation 2(1) of the terms "broadcasting stations", "diffusion service", "exhibitor", "operator" and "publisher" in this context. Do you have any comments?

Paragraphs 67-68

Regulation 18

33. We do not propose to amend Regulation 18. Do you agree?

Paragraph 69

Proposed new Regulation 20A

34. We propose a new Regulation 20A which provides that no registered prospectus or advertisement shall state or imply that the advertisement or prospectus, or the offer, or the securities have been in any way approved or endorsed by the Securities Commission or the Registrar of Companies. We welcome comments on this proposal.

Paragraph 70 Regulation 21

35. We are considering revoking Regulations 21(2) and (3) on the basis that the matters contained in them might be adequately covered by Regulation 8 (which prevents false or misleading statements in advertisements). In addition, we think that there may be good reason to extend the policy of clause 21(1) to apply to statements of returns or earnings generally. We welcome your comments.

Paragraph 71

Regulation 22

36. We propose to revoke this Regulation. Do you agree?

Paragraph 72

Regulation 23

37. We are interested in comment on the alternative proposals for this Regulation set out in paragraph 72.
38. If this Regulation is amended as proposed, should it also apply to other forms of trading mechanism?

Paragraph 73

Regulation 27

39. We propose to revoke this Regulation.

Paragraph 74

Regulation 28

40. We propose to revoke Regulations 28(1) and 28(2).

The Schedules to the Securities Regulations

Common amendments

Paragraph 75

Clause 1(4) of the First, Second and Third Schedules

41. We invite your comments on whether this clause should be amended.

Paragraphs 76-77

Clause 3 of the First and Second Schedules

42. We propose that clause 3(1) should also require disclosure of the statute or other authority by or under which the issuer is registered at the time of the offer.
43. We propose to revoke clauses 3(2) and 3(3).

Paragraph 78

Clause 5 of the First and Second Schedules and clause 2 of the Third Schedule

44. We propose to amend these clauses to better conform to clause 2 of Schedule 3A, clause 4 of Schedule 3B and clause 3 of Schedule 3C. We welcome comments.

Paragraph 79

Clause 5A of the First and Second Schedules

45. We propose to amend this clause to require only those limitations imposed by the company's constitution (or in the case of an issuer not incorporated under the Companies Act 1993, any limitations imposed under either the incorporating legislation or the constitution of that body). Do you agree?

Paragraphs 80-82

Clause 7(2) of the First Schedule, clause 6(2) of the Second Schedule and clause 4(3) of the Third Schedule

46. We welcome your comments on suggestions made in paragraphs 80 to 82.

Paragraph 83

Clause 8 of the First Schedule, clause 7 of the Second Schedule, clause 6 of the Third Schedule and Schedule 3A, clause 5 of the Schedule 3B and Schedule 3C

47. We suggest that this provision be revisited when a relevant standard has been issued. Do you agree?

Paragraphs 84-85

Clauses 9 and 10 of the First Schedule and Clause 7 of the Third Schedule

48. We are currently reviewing clauses 9 and 10. In the meantime, we propose that clause 10(1)(c) be amended to require a prospective statement of cash flows for a period ending on the next balance date. Where that period is less than one year, we propose to also require a prospective statement of cash flows for the year that follows. We welcome comments.

Paragraphs 86-88

Clause 11(1)(b) of the First Schedule, clause 8(1)(b) of the Second Schedule and clause 10(1)(b) of the Third Schedule

49. We believe there may be grounds to change the policy underlying this Regulation. We welcome your comments.
50. More generally, we are interested in your views on the circumstances in which disclosure of an acquisition or business should be required, the appropriate nature of such disclosure and the effectiveness more generally of clause 11 of the First Schedule and the equivalent clauses in subsequent Schedules.

Paragraphs 89-90 Clauses 11(2)(c) and 11(3)(f) of the First Schedule, clauses 8(2)(c) and 8(3)(f) of the Second Schedule, clauses 10(2)(b) and 10(3)(e) of the Third Schedule, clauses 9(2)(b) and 9(3)(e) of the Schedule 3A, clauses 7(2)(b) and 7(3)(e) of Schedules 3B and 3C

51. In order to ensure that an issuer does in fact disclose the "best available information", we propose that the Regulation should not be changed during Stage One and that the Commission continue to provide exemptions where appropriate. We welcome your comments.

Paragraphs 91-92 Clause 11(3)(g) of the First Schedule and clause 8(3)(g) of the Second Schedule

52. We would appreciate comments on the alternatives proposed in paragraph 92.

Paragraphs 93-94 Clauses 15(4) and 16(2) of the First Schedule and clauses 13(2) and 14(2) of the Third Schedule

53. We welcome comments on ways to achieve compatibility between the Schedules to the Regulations.

Paragraphs 95-101 Clauses 23, 34 and 36 of the First Schedule, Clauses 16, 27 and 29 of the Second Schedule and clauses 21, 31 and 33 of the Third Schedule Paragraph 95 General

54. We propose to amend these clauses to require financial statements in accordance with GAAP. Do you have any comments? Paragraphs 96-101 Interim financial statements
55. We propose that the Commission would work with the Institute of Chartered Accountants of New Zealand in developing proposals to amend FRS-24 so that it applies to interim financial statements that are drawn up for prospectus purposes and includes the two additional proposals made. Do you agree?

Paragraph 102 Clauses 24-33, 35, 37-38 of the First Schedule, clauses 17-26, 28, 30-32 of the Second Schedule and clauses 22-30, 32, 34 of the Third Schedule

56. We propose to revoke these clauses. Do you have any comments?

Paragraph 103 Clause 39 of the First Schedule, clause 33 of the Second Schedule

57. We propose to revoke references to memoranda and articles of association as they are obsolete.

Paragraphs 104-106 Clause 42(1) of the First Schedule, clause 36(1) of the Second Schedule and clause 38(1) of the Third Schedule

Paragraphs 104-105

58. We propose that no change be made to these clauses for the time being. Do you agree?

Paragraph 106

59. We are also interested to receive comments on whether auditors should be required to comment on the reasonableness of assumptions made by the issuer in compiling prospective financial information.

Paragraph 107 Clause 6(7) of Schedule3A, clause 5(7) of Schedules 3B and 3C

60. We propose to replace the references to "subclause 1(b)" with references to subclause 1, in order to correct a drafting error. First Schedule amendments

Paragraph 108 Clause 14(1)(a)

61. We propose to delete this clause as it is obsolete.

Paragraphs 109-110 Clause 14(1)(b) Paragraph 109

62. We propose to amend this clause so that statements about both appointment and removal of directors are required and possibly also information about the process by which directors retire. Do you have any comments?

Paragraph 110

63. We would be interested in any comment about whether this clause should also be amended to clarify that differences need not be specified to the extent they are consistent with the New Zealand Stock Exchange's Listing Rules, or for that matter with the rules of other similar organisations such as overseas stock exchanges.

Paragraph 111 Clause 14(2)

64. We propose to revoke this clause as retirement ages are no longer enforceable as a result of the Human Rights Act 1993. Do you have any comments?

Paragraph 112 Clause 15(5)

65. We propose to revoke this clause as it is obsolete. Third Schedule amendments

Paragraph 113 Clause 6(6)(ab)

66. We propose to replace the reference to "Group" in this clause with a reference to "Scheme" for consistency with the rest of the clause.

Paragraph 114 Clause 13(2)

67. We propose to replace this clause with an equivalent provision to that in clause 11(2) of Schedule 3A. Clause 11(2) is less prescriptive and allows greater flexibility. In this regard, see also the comments in paragraphs 93 and 94 above. We welcome your comments.

Paragraph 115 Clause 18

68. We propose to amend this clause to be consistent with the descriptions required by clause 4 of Schedules 3A and 3C and require disclosure of the principal terms of the trust deed. We welcome your comments. In particular, do you think that it is sufficient to refer generally to the "principal terms of the deed", or is it preferable to specify the terms that must be disclosed, along the lines of clause 13 of the Second Schedule?

Paragraph 116 Clause 35

69. In light of our proposed amendment to clause 18, we propose to amend clause 35 to include the constitutional documents. Schedule 3D amendments

Paragraph 117 Clauses 3(1) and 3(2)

70. We propose to amend clauses 3(1)(a) and 3(2)(a) to include any directors of the issuer. We welcome comment. Also, is there any other information which should be disclosed in an investment statement that is not currently required? Do these give rise to any special questions about the circumstances in which it may be necessary to amend an investment statement?

Paragraph 118 Clause 5(1)(b)

71. We propose to amend this clause to incorporate situations where payment can be made by electronic transfer. Do you agree?

Paragraph 119 Clause 20

72. We propose to clarify that this clause relates to information about the issuer or securities that is material to the offer. Do you have any comments?

Paragraph 120 Amending an investment statement

73. We are interested to receive comments on whether it is desirable to provide in the Regulations for amendments to investment statements, and if so on appropriate methods of doing so without compromising the objectives of the investment statement. Fourth Schedule amendments

Paragraph 121

74. We propose to include a reference to an investment statement. Do you agree? Seventh Schedule amendments

Paragraph 122 Clause 4(1)

75. We would be interested in receiving comment on suggestion that members of a participatory scheme should be able to waive the requirement for an annual meeting.

Eighth Schedule amendments Paragraph 123

76. We propose to revoke this Schedule as it is now obsolete.