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• Offers Made From Within New Zealand To Overseas Persons
• The Faster System448
• Internet Trading

16 Securities

313 ELECTRONIC SYSTEMS HAVE TRANSFORMED the nature of securities transactions on a global scale. All shares in New Zealand companies listed on the New Zealand Stock Exchange (NZSE) are now traded in a paperless environment on the FASTER (Fully Automated Screen Trading and Electronic Registration) system. A description of the FASTER system follows below and is included for interest only. In ECom 1, we queried whether the Securities Act 1978 should be amended to give the Securities Commission jurisdiction over offers for securities made to the New Zealand public from overseas.⁴⁴⁴ A corollary of this issue is what controls the Securities Commission should exercise over offers made from New Zealand but exclusively to people and institutions outside New Zealand.

314 In response to ECom 1, it was noted that although the Securities Act 1978 does not purport to apply to conduct outside New Zealand (unlike the Fair Trading Act 1986), the current effect of the Act is that it does apply to offers to the New Zealand public made from outside New Zealand. This is supported by case law and the existence of exemptions in the Securities Act 1978 for the case of overseas offerors.

315 Section 7 provides that certain sections of the Securities Act 1978 (notably those imposing disclosure requirements on offers made to the public) do not apply where an offer is made to persons outside New Zealand only, or to persons in New Zealand selected other than as members of the public. By exempting offers made to those outside New Zealand from certain sections of the Act, it follows that the remainder of the Act is intended to cover such offers. Thus the Act can be seen to apply extra territorially, and in Society of Lloyds and Oxford Members Agency Limited v Hyslop⁴⁴⁵ Richardson J stated that this approach should also be applied to offers made from overseas to the New Zealand public. He observed that in relation to an investment made outside New Zealand:

. . . section 7 itself provides for extra territorial application of the legislation and there is nothing in the statute to suggest a narrower approach in the present case.⁴⁴⁶

316 The Securities Commission makes the further point that if the Act does not extend to offers made from outside New Zealand there would be no need for overseas offerors to seek exemptions under the Act, yet the Act clearly provides for this in section 5(5).⁴⁴⁷ The Securities Commission is considering a policy regarding overseas collective investments in general: that where an offer of securities is capable of being accepted by someone in New Zealand, then there is deemed to be sufficient activity for the Securities Act 1978 to apply to that offer. Similar approaches have been taken in Australia and the United States.

317 We concur with the Securities Commission that no reform is necessary in this respect.

Offers made from within New Zealand to overseas persons

318 The effect of section 7 of the Securities Act 1978 is that the Securities Commission is unable to regulate advertisements for securities that are made from New Zealand exclusively to foreign jurisdictions. This may cause New Zealand to be viewed as a “safe” jurisdiction in which to base internet servers or web pages promoting offers of securities that are not subject to any regulatory regime. The Securities Commission considers that it is important that it is able to respond effectively to complaints regarding advertisements based in New Zealand that are likely to deceive, mislead, or confuse investors overseas. One way of achieving this would be to amend section 7 of the Act to provide that the Commission’s powers in respect of advertisements under section 38(b) of the Act apply to offers made to persons inside or outside New Zealand. The Securities Commission has recommended to Government that such an amendment be made.

The FASTER system⁴⁴⁸

319 The system for the electronic transfer of securities on the NZSE became fully operational on 18 May 1998, when the Order in Council approving the FASTER system came into force. That order revoked an earlier Securities Transfer (Approval of FASTER System) Order 1992. Between 1992 and 1998 it was possible to conduct transactions electronically between two brokers, and between a buyer and its broker, but transactions between a seller and its broker required the manual transfer form and securities certificate. Now these transactions can also take place electronically. The requirement to issue certificates under section 55(4) of the Securities Act 1978 has been removed for overseas companies and issuers of securities other than shares. Under section 54(4), New Zealand companies whose shares could be transferred by an approved electronic system which does not require a share certificate were already exempt from having to send a certificate to the security holder within one month of allotment/transfer. FASTER interconnects the trading system, members’ office systems, share registries and payments systems. All the New Zealand equities are currently traded through FASTER, and the system is expected to extend to New Zealand fixed interest instruments (eg bonds, debentures). Some but not all overseas equities are traded through the system, but unlisted (private) securities are not.

320 To effect a transaction two numbers are needed: the client’s registry account number and their FASTER identification number (FIN), which is confidential and operates in a similar way to a banking PIN. When these numbers are combined with the unique code of the securities being bought or sold, the orders are matched and FASTER then notifies broker systems of the trades. Statements or contract notes must be sent to both parties within five working days of the transaction.

321 All settlements within FASTER occur using a system of simultaneous, final and irrevocable delivery versus payment (SFI DvP), so that real payments and irrevocable delivery occurs simultaneously. Until a transaction has settled, the securities are held by the brokers on trust for the clients (NZSE Regulations 17(8)). The securities are held in the broker’s transfer account, through which all brokerage transfers must be cleared. Regulations 17(9) and (10) require brokers to deposit payments in respect of securities into the Members Clients Funds Account until the transfer is complete. Parties should therefore be protected against any default on behalf of a broker.

Internet trading

322 Under section 7 of the Securities Transfer Act 1991 a securities transfer system which is partly or wholly electronic must be approved by the Minister of Commerce (acting on a recommendation from the Securities Commission). To date approval has only been given in respect of FASTER, and for the electronic transfer of securities issued by New Zealand companies and listed on the Australian Stock Exchange. It is not currently possible to transfer New Zealand securities over the internet, although the internet can and is used to communicate with brokers and place orders.⁴⁴⁹

323 Compared with other jurisdictions the New Zealand securities market is not heavily regulated. We do not consider that there are any legal barriers to the development of electronic trading which need to be addressed in this report.