Paul Swain: On a path of global best practice

Although it has enjoyed a bit of a rally of late, our stock market has not been a star performer over the past decade. The small size of our domestic economy and the fact that much of the agricultural sector is not listed are two reasons for this.

Also to blame is the fact that our securities laws do not work as effectively as they should. Our insider trading laws are lax and the institutions regulating the market do not have adequate power to ensure the laws are effectively implemented.

Our laws are also out of step with international norms, particularly continuous disclosure and the regulatory environment for securities exchanges. The increasing international co-ordination of financial market regulation means being different imposes a significant cost.

A properly functioning securities market balancing the rights of companies and investors is vital for NZ's economic development.

We have already started reforming the regime. The Takeovers Code was introduced last year and the Securities Markets and Institutions (SMI) Bill went to Parliament last week for its second reading.

Australian law has been used as a starting point in many areas of the SMI Bill. But we are not just copying Australia for the sake of it.

The Australian system is consistent with international best practice and because of the increasing linkages between the two economies, it makes sense to have similar regimes. Companies active in both markets will face reduced transaction costs if legal requirements are the same, or if differences can be minimised.

Consistency with international norms means that foreign investors can take the regulatory regime for granted and focus on the commercial issues.

Consistency with Australia means that investors who understand and have confidence in the Australian regime will also have confidence in New Zealand.

Different regimes mean that further work is required to understand the laws and, for some investors, this will be enough of a hurdle that New Zealand drops off the list of places to invest.

The Opposition is part of a small group that wants to preserve the ineffective regime of the past. It claims that the US laws are best practice in the area of continuous disclosure and that we are following a less-than-satisfactory Australian model.

But the Opposition's comments do not recognise that the US is reviewing its regime and looks set to adopt something similar to Australia's. This year the Corporate and Auditing Accountability, Responsibility and Transparency Act passed through the US House of Representatives and is before the Senate.

The bill sets up a continuous disclosure regime and moves the US system beyond the old quarterly reporting and fair disclosure regime advocated by the Opposition and towards the Australian continuous-disclosure approach.

The US Securities and Exchange Commission supports the bill and does not agree that its current regime is "best practice".

The Opposition's comments also do not reflect market views on the bill and the changes to the continuous disclosure regime. The majority of submissions, most from listed companies, supported the NZSE's proposal to change the listing rules on continuous disclosure to reflect the Australian approach.

Act MP Stephen Franks says the Government is trying to take over the exchange and the exchange should have done more to fight it. His outdated comments ignore accepted commercial reality that a demutualised exchange may operate in its best commercial interests rather than in the interests of participants in the market.

Because the exchange now has the ability to demutualise, there is a need for legislative safeguards to provide a balance between the exchange's interests and the interests of the market. The Restructuring Bill, which provides for sharemarket demutualisation, and the SMI Bill provide these safeguards.

Balancing the rights of investors and companies and strengthening investor confidence in market institutions on which our markets depend is the Government's intention.

Internationally, the trend is to go further, with countries such as Britain placing the listing rule function of the London Stock Exchange in their securities regulator.

But this is not the end of the story. The Government has just released a three-volume discussion document as part of a "first principles" review of insider trading laws to determine whether they are adequate.

This Government has set itself a goal of lifting New Zealand back into the top half of the OECD. A healthy, effectively regulated market, enjoying the confidence of investors and in line with international norms, will be critical in helping us to get there.

* Paul Swain is the Minister of Commerce.

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