Connell Brian: Securities Legislation Bill — Second Reading 
Connell Brian: Securities Legislation Bill — Second Reading 
[Volume:629;Page:1336] 
BRIAN CONNELL (National—Rakaia) 
: 
 I want to confine my contribution to the major issues that the Commerce Committee discussed and add my views to those already captured to a lesser or greater degree in the commentary on the bill. I begin by drawing attention to the claim in the commentary that: “This bill is designed to ensure confidence in New Zealand’s capital markets by increasing the effectiveness of securities securities trading and takeover laws.” With the benefit of hindsight I have a concern. To seek to enhance a general confidence in the regulatory regime of a market is one thing but to create a view that there is confidence in the market is quite another. Confidence in the market will ultimately depend on the performance of that market. No regulatory regime should leave investors with the impression that they should not rely on their own judgment or seek the advice of experts as to the consequences of their investment decisions. 
The bill sets out to strengthen the law relating to insider trading. Most of us would agree that we do not want to see people getting rich or richer because they have access to information that other players in the market place do not have. The bill sets out quite unashamedly as the Minister has already noted to introduce a regime—albeit with some differences—similar to Australia’s. Australia’s regulatory regime is not fully effective but in my time in Australia I remember many high-profile prosecutions being brought against senior executives engaged in insider trading albeit those successful prosecutions were hard won. In my time in New Zealand I cannot recall and I will stand corrected a successful prosecution and believe as the Minister has already indicated that it is time to act to safeguard the integrity of our capital markets. But and there is a but establishing a different regulatory framework should not create an expectation that these changes will contribute significantly to an increase in findings of liability or successful criminal prosecutions. 
Internationally insider-trading and market manipulation offences are notoriously hard to nail. Market misconduct will remain difficult to detect whatever the legal regime. A point that I stress and it was stressed to the select committee is that applying adequate resources towards enforcement is probably more important than the changes being proposed in this bill yet I do not see any determination by this Government to make sure that the resources required to give a life to this legislation are being budgeted. 
I was concerned throughout the course of the select committee discussions to avoid the creation of a regulatory regime that would stifle our capital markets in the pursuit of one or two crooks. I do not want to leave the House with the impression that “one or two crooks” is unimportant but we as regulators have to weigh up the cost-benefit rewards for instituting legislation. What we must not do is put our capital flows at risk. I tried my best to temper the zeal of some of the Government members but I fear that some parts of this bill will still promise a lot. The cost will escalate and parts of it will deliver very little. I sincerely hope I am wrong. 
I draw the House’s attention to subsection (1)(a)(i) and (ii) of new section 4 “What information is generally available to the market” to be inserted in the Securities Markets Act by clause 20. What we must not do is stifle endeavour. We must not stifle our bright young things. That will have a bigger impact on our capital markets than anything else I can think of. 
Let me give a hypothetical example. A bright young market analyst in Auckland for example is following a stock and based on his instinct feels that the stock is worth pursuing. He takes a packed lunch and a pair of binoculars finds a vantage point overlooks the activities of the Auckland wharf and sees that company A is increasing its inflow of product and he invests heavily in that stock and makes a fortune. Was he subject to information that was not readily available to other members of the market? Or was he just smarter than the rest? These are the complications that I do not think this bill has yet come to terms with. 
R Doug Woolerton 
: Like looking at my bedroom; not a lot happening. 
BRIAN CONNELL 
: I cannot attest to what happens in the member’s bedroom. 
Market manipulation is quite a different matter from insider trading. The bill attempts to introduce comprehensive prohibitions against practices involving the creation of a false impression of securities trading price movement or market information. These distortions if they were commonplace would impact negatively on capital markets. The resulting uncertainty would discourage trading reduce liquidity create increases in the cost of capital and compromise the ability of markets to allocate capital to those companies that could best use it. But I am not convinced that market manipulation is rife in this country and even if it were a significant problem I believe that trying to prove it would be nigh-on impossible. In this respect I think the bill anticipates this difficulty so imposes wide-reaching sanctions that essentially leaves it to individuals or corporate bodies to prove their innocence if an action is brought against them. 
This bill—and I refer members to new section 11 to be inserted by clause 21—creates the exception defence where trading occurs for legitimate reasons. However there is no guidance on what might be a legitimate reason which leaves the court in the awkward and somewhat unusual position of having to determine what the purpose of the effects-based offence was and what policy reasons would justify the provisions not being presumed to apply. I have said before and I will say again I think a rethink will be needed by the Government in this regard and I have some suggestions that I will table in the Committee stage. If a regulatory regime is so tough that it presumes guilt we will create an environment of risk aversion which will do more to stifle our capital flows than any other activity I can name. 
Improvements to the bill were made primarily by National members. In particular I acknowledge that the bill contemplates a provision for regulations to be made to make it clear that some activity is not to be caught in the prohibitions. I refer members to new section 11C(1) and (2) to be inserted by clause 21 if they seek clarification although I do warn that the explanation is complex and a little convoluted. 
The other matter I wanted to raise is management banning orders. As the Minister has already remarked—and quite rightly so—a sensible amendment has been suggested by the select committee. The bill as it is drafted gives the court discretion to impose a management banning order on a person if that person has been convicted of an offence against the Securities Act or if a pecuniary penalty order has been made against that person. Furthermore an automatic management banning order is imposed for the same reason. The select committee thinks that this serious penalty is inappropriate for many minor infringements and therefore proposes that a management banning order may be imposed only on a person convicted of serious offences specified under sections 58 59 and 59A of the Act or where a pecuniary penalty order has been made against that person. 
That concludes the major issues I wanted to raise. A significant number of amendments have been suggested by the select committee and on balance I think that they are warranted. National supports the bill going to the Committee stage and I conclude by thanking members of the select committee who worked tirelessly on this legislation which was at times very challenging and certainly is complex. I note the contribution made by advisers to the select committee too.