Connell Brian: Securities Legislation Bill — First Reading 
Connell Brian: Securities Legislation Bill — First Reading 
[Volume:622;Page:18041] 
BRIAN CONNELL (National—Rakaia) 
: 
 National intends to support this bill through to the next stage and we will reserve our position thereafter. This bill addresses second-tier application issues such as defining the territorial scope of investment adviser law received or given in New Zealand. In what I consider to be a good move it removes the $20 million threshold requirement from the definition of “specified company” in the Takeovers Act in order to give greater certainty about whether a takeover is governed by the Takeovers Code. The Institute of Chartered Accountants raised a series of questions on that issue in a submission to the Ministry of Economic Development in September 2002 which somewhat persuaded me to come to the conclusion that the threshold should be removed. It argued that due to the shortcomings of the code there is little guidance as to how the $20 million asset threshold is to be measured—is it gross value of assets or market value that triggers the threshold? 
The bill deals with three other major issues that I want to address: insider trading market manipulation and substantial security holders’ disclosure. The bill sets out to strengthen the law relating to insider trading. Conceptually I think most of us would agree with that. I do not want players in the market to get richer on the basis that they have access to information that other players or investors do not have. Most of my business experience was gained in Australia and over the last 10 years or so there have been some high-profile prosecutions of senior executives who engaged in insider trading in Australia. That those prosecutions were successful speaks volumes about Australia’s determination to deal with those who would engage in some type of corporate fraud or deception. Australia’s insider-trading legislation has been framed to give teeth to that determination. I spoke about successful prosecutions in Australia yet in the corresponding time in New Zealand to my knowledge no successful prosecutions have been made. That cannot and should not continue. In that regard New Zealand is looked upon as something of a soft touch. 
The bill sets out quite unashamedly to adapt and introduce a regime similar to Australia’s. It will apply to any person who has material information that is not generally available to the public. I do have a caution that I would like the select committee to be cognisant of. Before extending the scope of our insider-trading regime the select committee must ensure that any benefits to be derived from that will outweigh the costs involved. A broad-reach system will invariably increase compliance costs for business. When members of the select committee are grappling with that issue I will be looking for them to determine the application of the law—that is whether it will apply to on-market transactions only to all transactions in quoted securities only or to all transactions in securities? Those are difficult decisions and they are quite complex in nature so the select committee will need to take expert advice in coming to a decision. 
Market manipulation is quite a different matter from insider trading. Market manipulation through the distorting of prices clearly impacts negatively on the efficient functioning of capital markets. The resulting uncertainty discourages trading reduces liquidity increases the cost of capital and compromises the ability of the markets to allocate capital to those firms that are best able to use it. Clearly market manipulation is a problem but again I caution the select committee to make a judgment call on whether the medicine will be worse than the illness. The unwanted costs of regulation need to be weighed up against the benefits of a well-designed regulatory regime. Essentially the challenge is to catch abusive practices without catching harmless practices to boot. The next decision the select committee will have to grapple with is this: should market manipulation be viewed as a private wrong or as a wrong against the market? The answer to that question will be critical to the framing of the law. Even in Australia very little action has been brought against those engaged in market manipulation simply because it is hard to determine where the responsibility lies. So while the theory is good the select committee may find that issue is a particularly hard nut to crack. 
Finally I want to address the issue of substantial security holders’ disclosure. The bill aims to simplify the current regime by requiring the disclosure of relevant interests by class and in respect of listed voting securities only. The updated regime ensures that investors and public issuers can identify substantial security holders and therefore make informed investment decisions. Of course the National Party supports that because the ability of investors to make informed decisions goes to the heart of credibility and of investor confidence. As we heard in a previous debate investor confidence in our markets is absolutely critical if New Zealand is to grow as a nation. 
Again though I have to issue a caution to the select committee. Costs to the investing community—to the firms involved in the capital markets—will increase. The select committee must ensure that a mechanism is in place to ensure that a spike in costs does not become institutionalised. That is one of my major concerns about the legislation that this House has passed during my time in Parliament. What is not often understood is that organisations maintain their profitability by being able to manipulate their margins. In times when there is revenue aplenty that does not represent such an obstacle. But if we institutionalise costs into the cost line of businesses when things turn bad—when the revenue line turns down—the ability of organisations to maintain their margins and therefore their profitability is impinged upon because they have no control over the costs that have been built into their businesses through what I roughly call the institutionalisation of costs. So when I sit on the select committee that I understand will be dealing with this legislation I will caution my colleagues that we need to be very cognisant of that concern. In the case of this issue it will not be easy to find solutions. 
This is very complex legislation and we are grappling with very complex issues. I will repeat my cautions. We must not create medicine that is actually worse than the illness. We need to make sure we have a solution that gives the business community and the investor community which we seek to support confidence in the legislation we are framing. With those cautions I conclude.