Copeland Gordon: Securities Legislation Bill — First Reading 
Copeland Gordon: Securities Legislation Bill — First Reading 
[Volume:622;Page:18047] 
GORDON COPELAND (United Future) 
: 
 I find it quite interesting and perhaps quite fortuitous that the Securities Legislation Bill follows hard on the heels of the Overseas Investment Bill because there are quite significant interrelationships between the two things. 
If we look at the big picture—and many of us made this point when talking about the Overseas Investment Bill—we see that New Zealand is dependent on overseas people investing in this country. If the market is to work properly one of the things that overseas people investing in this country need to know and have assurance about is that the local guys and girls do not have information about what is happening on the ground here that is not available to them. Basically I think that is what we are trying to describe however roughly when we talk about insider information. 
I have always thought of it as information gained by a person who has an association with a company—for example as a member of the management or the board—that is then used for personal gain. Using that information personally even under our rather loose arrangements here would probably get that person into trouble but he or she can dodge that by telling someone else the information and having that person undertake the transactions in his or her name on the basis that when a tidy profit is made both share the proceeds. That is all part and parcel of the kind of mischief this bill sets out to overcome. 
Stephen Franks 
: That’s illegal now. 
GORDON COPELAND 
: I appreciate that it is illegal at the moment. I think the case being taken at the moment against David Richwhite and the former chief executive of New Zealand Rail and some other former board members is about the sort of behaviour that everybody says is conceptually quite unacceptable. When people see individuals who quite clearly are on the inside of a company and who have information that the rest of the market does not have using that information to make unconscionably large sums of money in short periods of time to line their own pockets and when people look at the other side of the ledger and realise that others who put their money into the same company at the same time are now significantly disadvantaged sometimes to the point of having very significant losses they can plainly see that that is quite wrong and needs to be stopped. I hope that prosecution will go ahead and deliver some messages to others who might be tempted to go down that route. 
I want to agree though with what Stephen Franks said which was that generally the level of honesty and ethics in New Zealand markets is very good. However there have been a number of rogue people. Some of them have gone right over the boundary into fraud and have ended up in prison. But in some ways it is just as bad to defraud people of funds in other ways simply through using information that one has gained as an insider. 
I think that is the big picture. What we are trying to do with this bill is put together a regime that basically gives people living in New York and investing in a New Zealand company on the New Zealand stock exchange reasonable assurance that they are playing on a level playing field. We have Internet access these days which means that people in New York are able to have as much information about a New Zealand company as the locals do and that is fine. We simply need to give that kind of assurance so that we can encourage free and open markets. 
The other thing this bill does is change the conceptual framework around insider trading from the former understanding that it was a breach of duty to the company to say now that it is actually a breach of duty to the market itself. I think that is a step in the right direction. When I did my commerce degree and studied commercial law—a long time ago now—companies in New Zealand were not able to buy their own shares. Therefore if one was using insider information gained as an insider of the company one was also breaching a duty to that company. That has all changed; companies can now buy their own shares so it is now possible for a company itself to breach insider-trading concepts by utilising information that disadvantages the other participants in the market. The proposed change I think needs to happen. 
I am not quite as negative I think as the member Stephen Franks—and I certainly bow to his expertise in this area. I do not interpret the exceptions quite as he understands them. My understanding is that there will be exceptions for legitimate market-efficient activity such as research and analysis. By that my understanding is that people are still free to use their wits and their brains to figure out information about trends in a company market research and all those kinds of things in order to make an informed decision about whether an investment is a good investment or a lousy one. They have no obligation to tell anybody else about that and I do not think that flows from this bill at all. What the bill is trying to say is that that kind of activity is fine and clearly is not in any sense insider trading or insider information because it is information obtained by if one likes outsiders. 
So I think the exceptions are right and proper but they are imperfect. We have this curious thing which everybody talks about called Chinese walls. I know that Stephen Franks will be very familiar with that concept. Somehow we kid ourselves that people working in the research division of a stockbroking firm for example who find out information will not tell it to another member of the firm who might have an interest in that information. I know that some of the big professional firms do try to maintain these Chinese walls and they have quite strict rules about them but I think it is sometimes a bit of a stretch of the imagination to think they work quite as well as that. Stephen Franks is probably right that what actually happens is that the market sorts these things out itself and adopts some standard practice. I think that as long as that is fair and reasonable there is no problem but there is a point beyond which it should not go. When it goes over that point—and here I very much agree with Stephen Franks—it is important to prosecute and make examples of those people. That in itself basically sends a message to others that it could happen to them and that in itself restrains people and encourages them to act honestly sensibly and ethically which is what we are trying to do here. 
It is therefore very important that a new range of penalties is brought in and new powers are given to the Securities Commission and the Takeovers Panel so that they are armed with a comprehensive and flexible range of penalties and remedies which they can apply on a case by case basis. That seems to me to be a very sensible approach. The other things in the bill that I also think are good include the tightening-up of the investment adviser and investment broker law. It is important that people holding themselves out as experts are actually experts and that they make appropriate disclosures to people before they induce them to part with what might sometimes be almost their lifetime’s savings into the hands of a stranger who claims to have great knowledge and expertise in investing. I think that is a welcome step in the right direction too. 
Overall and as others have said I hope the Commerce Committee will go into the nitty-gritty detail of this bill and ensure that it remains on track in terms of common sense that it does not stray into overkill but that we get it right. With that trust in the select committee that will be looking at the bill I signal United Future’s support for it.