Skip to Content »

Capital market reforms

  • May 2nd, 2009

Yesterday’s  Legal Research Foundation’s capital markets seminar came just after Thursday’s release of the Commerce Select Committee’s woeful report on a bill intended to simplify capital raising. The Bill was a pitiful effort to start with, and the Committee has made it near useless.

The Select Committee’s intuitive nonsense is the kind of political reasoning that turns commercial law to mush. For example:

 "There is an important distinction between the primary and secondary markets. An offer made on the primary market is made by the issuer, who is in possession of any adverse information. It is, therefore, entirely reasonable to expect directors, when seeking new funds, to ensure that all relevant information is disclosed.

But the whole point of their compulsory continuous disclosure rule was that all material information must be made available continously. This is the rule that keeps sensible smaller companies away from listing, but why on earth should not those afflicted with it, already listed, at least be able to benefit from their existing cost of complying.

More worryingly (in terms of whether there is any analytical competence in the committee’s work) if the object of the law is investor protection, of what relevance is the reasonableness of an extra burden on directors, to the investor who buys in the secondary market or from a fresh issue, if it is at the same time and price and with the same information in the market.

 It get worse:

"With secondary market trades, on the other hand, neither party is presumed to have any special knowledge about the issuer; both must rely on information released under continuous disclosure. It would be unreasonable to require directors to undertake due inquiry at all times to support trades on the secondary market.

This concern about fairness to directors is touching, but it was not the issue. Who ever suggested due diligence to "support trading" at all times. The issue is for what purpose is the pointless compulsory disclosure, not whether the directors can do it or not.

Then we have the breathtaking knowledge of these people about matters that waste useless $$$millions each year (albeit to the enrichment of my specialty in the profession)

Prior to a new issue, such due inquiry [due diligence] is appropriate but need not be onerous if there are effective processes in place for continuous disclosure."

I hope this committee effort reflects a rush of blood to the head of presumptuous MPs, and is not instead the evidence of a loss of capacity in the MED to conduct disciplined analysis.

The seminar in Auckland was encouraging for the large number of people who attended. It is not often that commercial lawyers and investment bankers will spend a day watching policy debate. It is very hard to turn it to money. Perhaps it was evidence of nothing better to do.

But most discouraging was the Securites Commission chairman’s feverish disclaimer of any responsibility for the finance industry losses. She made the extraordinary false claim that the finance industry had been "completely unregulated". She must have seen jaws dropping around the room, because a few sentences later the claim was modified to "almost completely unregulated". The industry guys there who knew how much they’d been spending on regulatory compliance for the last 20 years must have been stunned to learn that it must have been completely voluntary.

Instead we had the Commission’s usual "dont look at me" in numerous ways, but mainly in the form of covering clamour for lots of new rules. These people have made pitiful use of their existing powers, Desperate eagerness for more rule-making is their only defence.

There was more of the now common blaming of trustee companies. We should not let passive regulators seize the chance to  deflect their responsibility on to the trustee industry. Trustees may have had weak trust deeds, but it was never their legal responsibility to dictate the form of deeds, and those deeds were fully disclosed.

The Securities Commission had the power to compel witnesses, to issue public warnings without fear of defamation liability, to educate the public to the emptiness of some of the poor deeds. Theyh could have shone light on the dark corners of related party dealing over the last 5 years. They failed.

When I was on the Commission I supported a chair who was happy to do some of that. I am proud of forcing at least some drongos and scamsters to scuttle to the shadows. Several years after leaving the Commission I had to fight them to get the evidence to successfully pursue insider trading in New Zealand’s most presitgious company.

Now of course the Commission are in a frenzy of activity. Too late!



Leave your comments:

* Required fields. Your e-mail address will not be published on this site

You can use the following HTML tags:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>