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Learning From Jim’s Securities Law Predicament

Learning From Anderton’s Securities Law Predicament

Thursday, September 13 2001 Stephen Franks Articles -- Commerce

Mr Anderton should be prosecuted said the NBR on 10 August. That is correct if prospectus law is to be seen to have integrity. But that law should then be repealed. And the experience should be a warning to Commerce Minister Swain to think again on his proposed mandatory disclosure law.

Ordinary business people, and the Crown, have wasted millions in legal fees to comply with the law Mr Anderton didn't seem to know about. It is important for us all that there by "one rule for rich and poor, for the favoured at Court, and the countryman at plough" as John Locke put it. So the law should be applied, then abolished.

Bans on pre-prospectus publicity are a stupid intervention in free commercial speech. I tried unsuccessfully to get the Securities Commission to work on repealing them while I was a member.

I have seen no empirical or other research to show that they serve any purpose. They do protect the self esteem of regulators who believe that the information they prescribe for investors, in formal prospectus and investment disclosure, is all they need and should get. Otherwise they are a perfect illustration of the ignorant approach of securities law around the world to market information flows.

A study for the Ministry of Commerce some years ago focused on how these rules impede raising venture capital. Jenny Morel found the ban prevents the normal iterative process of testing a market to refine the terms and conditions of an offer. It means that promoters waste capital and time on offerings that don't proceed once market reaction is evident. It means that the normal wide market assimilation and testing of information, is instead tightly channelled through underwriters.

Paradoxically the ban may give unwarranted authority to prospectus forecasts because normal debate and challenge about an offering can not start until the formal disclosure is available.

The New Zealand government has wasted millions trying to avoid but not evade this area of the law. Market softening "image advertising" accompanies major Crown offerings. It has attracted adverse Securities Commission scrutiny.

It is only fair that Mr Anderton should be subjected to the same rules that everyone has had to obey. But we should not make a mistake of thinking there is any ethical principle at stake here other than fairness. It is foolish law of which he has fallen foul.

Slogan thinking about information is the mark of political interventions in securities markets. Mr Anderton's cabinet colleague, Mr Swain is about to afflict us with Australian type rules for continuous disclosure. They are even more foolish and unsophisticated than pre-prospectus publicity bans. The SEC in the US is having second thoughts about its latest efforts in this area. It tried to "toughen up" by blocking the analyst communication channels that have assisted the efficiency of US markets.

Meanwhile we await Mr Swain's release. It will do little to address dishonesty and breach of fiduciary duties in relation to company information. But it will catch more unfortunates, like Mr Anderton. And it will enrich lawyers advising perplexed business people. Such oblique attempts to get at insider trading make sense only if you believe in the flat earth school of disclosure, that is, information can go to everyone at the same time, only through authorised channels, as soon as it is known to the company, and in a form equally meaningful to every recipient. A round world view would instead acknowledge that what can be achieved, with proper resolution to enforce, is a culture in which people with information privilege are not free to trade until the effect of it has disseminated.

When I conceived the current New Zealand Stock Exchange disclosure rules I studied the rules of the London, Sydney, New York, and Toronto regimes. They were compared with the actual practice reported from those markets. "Spanish customs" and exceptions were interpreted to allow something quite different from what the rules said. New Zealand Stock Exchange Listing Rule 9.1 and 9.2 were designed to be a fair reflection of actual best practice.

Mr Swain has vowed to sweep that away. With the help of his inexperienced officials he will no doubt do just that. We could see a securities market equivalent to our naïve Privacy Act. Our Privacy Act simply converted into law some sweeping OECD statements of principle. All other OECD countries qualified them with common sense loopholes and exceptions. Not New Zealand. The result is a privacy law that is widely resented.

There are plenty of useful things to be done in reforming insider trading law. Another naïve prescription for mandatory continuous disclosure is not one of them.

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