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Oversight review of NZX 2006 [2007] NZSecCom 3 (28 June 2007)
Last Updated: 11 November 2014
OVERSIGHT REVIEW OF NZX 2006
28 June 2007
CONTENTS
GLOSSARY OF KEY TERMS AND
ABBREVIATIONS
Structure
of NZX and its markets
EXECUTIVE
SUMMARY
Findings
and recommendations
INTRODUCTION
CONFLICT
MANAGEMENT
Autonomy
of the regulatory function
Commercial
pressure to reduce regulatory standards
Recommendations
THE
NZAX MARKET
Review
of the NZAX
Standards
applied to the NZAX market
Recommendations
NZX'S
FRONTLINE REGULATION
Minimising
the risk of non-compliance
Admission
of issuers
Approval
of market participants
Recommendations
NZX
DISCIPLINE
Matters
considered
Process
and procedure
Publication
of decisions
Amendments
to the NZX discipline rules
Recommendations
THE
SPECIAL DIVISION
Independent
solicitor and autonomy
Disciplinary
action in respect of NZX
Recommendations
RECOMMENDATIONS
ARISING FROM THE REVIEW OF THE 2005 YEAR
Update
on progress made in implementing the recommendations
CONCLUSION
APPENDIX
Scope
of review
Background
to review
Process
GLOSSARY OF KEY TERMS AND ABBREVIATIONS
Advisor
An individual
who has been accredited and approved by NZX to advise clients on any of the
markets provided by NZX.
Annual Regulatory Report
An annual
report required of NZX Discipline under the NZX Discipline
Rules.
Appointed Solicitor
NZX Solicitor who acts as a liaison
between NZX and the Special Division.
Business Rules
The rules
made by a securities exchange that govern the conduct of business on securities
markets operated by the securities exchange
and persons authorised to undertake
trading activities on those securities markets.
Client and Market
Services
Formerly known as Listed Company Relations - a team which deals with
company announcements.
Conduct Rules
The Participant Rules and
Listing Rules of NZX.
FSAP
Financial Sector Assessment Programme,
conducted by the International Monetary Fund.
Futures and Options
Participant
A Futures and Options Firm, Futures and Options Introducing
Broker or a Futures and Options Advisor designated by NZX as such under
the NZX
Futures and Options Rules.
IOSCO
International Organization of
Securities Commissions.
IOSCO Principles
IOSCO's Objectives and
Principles of Securities Regulation (October 2003) which are accepted as the
international standards for securities
regulation by the IMF and the World
Bank.
IOSCO Report
Issues Arising From Exchange Evolution - Final
Report (November 2006) by the Technical Committee of
IOSCO.
Issuer
Any entity which is or has been listed on the NZSX,
NZAX or the NZDX.
Listing Rules
Rules made by NZX that govern the
conduct of Issuers listed on NZX's markets, approved as Listing Rules under the
Securities Markets
Act 1988.
Listing Subcommittee
A committee of
four persons, any two of whom may be used by NZX Regulation to review offer
documents in assessing listing applications.
MAP
Market
Announcements Platform.
Market Participant
An organisation
accredited by NZX to participate in the markets that NZX
operates.
Market Supervision Group
A group within NZX led by the
Head of Market Supervision comprising two teams - NZX Regulation and Participant
Compliance.
NZAX
New Zealand Alternative Stock
Market.
NZSE
New Zealand Stock Exchange (the former name of
NZX).
NZSX
New Zealand Stock Market.
NZX
Discipline
A disciplinary body constituted by NZX under the NZX Discipline
Rules.
NZX Discipline Rules
The NZX Discipline Rules as made by
NZX.
NZX Regulation
A team within NZX's Market Supervision Group
which focuses on regulation of Issuers.
NZX
New Zealand Exchange
Limited.
Participant Compliance
A team within NZX's Market
Supervision Group which focuses on regulation of Market
Participants.
Participant Rules
Rules made by NZX that govern the
conduct of business on securities markets operated by NZX and persons authorised
to undertake trading
activities on those markets, approved as Business Rules
under the Securities Markets Act 1988.
Review Period
2006 calendar
year.
SMARTS
Securities Markets Automated Research Trading and
Surveillance - the real-time electronic market surveillance system that
generates
alerts indicating unusual trading.
Solicitor's
Handbook
Procedural handbook used by NZX Solicitors in processing
applications and regulating Listed Issuers under the Listing
Rules.
Special Division
The division of NZX Discipline that
exercises the powers and functions of NZX in relation to NZX or a related entity
as a Listed Issuer.
Sponsor
An entity or partnership which is
approved by NZX to assist a prospective NZAX Issuer in the listing or quotation
of securities.
Structure of NZX and its markets
![Structure of NZX and its markets](2007_300.png)
EXECUTIVE SUMMARY
- The
Securities Commission has reviewed NZX's performance of its regulatory functions
as a registered exchange under the Securities
Markets Act 1988. This review, the
second oversight review of NZX conducted by the Commission, focussed on NZX's
arrangements in
the 2006 calendar year for discharging its obligations.
- We
report on NZX's performance under the following headings:
- Conflict
management
- The
NZAX market
- NZX's
frontline regulation
- NZX
Discipline
- The
Special Division
- Recommendations
arising from the review of the 2005 calendar year
- The
Commission's overall conclusion is that NZX is satisfying its obligation to
operate its markets in accordance with its conduct
rules.
- NZX's
performance as a registered exchange is good. However, the Commission has made
recommendations for improvements in relation
to a number of areas. These
recommendations are set out below.
- The
Commission has communicated its concerns and recommendations to NZX, NZX
Discipline and the Special Division. Responses of the
parties in regard to the
recommendations and the Commission's view on those responses are set out
below.
- NZX,
NZX Discipline and the Special Division have already agreed to take specific
action in response to certain recommendations and
have committed to do so by 30
September 2007. If NZX, NZX Discipline and the Special Division take these
actions within the stated
timeframe, the Commission believes this will address
those recommendations.
Findings and
recommendations
Conflict management
For-profit exchanges face particular risks as a result of their competing
commercial and regulatory interests. NZX is aware that some
parties perceive
that NZX is subject to conflict between its commercial and regulatory functions
and the risks that arise from such
conflict. The Commission is satisfied that
NZX has satisfactory practical measures in place to address those issues at this
time.
However, these measures do not mean that these risks are not relevant to
NZX.
NZX considers that ensuring the proper regulation of its markets is in NZX's
best interests as it engenders confidence which subsequently
increases
investment in the markets. Nevertheless, the existence of these incentives does
not mean there is not an inherent conflict
of interest. The Board of NZX accepts
that there is a conflict that theoretically could arise due to its listed
company status, and
the Board states that it believes that this conflict is
appropriately managed, and that the conflict is kept under review at the
Board
level. The Commission welcomes these comments from NZX.
- NZX should
ensure that the Board is provided with relevant and up-to-date information on
conflict management in relation to for-profit
exchanges and that this
information is subject to regular discussion at Board meetings.
- NZX should
ensure that the practical measures used to ensure the practical separation
between its commercial and regulatory functions
have reference to the
information in relation to for-profit exchanges the Board receives on conflict
management.
NZX has agreed to prepare a Board paper updating the
Board on the IOSCO Report and arrangements that other for-profit exchanges have
implemented to manage conflicts (to the extent this information is publicly
available). The Board has determined to discuss this
matter each November at its
annual two-day Board strategy review. NZX has also agreed to have regard to this
information in its practical
measures to ensure separation between its
commercial and regulatory functions.
The NZAX market
The Commission does not have any recommendations in this area. The Commission
is satisfied that NZX is applying rigorous regulatory
standards to the NZAX
despite its smaller size and less demanding Listing Rules. However, the
Commission is concerned that the lack
of understanding about the lower-cost NZAX
regime may disadvantage the NZAX in market competition with other sources of
capital,
such as unregistered exchanges and private equity. The Commission
considers that education of Sponsors and NZAX Issuers as to the
regulatory
differences between the NZAX and the NZSX should be a priority for NZX. The
Commission anticipates that the recently commenced
education programme will help
to achieve this. The Commission is concerned that there may be an element of
misunderstanding about
the NZAX Listing Rules and the effect of those Listing
Rules and that this has been entrenched since the NZAX was created. The
Commission
is pleased that NZX has undertaken the review of the NZAX market and
supports the actions it has taken to address the issues which
were identified
out of that review.
NZX's frontline regulation
The Commission does not have any recommendations in this area. NZX is taking
appropriate action to minimise the risk of non-compliance
through various
mechanisms, including waivers, education initiatives and using disciplinary
proceedings as a deterrent. The Commission
is satisfied that the processes and
procedures which NZX uses to enforce compliance with the Listing Rules and
Participant Rules
in respect of admission of Issuers or approval of Market
Participants are satisfactory and applied properly.
NZX Discipline
The Commission is satisfied that NZX Discipline is independent of NZX and is
producing work of a high standard. However, the Commission
did identify some
issues in the course of the review. In particular, the Commission was concerned
to find that NZX Discipline had
sought an advance opinion from NZX on the
procedure which it proposed to follow in a matter before it. The Commission
considers this
was inadvisable.
The Commission is concerned that Market Participants who have been found to
have breached the Participant Rules are not being identified.
Not only is
publication a significant tool in deterring breaches, but it is also imperative
that NZX Discipline be seen to be sanctioning
Market Participants for any
breaches. The Commission believes that market confidence will be increased if
NZX Discipline is transparent
in naming Market Participants who have breached
the Participant Rules.
The Commission found during the review that NZX Discipline had ruled on the
scope of its review powers under the NZX Discipline Rules.
This ruling was
contrary to submissions by NZX, which would have narrowed the scope of the
review power. Subsequently NZX has sought
to amend the relevant NZX Discipline
Rule, effectively overturning NZX Discipline's ruling for future cases. The NZX
Discipline Rules
do not at present give NZX Discipline any formal role in
reviewing amendments. The Commission has concerns about the impact of this
on
NZX Discipline's autonomy and considers that NZX Discipline should be given an
advisory role in determining any changes to the
NZX Discipline Rules.
It appears to the Commission that although NZX Discipline has stated that it
does not feel its access to resources is in any way limited
by NZX, and NZX has
repeatedly asked NZX Discipline whether it requires further resources, that NZX
Discipline in fact requires more
resources in order to action non-urgent work
within reasonable timeframes. The Commission is concerned at extensive delays
which
have occurred in two matters in particular, the first of which is the
review of the NZX Discipline Rules and the second of which
involves a third
party.
The Commission also considers that it would be valuable if information about
the role, membership and mandate of NZX Discipline were
more readily available
to the market. Although information is provided in the Annual Regulatory Report,
the Commission does not consider
that this is sufficient.
- NZX
Discipline should ensure that, when determining the procedure to apply to a
proceeding before it, it treats all parties evenly.
- NZX
Discipline should be seen to be transparent in exercising its discretion whether
to publish decisions which identify Market Participants
who have breached the
Participant Rules. Where a Market Participant's details are not published, NZX
Discipline should disclose its
reasons for withholding this
information.
- NZX and NZX
Discipline should review the NZX Discipline Rules in order to give NZX
Discipline input into its own Rules, and amendments
arising from this review
should be included in the amendments which are presently being considered by NZX
Discipline.
- NZX
Discipline should review its resource requirements and structure, and
communicate its needs to NZX, so that delays in dealing
with non-urgent work are
minimised or removed.
- NZX should
provide more information about the role, membership and mandate of NZX
Discipline on its website. In particular, the contact
details for NZX Discipline
should be included on the NZX website.
NZX Discipline agrees
that it should treat all parties evenly.
NZX has agreed to provide more information about the role, membership and
mandate of NZX Discipline on its website.
The Special Division
The Commission is satisfied that the Special Division is operating
effectively. In particular, the Commission noted one disciplinary
matter
regarding a subsidiary of NZX that arose during the review period. It appears
that the Special Division endeavoured to act
in a way that was consistent with
NZX Regulation's approach and further, that it sought advice on the course of
action it should
take.
The Commission considers that it would be valuable if information about the
role, membership and mandate of the Special Division were
more readily available
to the market. Although some information is provided on the NZX website
concerning the role of the Special
Division, it is not extensive or easy to
find.
- NZX should
increase the amount of information it provides about the Special Division and
make it easier to find. In particular, the
contact details for the Special
Division should be included on the 'Contacts' and 'Supervision of NZX' pages of
the NZX website.
NZX has agreed to provide more information
about the Special Division on its website, in consultation with the
Commission.
Recommendations arising from last review
The Commission made 21 recommendations in the course of the last review. NZX
had responded to some of these prior to the report being
published, and
responded to the remainder on 7 December 2006. The recommendations, NZX's
responses and any additional comments from
the Commission are included
in this report ************************at page
25********************.
INTRODUCTION
- This
is the second oversight review of NZX's performance of its regulatory functions
as a registered exchange under the Securities
Markets Act 1988 and covers the
2006 calendar year.
- The
first review of NZX focussed on the activities of NZX more generally. The report
provided a general overview of the business and
processes of NZX and its
regulatory function. The 2006 review updates progress made from the first
review, and focusses on three
specific areas: the management and operation of
the NZAX market, the admission or approval of Issuers or Market Participants,
and
NZX's role in minimising the risk of non-compliance with the Listing Rules
and Participant Rules. These three areas reflect the areas
in which the
Commission considered deeper review and analysis would be valuable.
- NZX
has obligations under section 36G of the Securities Markets Act 1988 to secure
compliance with its Listing and Business Rules,
and to perform any obligations
that lie on NZX under those rules.
- The
Commission has statutory functions to review practices relating to securities
and activities on securities markets, and to comment
on these. In relation to
NZX, performance of these functions requires the Commission to keep under review
and comment on NZX's performance
of its obligations as a registered exchange.
- The
Terms of Reference for the Commission's review, along with the scope of and the
background to the review and the process that
we followed, are set out in the
Appendix to this report.
- The
report contains six sections with the following headings:
- Conflict
management
- The
NZAX market
- NZX's
frontline regulation
- NZX
Discipline
- The
Special Division
- Recommendations
arising from the review of the 2005 calendar
year.
CONFLICT
MANAGEMENT
- In
the 2005 oversight review, the Commission considered the conflict inherent in a
demutualised exchange between its regulatory and
commercial functions. The
Commission's report stated:
"The Board of NZX has told the
Commission that whilst it does not consider that such a conflict in fact exists,
NZX and the NZX Board
are aware that the perception of such a conflict can exist
and is held in some quarters. The NZX Board considers that addressing
this
perception is important and it is engaged to ensure that the perception of such
a conflict is addressed, including by keeping
under review its regulatory
structures and their position within the organisation."
- The
Commission considered that there was in practice effective separation between
NZX's supervisory functions and its corporate activities
at the time of the 2005
oversight review. However we considered that this issue was of ongoing relevance
to the oversight review
process. Accordingly, this issue was specifically
addressed again during the 2006 oversight review.
- In
November 2006 the Technical Committee of IOSCO released a report entitled
'Regulatory Issues Arising From Exchange Evolution -
Final Report'. The IOSCO
Report discusses the implications and impact of a changing environment on the
regulatory role of stock exchanges.
A number of key issues were identified,
including the need to balance the commercial and public interest functions of a
demutualised
exchange. While the Commission notes that conflicts arise in other
ownership structures as well, in this report we comment only on
the conflict
that is particular to demutualised, listed stock exchanges.
- In
particular, the IOSCO Report identifies a potential cause for concern in the
following terms:
"for-profit exchanges may reduce the resources
they devote to regulation. Worse, they may place insufficient value on the
regulatory
process, fail to sustain a strong regulatory culture and be less
willing to co-operate with their supervisory authorities and other
regulatory
bodies."
- The
Commission acknowledges that it did not find any evidence that NZX was
undervaluing its regulatory function in any of the ways
outlined in this
quote.
- The
Board of NZX has stated that it accepts that there is a conflict that
theoretically could arise due to its listed company status,
and in that respect
the Board acknowledges the statements in the IOSCO report concerning conflicts
that exist in a for-profit exchange
environment. The Commission welcomes these
comments from NZX. The Board has stated it believes that in the current
circumstances
the conflict is more theoretical than real.
Autonomy of the regulatory
function
- Information
obtained during the 2006 oversight review demonstrated that NZX views its
regulatory function as an integral part of the
NZX business. In particular, NZX
noted it is devoting sufficient resources to regulation and has satisfactory
physical separation
between its regulatory and commercial teams. NZX does not
consider that creating an organisationally separate regulatory function
is an
appropriate course of action at this time. NZX has concerns that separation
would make the commercial arm of NZX more vulnerable
to takeover and would
diminish the reputation of the NZX business.
- However,
NZX does have various mechanisms in place in order to increase the autonomy of
NZX Regulation, including:
- physical
separation of NZX Regulation staff from non-Regulation staff through the
structure of the NZX offices;
- a
secure hard drive for NZX Regulation files which cannot be accessed by
non-Regulation staff;
- the
Head of Market Supervision is provided with time at each Board meeting so that
she can raise any concerns without the CEO present;
and
- NZX
Regulation, NZX Discipline and the Special Division have open-ended budgets, to
allow for the execution of their regulatory functions
without financial
constraints.
- During
the review period NZX made a number of organisational changes. In respect of the
regulatory function specifically, NZX moved
the Client and Market Services team
from the Market Supervision Group to the Information and Fund Businesses Group.
However, this
team still performs a regulatory function and works closely with
the Regulation team. The Commission does not believe that this materially
changes the treatment of the regulatory and commercial functions.
- The
Commission notes that the IOSCO report does not go so far as to recommend that
exchanges adopt a particular structure. However,
the Commission intends to keep
the risks identified in that report under review and expects NZX to do the same.
Notwithstanding this,
the Commission considers that the mechanisms currently in
place are functioning as intended and are satisfactory at the present time.
Commercial pressure to reduce regulatory
standards
- It
was noted by NZX in the course of the review that some companies perceived the
regulatory requirements for listed companies, including
the Listing Rules and
requirements pursuant to the Securities Markets Act 1988, as a barrier to
listing or an undesirable consequence
of listing. The Commission considers that
in light of the availability of alternative vehicles for capital-raising in New
Zealand
markets there is a risk that NZX will feel commercial pressure to reduce
regulatory standards. This type of commercial pressure was
identified in the
IOSCO report as potentially giving rise to a 'race to the bottom' in regulatory
standards.
- The
Commission notes however, that there are checks and balances on any proposal to
amend the Listing Rules, including comments from
the Commission itself.
- NZX
is firmly of the view that membership of a regulated market is a benefit to
companies. It increases investor confidence in a company
and increases a
company's ability to communicate clearly and effectively with its investors. The
Commission agrees membership of
a regulated market can be a significant
benefit.
- NZX
particularly noted that the regulatory function, and the effective operation of
that function, contributed positively to NZX's
commercial reputation and brand.
The Commission sought information about how NZX positively promoted its
regulatory function. NZX
demonstrated it was providing stakeholders with
information explaining the benefits of listing on a regulated market. For
example,
NZX staff presented seminars at which Issuers were invited to tell the
story of their listing and the benefits arising from that.
The Commission is
satisfied that NZX is acting appropriately and proportionately to improve
stakeholders' perceptions of the regulatory
requirements of the Listing Rules as
a benefit. It considers this may further reduce the risk that NZX will face
commercial pressure
to diminish regulatory standards.
Recommendations
- For-profit
exchanges face particular risks as a result of their competing commercial and
regulatory interests. NZX is aware that some
parties perceive that NZX is
subject to conflict between its commercial and regulatory functions and the
risks that arise from such
conflict. The Commission is satisfied that NZX has
satisfactory practical measures in place to address those issues at this time.
However, these measures do not mean that these risks are not relevant to NZX.
- NZX
considers that ensuring the proper regulation of its markets is in NZX's best
interests as it engenders confidence which subsequently
increases investment in
the markets. Nevertheless, the existence of these incentives does not mean there
is not an inherent conflict
of interest. The Board of NZX accepts that there is
a conflict that theoretically could arise due to its listed company status, and
the Board states that it believes that this conflict is appropriately managed,
and that the conflict is kept under review at the
Board level. The Commission
welcomes these comments from NZX.
NZX should ensure that the Board is
provided with relevant and up-to-date information on conflict management in
relation to for-profit
exchanges and that this information is subject to regular
discussion at Board meetings.
NZX should ensure that the measures
used to ensure the practical separation between its commercial and regulatory
functions have reference
to the information in relation to for-profit exchanges
the Board receives on conflict
management.
THE NZAX MARKET
Review of the NZAX
- During
the review period NZX undertook its own review of the NZAX market. The NZAX
market is designed to provide an alternative market
for smaller Issuers.
Accordingly, it incorporates a number of changes from the structure, rules and
trading environment of the NZSX.
- NZX
consulted with a wide range of stakeholders including NZAX Issuers, Sponsors,
Market Participants and Advisors, in relation to
the performance and design of
the NZAX market. NZX received a good level of feedback to its review, and a
number of outcomes were
identified. NZX reported on the outcomes as follows:
- few
NZAX Issuers had a clear understanding of the distinction between the NZAX and
NZSX rule structures and how those differences
can be used to better meet the
business objectives of the NZAX Issuer. This was identified as a problem
stemming in part from lack
of information dissemination by the Sponsor network
and NZX, and the present rule set;
- stakeholders
more generally, including legal advisors, did not have a good understanding of
the differences introduced by the NZAX
structure and
rules;
- many
stakeholders did not believe the Sponsor concept had broadened the number of
organisations bringing companies to market, despite
the significant number of
organisations who had been approved as Sponsors;
- the
NZAX trading microstructure was not considered to have provided the desired
improvement in the underlying liquidity in the NZAX
market;
- stakeholders
were satisfied with the foundation of the NZAX Listing Rules, being continuous
disclosure and governance requirements,
and raising capital in the NZAX market
is widely viewed as efficient and cost-effective;
- the
majority of stakeholders considered the NZAX market lacked profile after an
enthusiastic launch.
- Following
this review, NZX developed a number of initiatives to address the issues arising
from the review. It reported these to the
market in a release dated 31 August
2006. The trading structure of the NZAX was proposed to be changed to be in line
with the NZSX,
and changes to the 'tick size', or the minimum amount that the
price of a share on the market can change, and an extension to trading
hours
were effected on 2 October 2006. The removal of the anonymous call auction
became effective on 19 March 2007.
- The
Sponsor network was identified as containing a high proportion of effectively
inactive Sponsors. NZX held seminars for Sponsors
to better educate them on the
special nature of the NZAX and has said it intends to review the number of
Sponsors.
- NZX
also identified that although stakeholders were of the impression that the NZAX
Listing Rules were virtually indistinguishable
from the NZSX Listing Rules, in
fact the issue appeared to be the level of understanding of the differences. NZX
has undertaken an
education initiative to further explain the differences
between the Listing Rules. NZX has sought to amend the NZAX Listing Rules
to
reflect the format of the NZSX Listing Rules, so that the differences between
the Listing Rules are more easily identified. These
amendments came into effect
on 1 March 2007. NZX has also formulated an ongoing plan to improve the profile
of the NZAX market.
- The
Commission is pleased that NZX undertook a review of the NZAX and is
endeavouring to distribute more information about the NZAX
and raise its
profile. The Commission is concerned that there may be an element of
misunderstanding about the NZAX Listing Rules
and the effect of those Listing
Rules and that this has been entrenched during the period since the NZAX was
created. The Commission
notes that the NZAX faces pressure due to the ability of
unregistered exchanges to operate in New Zealand.
Standards applied to the NZAX
market
- We
reviewed several files in which NZAX Issuers made applications under the Listing
Rules. The Commission noted that although the
requirements under the NZAX
Listing Rules are somewhat less demanding than those under the NZSX Listing
Rules, the Market Supervision
team applied the correct processes and reviewed
documentation with the same level of rigour. The Commission is pleased to see
that
NZX makes the same effort to enforce the NZAX Listing Rules despite the
smaller size of the
market
Recommendations
- The
Commission does not have any recommendations in this area. The Commission is
satisfied that NZX is applying rigorous regulatory
standards to the NZAX despite
its smaller size and less demanding Listing Rules. However, the Commission is
concerned that the lack
of understanding about the lower-cost NZAX regime may
disadvantage the NZAX in market competition with other sources of capital,
such
as unregistered exchanges and private equity. The Commission considers that
education of Sponsors and NZAX Issuers as to the
regulatory differences between
the NZAX and the NZSX should be a priority for NZX. The Commission anticipates
that the recently commenced
education programme will help to achieve this. The
Commission is concerned that there may be an element of misunderstanding about
the NZAX Listing Rules and the effect of those Listing Rules and that this has
been entrenched since the NZAX was created. The Commission
is pleased that NZX
has undertaken the review of the NZAX market and supports the actions it has
taken to address the issues which
were identified out of that
review.
NZX'S FRONTLINE REGULATION
Minimising the risk of non-compliance
- The
Foreword to the NZX Listing Rules states "Risk of non-compliance with the
Rules is one of many risks market participants must assess in valuing
investments, but compliance
is mandatory and NZX will endeavour to minimise the
risk of non-compliance", and further, "the Rules are not intended to result in
merit regulation by NZX of issuers availing themselves of market facilities. A
regulatory approach based on attempted merit assessment
of issuers by NZX would
offer a spurious assurance to investors."
- During
the course of this oversight review the Commission sought further information on
how NZX endeavoured to minimise the risk of
non-compliance. It is apparent that,
although NZX does not undertake active supervision of the Listing Rules it does
endeavour to
minimise the risk of non-compliance in a number of ways, including:
- issuing
reminders of periodic obligations such as Half-Yearly Reports;
- using
the consequences of breaching the Listing Rules as a
deterrent;
- encouraging
self-reporting of breaches by using this as a mitigating factor when seeking
penalties from NZX Discipline;
- ensuring
that market infrastructure is applied which allows NZX to monitor trading
activity and identify potential breaches;
- ensuring
that Market Participants, the public, and other stakeholders are able to
communicate any potential breaches to NZX;
- utilising
detailed checklists and other documentation to check required disclosure
documents.
- The
Commission is satisfied that NZX is endeavouring to minimise the risk of
non-compliance with the Listing Rules. We note that NZX
does not merit regulate
(in that it does not attempt to determine whether a security listed on its
markets is a good investment).
The Commission considers that this is appropriate
and notes that it is consistent with international practice. The Commission
believes
that the Foreword of the Listing Rules is clear about the scope of
NZX's actions and the fact that risk does exist despite the role
of NZX as the
frontline regulator of the NZX markets.
- NZX
granted waivers and made rulings over the review period. Waivers and rulings
minimise the risk of non-compliance as they recognise
that the Listing Rules
cannot contemplate every commercial arrangement and that technical breaches may
therefore arise. The Commission
considers that NZX used its discretion to grant
waivers and make rulings appropriately during the review period and that the
decisions
which were released clearly set out the grounds for reaching the
decision and any conditions attached. This provides a valuable precedent
to
other parties who seek similar waivers or rulings. The Commission found that NZX
uses these precedents when considering applications,
leading to consistency
across the decisions.
- The
Commission also notes that during the review period NZX amended Participant Rule
17.10, which now requires market participants
to report any breaches by
themselves or another market participant. NZX did not consider that instances of
self-reporting had increased
over the review period.
- NZX
provides ongoing education to Issuers and Market Participants about their
obligations under the Listing Rules and Participant
Rules, through the Issuer
Relation Updates, monthly Market Insight document, seminars, guidance notes,
forums such as the Legal and
Advisory Board, Listed Companies Association and
the Securities Industry Association, and the Top Tips document and practice
notes.
Admission of Issuers
- NZX
Regulation is not involved in seeking companies who may wish to have securities
quoted on an NZX market. The Market Supervision
team reviews documentation
required by the Listing Rules to be provided by companies when they seek listing
or quotation. There are
set procedures and checklists which NZX staff are
expected to refer to when reviewing this documentation. Commission staff
reviewed
several files in relation to listing and are satisfied that NZX staff
had access to these procedures and checklists and used them
to review the
documentation.
- NZX
Regulation staff did attend three listing presentations in the course of the
review period. It was clear that these staff were
presenting information about
the regulatory requirements and obligations of
listing.
Approval of Market
Participants
- NZX
Participant Compliance has an established procedure for approving Market
Participant applications in the form of a checklist and
any follow-ups required.
During the course of the 2006 review a number of applications were reviewed and
there was no deviation from
this procedure.
- The
current procedure is the same as was observed during the 2005 review. The
Commission is satisfied that these procedures were consistently
applied.
Recommendations
- The
Commission does not have any recommendations in this area. NZX is taking
appropriate action to minimise the risk of non-compliance
through various
mechanisms, including waivers, education initiatives and using disciplinary
proceedings as a deterrent. The Commission
is satisfied that the processes and
procedures which NZX uses to enforce compliance with the Listing Rules and
Participant Rules
in respect of admission of Issuers or approval of Market
Participants are satisfactory and applied
properly.
NZX DISCIPLINE
- NZX
Discipline is an independent body constituted under the NZX Discipline Rules.
Its principal function is to hear and determine,
without bias and after giving
the parties fair consideration, various matters under NZX Discipline Rule 1.1,
including matters involving
Market Participants, Issuers, and Futures and
Options Participants.
- The
Commission considered the overall management and processes of NZX Discipline in
the course of the 2005 review. The Commission
considered that this body should
be subject to further review in the course of this oversight review, because of
its important role
in the NZX regulatory structure.
- As
noted in the course of the last review, the Commission appreciates the work
undertaken by NZX Discipline and the professionalism
displayed by its members in
addressing issues brought to them for
consideration.
Matters considered
- It
is key to the effective functioning of the NZX regulatory function that NZX
Discipline is seen to be acting as an independent tribunal.
The Commission is
satisfied that NZX Discipline is independent from NZX. However, the Commission
did identify some issues in the
course of the review.
- The
Commission reviewed copies of all decisions taken by NZX Discipline and the
supporting documentation kept on file by NZX Discipline.
In the review period,
NZX Discipline considered 10 matters, comprising five matters under the Listing
Rules, four under the Participant
Rules, and one review of a decision by NZX
Regulation. NZX Discipline also published its first Annual Regulatory Report as
required
by the NZX Discipline Rules.
- The
Chairman of NZX Discipline noted the outstanding effort by NZX Discipline's
members and reported that he considered NZX Discipline
had satisfied its
functions well during the review period. The Commission also received feedback
on the Discipline process from NZX
staff members which was generally
positive.
- The
Commission does have some concerns about the amount of information that is
available to the public about the role and responsibilities
of NZX Discipline.
The Commission is of the view that NZX Discipline is a key part of the NZX
regulatory structure, and that information
regarding NZX Discipline should be
readily available to the public on an ongoing basis, rather than just in the
Annual Regulatory
Report.
Process and
procedure
- The
Commission noted that there had been an increase in the number of cases which
NZX was seeking to settle rather than taking to
a summary or full hearing by NZX
Discipline. It was noted that NZX Discipline plays a role in approving
settlements, and the Commission
is satisfied that NZX Discipline exercises
independent judgment as to the form and quantum of penalties reached by
settlement.
- Some
issues were identified around the length of time NZX Discipline had taken to
respond to two issues which required its attention.
NZX Discipline recognised
that delays had occurred, but this appeared to be related to a lack of resources
to deal with the issues
(arising in part from the part-time nature of the
Discipline members' roles) rather than a lack of knowledge or expertise.
- In
particular, the Commission notes that NZX Discipline has been in receipt of a
policy paper prepared by NZX regarding changes to
the NZX Discipline Rules for
approximately ten months. The Commission is concerned that NZX Discipline has
not yet addressed this
issue and considers that the process should be expedited.
The second issue involves a third party in the form of an NZSX-listed Issuer,
and the Commission is concerned that the delays in the matter may have reflected
poorly on NZX Discipline in the market. Apart from
these two matters, NZX
Discipline adhered to the timeframes set down in the NZX Discipline Rules.
- We
note that NZX has repeatedly asked NZX Discipline whether it is adequately
resourced and that it has not received requests for
further resources. The
Commission considers that this issue needs to be readdressed by NZX and NZX
Discipline.
- It
was noted in the course of the file review that NZX Discipline was aware of the
need to remain independent from NZX when determining
the procedure that it would
take when considering matters. The Commission observed that in the course of NZX
Discipline consulting
with parties on matters, NZX and NZX Discipline had
occasional differences of opinion on the correct procedure to be followed in
a
matter and noted that NZX Discipline's response to NZX concerns was robust and
measured. NZX Discipline also noted that it had
sought and received independent
legal counsel where it considered it was necessary.
- There
was an instance during the review period where NZX Discipline was required to
determine the procedure for a matter appearing
before it. NZX Discipline formed
a view on what the procedure would be and drafted a letter to both NZX and the
other party setting
out its view. However, before contacting both parties via
this original letter, NZX Discipline contacted NZX Regulation, allowing
NZX
Regulation to express an opinion on the proposed approach before it was
communicated to both parties. The Commission believes
that this course of action
was inadvisable. However, the Commission notes that in the event the other
party's submissions on the
proposed approach to the procedure were adopted and
that NZX Discipline is sensitive to the need to be seen to be acting
impartially.
Publication of
decisions
- Under
Part 11 of the NZX Discipline Rules, NZX Discipline has the discretion to hand
down various penalties, including a private reprimand
and/or issue a public
statement regarding the breach. The Commission also refers to Rule 5.17 of the
NZX Discipline Rules, which
sets out the process for publication of the
statement of reasons of NZX Discipline in reaching a decision and awarding a
penalty.
- It
appears to the Commission that rather than applying its discretion under the NZX
Discipline Rules, NZX Discipline is instead applying
a blanket policy across
every decision. NZX Discipline very rarely publishes the names of Market
Participants who have breached the
Participant Rules and instead generally
provides an anonymous notification of the breach to other Market Participants,
as well as
imposing a monetary penalty against the Market Participant.
- NZX
Discipline withholds publication of Market Participant details due to concerns
about the impact on investor confidence in the
profession. NZX Discipline
believes that media attention arising from the release of NZX Discipline
decisions may be disproportionate
to the breach. NZX Discipline is concerned
that media attention on breaches by Market Participants may give the impression
that the
industry has widespread problems and that subsequently investors may be
less inclined to rely on firms which have suffered negative
press. NZX
Discipline considers this may create commercial pressure for firms. However, NZX
Discipline publishes the decisions it
reaches in respect of Issuers (although we
note that it has withheld confidential or commercially sensitive information
where appropriate).
The Commission does not consider that there are grounds for
a distinction to be drawn between Issuers and Market Participants in
terms of
publication by NZX Discipline.
- The
Commission considers that publication of the names of Market Participants who
are guilty of breaches of the Participant Rules
will not have the effect
anticipated by NZX Discipline. In fact, the Commission considers that
publication has significant benefits.
The risk of being publicly censured is a
strong deterrent to Market Participants. In addition, public confidence is
likely to be
advanced if the Participant Rules can be seen to be enforced in
respect of particular Market Participants.
- The
Commission considers that market confidence in the ability of NZX Discipline to
properly sanction those Market Participants who
commit breaches should be a
paramount concern for NZX Discipline. Accordingly, the Commission considers that
publication of Market
Participant details where they have committed a breach
should be the default position, and be deviated from only in exceptional
circumstances
where serious confidentiality, commercial sensitivity or public
interest factors required this, or where the breach is merely trivial.
In the
interests of transparency, where a Market Participant's details are not
published NZX Discipline should disclose its reasons
for withholding this
information. The Commission does not consider that publication of anonymous
cases in the NZX Discipline Annual
Regulatory Report is sufficient to satisfy
this, as it does not address the question of which Market Participant is
responsible for
which breach.
Amendments to
the NZX Discipline Rules
- The
Commission noted that during the review period NZX Discipline had reached an
interpretation of the NZX Discipline Rules which
did not accord with the
intention of NZX when the NZX Discipline Rules were drafted. NZX's proposed
changes to the NZX Discipline
Rules are presently being reviewed by NZX
Discipline and the Rule which was the subject of NZX Discipline's interpretation
has been
redrafted to reflect NZX's intention rather than NZX Discipline's
interpretation. The Commission notes that in the absence of an
amendment to the
NZX Discipline Rules, interpretations by NZX Discipline provide a binding
precedent for future applications. The
actions of NZX in seeking to amend the
NZX Discipline Rules in this way have highlighted to the Commission an
unforeseen impact on
NZX Discipline's autonomy.
- While
the Commission recognises that NZX may make amendments to the Listing and
Participant Rules, including the NZX Discipline Rules,
(subject to ministerial
approval and other checks and balances), we are concerned that an otherwise
binding interpretation of the
NZX Discipline Rules can be overcome in this way.
The NZX Discipline Rules do not at present give NZX Discipline any formal role
in reviewing amendments. The Commission has concerns about the impact of this on
NZX Discipline's autonomy and considers that NZX
Discipline should be given an
advisory role in determining any changes to the NZX Discipline Rules.
- It
seems anomalous that NZX, appearing as a party to a discipline proceeding, has
the ability to change the rules which govern the
processes and procedures of NZX
Discipline without the consent of NZX Discipline. The Commission is concerned
that the autonomy of
NZX Discipline may be adversely affected.
- The
Commission intends to examine in detail any changes to the NZX Discipline Rules
that come before it during the disallowance process,
to determine whether such
changes may have the tendency to undermine NZX Discipline's autonomy and are
therefore not in the public
interest. The Commission will seek the views of NZX
Discipline in this process. The Commission notes that the NZX Discipline Rules
are currently being reviewed and considers that this provides an excellent
opportunity for NZX and NZX Discipline to incorporate
the changes necessary to
give NZX Discipline more input into amendments to its
Rules.
Recommendations
- The
Commission is satisfied that NZX Discipline is independent of NZX and is
producing work of a high standard. However, the Commission
did identify some
issues in the course of the review. In particular, the Commission was concerned
to find that NZX Discipline had
sought an advance opinion from NZX on the
procedure which it proposed to follow in a matter before it. The Commission
considers this
was inadvisable.
- The
Commission is concerned that Market Participants who have been found to have
breached the Participant Rules are not being identified.
Not only is publication
a significant tool in deterring breaches, but it is also imperative that NZX
Discipline be seen to be sanctioning
Market Participants for any breaches. The
Commission believes that market confidence will be increased if NZX Discipline
is transparent
in naming Market Participants who have breached the Participant
Rules.
- The
Commission found during the review that NZX Discipline had ruled on the scope of
its review powers under the NZX Discipline Rules.
This ruling was contrary to
submissions by NZX, which would have narrowed the scope of the review power.
Subsequently NZX has sought
to amend the relevant NZX Discipline Rule,
effectively overturning NZX Discipline's ruling for future cases. The NZX
Discipline Rules
do not at present give NZX Discipline any formal role in
reviewing amendments. The Commission has concerns about the impact of this
on
NZX Discipline's autonomy and considers that NZX Discipline should be given an
advisory role in determining any changes to the
NZX Discipline Rules.
- It
appears to the Commission that although NZX Discipline has stated that it does
not feel its access to resources is in any way limited
by NZX, and NZX has
repeatedly asked NZX Discipline whether it requires further resources, that NZX
Discipline in fact requires more
resources in order to action non-urgent work
within reasonable timeframes. The Commission is concerned at extensive delays
which
have occurred in two matters in particular, the first of which is the
review of the NZX Discipline Rules, and the second of which
involves a third
party.
- The
Commission also considers that it would be valuable if information about the
role, membership and mandate of NZX Discipline were
more readily available to
the market. Although information is provided in the Annual Regulatory Report,
the Commission does not consider
that this is sufficient.
NZX
Discipline should ensure that, when determining the procedure to apply to a
proceeding before it, it treats all parties evenly.
NZX
Discipline should be seen to be transparent in exercising its discretion whether
to publish decisions which identify Market Participants
who have breached the
Participant Rules. Where a Market Participant's details are not published, NZX
Discipline should disclose its
reasons for withholding this information.
NZX and NZX Discipline should review the NZX Discipline
Rules in order to give NZX Discipline more input into its own Rules, and
amendments
arising from this review should be included in the amendments which
are presently being considered by NZX Discipline.
NZX
Discipline should review its resource requirements and structure, and
communicate its needs to NZX, so that delays in dealing
with non-urgent work are
minimised or removed.
NZX should provide more information
about the role, membership and mandate of NZX Discipline on its website. In
particular, the contact
details for NZX Discipline should be included on the NZX
website.
THE SPECIAL DIVISION
- As
in the last review, the Commission found that the Special Division was working
well and enforced the separation between the commercial
and regulatory functions
of NZX. The Special Division acted independently of NZX and did not encounter
any resourcing issues over
the period. The Special Division also indicated that
it was satisfied with the outcome of actions taken in response to the
recommendations
made in the context of the 2005 oversight review.
- The
Commission noted that NZX should set an example of full compliance with all
lawful directions or requests of the Special Division
during the 2005 oversight
review. We note that this issue did not arise during the 2006 review
period.
Independent solicitor and autonomy
- As
a result of the recommendations made by the Commission in the last review, the
Special Division contracted an independent solicitor,
rather than relying on an
NZX Regulation solicitor. In the course of the current oversight review, the
Commission queried whether
this increase in autonomy had been successful. Both
NZX and the Special Division reported that the use of the independent solicitor
had been successful in promoting the independence of the Special Division.
- The
Commission had also recommended that a communication strategy about the role of
the Special Division should be developed and implemented,
including the
publication of separate contact details for the Special Division. NZX issued a
press release with this information
in it. However, the Commission notes that
the separate email address has not been utilised, and considers that this
reflects the
difficulty in finding the email address. The Commission notes that
besides a link to the original press release at the very bottom
of the NZX
homepage there is no other place on the NZX website which sets out the Special
Division's contact details, although there
is a page which discusses the Special
Division and the supervision of NZX. The Commission considers that better
dissemination of
information about the Special Division would be useful in
educating the market about the various and separate roles of NZX, NZX Discipline
and the Special Division.
Disciplinary
action in respect of NZX
- During
the review period a subsidiary of NZX, Smartshares Limited, breached the Listing
Rules by not providing a preliminary announcement
or half-yearly report for the
six month period ended 30 September 2006 in respect of the NZX Australian 20
Leaders Index Fund (also
known as smartOZZY) within the timeframes required
under the NZSX Listing Rules. NZX has systems which alert it the day before an
Issuer's report is due. In this case however, due to a clerical error, it was
not identified for some months that smartOZZY's announcement
and report were
late. This is a substantial period and the Commission is concerned that this was
able to occur. The error was identified
by Smartshares and notified to the
Special Division.
- The
Special Division initially contacted Smartshares and requested certification
from the directors that all material information
in respect of smartOZZY had
been disclosed to the market. Smartshares was granted two weeks to provide the
half-yearly report. The
Special Division subsequently suspended trading in
smartOZZY securities until the report was provided. The trading halt was used
appropriately, in the Commission's view, to encourage production of the report
by Smartshares in a timely manner, and did in fact
result in such report being
published expeditiously. The Special Division took disciplinary proceedings
against Smartshares, which
were settled. Smartshares was required to pay a
$10,000 penalty to an organisation approved by the Special Division for the
purpose
of market education, and the application of funds was not to relate to
expenditure that would customarily be made by Smartshares
or NZX.
- The
Commission notes that there was no direct precedent available to the Special
Division to draw from as NZX Regulation has not had
to deal with a breach by a
passive fund. However, it appears that the Special Division endeavoured to act
in a way that was consistent
with NZX Regulation's approach and further, that it
sought advice on the course of action it should
take.
Recommendations
- The
Commission is satisfied that the Special Division is operating effectively. In
particular, the Commission noted one disciplinary
matter regarding a subsidiary
of NZX that arose during the review period. It appears that the Special Division
endeavoured to act
in a way that was consistent with NZX Regulation's approach
and further, that it sought advice on the course of action it should
take.
- The
Commission considers that it would be valuable if information about the role,
membership and mandate of the Special Division were
more readily available to
the market. Although some information is provided on the NZX website concerning
the role of the Special
Division, it is not extensive or easy to find.
NZX should increase the amount of information it provides about the
Special Division and make it easier to find. In particular, the
contact details
for the Special Division should be included on the 'Contacts' and 'Supervision
of NZX' pages of the NZX website.
RECOMMENDATIONS ARISING
FROM THE REVIEW OF THE 2005 YEAR
Update on progress made in implementing the
recommendations
- The
Commission made a total of 21 recommendations in the course of the 2005 review.
We report on NZX, NZX Discipline and the Special
Division's progress in
implementing these recommendations.
Market Supervision Group
(general)
- NZX
should introduce and communicate a formal policy for all Market Supervision
staff concerning identifying and declaring personal
conflicts of
interest.
NZX has created and communicated a formal
policy regarding conflicts of interest within the agreed timeframe.
Supervision of Market Participants
- NZX
should take disciplinary action against Market Participants who commit repeat
breaches of the Participant Rules.
As a general principle NZX
agrees that, where a participant has failed to implement an agreed action point
related to a breach of
the Participant Rules identified on inspection, this is a
matter generally deserving disciplinary action. However, there are always
going
to be circumstances that mean departure from this general principle is
desirable. For this reason NZX disagrees with a recommendation
that would
require all repeat breaches noted on inspection (or otherwise) to be referred to
NZX Discipline, and it believes it should
deal with matters on a case by case
basis.
The Commission's 2006 review of NZX practices in respect of
participants satisfies us that NZX is taking an appropriate disciplinary
approach to participant compliance.
Supervision of Listed Issuers
- NZX
should consider enlarging the membership of the Listing Subcommittee to address
potential issues arising from conflicts of interest.
NZX
appointed two extra members to the Listing Subcommittee within the agreed
timeframe.
- NZX
should ensure that NZX Regulation adheres to its established procedures for
timely appointment of and consultation with division
members, to avoid delays in
addressing applications.
NZX reiterated its policies for
appointment of divisions to NZX Regulation staff, and compliance with the
process is now monitored
by the Group Leader and Business Leader of the Market
Supervision Group.
- NZX
should ensure that the delegation of decision-making authority and the
accountability for decisions made by NZX Regulation divisions
are clearly
recorded.
NZX revised the delegations of decision-making
authority and accountability within the agreed timeframe.
NZX
Discipline
- NZX
and NZX Discipline should together review the administrative support and
resource arrangements in place for NZX Discipline. These
resource arrangements
should be reviewed regularly to ensure that NZX Discipline receives all the
resources it requires to enable
it to continue to carry out its functions
effectively.
NZX and the Chairman of NZX Discipline have agreed
on a suitable fee for administrative time spent by the Chairman and have created
a framework for discussing NZX Discipline's resource requirements.
- NZX
should establish a periodic review of NZX Discipline members' fees and consult
with NZX Discipline members on this. The NZX Discipline
Rules should entrench
that the fees for members of NZX Discipline may not be reduced by
NZX.
The current review of the NZX Discipline Rules incorporates
proposed changes to the treatment of Member's fees. The Commission notes
that
the Chairman of NZX Discipline agrees with this approach. The proposed
amendments to the NZX Discipline Rules are currently
with the Chairman of NZX
Discipline for comments. The proposed changes had not come into effect at the
date of this report.
- NZX
Discipline should publish its Annual Regulatory Report
annually.
NZX Discipline agrees that the annual report should be
published annually and will advise the Commission if this will not be
achievable.
The Commission expects that the report will be published annually.
Special Division
- The
Special Division, as a body, should determine whether the Special Division has
jurisdiction to deal with matters referred to it.
Any delegations from the
Special Division to its Chairman should be formally
recorded.
The Special Division has determined that any questions
of jurisdiction will be determined by the Division as a whole. Any delegations
will be documented.
- Given
the important role of the Special Division in respect of NZX's compliance as a
Listed Issuer, the Special Division should take
steps to ensure that it is fully
aware of the powers available to NZX Regulation under the Listing Rules in
respect of other Listed
Issuers, and should exercise those powers as appropriate
in relation to NZX as a Listed Issuer.
The members of the
Special Division have been provided with all relevant regulatory material by NZX
and have stated their willingness
to take independent legal advice where
necessary.
- Given
NZX's position as both a Listed Issuer and regulator of all other Listed Issuers
listed on its markets, NZX should set an example
of full compliance with all
lawful directions or requests from the Special Division.
NZX
does not believe it must comply with every request or direction from the Special
Division. NZX considers that as other Issuers
are not required to comply with
every direction from NZX, the recommendation amounts to an unequal treatment of
NZX. NZX therefore
did not agree to implement this recommendation as stated
above. However, the Commission is satisfied that during the 2006 review
period
the relationship between the Special Division and NZX was good, and that NZX
provided all information that was requested.
As stated in the 2005
review, the Commission considers that in practice NZX does have the power to
compel production of information
by refusing to grant waivers if relevant
requested information is not provided.
The Commission remains of the
view that NZX should set an example of full compliance with all lawful
directions or requests of the
Special Division.
- The
Special Division should discuss its resource requirements with the Board of NZX.
The NZX Board should have a formal guarantee
of funding for the Special Division
should the Special Division need to take NZX to NZX
Discipline.
The Board of NZX has provided confirmation to the
Special Division that it is authorised to incur expenditure on behalf of, or in
the name of, NZX.
- NZX
and the Special Division should develop and implement a communication strategy
about the role of the Special Division. Communication
should include publication
of separate contact details for the Special Division.
NZX has
established an email address for the Special Division:
info@specialdivision.co.nz. The address is published on the NZX website
via a
link to the press release at the bottom of the NZX homepage. Email sent to this
address is automatically received by all four
members of the Special Division
and its counsel. The Commission is concerned that this has not been effective
and has made recommendations
to address this issue again.
A press
release concerning the role of Special Division was created by NZX and released
via MAP and posted on the NZX website.
- The
Special Division should formalise its delegation to the appointed solicitor and
should receive regular reports on work dealt with
by the appointed solicitor
under delegation.
The Special Division has engaged the services
of a senior lawyer on a contract basis. Certain delegations have been made to
this lawyer
pursuant to that contract, and the Special Division receives reports
from the solicitor in respect of the exercise of those delegations.
- The
Special Division should have and use the same procedures manuals in respect of
NZX's compliance as a Listed Issuer that are used
by NZX Regulation in respect
of all other Listed Issuers. The Special Division should satisfy itself that the
appointed solicitor
uses the NZX Regulation procedures, including where matters
are delegated to that solicitor.
The lawyer contracted to the
Special Division must use the NZX Regulation Solicitor's Handbook and conduct
precedent searches in LRS
and i-Search. As stated above, the members of the
Special Division also have copies of all relevant regulatory material. The
solicitor
provides overflow assistance to NZX Regulation from time to time and
accordingly considers waiver and ruling applications for other
Issuers. She is
accordingly very familiar with NZX Regulation precedents.
- The
Special Division should settle internal procedures that it would use, including
procedures for communicating with the market,
in dealing with a serious
compliance matter regarding NZX.
The Special Division has
settled procedures that it will use to communicate with the market in the event
of a compliance matter regarding
NZX.
The Special Division has also
settled the procedures for dealing with a breach of the Listing Rules by NZX,
including referral to
the Securities Commission under the Securities Markets Act
1988.
- The
Special Division should formalise its expectation about the referral of data
generated by the SMARTS market surveillance system
concerning NZX's listed
securities. Where alerts from SMARTS are below the threshold set by the Special
Division for referral to
it, the appointed solicitor should regularly advise the
Special Division of the number of such alerts received in the period and
a
summary of any alerts that were not referred.
All SMARTS alerts
are to be referred to the Special Division. NZX has amended its procedures
manual to reflect this.
- To
avoid a situation of conflict for the appointed solicitor, the appointed
solicitor should have no role in matters that raise contentious
issues,
including complaints handling (beyond an initial transmittal of a matter to the
Special Division). The Special Division should
engage external advisers to
assist it in dealing with such matters and be funded to do so. The external
advisers should have access
to NZX's facilities and regulatory precedents and be
able to consult with NZX Regulation.
The Special Division has
appointed a senior lawyer on a contract basis. No NZX staff provide services to
the Special Division.
- NZX
should either formally assure the Special Division that the appointed solicitor
will not perform any corporate advisory work for
NZX or should revisit the use
of an NZX Solicitor for the appointed solicitor role.
The
Special Division has appointed a senior lawyer on a contract basis. No NZX staff
provide services to the Special Division.
- The
Special Division should report to NZX Discipline all material findings that it
makes. NZX Discipline should incorporate that information
into its published
Annual Regulatory Report.
The Special Division will table a
written report to NZX Discipline's annual meeting. NZX Discipline and the
Special Division will
also discuss the nature of the update to be included in
the NZX Discipline annual report.
Governance
- Given
the risk of lack of clarity regarding roles in responding to a crisis, the
Commission recommends that responsibilities of the
CEO and Head of Regulation
for exercising delegated powers be reconsidered by the Board of NZX to ensure
that the responsibilities
are clarified.
NZX continues to be of
the opinion that its current delegations are effective in a crisis. The Board
will keep the matter under review.
In the interim, the Head of Market
Supervision is now provided with time during each Board meeting where the CEO is
not present,
in order to enable her to raise any issues with the non-executive
members of the Board. The Commission is comfortable with the progress
being made
in respect of this matter.
CONCLUSION
- The
Commission's overall conclusion is that NZX is satisfying its obligation to
operate its markets in accordance with its Conduct
Rules.
- The
Commission expects that future reviews of NZX will follow a similar format to
the 2006 oversight review, in that they will focus
on particular issues
regarding NZX's performance of its statutory functions. The Commission believes
that annual reviews of NZX are
valuable because they allow the Commission and
the market to receive information about NZX's performance on a regular
basis.
- The
Commission's concerns and recommendations recorded as a result of this review,
NZX's actions and response to these recommendations,
and relevant intervening
matters, will be reviewed next
year.
APPENDIX
Scope of review
- Section
36G of the Securities Markets Act 1988 says that NZX must operate each of its
securities markets in accordance with approved
rules for that market. The
Conduct Rules include Listing Rules, and Business Rules that govern the conduct
of persons authorised
to undertake trading activities on the market.
- NZX's
obligations under section 36G are to secure compliance with its listing and
business rules, and to perform any obligations that
lie on NZX under those
rules. To do this, NZX has established a Market Supervision Group with
responsibilities for discharging NZX's
regulatory function. The NZX Discipline
Rules establish a dedicated body, NZX Discipline, to determine questions of
non-compliance
with the listing or Business Rules. Decisions can be appealed to
the Appeal Panel. An independent body, the Special Division of NZX
Discipline,
exercises the powers and functions of NZX in relation to NZX as a Listed Issuer
and its related entities.
- The
Commission has statutory functions to review practices relating to securities
and activities on securities markets, and to comment
on these. In relation to
NZX, performance of these functions requires the Commission to keep under review
and comment on NZX's obligations
as a registered exchange. The oversight review
was conducted under sections 10(b), 10(c) and 10(caa) of the Securities Act
1978.
- The
Commission's Terms of Reference for the review were:
The Securities
Commission ("the Commission") is conducting an oversight review of New Zealand
Exchange Limited ("NZX") under sections
10(b), 10(c) and 10(caa) of the
Securities Act 1978. The purpose is to review NZX's performance of its
co-regulatory function, in
particular its obligations under section 36G of the
Securities Markets Act 1988 and, in respect of futures and options dealers,
NZX's
regulation of dealers under its Futures and Options Participant Rules.
In particular, in respect of the 2006 calendar year, the Commission
will review the following aspects of NZX's activities:
- the
management and operation of the NZAX market, including resources, practices and
procedures, and the ongoing maintenance of that
market;
- the
processes undertaken by NZX in considering the admission or approval of listed
issuers and market participants to its markets,
and any particular issues which
arise as a result of those processes; and
- NZX's
role in minimising the risk of non-compliance by listed issuers and market
participants in relation to their obligations under
the Listing Rules and
Participant Rules;
The Commission's review will
consider any new developments in relation to the following areas:
- supervision
of market participants and enforcement of the Participant Rules;
- supervision
of listed issuers and enforcement of the Listing
Rules;
- allocation
of human, technological and financial resources as it affects performance of the
regulatory functions of NZX;
- internal
practices and procedures associated with investigations, price enquiries,
complaints-handling and referrals;
- discipline
practices, procedures and resources;
- arrangements
for market infrastructure development and maintenance;
- Special
Division practices, procedures and resources; and
- corporate
governance arrangements, including board composition, policy setting, crisis
response and oversight of executive management,
with reference to regulatory
standards relating to governance of demutualised exchanges under IOSCO and other
international principles.
The review may also consider any
issues arising in the course of the review in relation to the above areas.
The Commission's review will consider the progress made by NZX (up to
the date of the Commission's report on this oversight review)
towards
implementing the Commission's recommendations set out in its report dated 26
September 2006.
AND accordingly, will obtain, consider and
utilise information for the purposes of any recommendation, report or comment
the Commission
may decide to make under sections 10(b), 10(c) or 10(caa) of the
Securities Act 1978 in relation to the above matters.
SUBJECT to
the Commission's discretion to amend these Terms of Reference as it may consider
fit.
December 2006
Background to review
- In
2002 the Securities Markets and Institutions Bill created a co-regulatory
regime for registered exchanges. NZX is the only registered exchange in New
Zealand. Under the co-regulatory
regime it is intended that the Commission
monitors the performance of NZX's statutory responsibilities.
- In
2003 the International Monetary Fund conducted a Financial Sector Assessment
Programme (FSAP) review of New Zealand. The FSAP measured
New Zealand's
framework of securities regulation and its operation against the Objectives
and Principles of Securities Regulation published by the International
Organization of Securities Commissions. The IOSCO Principles include principles
for self-regulatory
organisations.
- One
of the recommendations in the FSAP report was that the Commission develop a
formalised oversight plan for regulated exchanges,
providing for risk assessment
criteria and periodic inspections that take into account best practices for
self-regulatory organisations
and exchanges. It recommended that there should be
public disclosure summarising the objectives of the oversight plan and of the
key findings of such reviews. The Government response noted that the Commission
had decided to develop a formal oversight plan for
regulated exchanges and had
informed NZX.
- Demutualisation
and listing of stock exchanges has been an emerging phenomenon overseas in the
past decade. In all cases we have seen,
regulatory structures have been put in
place accompanying such moves, reflecting the core importance of stock exchanges
to countries'
capital markets and broader economies. In New Zealand these
regulatory structures include an ownership cap, regulatory review of
exchange
rules, and oversight by the Commission. Different approaches have been taken in
various jurisdictions overseas. The approach
taken in New Zealand was settled
after consideration of international models existing at the time, and the
particular circumstances
of the New Zealand markets. It has not been a part of
this review to reconsider these arrangements.
- However,
as encouraged by the FSAP review, we have looked to the emerging high-level
standards in overseas jurisdictions to gain an
insight into best practices for
exchanges. We have taken into account the report of the FSAP inspectors, the
IOSCO Objectives and Principles of Securities Regulation, and the
methodology used for assessing compliance with these standards, in particular
the principles applying to self-regulatory
organisations.
- The
Commission has also looked to the legal obligations of exchanges in similar
jurisdictions to gain an understanding of the expectations
that overseas
investors in particular are likely to have for the conduct of a registered
exchange. While there are differences in
the approaches taken by each
jurisdiction, there are a number of standards that can be taken from an overall
assessment of the IOSCO
Principles and overseas law and practice. These suggest
that a stock exchange should:
- meet
and maintain adequate standards of integrity and fitness to operate a
market;
- develop
rules for the conduct of listed issuers and market
participants;
- develop
and operate fair procedures for the enforcement of its
rules;
- conduct
a fair, orderly, informed, and efficient market;
- maintain
effective trading, clearing, and settlement systems;
- have
adequate capacity to carry out its regulatory functions and enforce its rules;
and
- have
procedures in place to manage conflicts of interest.
- Development
of rules is addressed in New Zealand under the statutory approval and
disallowance process for conduct rules. The IOSCO
Principles also address
competition issues, which are outside the remit of the Securities Commission.
The remaining matters have
been addressed in this review.
- The
oversight review conducted this year is the second oversight review of NZX
conducted by the Commission. The review focussed on
the 2006 calendar
year.
Process
- The
Commission requested information from NZX under section 36ZK of the Securities
Markets Act. Section 36ZK says that a registered
exchange must give the
Commission (or any person authorised by the Commission) information, assistance,
and access to the exchange's
facilities if the Commission reasonably requests it
to carry out its functions.
- The
Commission sent questionnaires to NZX, NZX Discipline and the Special Division
seeking information the Commission considered necessary
to effectively evaluate
NZX's performance of its regulatory functions. The questionnaires covered the
areas identified in the Terms
of Reference.
- The
Commission requested copies of any procedures manuals and process documents that
evidenced NZX's policies and procedures for each
of the areas covered by the
questionnaires. Where written procedures and policies were not available, we
requested written explanations
and information from NZX in response to each
specific information request.
- NZX
provided information in response to the questionnaires, including procedures
manuals and process documents where relevant. Questions
relating to NZX
Discipline and the Special Division were answered by the Chairs of those bodies.
- Commission
staff selected and reviewed a sample of NZX's files across a range of regulatory
activities.
- Commission
staff conducted interviews with NZX personnel and Board members. Commission
staff also interviewed the Chairman of NZX
Discipline and the Chairman of the
Special Division. A total of 11 interviews were conducted and the interviews
were recorded.
- Confidentiality
and privacy orders were in place throughout the review.
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