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The proposed conduct rules of the New Zealand Stock Exchange. Public Consultation paper for the purpose of preparing advice to the Minister of Commerce in respect of the approval process under the New Zealand Stock Exchange Restructuring Act 2002 [2002] NZSecCom 8 (17 June 2002)

Last Updated: 7 November 2014










THE PROPOSED CONDUCT RULES

OF THE NEW ZEALAND STOCK EXCHANGE




PUBLIC CONSULTATION PAPER FOR THE PURPOSE OF PREPARING ADVICE TO THE MINISTER OF COMMERCE IN RESPECT OF THE APPROVAL PROCESS UNDER THE NEW ZEALAND STOCK EXCHANGE RESTRUCTURING ACT 2002
































SECURITIES COMMISSION

17 June 2002




















































Securities Commission

12th Floor, Reserve Bank building

2 The Terrace

PO Box 1179

Wellington, New Zealand www.sec-com.govt.nz

TABLE OF CONTENTS

PART ONE

Introduction ....................................................................................................................... 5

Purpose of this review ......................................................................................................... 5

Background – The New Zealand Stock Exchange ............................................................... 5

Public interest test ............................................................................................................... 8

Basis of analysis of Conduct Rules .................................................................................... 10

Specific Topics Canvassed in the Paper ............................................................................. 11

Securities Markets and Institutions Bill ............................................................................. 12

Invitation to comment ....................................................................................................... 12

Disclaimer ........................................................................................................................ 13



PART TWO

Conduct Rules – Issues for Discussions........................................................................... 14

Demutualisation ................................................................................................................ 14

Incentive to monitor and enforce the Conduct Rules .......................................................... 24

Responsibility for monitoring and enforcement of relevant legislation .............................. 28

Waivers and Rulings ......................................................................................................... 32

– Exercise of NZSE discretion ............................................................................... 32

– Related party transactions ................................................................................... 39

NZSE discretion to accept new entities for listing ............................................................. 42

Adequacy of sanctions ...................................................................................................... 45

Disclosure of information – Continuous Disclosure ........................................................... 48

Dissemination of information ............................................................................................ 55

Corporate governance of listed issuers .............................................................................. 58

Surveillance by broker network ......................................................................................... 61

Capital adequacy and fidelity guarantee fund ..................................................................... 63



PART THREE

Other Matters or Issues ................................................................................................... 69



PART FOUR

Discussion Questions........................................................................................................ 70

APPENDIX A (Letter of the Minister of Commerce to the Securities Commission) APPENDIX B (Comparison of Conduct Rules with international principles) APPENDIX C (Continuous Disclosure Regime)

APPENDIX D (Listing Rule 9.2 waiver history)

Glossary of Terms

“ASIC” – the Australian Securities and Investment Commission

“ASX” – the Australian Stock Exchange

“FIBV” – the Federation Internationale des Bourses de Valuers, now known as the World

Federation of Exchanges

“HKSFC” – The Hong Kong Securities and Futures Commission

“HKX” – The Hong Kong Stock Exchange

“ICMG” – the International Markets Group

“IOSCO” – the International Organisation of Securities Commissions

“MAS” – the Monetary Authority of Singapore “MOU” – Memorandum of Understanding “NZSE” - the New Zealand Stock Exchange

“Panel” – the Market Surveillance Panel of the New Zealand Stock Exchange “Restructuring Act” – the New Zealand Stock Exchange Restructuring Act 2002 “SGX” – the Singapore Stock Exchange

“Sharebrokers Act” – the Sharebrokers Amendment Act 1981

“SMI Bill” – the Securities Markets and Institutions Bill

PART ONE


INTRODUCTION


PURPOSE OF THIS REVIEW

  1. The Minister of Commerce has asked the Securities Commission to advise him on the Conduct Rules (that is, the Listing Rules and the Business Rules) of the New Zealand Stock Exchange (“NZSE”). Under the Restructuring Act, if the NZSE decides to demutualise, its Conduct Rules will require approval by the Governor-General by Order in Council on the recommendation of the Minister of Commerce. Under the Restructuring Act, the Minister must recommend that the Conduct Rules be approved unless he is satisfied that it is not in the public interest to do so.

2. The Minister of Commerce has asked the Securities Commission to provide advice to enable him to effectively discharge his function of making his recommendation to the Governor-General. To help it prepare that advice, the Commission is seeking public comment on the proposed Conduct Rules of the NZSE.

BACKGROUND - THE NEW ZEALAND STOCK EXCHANGE

Constitution and funding

  1. The NZSE is currently a mutual organisation, established under the Sharebrokers Act, and owned by its sharebroking members. The NZSE is funded by charges to its members, fees paid by listed companies and charges levied from market participants for the supply of information.

Functions

4. The Sharebrokers Act states that the NZSE’s functions are, in summary:

to operate a national stock exchange;

to promote and specify the conditions for listing;

to regulate and promote uniformity in the conduct of its member sharebrokers, and to promote the interests of its members and the public in relation to securities

trading.

  1. The NZSE operates and administers a computer-based trading and settlement system which can be accessed and used by members (sharebrokers) and their employees to trade securities in listed issuers on behalf of their clients and on their own account. The NZSE acts as a central point for the dissemination of market information to its members, the news media and other subscribers.

NZSE Board and the Panel

  1. The NZSE is currently governed by a board of up to ten directors elected by NZSE members. At least two directors, including the managing director, must be non- NZSE members. The NZSE appoints the Panel, which is responsible for day-to-day regulation of listed issuers. A majority of Panel members must not be members or directors of the NZSE.

Listing Rules

  1. As the operator and administrator of the trading system, the NZSE sets the rules governing the listing of companies (and other issuers such as managers of unit trusts and group investment funds) and their continuing compliance obligations. These are called the “Listing Rules”. In broad terms, the Listing Rules regulate the conduct of listed issuers regarding:

governance and director appointments;

criteria for listing;

documents such as prospectuses, investment statements and notices of meeting;

issues and buybacks of securities;

related party and material transactions; and disclosure of information to the market.

  1. The Listing Rules do not have the force of law. Instead, they comprise a contract between the NZSE and each listed issuer which can be enforced either by the NZSE or, under the Contracts (Privity) Act 1982, by that issuer’s shareholders. The NZSE has delegated day-to-day responsibility for administering the Listing Rules to the

Panel. Under this delegated authority the Panel has, in the past, imposed sanctions for breach, such as suspensions of trading and public censure of companies and their

directors and officers. The listing and delisting of companies has always been the responsibility of the NZSE itself, not the Panel.

  1. The NZSE has not been required to obtain the approval of any external party when setting or amending its Listing Rules though it has, in practice, consulted with market participants on amendments to the Listing Rules.

Business Rules

  1. The rules governing NZSE members’ conduct and business are referred to under the Restructuring Act as the “Business Rules”. The Sharebrokers Act has required the NZSE to have these rules approved by the Governor-General by Order in Council. Accordingly, there has always been some external involvement in setting and amending the NZSE’s Business Rules.

11. The Business Rules relate to the operations of the NZSE and its members and act as a constitutional document for the NZSE itself. In broad terms, the Business Rules have in the past regulated matters such as:

admission of individuals and corporates to membership;

the composition of the NZSE Board;

general meetings of members;

members’ authority to act in relation to public offers of securities;

dealings by members as principals;

discipline of members; disputes between members; defaulting members;

audits and inspections of members;

capital adequacy requirements; and

the establishment of a fidelity guarantee fund.

  1. The NZSE itself has always been responsible for monitoring and enforcing its Business Rules, although disputes and allegations of breaches have been dealt with by separate committees.

Demutualisation

  1. Significantly, the NZSE has always been “owned” by its member sharebrokers who have controlled appointments to the Board and the separate committees. Also, the NZSE has historically been a not-for-profit organisation.

  1. However, the NZSE is now proposing to demutualise and become a company, the shares of which will be issued to the members. It is anticipated that the NZSE would itself be listed and its shares quoted to allow member shareholders access to a formal market for their shares and also to allow members of the public to invest in the NZSE as they might any other listed company. The Restructuring Act provides a mechanism for achieving this proposed demutualisation.

  1. The requirement for approval of the Conduct Rules was developed in the context of this demutualisation and legislative process and the perceived changes in the incentives on the NZSE brought about by operating under a corporate structure. Because the corporate structure will require the delivery of shareholder returns, and because the NZSE’s shares will be quoted on the market which the NZSE regulates,

there is a risk that the NZSE may have an increased incentive to favour the interests of itself and its shareholders over the interests of the New Zealand sharemarket in general. An approval requirement for stock exchange rules is consistent with established practice in various overseas jurisdictions. The requirement in the Restructuring Act for Ministerial approval of the Conduct Rules is a result of the demutualisation process itself.

PUBLIC INTEREST TEST

  1. The Restructuring Act requires the NZSE’s Conduct Rules to be approved by the Governor-General on the recommendation of the Minister of Commerce before the demutualisation can occur. The Minister must recommend the approval of the Conduct Rules “unless satisfied that it is not in the public interest to do so”.

17. As noted, the Conduct Rules comprise the Listing Rules and the Business Rules of the

NZSE. These terms are defined in the Restructuring Act as follows:

“business rules” means the rules made by the NZSE...that will govern the conduct of –

(a) the business on the stock exchange to be operated by the [NZSE]; and

(b) the sharebrokers who will be authorised to undertake activities on the

[NZSE].


“listing rules” means the rules made by the NZSE... that will relate to –

(a) the governance of the persons who are parties to listing agreements with the [NZSE]; and

(b) the entry into, and revocation of, listing agreements with the [NZSE].

  1. The Minister has advised the Commission that the requirement for him to recommend the approval of the Conduct Rules “unless satisfied that it is not in the public interest to do so” is a high threshold. In addition, the Minister considers that the public interest test has two key components for the purposes of this review:

1. market integrity, or public confidence in the effective functioning of the sharemarket; and

2. the international perception of the New Zealand sharemarket.

  1. A copy of the letter from the Minister to the Commission is at Appendix A. The Commission’s review of the Conduct Rules, and the advice it will give to the Minister, is undertaken in the context of the Minister’s request.

  1. The NZSE has provided a set of proposed Conduct Rules to the Commission, and has advised that these are the Rules that it presently intends to submit for approval to the Minister. Because the approval process will only be required if the Exchange decides to demutualise, the Conduct Rules given to the Commission are intended to be those that will apply after demutualisation. These comprise:

(a) the proposed Business Rules; (b) the current Regulations;

(c) the current Code of Practice;

(d) the current Listing Rules, with some proposed amendments, notably to section 10 (continuous disclosure) and Appendix 3 (constitution of the Panel).

  1. We note that the NZSE intends to continue its current practice of regulating stockbroker conduct through three of the documents referred to above: the Business Rules, Regulations, and Code of Practice. It seems likely that all three of these documents could be considered “Business Rules” in terms of the definition in the Restructuring Act, and for this purpose all three are included in this review. In this paper the term “Business Rules” covers all three documents unless the context requires otherwise.

  1. The proposed Conduct Rules, as presented to the Commission, are available on the Commission’s website, www.sec-com.govt.nz, and on the NZSE’s website, www.nzse.co.nz.


BASIS OF ANALYSIS OF CONDUCT RULES

  1. In view of the high “public interest” threshold that will apply to the Minister’s consideration of the Conduct Rules, a detailed review, analysis, comparison and critique of every rule would be unwarranted. Instead, in view of this threshold, the Commission is reviewing the Conduct Rules from three perspectives:

  1. The Conduct Rules have been compared with various international principles for stock exchange regulation published by IOSCO, the ICMG, and the FIBV. This review involved identifying these general principles, and then comparing the Conduct Rules with them. A copy of this comparison is at Appendix B.

  1. The Commission has looked at particular Conduct Rule issues that have in the past been of industry or public concern or comment.

3. The Commission is inviting comments on any other matter arising from the Conduct Rules which, while not covered in this paper, should be considered by the Commission in its review and advice to the Minister.

International comparisons

  1. Some comparisons have been made with the equivalent rules of the primary exchanges of Australia, Hong Kong and Singapore. Each of these exchanges has demutualised and is listed on "itself" (although, strictly, in the case of Hong Kong and Singapore, the exchange holding company is listed on the exchange that is operated

by its wholly owned subsidiary, while the holding company itself retains the

regulatory functions). The purpose of this comparison is not to harmonise the

Conduct Rules with those of other jurisdictions. Rather, it is to see how similar issues are dealt with overseas, so as to analyse whether dealing differently with an issue could adversely affect confidence in, or international perceptions of, the New Zealand sharemarket.

  1. In conducting its review, the Commission has observed that the Conduct Rules that set out the way in which, and by whom, the market is to be monitored and administered can be as significant as those Conduct Rules that relate to the duties and obligations of the listed issuers and brokers. That is, the Conduct Rules might contain all of the provisions that would be internationally expected in relation to listed issuer or broker conduct but if, for example, the Conduct Rules are not, or are not seen to be, sufficient to require consistent and impartial application of the substantive rules, the reputation of the NZSE could be undermined. Parts of this paper therefore discuss, and raise for consultation, issues about the role of the NZSE and the Panel under, and in terms of, the Conduct Rules.


SPECIFIC TOPICS CANVASSED IN THIS PAPER

26. Our review has raised the following topics for discussion in Part Two of this paper:

(a) Demutualisation (the NZSE’s role in the context of a demutualised exchange). (b) NZSE incentives to enforce the Conduct Rules.

(c) Responsibility to monitor and enforce legislation. (d) Waivers and rulings.

(e) NZSE discretion to accept new entities for listing. (f) Adequacy of sanctions.

(g) Disclosure of information.

(h) Dissemination of information.

(h) Corporate governance of listed issuers. (i) Surveillance by member network.

(j) Capital adequacy and fidelity guarantee fund.

In Part III of this paper the Commission also invites comment on any other relevant issue or topic.

SECURITIES MARKETS AND INSTITUTIONS BILL

  1. This discussion paper is being published at a time when an important piece of proposed legislation, the SMI Bill, is before Parliament. The SMI Bill’s general policy statement states that it is designed to promote confidence in the New Zealand market by increasing the effectiveness and efficiency of the law and regulatory institutions governing securities markets, and the comparability of the law with the law of other jurisdictions.

  1. The SMI Bill is significant in the context of this review of the Conduct Rules. In particular, the Bill grants certain powers to the Commission, which significantly change the regulation of the New Zealand sharemarket. The review of the proposed Conduct Rules is therefore being undertaken in the context that the regulation of the New Zealand sharemarket is expected to be affected not only by the demutualisation of the NZSE and its adoption of new Conduct Rules, but also by the passing into law of the SMI Bill.

  1. The Commission’s advice to the Minister, and this public consultation, will not depend on enactment of the SMI Bill. However, the Commission invites people commenting on this paper to address whether their comments would be affected by enactment of the SMI Bill. A copy of the SMI Bill, as reported back from the Finance and Expenditure Select Committee on 4 June 2002, may be downloaded for no charge from the Commission’s website.


INVITATION TO COMMENT

  1. We invite comment on the discussion questions in this paper. We also seek submissions on any other matters that you might be consider relevant to the Conduct Rules from a public interest perspective. We note in this regard that the Minister will consider each of the Listing Rules and the Business Rules as a whole in applying the public interest test, rather than considering individual Rules.

  1. This paper may be downloaded from www.sec-com.govt.nz, together with a form containing the discussion questions that can be completed and returned electronically.

Comments on the paper should be sent to the Commission by 12 July 2002. They can be emailed to liam.mason@sec-com.govt.nz or sent in hard copy to:

Liam Mason

Securities Commission

Facsimile (04) 472-8076

PO Box 1179

Wellington


32. Comments or submissions received will be subject to the Official Information Act

1982. It is the practice of the Commission to make submissions available on request and, where appropriate, to refer to them in any further paper. If you would like us to withhold information included in any comments on this paper would you please let us know. Any request to withhold information will be considered in accordance with the Official Information Act 1982.

Disclaimer

  1. While every effort has been made to ensure that the statements of law and practice contained in this document are accurate as at the time of publication, errors may have occurred. Accordingly, this document should not be relied upon other than as a platform for comment on the proposed Conduct Rules of the NZSE.

PART TWO


CONDUCT RULES – ISSUES FOR DISCUSSION



DEMUTUALISATION

  1. Demutualisation of stock exchanges has occurred in various countries and has been the topic of considerable attention in securities markets. A recent report of the Technical Committee of IOSCO on demutualisation published in June 2001 identified the special issues that arise when not-for-profit and member-owned organisations transform, or demutualise, and become shareholder-owned enterprises. That report summarised the key concern as follows:

“Commercial pressures or the governance structure may undermine the commitment of resources and capability of the Exchange to effectively fulfil its regulatory and public interest responsibilities to an appropriate standard.”

This pressure is considered to be even greater where the stock exchange performs significant regulatory functions and might be listed upon itself. The IOSCO Technical Committee report highlights the following potential ways of addressing these conflict of interest concerns (each of which is described briefly below).

(a) Corporate governance requirements, such as the requirement for independent/non-shareholding directors on the Board, some objective oversight of management, as well as restrictions on shareholdings.

(b) Separation of commercial functions from regulatory functions. (c) Rigorous regulatory oversight.

(d) Enhanced transparency of decision-making.

Corporate governance/separation of commercial and regulatory functions

  1. This paper highlights the importance to the integrity of the New Zealand sharemarket of those Conduct Rules that relate to administration and enforcement. In Hong Kong and Singapore (although notably not in Australia), the significance of this issue from a public policy perspective is recognised in legislation which, in broad terms, requires the appointment of directors of the HKX and the SGX to be approved by a

government agency like the Securities Commission. The directors of the ASX are appointed by its shareholders.

  1. A similar requirement has never existed at law in relation to the NZSE, and no similar requirement will arise following demutualisation. When the NZSE demutualises, the new Business Rules will not regulate the composition of the NZSE Board as the current rules (known as the "Members' Rules") do. As for any other listed company, the NZSE’s shareholders will be responsible for appointing a board of directors in accordance with the new company’s constitution. The role of that board will be both

to provide a commercial return and to protect and enhance the integrity of the New

Zealand sharemarket through the Conduct Rules.

  1. In view of IOSCO’s comments on the need for objective oversight of management, and the need to separate commercial and regulatory functions in a demutualised exchange, the question arises as to whether the Conduct Rules, given New Zealand’s legislative environment, should contain anything further to address those principles.

  1. One question is whether the NZSE Board and executive should continue to administer and enforce the Business Rules or whether, as with the Listing Rules, an independent body should do so while the NZSE focuses on its corporate/commercial operations.

In other words, should the Business Rules provide that they are to be administered by an independent and experienced body in order to demonstrate that brokers, like listed companies, will be independently monitored?

Discussion

Role and objectives of the Panel

  1. In 1989 the NZSE established the Panel and delegated to it responsibility for day-to- day administration and enforcement of the Listing Rules. The NZSE saw the need to establish a body that was, and would be seen to be, experienced and independent of any particular market segment in relation to listed issuer activity and compliance.

  1. Paragraph 13 of the Foreword to the Listing Rules sets out the objectives of the Panel which are:

to represent the interests of market participants;

to be, and be seen as, a body that is independent of any sector group in the market, with authority and experience to engender respect for the Listing Rules and encourage voluntary compliance with them; and

to give the surveillance executives the authority of support by a prestigious market representative body.

Effect of demutualisation on the Panel

  1. The demutualisation of the NZSE will not alter either the Panel’s role or the manner in which it is constituted. The Panel’s constitution will continue to be stated in the Listing Rules, as will the NZSE’s powers of delegation to the Panel. A majority of the Panel members will still be required to be non- NZSE shareholders, employees or directors. Panel members will continue to be appointed by the NZSE, which will still be required to have regard to the Panel’s recommendations for appointment. The Panel will remain obliged to nominate persons with demonstrated knowledge and expertise in relation to markets, or facets of a market, who will best contribute to achieving the objectives set out the Listing Rules. The Panel will still be able to remove one of its members by a seventy five per cent majority. Panel members will still be precluded from considering a matter if they have a conflict of interest.

Administration of the Business Rules

  1. The NZSE has, and will continue to have, another significant regulatory role, in relation to its Business Rules. Historically, the NZSE has administered these itself and the Business Rules contemplate that this will continue following demutualisation.

The Business Rules comprise the terms of a contract between the NZSE and its broker members. High level general principles and framework provisions are set out in the Business Rules, while more detailed provisions are expanded upon in the Regulations and Code of Practice.

43. The proposed Business Rules govern matters such as:

applications for accreditation;

ongoing requirements for brokers;

the power of the NZSE Board to admit, review and revoke accreditation;

the ability to bring charges for breach by brokers;

disciplinary committee procedures;

disputes;

capital adequacy; and inspection of brokers.

44. It is contemplated that the NZSE Board and executive will remain responsible for administering the Business Rules (although the disciplinary committee, which has some external representatives, will continue to have certain responsibilities).

Supervision of exchange members in other jurisdictions

  1. In Australia, Hong Kong and Singapore, as in New Zealand, exchange brokers are regulated largely by the business rules of the relevant exchange.

Australia

  1. Sections 13 and 14 of the business rules of the ASX deal with supervision of exchange members. The ASX itself is responsible for the protection of the interests of the exchange or the public. The ASX may suspend members or, subject to certain procedural safeguards, cancel recognition of a member.

  1. Alleged breaches of the business rules and certain "prohibited conduct" are referred by the ASX to the National Adjudicatory Tribunal (the “Tribunal”), either compulsorily or at the option of the member affected. A Tribunal hearing is conducted by the chairperson, who is appointed by the ASX, and two others selected by the chairperson from the Tribunal Panel, a pool of ten persons nominated by the ASX.

  1. The Tribunal has a full range of disciplinary measures at its disposal. A disciplined member or the ASX may in most cases appeal to the Appeal Tribunal. An Appeal Tribunal hearing is conducted by the chairperson, who must be a retired Judge or a barrister or solicitor, and two others (who did not participate in the original decision) selected by the chairperson from the Tribunal Panel.

  1. The ASX itself considers complaints by non-members against members and may investigate and make decisions on disputes between members or between members and non-members. Any of the ASX's disciplinary functions may be delegated, for example to a committee of members or certain associates of members.
  2. The ASX also appoints accountants and inspectors to monitor members' compliance with the business rules. This monitoring role may lead to an investigation by the ASX's Investigations and Enforcement Unit.

Hong Kong

  1. The Board of the HKX has the power to discipline members under Chapter 2 of its business rules. It may exercise a range of disciplinary powers and may determine guidelines or procedures for disciplinary proceedings.

  1. The Board may delegate powers to committees (which may include non-Board members). In contrast to the ASX the rules of the HKX provide that, while committees established by the Board (which may include persons who are not Board members) may have powers delegated to them, each committee is always subject to an overriding power of the Board to review, vary, or supplement its decisions. The HKX rules contemplate a Disciplinary Committee to administer the disciplinary rules and a Disciplinary Appeals Committee to discharge the Board's powers and functions to review, vary or supplement the decisions of the Disciplinary Committee.

Singapore

53. For completeness, we note that the business rules of the SGX (the "Rules and Bye- Laws") are currently under review by that exchange, so are not discussed further in this section.

Summary of ASX and HKX provisions

  1. The above comparison indicates that neither the ASX nor the HKX has totally delegated its monitoring and enforcement role in respect of its business rules to an independent body. They both retain the primary executive role in relation to the detection and investigation of member compliance and some matters of discipline. Significantly, both the ASX and the HKX business rules establish separate committees to consider most matters of non-compliance or discipline and each includes a level of appeal, although, ultimately, panel (and committee) members are appointed by the exchange itself.

Comparison of proposed NZSE provisions with ASX and HKX provisions

  1. The monitoring and enforcement regime of the NZSE under the proposed Business Rules is consistent with the practices of the ASX and the HKX. The Business Rules contemplate the NZSE retaining the primary role in terms of day-to-day monitoring and enforcement, with a separate committee being established to consider any significant disciplinary matters.

  1. The proposed NZSE Business Rules require a level of independence in the Disciplinary Committee greater than that required in the comparable committees in Australia or Hong Kong. The chairman must be an experienced barrister, there must be at least one stockbroker who is not a Board member, and there must be one member of the public.

57. Unlike the ASX and the HKX, the NZSE does not provide an appeal from decisions

of the Disciplinary Committee. However, there is a right of appeal to the Disciplinary Committee from findings or penalties imposed either by a Complaints Committee (which is a committee appointed by the NZSE Board to deal with matters not serious enough to require the attention of the Disciplinary Committee) or by the Managing Director (who can also be appointed by the Board to deal with these less serious cases).

  1. The current Business Rules of the NZSE provide further transparency by requiring the NZSE to advise the Securities Commission of the appointment of the independent member of the Disciplinary Committee, and requiring the independent member to report to the Commission at least once a year. However, the proposed Business Rules do not contain these requirements. We query whether this reduction in the reporting

of the Disciplinary Committee may seem at odds with the recognised need, discussed above, to increase the transparency of decision making by demutualised exchanges.

Should there be an independent Business Rules panel?

  1. We raise the question of whether an independent panel, rather than the Board and the Complaints Committee, should administer the Business Rules on a day-to-day basis. As is the case for the Market Surveillance Panel, transparency could be enhanced through a formal statement of the constitution and operating procedures, and by an obligation to publish an annual report. As noted earlier in this paper, the Market Surveillance Panel was established to demonstrate expertise, impartiality and

independence. The same reasons would seem to apply in considering whether a separate and independent panel should monitor the Business Rules. Whether or not the lack of an independent Business Rules panel (in addition to the Disciplinary

Committee) would affect the Business Rules from a public interest perspective should also be considered.

  1. A separate but related question, if a separate panel is desirable, is how the members of such a panel should be appointed. Should the Market Surveillance Panel model be adopted (i.e., appointment by the NZSE Board on nomination from the Panel), or should an external party be involved with in addition to, or in place of, the NZSE Board?

Regulatory Oversight of the NZSE as a listed company

  1. As mentioned in Part I of this paper, the NZSE intends to become a listed company after demutualisation. Like other listed companies, the NZSE will be bound to comply with its own Listing Rules.

Supervision of NZSE compliance

  1. The NZSE has recognised, as have demutualised exchanges in other jurisdictions, a need for a special body of persons to monitor and enforce its compliance with the Listing Rules so as to avoid the perception that the Listing Rules might not be applied to the NZSE (in its new position as a listed company) in an independent and impartial manner.

  1. The NZSE proposes that a “Special Division” of the Panel should undertake regulatory oversight of compliance with the Listing Rules by a listed NZSE entity. The NZSE proposes to amend Appendix 3 to the Listing Rules to provide that the Special Division’s objective should be to foster confidence that the Listing Rules are applied to the NZSE in an independent and impartial manner.

64. The Special Division would comprise three independent Panel members who are to be selected by the Chairman of the Panel. “Independent” in this context means that each member of the Special Division must not be a director, employee or shareholder of

the NZSE or of any related company. The Special Division would deal with the NZSE’s listing application, consider any compliance issues, and take any enforcement action against the NZSE. It would have all the powers of the NZSE in doing so.

  1. Significantly, the functions of the Special Division and its surveillance and enforcement powers under the Listing Rules as now proposed, could not be revoked by the NZSE without the Listing Rules themselves being amended.

  1. We seek comment on whether the establishment of the Special Division in the manner proposed would affect confidence and international perception that the Listing Rules will be applied to a listed NZSE entity in an independent and impartial manner.

Discussion

  1. Although in practice the members of the Special Division are likely to be persons of significant repute there might be a perception that the Listing Rules do not require them to be sufficiently independent. The definition of “independent” under the Rules is relatively restricted. For example, it does not appear to exclude a Panel member who has other more general conflicts of interest, including a member whose employer (such as a fund manager) held shares in the NZSE. There is also a broader question of whether any Special Division member, as someone appointed by the NZSE to the Panel in the first place, will be considered by the market to be sufficiently independent.

68. In this regard we note that to date the Panel has comprised people with status in the business community, and knowledge and relevant expertise, as contemplated by the Panel’s constitutional requirements (set out in Appendix 3 of the Listing Rules).

69. We seek comment as to whether, under the proposed Business Rules, the Special

Division will be perceived to be sufficiently independent to achieve its objectives.

Monitoring the ASX, the HKX and the SGX

  1. By way of comparison, in Australia ASIC has power (under section 798C of the Corporations Act and a Memorandum of Understanding between ASIC and the ASX in relation to self-listing) to administer the listing rules as they relate to the ASX as a listed company. Similarly, in Hong Kong and Singapore the HKSFC and the MAS respectively administer the listing rules in relation to the HKX and the SGX under statutory authority and MOUs. We should note that these regulatory functions of ASIC, HKSFC and MAS have been provided for in legislation, not in the relevant conduct rules of those stock exchanges. There is no equivalent legislative provision in New Zealand.

Possible New Zealand alternatives

  1. An alternative might be for an independent body (perhaps even the listed companies, by way of vote) to have some involvement in appointing the members of the Special Division. This involvement could take the form of an approval requirement, or an obligation on the NZSE to consult with the independent body.

  1. If this were considered appropriate, how would it be best achieved? Should it be prescribed in the Listing Rules?

  1. Would this, coupled with the fact that the Special Division’s powers cannot be revoked without amending the Listing Rules, further demonstrate a separation between the NZSE and the body that regulates its compliance with its own Listing Rules?

Transparency of decision-making


  1. The question of transparency of decision-making is discussed below, as a separate topic.

Discussion questions

75. We invite comments on the following questions.

The Panel

(a) Is the Panel sufficiently independent under its present constitution?

(b) Is the definition of “independent” in the Listing Rules sufficient to ensure adequate separation between the Panel and the NZSE?

(c) Are the provisions for appointment of Panel members appropriate? (d) If not, in what respects do you think they are inappropriate?

(e) Should the Panel have its own separate powers under the Listing Rules rather than acting as a delegate of the NZSE?

The Disciplinary Committee

(f) Is the Disciplinary Committee, as proposed, sufficiently independent from the

NZSE Board?

(g) Should there be a separate body to monitor and enforce the Business Rules?

Appointment of the Panel and Disciplinary Committee

(h) Should the Board of the NZSE appoint the Disciplinary Committee and the

Panel?

(i) Should there be a requirement to involve any other person or organisation in the appointment of the members of either body? If so, who?

(j) If the answer to (i) is yes, what should be the extent of that involvement (ie, power to appoint, obligation to consult)?

(k) Are the proposed appointment arrangements likely to detract from public confidence in the effective functioning of our market, or from international perceptions of the market?

The proposed Special Division

(l) Are the proposed Special Division appointment procedures under the Conduct Rules sufficient to achieve appropriate independence and integrity in the body that monitors and enforces compliance with the Listing Rules by NZSE as a listed company?

(m) Would international perception of the market, and the market’s integrity, suffer if compliance by a listed NZSE entity were monitored and enforced by

a body whose members are drawn from a body appointed by the NZSE? If so, what other arrangement might be most appropriate?

(n) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should each of the above issues be given?

INCENTIVE TO MONITOR AND ENFORCE THE CONDUCT RULES

  1. Monitoring and enforcing the Conduct Rules can be expensive. It can require retention of professional advisers and investigators such as lawyers and accountants, as well as the exchange’s own staff . A demutualised stock exchange, has an increased commercial incentive, to provide and improve shareholder returns. The public could perceive a conflict of interest between the need to provide these returns and the need to undertake expensive and, theoretically, non-revenue-generating activities such as vigorous monitoring and enforcement of the Conduct Rules. Pursuing a listed issuer for a Listing Rule breach is likely to be in the public and market interest, but the cost to a stock exchange of doing so might well negatively impact on shareholder value. There may be a perception that such activities will not be pursued.

  1. An exchange needs to demonstrate that it will deal with this perceived conflict of interest in a way that will not jeopardise its essential monitoring and enforcement role. If the NZSE were unable to demonstrate this, confidence in the New Zealand sharemarket could be eroded and its international reputation adversely affected. Investors might consider that investing in New Zealand listed companies involves a greater regulatory risk, which might discourage foreign investment.

Discussion

Is this conflict more perceived than real?

  1. The Commission is aware of the argument that this conflict of interest may be more perceived than real because there is a natural incentive for the NZSE to enforce its Conduct Rules. The basis of the argument is that if the NZSE is not, or is not seen to be, actively monitoring and enforcing its Conduct Rules, especially by comparison with other stock exchanges, investors will lose confidence in it and will no longer invest in the New Zealand sharemarket. A reduction in the availability of investment capital would in turn reduce the attractiveness of the NZSE as a vehicle for raising capital. In turn, there would be less income from listing fees. Potential and existing issuers would then take their business to the other stock exchanges where there was more robust monitoring and enforcement and consequent investor confidence and support.
  2. The argument, in essence, is that this potential chain of events provides stock exchanges with a natural incentive to monitor and enforce compliance because, although there may be a substantive immediate cost in doing so, the long term consequences of inadequate monitoring and enforcement would ultimately be detrimental to the future of the stock exchange and reduce NZSE shareholder value. The Commission is interested in comments on the validity or otherwise of this argument.

  1. From a public interest perspective the issue is whether the competitive incentives on the Exchange are sufficient to provide the public with confidence that the market will be appropriately policed and whether, internationally, the NZSE will be regarded as having found the right balance between commercial and regulatory objectives.

Panel required to disclose funding shortfall

  1. The Listing Rules require the Panel to publish an annual report. The Rules require this report to state whether, in the Panel’s view, its funding has been sufficient to ensure it could meet its functions and if not, what matters the Panel was unable to address to the level it thought desirable. This obligation on the Panel to disclose any funding shortage may be seen to balance to a degree the commercial pressures that might cause the NZSE to limit the resources it devotes to the Panel’s regulatory functions.

Effect of the SMI Bill

  1. The SMI Bill will impose greater monitoring and enforcement obligations on the NZSE. It proposes that the NZSE be required to notify the Commission of disciplinary action under, or known or suspected breaches of, its Conduct Rules. It will also empower the Commission to direct the NZSE to suspend trading in any security or to take some other action relating to trading in a security where necessary to protect people dealing in those securities. These measures appear to provide additional statutory incentives on the NZSE to maintain an active monitoring role, in addition to providing for direct involvement by a statutory agency.

Enforcement obligations in other jurisdictions

  1. In other jurisdictions the law requires stock exchanges to undertake appropriate monitoring and enforcement.

Australia

  1. Section 792A of the Australian Corporations Act requires the ASX to have "adequate arrangements for supervising the market, including arrangements for handling conflicts between the commercial interests of the ASX, monitoring the conduct of participants in the market and enforcing compliance with its business and listing rules".

  1. In addition, the ASX is required to have sufficient resources to operate the market properly and for the required supervisory arrangements to be provided. The ASX must also give ASIC an annual report on the extent to which the ASX has complied with those, and a number of other, requirements. The relevant government minister may direct the ASX to take specific action to promote its compliance.

Hong Kong

  1. In Hong Kong, the Exchanges and Clearing Houses (Merger) Ordinance does not refer specifically to monitoring and enforcement but requires exchange controllers to ensure an orderly and fair market and to ensure that risks are managed prudently.

Singapore


  1. In Singapore, the Securities Industry Act provides the MAS with a broad power of direction over a securities exchange.

Funding enforcement action


  1. While there may be commercial incentives for an exchange to regulate well, there may also be strong commercial incentives to minimise the cost of self-regulation.

  1. One way of reducing enforcement costs for the Exchange may be to ensure that such costs are borne by the listed issuers themselves. The Listing Rules give the NZSE certain powers to recover its enforcement costs and therefore, to a certain extent, this has already been addressed.

  1. Specifically, Listing Rule 2.8 empowers the NZSE to charge listed companies for all costs and expenses incurred in carrying out its functions or exercising its rights and powers. The Panel’s 2001 Annual Report reveals that of its total expenses of

$715,000, $582,000 was funded by direct charges paid by listed issuers in respect of

Panel activity in which they were involved. Listing and trading fees also assist the

NZSE to fund its monitoring and enforcement expenses.

Issuers’ bank bonds

  1. An alternative may be for the NZSE to increase the amount of the bank bond each issuer is required to pay. The Listing Rules require each listed issuer to provide a

$75,000 bank bond to the NZSE. This is essentially a letter of credit that can be used at any time by the NZSE to fund an investigation into a potential breach of the Listing Rules. It is understood that the NZSE treats bank bonds as a last resort and that the bonds are rarely drawn upon. The questions arise as to whether the requirement for a bond is still appropriate, and if so whether a bond of $75,000 is sufficient.

Private enforcement

  1. Paragraph 4 of the Foreword to the Listing Rules suggests that the NZSE prefers to emphasise private enforcement of the Listing Rules by investors themselves. In particular, paragraphs 2 and 3 of the Foreword refer to the NZSE vigorously pursuing non-compliant companies only where “remedies available to other market participants do not constitute an effective sanction”. The question arises as to whether this articulates a sufficient commitment by the NZSE to enforcing the Listing Rules.

The Business Rules

  1. A breach of the Business Rules by a broker could theoretically damage the reputation of the NZSE as much as could a breach of the Listing Rules by a listed issuer. The Business Rules contain provisions dealing with member discipline and sanctions, as is expected by the identified international principles. The NZSE does not have an express power to require its investigative costs under the Business Rules to be paid in the same way that it does under the Listing Rules; that is in the hands of the Disciplinary Committee . The NZSE does have a general power under the Business Rules to impose such fees, levies and other charges as it sees fit. The NZSE advises that this might be used to impose charges on specific firms. As with the Listing

Rules, if the NZSE is able to adequately recover its costs of investigating complaints against brokers this should reduce enforcement costs for the NZSE, and also reduce disincentives on the NZSE conducting rigorous investigations. We note that where a broking firm successfully appeals to the Disciplinary Committee against a decision of the NZSE to suspend or revoke its designation, the Board of the NZSE must pay the

costs of the appeal. This exposure on the part of the NZSE may mean that it is less willing to take on specific cases unless its chance of success are high. On the other hand brokers obtain some comfort that should not have to pay for an unjustified action under the Business Rules.

Discussion questions

94. In light of the above, we invite comments on the following:

(a) Do the Conduct Rules place sufficient obligations and incentives on the NZSE

to monitor and enforce those Rules?


(b) If not, could this adversely affect public confidence in the proper functioning of the market, or international perceptions of the market?

(c) Should the Conduct Rules expressly give the NZSE primary responsibility for monitoring compliance and for enforcing its Conduct Rules?

(d) Should the NZSE state in its Rules that it has this responsibility?

(e) Should the NZSE state that it will take actions for breaches of the Conduct Rules for the benefit of shareholders, in priority to encouraging private actions by aggrieved shareholders?

(f) Is the requirement for an issuer to provide a bond to the NZSE still appropriate? If so, is $75,000 the appropriate amount?

(g) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should these issues be given?

RESPONSIBILITY FOR MONITORING AND ENFORCEMENT OF RELEVANT LEGISLATION

  1. As well as enforcing its own Conduct Rules there is a question of what role, if any, the NZSE should play under its Conduct Rules in monitoring compliance by listed issuers with their statutory obligations. The most relevant legislation in the context of the New Zealand sharemarket is probably the Securities Act 1978, the Companies Act

1993, the Financial Reporting Act 1993, the Takeovers Code, the Securities Amendment Act 1988, and the Fair Trading Act 1986. If the Listing Rules state a requirement that listed issuers comply with certain key pieces of legislation this may

send a clear message to listed issuers of the importance accorded by the NZSE to such compliance. It may also place some obligation on the NZSE in terms of monitoring and enforcing breaches of statutory obligations, as these would also be breaches of the Listing Rules. The Listing Rules already refer to statutory compliance. For example, any prospectus or investment statement prepared in connection with a listing application is required to comply with the Securities Act 1978, and any annual report of a listed issuer is required to contain any confirmation “required by law”. The Listing Rules also expressly require all listed issuers to comply with their obligations under the Financial Reporting Act 1993.

  1. We invite comments as to whether it is desirable for the Conduct Rules to require compliance with any statutes, to signal the standards to which the NZSE expects issuers and other market participants to comply, and to make compliance with such statutes a Conduct Rules issue, giving the NZSE an independent basis for action if issuers do not comply.

Discussion

  1. An obligation on issuers to comply with certain legislation sends a clear message to the sharemarket that legislative compliance is expected of listed issuers, and is considered by the NZSE as important. It also allows the NZSE to act on a breach of the law as a breach of its own rules.

  1. Such an obligation on issuers in the Listing Rules raises the question of the proper role of the NZSE in monitoring compliance with the relevant statutory compliance, and with enforcing the law.

  1. Stock exchanges are often described as "front-line" regulators in that they are in close contact with the activities of listed issuers and other market participants. This may provide certain practical advantages to the NZSE in enforcing suspected breaches of the law. For example, the NZSE's broker network could be a valuable source of information in insider trading cases.

  1. However, if the role of the NZSE is expressed in too broad terms it might involve the NZSE in evaluating compliance with legislation in respect of which it has no expertise. It might result in the NZSE becoming involved in areas which are best left to other regulators. Extensive monitoring obligations in respect of legislative compliance could also impose a high cost and risk on the NZSE. It is possible that

questions of liability may arise, although these might be addressed to an extent by agreement within the Rules themselves.

  1. A possible middle-ground might be for the Listing Rules to require the NZSE to report suspected legislative breaches of certain specified laws to the relevant authority. Listing Rule 5.4.2 currently gives the NZSE the power to report a listed issuer’s conduct to any governmental authority, without obliging it to do so. An obligation to make such reports would not mean that the NZSE was responsible for enforcing such legislation; it would mean that the NZSE’s position as a front-line regulator, with access to important information, was available for the benefit of other regulators within New Zealand.

Role and effectiveness of Panel

  1. The NZSE considers that the proposed changes to the role of the NZSE as a front-line regulator should not occur at the expense of the effectiveness of the NZSE as a regulator. A feature of the New Zealand market is the role of the NZSE's Market Surveillance Panel, which has primary responsibility for the surveillance and enforcement of compliance with the Listing Rules. The Panel has a focus of working with market participants. Consistent with this focus the Panel comprises of persons who have been appointed due to their expertise of and status in the market. The

NZSE believes that changing the scope of the Panel’s functions to include mandatory reporting on potential and actual breaches of the conduct rules and legislation related to the secondary market could impact on the effectiveness of the Panel.

103. In particular, the NZSE has questioned whether:

(a) mandatory reporting of potential breaches could affect the flow of information between an issuer and the Panel, and the willingness of public issuers to approach the Panel;

(b) whether extending the scope of the Panel’s reporting requirements to matters other than the Listing Rules (e.g. potential or actual breaches of legislation) might impact on the willingness of some market participants to take up voluntary positions on the Panel on the basis that they do not have expertise in this area (e.g. intermediaries, brokers, accountants, etc); and

(c) whether the creation of an obligation to report on potential or actual breaches may impact on the willingness of market participants to take up a role as a Panel member.

The SMI Bill and the Corporations Act

  1. The SMI Bill contains a provision that would oblige the NZSE to report to the Commission suspected breaches of the Securities Amendment Act 1988, the Securities Act 1978 or the Takeovers Act 1993. The obligation to pass on information about suspected breaches may demonstrate that the NZSE’s position as a front-line regulator can be coupled with the Commission’s enforcement powers for the purposes of strengthening market regulation. An obligation to report suspected breaches is consistent with the ASX’s obligations under the Corporations Act. This requires the ASX to report suspected breaches of listing rules and the Corporations

Act to ASIC. The Corporations Act regulates a very broad range of matters, including company and securities law, insider trading, takeovers, financial reporting, and continuous disclosure matters.

Discussion questions

105. We invite comments on the following:

(a) What role (if any) should the NZSE have under the Conduct Rules in monitoring or enforcing compliance with applicable legislation by listed issuers and brokers?

(b) Is such a role important in terms of New Zealand’s market integrity and international perceptions of our market?

(c) If the answer to (a) was yes, which specific statutes should be referred to in the Conduct Rules for this purpose?

(d) What impact, if any, do you think there would be on the effective

functioning of the Panel if the Panel were required under the Listing Rules to report to the Commission on likely or actual breaches of the Conduct Rules, and legislation relating to primary offers and secondary trading?

(e) If the SMI Bill is not passed into law, should the Conduct Rules contain an obligation on the NZSE to report relevant legislative and Conduct Rule

breaches to the Commission and require co-operation and information sharing with the Commission, Takeovers Panel or other regulatory bodies in relation to any such suspected breaches?

(f) If so, what should be the extent of any such obligation on the NZSE (e.g. actively monitoring compliance, reporting known or suspected breaches, acting on suspected breaches under its own powers)?

(g) In terms of the public interest criteria against which the Rules are to be assessed, how much weight should these issues be given?

WAIVERS AND RULINGS


Exercise of NZSE discretion

  1. Listing Rule 1.7.1 provides the NZSE with a broad discretion to waive the application of any Listing Rule on such terms and conditions as it determines. Listing Rule 1.6.1 provides the NZSE with significant powers to make rulings as to the application of any Listing Rule.

  1. Under a delegation from the NZSE the Panel has been responsible for dealing with matters of ongoing compliance, and with waivers and rulings in respect of the Listing Rules.

Application of powers

108. Paragraph 11 of the Foreword to the Listing Rules notes that the rules cast a wide net.

The purpose of this is to avoid the rules falling into disrepute due to unintended avoidance. On the other hand the Foreword acknowledges that there is a need for commercial transactions not to be constrained where their form or development does not undermine the objectives of the NZSE. Accordingly the Foreword invites companies to:

"...make use of these [waiver] powers in circumstances in which the Exchange can be satisfied that the proposals for which dispensation is sought are innocuous."

Listing Rule 1.8.1 states, with regard to rulings (i.e. decisions on the interpretation of the Listing Rules), including waivers, that:

"the Exchange shall be guided by the policies set out or explained in the Foreword to the Rules and in the footnotes and any other practice notes or Rulings promulgated to Issuers."

There is no requirement for the NZSE to publish its waivers or rulings or to set out the reasons why the exercise of its power meets the above criteria. Listing Rules 1.6.2

and 1.7.3 permit any waiver or ruling to be published, at the NZSE’s discretion, and we are advised that in practice most are published.

  1. The question that arises from a public interest perspective is whether, and to what extent, any disciplines should be imposed upon the NZSE and the Panel to ensure that the discretion is, and is seen to be, exercised prudently, consistently and fairly.

  1. This question received scrutiny in 2001 in the context of the attempted takeover of Montana Limited (“Montana”) by Lion Corporation Limited (“Lion”) when Lion was alleged to have breached the takeover provisions of the Listing Rules.

  1. The Standing Committee in the Lion/Montana decision said the following as regards the exercise of the NZSE’s waiver power:

“Ideally, there should also be a brief statement of reasons by the Panel for the grant of the [waiver]. In this way, disgruntled investors would be able to assess the reasons

for the Panel’s decision. In the Committee’s view, any need for urgency should not overwhelm the need for reasonable process, given the far-reaching effects of granting a waiver.”

This quotation illustrates a sentiment that, rightly or wrongly, is expressed from time to time in the media and to the Securities Commission that there needs to be greater transparency in, and consistency of, decision-making by the NZSE in order to provide certainty as to what is and what is not permitted in terms of the Listing Rules. Confidence in the decision-making processes of a body can be enhanced where the rules under which decisions are made themselves provide for a transparent and accessible procedure.

Discussion

Waiver powers in other jurisdictions

Australia

112. The ASX has a broad waiver power under its listing rules, except to the extent that the

ASX listing rules specify that a particular rule may not be waived. The listing rules

require the ASX to publish waivers periodically. In practice, the ASX publishes a waiver register monthly which includes a brief description of the waiver and the names of the entities involved.

Hong Kong


  1. The HKX is also permitted by its listing rules to waive compliance in individual cases. However, any generic waiver (i.e. one that affects more than one listed entity at a time) may be granted only with the prior consent of the HKSFC. In practice, the HKX also publishes a summary of the facts, an analysis, the reasoning and the decision of each such waiver on its website.

Singapore


114. The SGX has recently undertaken a review of its Rules and has published a new

listing manual which comes into effect on 1 July 2002. Under it, the SGX has a broad discretion to grant waivers, except to the extent that a rule is specified as not subject

to a waiver. Where a waiver is granted, it must be announced by the issuer as soon as possible. Where the SGX rejects an application it may, but is not obliged to, disclose the reasons for its decision.

Need for flexibility

  1. The above comparisons indicate that stock exchanges need the flexibility to grant waivers and make rulings. In fact, it appears that significant public interest questions would arise if the NZSE did not have the discretion to grant waivers, as the Listing Rules would establish a regimented and comparatively inflexible compliance regime which would have the potential to discourage listings and increase compliance costs.

Need for transparency


  1. A separate but related question is whether the waiver process under the Listing Rules is sufficiently transparent in terms of publication of decisions and reasons. While the NZSE has the ability under the Listing Rules to publish waivers, and provides each year a brief summary of waiver statistics in its Annual Report, the NZSE is not required by the Rules to publish waivers or the reasons for waivers. It is understood that, in practice, an entity that is granted a waiver is required to publish the fact that the waiver has been granted, but this requirement also is not currently reflected in the Listing Rules.
  2. Because the decisions and, importantly, the reasons for waivers do not have to be made publicly available, there is a risk that the public may not always be able to assess for itself the process and merits of the decision. Although the NZSE’s waiver and ruling decisions could be fair, reasonable, consistent and impartial, justice may not be seen to be done. We welcome comment on whether a greater public scrutiny

of NZSE decisions on rulings and waivers, together with an explanation of the reasons behind them, could promote public confidence and could improve international perceptions of the decisions.

Listing Rule objectives

  1. A related issue is whether the objectives of the Listing Rules should be better set out, perhaps in the Foreword, so that there can be some assessment as to whether particular waivers ensure that those objectives are not undermined. In this regard, paragraph 11 of the Foreword to the Listing Rules states that:

“The Exchange does not wish the necessarily broad scope of the Rules to constrain the form or development of commercial transactions which do not undermine the objectives of the Exchange."

Comparison with overseas exchanges

  1. In exercising its discretion the NZSE is required by Listing Rule 1.8 to be guided by the policies set out or explained in the Foreword and in the footnotes and any other practice notes or rulings promulgated to issuers. While there is a broad reference to "the objectives of the Exchange" in the Foreword (which would presumably act as a benchmark in the determination of waivers) there is no concise easily accessible exposition of what those objectives are in the same way that there is under the ASX or the SGX listing rules in relation to their “principles”. On the other hand the Foreword taken as a whole may seem to elucidate what the NZSE considers to be the important features of the Listing Rules and these overlap in many respects with the simple list of the ASX or the SGX.

ASX

  1. The Introduction to the ASX listing rules notes that waivers can be granted where the principles, which are also set out in the Introduction, are not undermined. The Introduction sets out the ten principles of the listing rules. These principles require, for example:

that certain standards of quality must be met by the issuer;

that there is sufficient investor interest to warrant quotation;

that securities must be issued in circumstances and have rights attached which are fair to new and existing security holders;

that timely disclosure is made of information which may influence investment decisions or in which various parties have a legitimate interest; and

that security holders must be consulted on matters of significance.

  1. These are consistent with the principles that are provided by international industry organisations such as IOSCO, ICMG and FIBV and, again, overlap with the contents of the Foreword of the NZSE’s Listing Rules. Reference to those principles, however, is not an element of the substantive waiver rule in Australia as it is in New Zealand.

SGX and HKX

  1. The listing rules of the SGX contain a five point explanation of the underlying principles of the rules. These must be taken into account where the SGX considers whether or not to accept a listing application, although they are not specifically referred to in the context of waivers. The HKX does not appear to set out the principles that underlie its listing rules.

Takeovers Panel

  1. In New Zealand context, as mentioned above, when the Takeovers Panel grants exemptions it is required under the Takeovers Act 1993 to set out why the exemption is consistent with the objectives of the Takeovers Code. These six objectives are set out in section 20 of the Takeovers Act.

Should objectives be expressly stated?

  1. It is possible that there may be some confusion between the statement made under Listing Rule 1.8.1 (relating to rulings) and the statement of policy made in relation to waivers in the Foreword. Is it clear that in considering whether to grant waivers the NZSE must look only at policies for waivers set out in the Foreword or might other, non-disclosed “objectives” of the NZSE impact on the decision? If the key principles were set out in the Foreword (in the same way as they are in the ASX or SGX listing

rules) would there be a clearer perception of the principles against which waiver decisions are made?

Generic waivers

  1. Under the HKX listing rules the HKX cannot grant any generic waivers without the approval of the HKSFC. A generic ruling or waiver is arguably, in substance, an amendment to the listing rules themselves. The Restructuring Act is intended to require any changes to the Listing Rules to be subject to the scrutiny of the Minister and the approval of the Governor-General by Order in Council. Accordingly, it appears that if the NZSE has the power to grant generic waivers or rulings, it will essentially have the power to circumvent the requirement for amendments to be approved.

  1. The Commission is informed by the NZSE that, in practice, it very rarely grants generic waivers. Nevertheless, as the requirement for approval of the Conduct Rules is considered to be an important part of building investor confidence, it may be desirable for the Listing Rules to prohibit generic waivers or rulings without independent approval or consultation.

Rules not subject to waiver

Comparison with other jurisdictions

  1. A particular feature of the waivers rules of the NZSE, ASX and SGX is that certain rules cannot be waived, although all these exchanges recognise the importance of having the flexibility to grant waivers. The only rules of the NZSE that may not be waived (under the terms of the Listing Rules) are the FASTER rules which govern the operation of the exchange’s securities transfer and settlement system.

Australia

  1. The ASX states that it will not waive the rules that require a foreign exempt issuer to comply with the rules of its home exchange and to provide all the information that it provides to its overseas home exchange. Also, more administrative rules such as those that require the suspension of an issuer for failure to lodge documents or pay listing fees cannot be waived. The ASX does not further limit its discretion to grant waivers.

Singapore


  1. The SGX states that it may not waive the rules in relation to the disclosure of information.

Reasons for entrenchment

  1. In principle, the requirement that compliance with a rule should only be waived in appropriate circumstances should provide adequate protection and obviate the need to state that certain rules cannot be waived. It may be, however, that there are other

good reasons for entrenchment. The policy behind entrenchment of rules appears to be to send a signal to the market participants on certain matters. The question arises whether there are any further rules that might be considered so important to the integrity or perception of the market that no waiver power should exist in respect of them.

Consultation option

  1. A more flexible approach might be for the Listing Rules to require the NZSE to consult with an independent body, such as the Commission, before granting a waiver from certain rules. This approach is proposed by the NZSE in respect of its new Listing Rule 10.1 (see Appendix C to this paper). A footnote to the rule states that, with the exception of certain matters seen as minor, the NZSE will consult with the Securities Commission prior to granting any waiver from the proposed continuous disclosure rules.

  1. We note that the SMI Bill requires consultation with the Commission on waivers from, or determinations relating to, the continuous disclosure rules. Are there any other rules in respect of which the NZSE should consult prior to giving a waiver?

Perceived disadvantages of consultation

  1. The NZSE has questioned whether imposing an obligation on the NZSE to consult with the Commission prior to granting waivers might adversely impact on the effective functioning of the Panel. The NZSE’s concern is threefold:

(a) it considers that an essential element in attracting persons of experience and status to the Panel is the belief that they are undertaking a role in which they have prime responsibility. The NZSE believes that the requirement to consult

the Commission before granting waivers may impact on those persons’

perceptions of the autonomy and value of the Panel’s role;

(b) it considers this obligation may create confusion for market participants as to who is ultimately responsible for surveillance of compliance with the Listing Rules. The NZSE believes that if there is an obligation to consult with the Commission before granting waivers then public issuers who are seeking waivers may think it necessary to approach both the Panel and the Commission to ensure both parties are aware of the reasons why they are seeking the waiver;

(c) the NZSE considers that the Panel places a high priority on a speedy resolution of applications and the NZSE questions whether a waiver consultation process may compromise this element of the Panel decision making process.

Related party transactions – Listing Rule 9.2

134. The Panel’s annual report for 2001 indicated that, of all the waivers that were granted,

52 per cent involved Listing Rule 9.2. Listing Rule 9.2 is a key provision which regulates related party transactions. Essentially, the rule states that a material transaction between a listed company and a related party must be independently appraised and put to the vote of the non-associated shareholders in general meeting. It is considered to be a fundamental rule because it assists in preventing public investors from being adversely affected by non arm’s length transactions between a listed company and someone with control or influence over it.

  1. The waiver history mentioned above raises questions as to whether too many waivers of the rule have been granted, whether the rule itself is too broadly drafted, or whether the thresholds are too low. In terms of the public interest, confidence in the market could be eroded if, despite the existence of such a fundamental provision such as Listing Rule 9.2, its application was being waived so frequently that in practice it did not, or did not appear to, serve to protect investors. Attached as Appendix D is a table summarising the Panel’s waiver activity in relation to Listing Rule 9.2 since

1993.

Criteria for waiver from LR 9.2

  1. Listing Rule 9.2 is broadly drafted. The Commission understands that this is consistent with the NZSE’s strategy of avoiding a black letter law approach, so as to capture all transactions with associated party involvement. If this provision were not broadly drafted loopholes may be found by listed companies and their advisors. As a result, the integrity of the provision itself could be undermined. This concern is mentioned in paragraph 11 of the Foreword to the Listing Rules. The danger of such broad drafting is addressed in the footnote to Listing Rule 9.2 which explains that the NZSE will waive compliance where it is satisfied that the personal connections with, or involvement of, a related party are immaterial or plainly unlikely to have influenced the transaction or its terms and conditions.

Comparison with Australia

  1. The ASX Annual Regulatory Report for 2001 reveals that of the 389 waivers granted by the ASX, 97 of them (or 25 per cent) involved the ASX’s equivalent of Listing Rule 9.2. By comparison, the proportion of related party waivers granted by the NZSE appears to be relatively high at 52 per cent. To some extent this discrepancy could be due to the fact that the rules of the ASX are longer and more detailed than those of the NZSE and that of the 389 waivers mentioned above, 127 related to rules

for which New Zealand has no equivalent. Disregarding those waivers, the proportion of related party waivers granted by the ASX is increased to 37 per cent.

  1. The comparison with the ASX also reveals that the five per cent materiality threshold in Listing Rule 9.2 is the same as in Australia. One difference is that the ASX does not have a 0.5 per cent threshold for annual service fees paid to related parties.

  1. In the absence of a review of the waivers themselves and the circumstances in which they are granted, it is not possible to assess whether the policy of the NZSE in granting waivers from Listing Rule 9.2 is appropriate. If it is desirable from a public interest perspective for Listing Rule 9.2 to be broadly drafted, there will inevitably be a large number of waiver applications. Any issue with waivers of Listing Rule 9.2 is, we consider, not so much with the fact that the waivers have been granted, but rather with the transparency of the decision making, an issue that is discussed separately above. In other words, the fact that a number of waivers have been granted from a broadly-drafted related party rule is not in itself evidence that practice in New

Zealand is unusual or inconsistent with international practice.

Discussion questions

140. We invite comment on the following:

(a) Is the process under the Listing Rules by which the NZSE can grant and publish waivers a matter that may affect either public confidence in the effective functioning of the market or international perceptions of the market?

(b) Should the Listing Rules require the NZSE to publish each waiver that is granted, as and when it is granted?

(c) If the answer to (b) is yes, should the Listing Rules also require the NZSE to publish its reasons for each waiver?

(d) Should any Listing Rules not be subject to waiver? If so, which rules, and why?

(e) Should the NZSE be required to consult with an independent body (such as the Commission) before granting waivers from any Listing Rules, as is contemplated in relation to waivers of the proposed new Listing Rule 10.1?

(f) If the answer to (e) is yes, on which Rules should the NZSE be required to consult, and who should be consulted?

(g) Should the approval of an independent body be required in order to grant any generic or class waivers?

(h) Alternatively to (g), should the Listing Rules require consultation with any independent body before any generic or class waivers are granted?

(i) Would a requirement for the Panel to consult with the Commission before granting specific waivers impact on the effective functioning of the Panel?

(j) If the answer to (i) is yes, do you think the benefits of requiring consultation exceed the potential for any detriment to the effective functioning of the Panel?

(k) Bearing in mind the NZSE’s intention to deliberately set a low threshold for related party transactions, is there any concern over the number of waivers that have been granted from Listing Rule 9.2?

(l) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should these issues be given?

NZSE DISCRETION TO ACCEPT NEW ENTITIES FOR LISTING

  1. The NZSE has a broad discretion under the Listing Rules to accept or reject an applicant for listing. Certain objective criteria must be met by the applicant in that the listing application must be supported/sponsored by an NZSE member, the entity must have a market capitalisation of $5 million and there must be a sufficient spread of securities to provide liquidity. Over and above these matters the NZSE retains an absolute discretion to accept or reject a listing application as it sees fit.

  1. From a public interest perspective, there appears to be a concern voiced in the media from time to time that some important decisions are made behind closed doors and without adequate publication or explanation. This perception could be unfavourable from the point of view of the sharemarket’s reputation and public confidence because it suggests that the NZSE is unwilling to have its decision on a matter of potentially wide public interest subjected to public scrutiny.

Discussion

No review, reasons or appeal

  1. Although Listing Rule 2.4.1 gives the Panel the power to review NZSE decisions, this power does not extend to an NZSE decision on an application for listing. In addition, although the NZSE is obliged to give reasons to the entity concerned where a listing is cancelled, no reasons have to be given to the applicant or publicly if the NZSE refuses a listing application. There is no right of appeal on listing decisions.

Quality and transparency of decisions

  1. The questions raised here go to both the quality of decisions and the transparency of the decision-making process. Should the Listing Rules contain clearly expressed disciplines that aim to ensure that consistent and high quality decisions are made, and that the power to refuse a listing application is exercised prudently, consistently and professionally? How transparent should the process itself be?

Comparison with other jurisdictions


Australia and Singapore

  1. Like the NZSE, the ASX and SGX also retain a wide discretion in relation to the acceptance of new entities for listing. Their listing rules do not prescribe a right of appeal to any higher authority, and do not require reasons for refusal to be given to an unsuccessful applicant. In practice, however, the ASX has an internal procedure for the review of listing decisions by the Listing Committee which considers the matter afresh and makes an independent decision.

Hong Kong

  1. The HKX also has a wide discretion in relation to listing decisions. Unlike most exchanges we have considered, however, very detailed rules are set out in the HKX listing rules as to the review procedure that is available to unsuccessful applicants. Approval for listing involves an application to the Listing Division with final approval coming from an independent Listing Committee. There is an opportunity for appeal

to the Listing Appeals Committee where an application for listing has been rejected solely on the grounds that the issuer or its business is unsuitable for listing. This implies that reasons for the refusal of an application are given to an unsuccessful applicant by the Listing Committee, although there is no rule to that effect.

Commercial sensitivity

  1. An unsuccessful listing application may involve matters of significant commercial sensitivity for the NZSE. It may be that without some protection from legal action the NZSE would be restricted from publicly explaining its reasons for declining a listing application. On this point we note the NZSE now proposes to require applicants for listing to sign a pre-listing agreement with the NZSE that provides protections for the NZSE against any action resulting from a refusal to admit the issuer to the list.

148. It may be that often the reasons for a refusal to list are rightly kept confidential.

Perhaps the fundamental question for discussion is whether the NZSE should be required to explain to the unsuccessful applicant why its application has failed. If the NZSE were obliged to explain to an unsuccessful applicant why it was declined, it would then be up to the entity involved to decide whether or not to publish the decision. Publication by the entity concerned would address any privacy, commercial

sensitivity, or defamation concerns that might arise from public disclosure by the

NZSE.

  1. The Commission understands that in practice the NZSE generally does explain the reasons for refusal to unsuccessful applicants. However, the Listing Rules expressly state that the NZSE is not required to give any reasons.

Alternatives


  1. This issue has elements in common with that discussed above regarding the exercise by the NZSE of its discretion in the granting of waivers and rulings. The requirement to articulate the rationale for the refusal of a listing may provide a further incentive

for the NZSE to exercise that discretion appropriately and should assist in promoting public confidence in the NZSE’s decisions.

  1. Another requirement that could assist in achieving the same result would be a right of appeal to an independent body to review an NZSE decision on listing. Again, if an appropriate appeals procedure could be established, the public may see that there is independent overview and effective monitoring of decisions to avoid any misuse of the discretion.

Discussion questions


152. We welcome comments on the following questions:

(a) Is transparency in the listing process important to a market’s integrity and perceptions of that market?

(b) Should the NZSE be required to disclose its reasons for refusing a listing?

(c) If the answer to (b) is yes, should the NZSE have to disclose its reasons to the public, or only to the unsuccessful applicant?

(d) What further protections should there be for the applicant and the NZSE, if any, to deal with issues of confidentiality and defamation? How can these be implemented within the scope of the Conduct Rules?

(e) Should the jurisdiction of the Panel, or perhaps some other regulatory body, be extended to hearing appeals from NZSE decisions on listing applications?

(f) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should this issue be given?

ADEQUACY OF SANCTIONS

  1. The effectiveness of the Listing Rules relies in part on the deterrent effect of their sanctions. If listed issuers are not afraid of the consequences of breaking the Listing Rules, there may be limited incentive for them to comply. In the 2000 Annual Report of the Market Surveillance Panel the Chairman noted that:

"During the year there has from, time to time, been criticism of the state of the share market in New Zealand. There is sometimes media criticism of a perceived lack of

‘teeth’ of bodies such as the Panel."

The Chairman goes on to note, however, that:

"While the outcome [of an investigation] may be a censure or critical comment from the Panel (which the media delight in regarding as a "slap on the wrist"), it is evident from our discussions with listed issuers under investigation that public exposure of their shortcomings is viewed seriously by them."

Discussion

Available sanctions

154. The sanctions for breach of the NZSE's Listing Rules are set out in Listing Rule 5.4.2.

The NZSE may, in its absolute discretion (although it must give reasons):

cancel a listing;

cancel or suspend the quotation of any securities;

publish a censure or statement relating to the conduct of any issuer;

director or associated person; or

refer conduct to any statutory or governmental authority.

Comparison with other jurisdictions

  1. These sanctions are identical to those available to the ASX, HKX and SGX under their respective rules. In each jurisdiction we have considered, any further penalties for breaching listing rules have been provided for in statute rather than in the listing rules of the exchange in question.
  2. The above demonstrates that the NZSE has implemented sanctions for breach of its Listing Rules that are consistent with international practice. The sanctions arguably go as far as is appropriate to the extent that the Listing Rules set out the contractual rights and obligations of a self-regulated exchange.

Should there be a penalty or damages regime?

  1. The effectiveness and appropriateness of suspensions and delistings as sanctions has been questioned on the basis that it is usually the minority shareholders, rather than the officers or directors of the company, who suffer from such an action.

  1. This raises the question whether a penalty or damages regime could (from a legal perspective) and should be introduced, whereby either the issuer or the persons responsible within the issuer are held accountable for breaches? A further question is whether the Listing Rules are an appropriate mechanism to achieve this?

  1. A regime that extends sanctions to company officers could focus directors and management more clearly on matters of compliance. It should be noted that such a regime would take a step further than the current Listing Rule requirement that directors, before being appointed, sign a written undertaking to ensure that their company at all times complies with the Listing Rules.

160. In respect of the company itself could a penalties or damages regime entail either the power to impose penalties, or to sue for damages under an amendment to the present Rule 2.1.2?

Legal issues

  1. Any discussion of a power for the NZSE to take further steps against issuers than it can at present, and in particular any discussion about a power to impose penalties, raises the question of whether the NZSE could take such steps within the contractual framework of the Conduct Rules. In general, the law will not allow a contract to impose penalties (although it will allow a contract to require payment of estimates of possible damages).

  1. This point arose in 2001 when the Standing Committee of the Panel was asked to consider the remedies available under the Rules for a breach by Lion Nathan Limited of the Notice and Pause provisions of the Listing Rules. In its decision of 29 June

2001 the Standing Committee found that although the NZSE derives its jurisdiction

from contract it is performing a regulatory function of a public nature, and so the private law doctrine of penalties should not be applied to render unenforceable clear consequences of breach set out in the Listing Rules. If the Standing Committee is correct then the NZSE should be able to impose penalties under its rules at present.

Penalties under the proposed Business Rules

  1. We note the proposed Business Rules of the NZSE (which will also have contractual force under the Restructuring Act) allow the imposition by the Disciplinary Committee of fines, “by way of penalty”, of up to $1 million against broking firms that breach the rules. The current Business Rules also provide for these penalties, but we note that the same legal issues about penalties in contracts do not arise, because the Sharebrokers Amendment Act 1981 expressly allows the NZSE to impose penalties through its Business Rules. This Act will be repealed on the day the NZSE is restructured. While not determinative of the legal question, the inclusion of penalties in the proposed Business Rules indicates that the NZSE considers it will be entitled to impose contractual penalties under the new rules.

Effect of the Restructuring Act

  1. Under the Restructuring Act, the Conduct Rules of the NZSE will need to be approved by the Governor-General by Order in Council prior to registration of the demutualised NZSE. That Act provides that the Conduct Rules will not be regulations, and also states that they will have contractual force from the day the restructuring takes effect. As such it may be that the change in regulatory structure will not change the status of the rules in such a way as to affect the application (if any) of the rule against penalties.

  1. In view of the Standing Committee’s comments on the public nature of the NZSE’s functions, we raise for comment the question whether this governmental approval of the Conduct Rules may give a greater basis on which to distinguish the Conduct Rules from other contracts, and permit more latitude for the imposition of penalties or damages against listed issuers and their directors, and in the context of the Business Rules, also brokers. We note that under SMI Bill the conduct rules of any future registered exchange would be subject to the same statutory approval regime, which provides a wider relevance to this question.
  2. Comment is sought on whether such a regime could, and should, be introduced in respect of either issuers or officers, how it would operate, what the sanctions might be, what rights of appeal and other procedural safeguards should apply - and what change, if any, should be made to these answers if the SMI Bill was in force?

Discussion questions

167. We invite comment on the following questions:

(a) Do the sanctions that are currently available to the NZSE for breaches of its

Conduct Rules provide an adequate deterrent?

(b) If not, what additional sanctions could or should be imposed under the

Conduct Rules, and for which breaches?

(c) Does the NZSE have jurisdiction or power under the Conduct Rules to impose financial penalties on, or seek damages from, issuers or directors of issuers?

(d) Would a penalties or damages regime for issuers, directors or officers be appropriate in the context of ensuring that the Conduct Rules create confidence in the New Zealand sharemarket?

(e) If the answer to (d) is yes, what should those penalties entail? Under what authority could they be imposed and enforced?

(f) Is this a matter to be addressed in the context of statute law reform or in the

Conduct Rules?

(g) If this is a matter that should be addressed in the Conduct Rules, then in terms of the public interest criteria against which the Rules are to be assessed, how much weight should this issue be given?

DISCLOSURE OF INFORMATION – CONTINUOUS DISCLOSURE

  1. Disclosure by issuers of material information that may affect investment decisions is a core requirement of the listing rules of a stock exchange. An informed market is vital for the efficient pricing of securities. The perception of information flows in the market is an important factor for investor confidence in that market.
  2. An obligation on listed issuers to publicly disclose price sensitive information in a timely manner will reduce the opportunity for those “in the know” to obtain a benefit from trading on inside information at the expense of those who have less access to information. The timely disclosure of material information can assist investors to make informed decisions. It can also encourage them to have confidence in the integrity of the market by helping to counter insider trading, and by helping to prevent false markets and the distortion of the market through false rumours.

Current Listing Rule requirements

170. Paragraph 8 of the Foreword to the Listing Rules states:

“...trading on the market is most efficiently conducted and fostered for all participants when issuers are required to disclose to all participants as much material information as can be disclosed without material damage to the interests of the issuers.”

The last part of the above quotation highlights the tension that exists between the need for the sharemarket to be fully informed and the need for listed companies not to be put in a position whereby their disclosure obligations have the potential to put the business at risk.

  1. Listing Rules 10.1.1 and 10.1.2 establish the current continuous disclosure regime for listed companies. Other parts of the Listing Rules address specific disclosures that are required such as information to be included in annual reports and prospectuses. In terms of ensuring that the market is continually informed, Listing Rule 10.1.1 is the operative provision to which listed companies must have regard. In broad terms, Listing Rule 10.1.1 requires a listed issuer to treat “relevant information” as its own asset, to be used and applied for its own benefit. Listed issuers are required to safeguard relevant information, but release it to the market when:

(a) it is received by someone who is not bound to keep it confidential, or by someone who is likely to use it in deciding whether or not to deal in the issuer's securities; or

(b) it ceases to have greater value to the issuer for that information to remain confidential (it is not a good enough reason under the existing rule to withhold the disclosure of information under this limb if the release may adversely affect the market price of the issuer's securities).

“Relevant information” is a key element of the rule. The term refers to information of a listed issuer about its business which is not reasonably available to an informed investor and which, if it were released to the market, would or would be likely to affect materially the market price of the issuer's securities.

Proposed new Listing Rules

  1. The NZSE is proposing to adopt a new Listing Rule 10.1.1 together with a new definition of “relevant information” (see Appendix C to this paper). The NZSE is consulting with market participants on this and other changes proposed to its Listing Rules. In broad terms, the new Listing Rule 10.1.1(a) will require a listed issuer to disclose relevant information to the market as soon as it becomes aware of it. The only exception to this obligation is where:

(a) a reasonable person would not expect disclosure; and

(b) the information is confidential; and

(c) one or more of the following applies:

(i) it would be a breach of law to disclose the information;

(ii) the information comprises an incomplete proposal or negotiation; (iii) the information comprises matters of supposition or is insufficiently

definite to warrant disclosure;

(iv) the information is generated for the internal management purposes of the entity; or

(v) the information is a trade secret.

  1. Accordingly, the criteria of (a), (b) and one of (c)(i)-(iv) above must be satisfied before a listed issuer may withhold relevant information. The listed issuer will be deemed by Listing Rule 10.1.1 to be aware of information if a director or officer of it, or any of its subsidiaries, has, or ought reasonably to have, come into the possession of the information in the ordinary course of performance of their duties as a director

or officer.

  1. The other key part of the proposed new Listing Rule 10.1.1 is that disclosure will also be required as soon as the relevant information is received by someone who might use it as a basis for trading (or divulge it to such a person) or where it is necessary to prevent the development or subsistence of a false market. These latter disclosure

obligations will apply even if the criteria in Listing Rule 10.1.1(a), which permits withholding, are otherwise satisfied.

175. In addition to the general obligation to disclose relevant information, Listing Rule

10.1 will continue to require disclosure of specific information under Listing Rule

10.1.2. This Rule requires prompt disclosure to the NZSE of any arrangement in respect of which members of the public might reasonably consider directors of the issuer have a conflict of interest which may lead them to approve terms which are materially more favourable to the other parties than arm’s length terms. In particular an issuer must always disclose:

(a) any arrangements by the issuer with any director or associated persons of a director or with any shareholder who is not a member of the public; and

(b) the entry into any arrangement or agreement that will require shareholder approval as a related party transaction under section 9 of the Listing Rules.

  1. The Listing Rules require disclosure of these matters whether or not they are confidential, and whether or not the directors consider it of greater value to the issuer that this information remains confidential.

177. Further specific matters must be disclosed under section 10 of the Listing Rules.

These include:

(a) periodic reporting – six monthly and annual reports, preceded by preliminary announcements;

(b) any proposed change in the general nature of the business of an issuer;

(c) any action or disposal by a listed issuer of a holding of more than 5% of the securities of another listed issuer;

(d) any acquisition or disposal of assets with a gross value exceeding 10% of the issuers’ shareholder funds;

(e) any proposal to consolidate or sub-divide securities or to issue equity securities (whether or not to be quoted);

(f) any proposal to amend conditions of quoted securities;

(g) non-confirmation by a meeting, or cancellation of any proposal already notified to the NZSE;

(h) any change in the directors or auditor of the issuer;

(i) any change in the contact details, registered office, or share registry, of an issuer;

(j) any proposed name change of an issuer;

(k) the opening or closing of a branch register; and

(l) any credit rating of an issuer or any guaranteeing entity of an issuer of debt securities.

  1. In view of the significant impact that ongoing/continuous disclosure rules can, and do, have on market confidence, consultation is sought on the proposed changes to Listing Rule 10 (which is set out in Appendix C). As noted above, the NZSE is running a simultaneous consultation process in relation to the proposed changes to Listing Rule

10.1. There has also been comment on the specific disclosures required under Rule

10, for example, whether the reasons for changes in directors or auditors should also be expressly required to be disclosed as specific matters. The NZSE has informed the Commission that it is also intending to review the specific disclosure requirements referred to in Rule 10. Any comments on these matters are also invited in submissions on this paper.

Effect of the SMI Bill

  1. We note also that the SMI Bill, as is it has emerged from the Finance and Expenditure Select Committee, does not prescribe the continuous disclosure rules that will apply to listed issuers. This is left to the NZSE. However, the Bill provides a regulatory framework within which the NZSE’s continuous disclosure regime will operate. That framework includes obligations to consult with the Commission in certain circumstances, an ability for the Commission to make orders and directions relating to continuous disclosure, and a “regulatory backstop” mechanism that would permit a continuous disclosure regime to be imposed by regulations should the Listing Rules regime prove not to provide appropriate disclosure.

Discussion

New Rule changes emphasis

  1. As noted by the NZSE in its paper introducing the proposed Listing Rule amendments, the key change to Listing Rule 10.1 might be seen as a change in

emphasis. The existing rule 10.1.1 says that every issuer must treat relevant information as valuable property to be used for the overall benefit of the issuer, must safeguard relevant information and ensure it is not wrongly divulged, and must release all relevant information to the NZSE immediately it ceases to have greater value to the issuer for the information to remain confidential.

  1. The Panel, in its 18 February 2002 report on Air New Zealand Limited’s compliance with Listing Rule 10.1, stated that there is a presumption in favour of disclosure within the existing rule unless the listed issuer itself can rationally explain why disclosure has not been made. The proposed new rule more clearly places primary

emphasis on the listed issuer to disclose relevant information, except in certain clearly identified situations. In other words, there is a clear presumption under the proposed new rule that relevant information will be disclosed and the onus is upon the listed issuer to justify why, in terms of the specific criteria, disclosure may be avoided.

  1. In particular, a listed issuer will not be able to avoid disclosing price sensitive information merely on the basis that it is of greater value to it to withhold the information. Instead, the issuer would have to determine a reasonable person would not expect the information to be disclosed, and that the information was confidential, and that one of the other five criteria specified above was met.

Comparison with other jurisdictions

Australia

  1. The new disclosure regime is almost identical to that of the ASX. In fact, because Listing Rules 10.1.1(b), (d) and (e) (which prevent selective disclosures of information and require disclosure where it is likely that information has been used to decide whether or not to acquire shares), are to be retained, the NZSE’s regime probably requires disclosure in more situations than does that of the ASX.

Singapore

184. The new regime is also broadly in line with the continuous disclosure requirements of

SGX which also appear to mirror those of the ASX.

Hong Kong

  1. The disclosure rules of the HKX are a little less precise than those of the ASX, SGX and the proposed new rule 10.1.1. Under the HKX listing agreement a listed company must keep the HKX informed of information relating to its business which is necessary to enable market participants to appraise its position, to avoid the establishment of a false market, or where it might reasonably be expected to

materially affect market activity. Much of the practical effect of the rule appears to be dealt with by the HKX's Guide on Disclosure of Price-sensitive Information which

was published in January this year.

  1. While it has been argued that the existing Listing Rule 10.1.1 and the ASX’s equivalent rule (3.1) achieve the same outcome in terms of disclosure obligations, albeit through different drafting, the proposed new rule 10.1.1 appears to be in line with international practice in the region, and appears to make it clear that the emphasis is on disclosure (with exceptions for withholding).

  1. Given the increasing emphasis on the harmonisation of securities laws and regulations with Australia, there would appear to be merit in the adoption of an identical disclosure regime. Not only should it assist dual listed issuers to determine where

they stand as between the disclosure rules of the NZSE and ASX, it should allow for some learning from experience in Australia in applying the rule to the variety of situations that invariably will continue to arise.

  1. Another feature of the proposed disclosure regime is the requirement under footnote 8 for the Securities Commission to be consulted before any waiver of the new continuous disclosure rule is given. In effect, the footnote recognises, as discussed above, that a waiver of a Listing Rule can have the same effect as an amendment which, under the SMI Bill, is subject to Ministerial veto.

  1. The footnote also states that under the SMI Bill the Commission will have the ability to issue a direction to suspend trading if it considers the market to be insufficiently informed. In other words, a waiver without Securities Commission agreement could involve listed issuers running the risk of a halt in trading in the event that there was disagreement over the merits of the waiver. In fact we note that the Select Committee has recommended an amendment to the SMI Bill that will, in any event, require the NZSE to consult with the Commission on any waiver application relating to the continuous disclosure regime.
  2. The NZSE also states in the footnote that NZSE Surveillance Executives may be consulted in cases of doubt as to continuous disclosure requirements on a confidential basis. The NZSE is of the view that the ability for listed issuers to be able to do that

is an important part of the ongoing relationship with the NZSE in that it assists rather than impedes ongoing compliance and co-operation.

Discussion questions

191. We welcome comments on the following questions:

(a) Will the adoption in the Conduct Rules of the proposed new continuous disclosure regime contribute to and improve confidence in, and international perception of, the New Zealand share market?

(b) From a public interest perspective, are there any reasons why it is inappropriate to adopt a continuous disclosure regime that is broadly the same as that of the ASX?

(c) Is the combination of general disclosure obligations and specific disclosure requirements desirable?

(d) In the context of the New Zealand market, are there any other particular matters that should be addressed in the continuous disclosure rules or in the specific matters required to be disclosed as referred to above?

(e) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should this issue be given?

DISSEMINATION OF INFORMATION

  1. A key principle of the administration of any stock market is the timely disclosure of price sensitive information in a manner that allows all market participants to trade on an equally-informed basis. The obligations on listed issuers to disclose information is discussed above.

  1. A further question that is raised is whether the NZSE should itself be obliged to release information supplied to it and, if so, how the NZSE should go about doing so.

Discussion

  1. Listing Rule 10.1.3 currently permits the NZSE to disseminate information to the public as it sees fit in pursuance of the objectives of the Rules. There is, however, no positive obligation on the NZSE to release the information to the public.

Subscriber services

  1. The NZSE currently releases information to its subscribers immediately for a fee, and then makes it generally available to another set of subscribers about twenty minutes later for no charge. Daily and weekly memoranda are also released to subscribers for

a fee. This raises the issue of whether it is appropriate for certain people in the market (albeit those who pay the NZSE for the privilege) to have more timely access to information about listed issuers.

Effects of free access

  1. This practice reveals a potential tension between the NZSE’s objectives of providing an orderly market and of operating as a successful commercial venture. The NZSE has stated that if it were to provide real time announcements, in full and for free, to anyone who requested them, it would be losing one of its revenue streams. The

NZSE states that this loss of revenue would need to be made up from somewhere else, perhaps through higher trading charges. Any discussion about the NZSE’s processes and charges for the dissemination of information needs to take account of these concerns.

ASX practice

  1. The NZSE’s practise is not inconsistent with that of the ASX which also derives revenue from those who subscribe to its news service. We seek comment on whether this approach achieves the right balance between the commercial returns from the service and the public interest in having the whole market able to access the information at the same time.

Wider publication by issuers

  1. As well as public release by the NZSE we invite comment on the topic of public release of information by listed issuers themselves (in addition to release to the NZSE) . The Conduct Rules could require listed issuers to publish information

provided to the Exchange, in order to provide the widest possible dissemination of relevant information.

  1. The ASIC “Better Disclosure for Investors” principles, which have been incorporated by the ASX in its Guidance Note on continuous disclosure, encourage companies to post information on their own websites as soon as the ASX confirms it has posted an announcement to the market. We invite comment on whether the NZSE’s Listing Rules should oblige listed issuers to post their announcements on their websites contemporaneously with or immediately following their release to the NZSE itself in order that those market participants who follow these companies (but do not subscribe to the NZSE’s information service) can have “real-time” access to relevant announcements. The NZSE already posts headlines of announcements on its website as it releases the information to the market. The ASX does as well, although it also publishes the whole announcement, after a twenty-minute delay.

Discussion questions

200. We invite comment on the following questions:

(a) Should there be an obligation on the NZSE, under the Listing Rules, to release to the market price-sensitive information provided to it by listed issuers?

(b) Is the lack of such an obligation likely to reduce public confidence in the effective functioning of the market?

(c) Taking into account the NZSE’s statements about the effect on its financial position that might flow from the immediate free provision of information, should there be a positive obligation on the NZSE to release price sensitive information to the public/market generally, immediately upon receiving the information from the issuer?

(d) Should the NZSE publish whole announcements on its website? If so, when?

(e) Has the NZSE struck the correct balance between commercial and public interest with its practice of releasing price-sensitive information immediately on receipt only to subscribers and twenty minutes later to non-paying market participants?

(f) Should it be left to the NZSE to balance how it derives its revenue – through listing and trading fees and through charges for the dissemination of information?

(g) Should the Listing Rules require listed issuers to publish announcements on their websites?

(h) Would the answers to the above questions be any different if there were a statutory backing for the continuous disclosure rules?

(i) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should these issues be given?

CORPORATE GOVERNANCE OF LISTED ISSUERS

  1. The United Kingdom’s Committee on Corporate Governance’s Final Report in 1998, which stated that corporate governance is “the system by which companies are directed and controlled”, said the following about the merits of good corporate governance.

“Good governance ensures that constituencies (stakeholders) with a relevant interest in the company’s business are fully taken account of ... . In addition, good governance can make a significant contribution to the prevention of malpractice and fraud, although it cannot prevent them absolutely.”

202. The expression “corporate governance” can mean different things to different people.

The Listing Rules address key corporate governance matters such as:


related party transactions;

director remuneration and rotation;

shareholder approvals of transactions; and

provisions dealing with issues and buybacks of securities.

  1. The question arises as to whether the NZSE should have a further role under the Listing Rules in setting, influencing, monitoring, and/or enforcing corporate governance standards of listed issuers.

Discussion

  1. The Listing Rules do not prescribe a code of practice for corporate governance, although as noted many of the obligations arising under the Listing Rules are aimed at achieving good corporate governance.

  1. The NZSE’s Listing Rules do require issuers to publish, in their annual reports, a statement of any corporate governance policies, practices and processes adopted or followed by the issuer. There is no expansion of what those policies, practices or processes might be. Failure by a listed issuer to adopt specific corporate governance policies will not expose it to sanction, provided it discloses accurately any policies or practices it does have.

International comparisons

UK

  1. The United Kingdom Report of the Committee on the Financial Aspects of Corporate Governance in December 1992 (also referred to as the “Cadbury Report”) and the subsequent committee on Corporate Governance Final Report of January 1998 (also referred to as the “Hempel Report”) both recommended, amongst other things, that boards of listed companies include in their annual reports a statement or narrative account of how they apply the broad principles of corporate governance (as identified in those reports) together with reasons for non-compliance. Both reports suggest that by requiring an explanation of whether and to what extent the principles of corporate governance are complied with, shareholders themselves can form judgments as to their merits. The latter report also stated that the Committee would produce a set of principles for good corporate governance which would be passed on to the London Stock Exchange.

Australia

  1. The ASX has a similar requirement for annual report disclosure of corporate governance practices to that of the NZSE. Unlike the NZSE, the ASX listing rules

also contain some guidance as to the principles of corporate governance against which the report needs to be made. In this regard, the ASX’s Guidance Note provides an indicative list of corporate governance matters that should be considered by listed companies in making this disclosure. That list includes:

make-up of the Board in terms of executive and non-executive directors;

policies relating to the appointment of non-executive directors;

procedures for directors to seek external professional advice at the company’s expense;

procedures for establishing the remuneration of the chief executive and other senior executives;

procedures for appointing auditors and any audit committee; and procedures for identifying business risk.

  1. The ASX’s rules do not suggest that the ASX will have an active role in monitoring or enforcing actual compliance with those principles themselves. Guidance Note 9 of

the ASX’s rules states that:

“The role of the ASX in the area of corporate governance is primarily to promote the disclosure of corporate governance practices adopted by listed entities and to assist in the development of these practices generally. ASX policy is not to require that particular practices be adopted or that entities report against prescribed check-lists (‘tick-the-box’ approach).”

Singapore

  1. With effect from 1 January 2003, issuers listed on the SGX will be required to make certain disclosures under its listing rules in respect of the “Code of Corporate Governance” issued by the Corporate Governance Committee. Where issuers deviate from the best practices set out in the Code they must disclose this and provide an appropriate explanation.

Discussion questions

210. We invite comment on the following questions:

(a) In the context of ensuring that the Listing Rules promote international confidence in the New Zealand market what role, if any, should the NZSE have under those Conduct Rules in enforcing good corporate governance practice?

(b) Should the NZSE’s role be limited to requiring disclosure of the corporate governance practices and policies?

(c) Are the proposed Listing Rules adequate in relation to the disclosure of corporate governance practices?

(d) If the answer to (c) is no, how should the Rules be altered? For instance, should issuers be required to report compliance with a set of non-binding corporate governance principles written into the Listing Rules?

(e) Should the Listing Rules provide that the NZSE can impose sanctions for inadequate corporate governance systems and procedures?

(f) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should this issue be given?

SURVEILLANCE BY BROKER NETWORK

  1. The Business Rules of the NZSE do not currently include an active obligation on Members to report suspected breaches of the Conduct Rules or relevant legislation to the NZSE. Regulation 19(5) of the NZSE Regulations requires all Member firms to have in place procedures for the referral to senior management of any instances of suspected insider trading by a client. There is no further obligation for the broking firm to report this activity to the Exchange or any regulatory authority. We invite comment on whether such a requirement under the Business Rules might contribute to investor confidence in the sharemarket.

Discussion

  1. Members of the New Zealand Law Society are obliged, under the Rules of Professional Conduct, to report suspicious activity on the part of other members. The Law Society’s rules state that each member has an obligation, where they suspect defalcation or other improper act by another practitioner, to make a confidential report to the Law Society. The obligation to report extends to suspected breaches of both legal and ethical obligations.

  1. The NZSE Code of Practice sets out some of the requirements of “good stockbroking practice”. The Introduction to this document states that:

“Self-regulation within a particular peer group has long been the accepted and efficient form of establishment and enforcement of these codes of conduct.”

  1. The Code of Practice provides ethical standards for brokers and firms, including rules against manipulative practices and rules for relations with clients and other broking firms. Within this context it may be that a positive obligation on brokers and broking firms to report misconduct on the part of other market participants could provide valuable assistance to the NZSE in matters of compliance.

  1. In the context of the Business Rules generally an obligation of this nature would send a very clear message to the broking network that they will be scrutinised by their peers. Such a provision would also send a message to the public that the NZSE in setting the Rules, and its accredited brokers in agreeing to abide by them, are serious about standards of conduct in the market. On this basis a requirement to report misconduct could have the benefit of improving confidence in the public perception of the broking community.

  1. Any obligation to report could apply to suspected breaches of Business Rules and of securities markets laws. Given the broking community’s close involvement with

listed issuers it might be practical to extend the obligation to include suspected Listing

Rule breaches.

  1. An obligation on accredited brokers to report misconduct could demonstrate that it is not just the NZSE’s board and executive compliance team that is responsible for monitoring and enforcement, but the whole broker/member network. The effects could include increased rates of detection of breaches, and an associated deterrent effect in relation to compliance with the relevant rules and laws.

Discussion questions

218. We invite comment on the following questions:

(a) Should NZSE sharebrokers be obliged to report suspected breaches of the

Business Rules, Listing Rules, or securities markets legislation?


(b) Would a reporting obligation improve public confidence in the effective functioning of our capital markets?

(c) Would there be any negative implications of a reporting obligation?

(d) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should this issue be given?

CAPITAL ADEQUACY AND FIDELITY GUARANTEE FUND

  1. Confidence in a market can be increased if participants can take some comfort that an order executed through a broker will be met and the trade settled, and that an order does not amount to taking an unregulated credit risk on another broker or his or her client. In the absence of such confidence, participants could be discouraged from using the sharemarket. The NZSE’s Business Rules have always recognised a need for its member sharebrokers to have sufficient financial resources to meet unexpected situations such as those that arise when a client defaults on payment. In addition the NZSE Business Rules provide a fidelity guarantee fund to meet claims where broking firms do fail to meet their obligations.

Capital adequacy

  1. Corporate members are at present required by the Business Rules to have shareholders’ funds of at least $1 million, and liquid capital at or above the “prescribed level” (5% of external liabilities or $250,000, whichever is greater). The NZSE is currently consulting on amendments to the capital adequacy requirements. The specific changes being proposed include:

(a) No distinction between types of broker (corporate, partnership, sole trader), and no distinction based on whether or not the broker is a FASTER or trading firm;

(b) Minimum liquid capital for all brokers (or firms) of $100,000 at all times;

(c) Liquid capital of 5% of gross external liabilities to be additional to the $100,000 minimum level of liquid capital;

(d) Higher liquid capital requirements for start-up firms of $250,000 at all times for the first 12 months of operation;

(e) Corporate broking firms will no longer be required to maintain $1 million shareholder funds.

The NZSE believes that these changes will not negatively impact on the security or integrity of dealing with NZSE accredited firms in light of the “know your client” regulations, the FASTER insurance, and trust accounting for client assets.

Fidelity Guarantee Fund


  1. The NZSE intends that this capital adequacy requirement will be coupled, under the Business Rules, with a continuing requirement for the NZSE to maintain a “fidelity guarantee fund”. The fund is intended to meet just claims from anyone who has suffered pecuniary loss from a sharebroking transaction where a member has not met its financial obligations. Member firms are required to make contributions to the fund each year, as determined by the NZSE, which do not exceed $1 million in aggregate.

  1. Unless otherwise determined by the NZSE Board, the maximum claim a person can make for compensation from the fund is $20,000. Unless the NZSE’s Board determines otherwise, the total amount that may be paid out in relation to the default of any member is $500,000. The NZSE’s Board also determines the extent, if any, to which any claim on the fidelity fund is met. The limits proposed are the same as in the current Business Rules.

Discussion

Overseas requirements


Australia

  1. In Australia, the capital adequacy requirements are set out in the business rules of the ASX. In broad terms each "participating organisation" must ensure that its "liquid capital" is at all times greater than its "total risk requirement" and that its "core liquid capital" is at all times not less than A$100,000.

  1. The Corporations Act 2001 of Australia provides for a fidelity fund, the National Guarantee Fund, to compensate persons for loss caused by exchange members. The specific instances in which compensation may be claimed in respect of a loss can be prescribed in regulations to the Act. Although the Act does not specify a maximum amount for which a claimant may claim, the regulations may impose an upper limit to which a person is entitled in respect of a claim in particular circumstances. Under the Act, the minimum amount of the National Guarantee Fund is A$80,000,000. If the amount in the fund is less than this the Securities Exchanges Guarantee Corporation (“SEGC”), the administrator of the fund, may require members of the exchange to pay a levy. The amount of any such levy is at the discretion of the SEGC. The SEGC has the power to determine claims and to pay out of the fund the amount of any claim it allows.

Hong Kong

225. The capital adequacy requirements in Hong Kong are set down in regulation under the

Financial Resources Rules rather than in the business rules of the exchange itself.

The Financial Resources Rules set out the various capital requirements, which depend on the role that the relevant person undertakes. For example, a securities dealer must maintain liquid capital of at least HK$3,000,000. A greater capital requirement can apply, depending upon the circumstances. Where the securities dealer is a corporation (and provides securities margin financing), he or she must maintain paid up share capital of at least HK$10,000,000. These legal provisions are supplemented by the business rules of the HKX.

  1. The business rules of the HKX provide for a "fidelity fund and guarantee scheme", the purpose of which is to compensate exchange members who have suffered loss in connection with the default of another member. In contrast to the New Zealand position, HKX members must provide the HKX with a guarantee of HK$2,000,000 or alternatively must participate in the fidelity fund. The maximum amount payable to

all successful claimants in respect of all defaults of any one member cannot exceed HK$2,000,000. Members who participate in the fidelity fund must deposit HK$50,000 with the "Compensation Committee" established by the Board of the exchange.

  1. In addition to this scheme, Hong Kong has the "Unified Exchange Compensation Fund", which was established under the Securities Ordinance to compensate persons who are not members (i.e. investors) who have a cause of action against a member in connection with the member's stockbroking business. Under the Securities Ordinance, the exchange must deposit with the HKSFC HK$50,000 for each member and may be required to replenish the fund after a payment from the fund has been

made. Therefore, under the HKX’s business rules, each member is required to deposit HK$50,000 with the HKX and may also be required to replenish the fund after a payment has been made. The maximum amount payable to all successful claimants in respect of any default of any one member cannot exceed HK$8,000,000.

Singapore

  1. Capital adequacy requirements in Singapore are also provided for in regulation, under Singapore’s Securities Industry Regulations. A person is not permitted to hold a dealer's licence unless, in the case of a dealer which is a member of a securities

exchange, its paid up capital is at least SG$15,000,000. The dealer's licence will lapse if aggregate indebtedness exceeds 1000% of its adjusted net capital or its adjusted net capital falls below SG$5,000,000 for four consecutive weeks. The Monetary Authority of Singapore (“MAS”) must be notified where a member company reaches certain trigger points approaching the prohibited levels. In addition, the member company must maintain a reserve fund of either 50% or 30% of net

profits depending on profit levels until MAS exempts a member company from the requirement or allows distribution of dividends.

  1. MAS has announced that it is introducing a new "risk-based capital framework" in relation to capital adequacy requirements. The new framework will form part of the Securities and Futures Regulations 2002, which will be released at the end of June. It is intended that the new capital requirements will tie in more directly with the risks arising from the business activities of the firm. There will be a fixed dollar minimum capital requirement and a risk-based financial resources requirement.

  1. Under the Securities Industry Act in Singapore, the fidelity fund of the SGX must consist of an amount not less than SG$20 million (or such other amount as the Minister may substitute). Members may be levied to enable the fund to satisfy its liabilities, but no member is required to pay more than SG$300,000 in aggregate under that provision. A committee of the exchange may pay out of the fund the amount of any claim allowed by the committee. There is no maximum amount for which a claimant may claim.

Comparisons

  1. The fidelity fund regime of the NZSE is similar in structure and operation to the equivalent regimes in Australia, Hong Kong and Singapore. Members are required to contribute to a pooled fund which can be used to meet claims up to certain levels. NZSE members are also required to maintain certain levels of capital to ensure their capacity to meet obligations to other brokers. This requirement is also consistent with international practice. However the value of a fidelity fund is relative to its size, and capital adequacy requirements are only as good as their relevance to the level of protection that might be required. To assess that level it is useful to look at the common size of trades conducted on the exchange.

(a) NZSE = total turnover (2001), NZ$30.2 billion; 707,000 trades; $42,715.00 average trade;

(b) ASX = total turnover (2001) A$417.6 billion; 13 million trades, $32,123 average trade;

(c) HKX = total turnover (2001) HK$1852 billion; (d) SGX = total turnover (2001) SG$146 billion.

  1. Taking account of all trades on the NZSE, retail and institutional, the maximum claim generally available to clients of brokers from the fidelity guarantee fund ($20,000) is less than the average trade size of $42,715. For the average trade, only half the dollar amount involved is protected by the fidelity guarantee fund. Defaults among sharebrokers do happen, as was seen immediately after the 1987 sharemarket crash.

In these circumstances the question of the size of the fund and the maximum claim limit of $20,000 seem important, as does the $500,000 total that can be paid in respect of the default of any one member.

  1. The NZSE advises us that while the maximum claim generally available to clients of brokers from the fidelity guarantee fund is less than the average trade size of $42,715, this statistic is affected by large institutional trades. The NZSE states that the average size of trades under $100,000 (which is 80% of all trades) is only $9,000, well within the maximum that can be claimed under the fund. The NZSE also considers that there is a reduced likelihood that faults can occur, as happened after the 1987 sharemarket crash, and so the question of the size of the fund and the maximum claim limit of

$20,000 seems less important now, as does the $500,000 total that can be paid in respect of the default of any one broking firm.

Other factors

  1. The NZSE considers that the risks of broking firm defaults have been materially reduced by a number of regulations it has introduced over the last decade. These are:

(a) full asset trust accounting for client assets held by broking firms;

(b) delivery versus payment in the settlement system, which eliminates principal risk;

(c) insurance over for invalid transfers through the FASTER system;

(d) reduced settlement times and better accounting for client obligations in broking firms;

(e) full risk based capital adequacy requirements for broking firms; and

(f) “know your client” provisions in the Regulations.

  1. In view of the applicable maximum that can be claimed under the fund, and the proposed changes to the capital adequacy regulations, should investors be made aware of the limited protection that the fidelity guarantee fund provides? Should there be a positive obligation under the Regulations or Code of Conduct (in addition to the disclosure requirements of the Investment Advisers (Disclosure) Act) to advise clients of the extent of the various protections that exist?

Discussion questions

236. In light of the above, the following questions arise for discussion:

(a) Are the NZSE’s proposed broker capital adequacy requirements adequate? (b) Should the capital adequacy requirements be higher or lower in view of the

level and extent of trading on the NZSE and the other protections that are in place?

(c) Does the fidelity guarantee fund as proposed contribute to investor and public confidence in our markets?

(d) Should the size of the fidelity guarantee fund or the size of the maximum claim be increased (bearing in mind that the NZSE has noted doing so will almost inevitably lead to an increase in trading charges)?

(e) Would international perception of, or public confidence in the New Zealand sharemarket be adversely affected if the capital adequacy requirements and fidelity guarantee fund arrangements were to remain as currently proposed?

(f) Should brokers be required to advise clients of the limitations on the protections provided by the fidelity guarantee fund and a summary of the procedures for making a claim?

(g) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should this issue be given?

PART THREE



OTHER MATTERS OR ISSUES


  1. The topics discussed in Part Two are those that the Commission, based upon the analysis and comparison that it has conducted, has highlighted as being of particular relevance.

  1. However, the Commission also wishes to be advised of any other matters or issues relating to the Conduct Rules not addressed in this paper which people consider we should address in our review and advice process. Submissions under this heading should also comment on how such matters or issues go to the public interest, public confidence and international perception criteria being applied by the Commission in this review.

  1. As a final matter we draw attention to the Minister’s obligation to approve the Conduct Rules of the Exchange unless it would not be in the public interest for him to do so. With this in mind we would welcome comment from participants on their general perception of the Listing and Business Rules of the NZSE. Given that the Minister has to approve or disapprove each set of Rules as a whole:

(a) What are the positive aspects of these Rules that are likely to add to public confidence in and international perceptions of our capital markets?

(b) What are the negative aspects of these Rules that are likely to detract from public confidence in and international perceptions of our capital markets?

PART 4



DISCUSSION QUESTIONS

1. Demutualisation (the NZSE’s role in the context of a demutualised exchange)

The Panel

(a) Is the Panel sufficiently independent under its present constitution?

(b) Is the definition of “independent” in the Listing Rules sufficient to ensure adequate separation between the Panel and the NZSE?

(c) Are the provisions for appointment of Panel members appropriate? (d) If not, in what respects do you think they are inappropriate?

(e) Should the Panel have its own separate powers under the Listing Rules rather than acting as a delegate of the NZSE?

The Disciplinary Committee

(f) Is the Disciplinary Committee, as proposed, sufficiently independent from the

NZSE Board?

(g) Should there be a separate body to monitor and enforce the Business Rules?

Appointment of the Panel and Disciplinary Committee

(h) Should the Board of the NZSE appoint the Disciplinary Committee and the

Panel?

(i) Should there be a requirement to involve any other person or organisation in the appointment of the members of either body? If so, who?

(j) If the answer to (i) is yes, what should be the extent of that involvement (i.e., power to appoint, obligation to consult)?

(k) Are the proposed appointment arrangements likely to detract from public confidence in the effective functioning of our market, or from international perceptions of the market?

The Proposed Special Division

(l) Are the proposed Special Division appointment procedures under the Conduct Rules sufficient to achieve appropriate independence and integrity in the body that monitors and enforces compliance with the Listing Rules by NZSE as a listed company?

(m) Would international perception of the market, and the market’s integrity, suffer if compliance by a listed NZSE entity were monitored and enforced by

a body whose members are drawn from a body appointed by the NZSE? If so, what other arrangement might be most appropriate?

(n) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should each of the above issues be given?

2. The incentives on the NZSE to enforce the Conduct Rules

(a) Do the Conduct Rules place sufficient obligations and incentives on the NZSE

to monitor and enforce those Rules?

(b) If not, could this adversely affect public confidence in the proper functioning of the market, or international perceptions of the market?

(c) Should the Conduct Rules expressly give the NZSE primary responsibility for monitoring compliance and for enforcing its Conduct Rules?

(d) Should the NZSE state in its Rules that it has this responsibility?

(e) Should the NZSE state that it will take actions for breach of the Conduct Rules for the benefit of shareholders, in priority to encouraging private actions by aggrieved shareholders?

(f) Is the requirement for an issuer to provide a bond to the NZSE still appropriate? If so, is $75,000 the appropriate amount?

(g) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should these issues be given?

3. Responsibility to monitor and enforce legislation

(a) What role (if any) should the NZSE have under the Conduct Rules in monitoring or enforcing compliance with applicable legislation by listed issuers and brokers?

(b) Is such a role important in terms of New Zealand’s market integrity and international perceptions of our market?

(c) If the answer to (a) was yes, which specific statutes should be referred to in the

Conduct Rules for this purpose?

(d) What impact, if any, do you think there would be on the effective functioning of the Panel if the Panel were required under the Listing Rules to report to the Commission on likely or actual breaches of the Conduct Rules, and legislation relating to primary offers and secondary trading?

(e) If the SMI Bill is not passed into law, should the Conduct Rules contain an obligation on the NZSE to report relevant legislative and Conduct Rule breaches to the Commission and require co-operation and information sharing with the Commission, Takeovers Panel or other regulatory bodies in relation to any such suspected breaches?

(f) If so, what should be the extent of any such obligation on the NZSE (e.g. actively monitoring compliance, reporting known or suspected breaches, acting on suspected breaches under its own powers)?

(g) In terms of the public interest criteria against which the Rules are to be assessed, how much weight should these issues be given?

4. Waivers and Rulings

(a) Is the process under the Listing Rules by which the NZSE can grant and publish waivers a matter that may affect either public confidence in the effective functioning of the market or international perceptions of the market?

(b) Should the Listing Rules require the NZSE to publish each waiver that is granted, as and when it is granted?

(c) If the answer to (b) is yes, should the Listing Rules also require the NZSE to publish its reasons for each waiver?

(d) Should any Listing Rules not be subject to waiver? If so, which rules, and why?

(e) Should the NZSE be required to consult with an independent body (such as the Commission) before granting waivers from any Listing Rules, as is contemplated in relation to waivers of the proposed new Listing Rule 10.1?

(f) If the answer to (e) is yes, on which Rules should the NZSE be required to consult, and who should be consulted?

(g) Should the approval of an independent body be required in order to grant any generic or class waivers?

(h) Alternatively to (g), should the Listing Rules require consultation with any independent body before any generic or class waivers are granted?

(i) Would a requirement for the Panel to consult with the Commission before granting specific waivers impact on the effective functioning of the Panel?

(j) If the answer to (i) is yes, do you think the benefits of requiring consultation exceed the potential for any detriment to the effective functioning of the Panel?

(k) Bearing in mind the NZSE’s intention to deliberately set a low threshold for related party transactions, is there any concern over the number of waivers that have been granted from Listing Rule 9.2?

(l) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should these issues be given?

5. NZSE discretion to accept new entities for listing

(a) Is transparency in the listing process important to a market’s integrity and perceptions of that market?

(b) Should the NZSE be required to disclose its reasons for refusing a listing?

(c) If the answer to (b) is yes, should the NZSE have to disclose its reasons to the public, or only to the unsuccessful applicant?

(d) What further protections should there be for the applicant and the NZSE, if any, to deal with issues of confidentiality and defamation? How can these be implemented within the scope of the Conduct Rules?

(e) Should the jurisdiction of the Panel, or perhaps some other regulatory body, be extended to hearing appeals from NZSE decisions on listing applications?

(f) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should this issue be given?

6. Adequacy of sanctions

(a) Do the sanctions that are currently available to the NZSE for breaches of its

Conduct Rules provide an adequate deterrent?

(b) If not, what additional sanctions could or should be imposed under the

Conduct Rules, and for which breaches?

(c) Does the NZSE have jurisdiction or power under the Conduct Rules to impose financial penalties on, or seek damages from, issuers or directors of issuers?

(d) Would a penalties or damages regime for issuers, directors or officers be appropriate in the context of ensuring that the Conduct Rules create confidence in the New Zealand sharemarket?

(e) If the answer to (d) is yes, what should those penalties entail? Under what authority could they be imposed and enforced?

(f) Is this a matter to be addressed in the context of statute law reform or in the

Conduct Rules?

(g) If this is a matter that should be addressed in the Conduct Rules, then in terms of the public interest criteria against which the Rules are to be assessed, how much weight should this issue be given?

7. Disclosure of information

(a) Will the adoption in the Conduct Rules of the proposed new continuous disclosure regime contribute to and improve confidence in, and international perception of, the New Zealand share market?

(b) From a public interest perspective, are there any reasons why it is inappropriate to adopt a continuous disclosure regime that is broadly the same as that of the ASX?

(c) Is the combination of general disclosure obligations and specific disclosure requirements desirable?

(d) In the context of the New Zealand market, are there any other particular matters that should be addressed in the continuous disclosure rules or in the specific matters required to be disclosed as referred to above?

(e) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should this issue be given?

8. Dissemination of Information

(a) Should there be an obligation on the NZSE, under the Listing Rules, to release to the market price-sensitive information provided to it by listed issuers?

(b) Is the lack of such an obligation likely to reduce public confidence in the effective functioning of the market?

(c) Taking into account the NZSE’s statements about the effect on its financial position that might flow from the immediate free provision of information, should there be a positive obligation on the NZSE to release price-sensitive information to the public/market generally, immediately upon receiving the information from the issuer?

(d) Should the NZSE publish whole announcements on its website? If so, when? (e) Has the NZSE struck the correct balance between commercial and public

interest with its practice of releasing price-sensitive information immediately

on receipt only to subscribers and twenty minutes later to non-paying market participants?

(f) Should it be left to the NZSE to balance how it derives its revenue – through listing and trading fees and through charges for the dissemination of information?

(g) Should the Listing Rules require listed issuers to publish announcements on their websites?

(h) Would the answers to the above questions be any different if there were a statutory backing for the continuous disclosure rules?

(i) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should these issues be given?

9. Corporate governance of listed issuers

(a) In the context of ensuring that the Listing Rules promote international confidence in the New Zealand market what role, if any, should the NZSE

have under those Conduct Rules in enforcing good corporate governance practice?

(b) Should the NZSE’s role be limited to requiring disclosure of the corporate governance practices and policies?

(c) Are the proposed Listing Rules adequate in relation to the disclosure of corporate governance practices?

(d) If the answer to (c) is no, how should the Rules be altered? For instance, should issuers be required to report compliance with a set of non-binding corporate governance principles written into the Listing Rules?

(e) Should the Listing Rules provide that the NZSE can impose sanctions for inadequate corporate governance systems and procedures?

(f) in terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should this issue be given?

10. Surveillance by member network

(a) Should NZSE sharebrokers be obliged to report suspected breaches of the

Business Rules, Listing Rules, or securities markets legislation?

(b) Would a reporting obligation improve public confidence in the effective functioning of our capital markets?

(c) Would there be any negative implications of a reporting obligation?

(d) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should this issue be given?

11. Capital adequacy and fidelity guarantee fund

(a) Are the NZSE’s proposed broker capital adequacy requirements adequate? (b) Should the capital adequacy requirements be higher or lower in view of the

level and extent of trading on the NZSE and the other protections that are in

place?

(c) Does the fidelity guarantee fund as proposed contribute to investor and public confidence in our markets?

(d) Should the size of the fidelity guarantee fund or the size of the maximum claim be increased (bearing in mind that the NZSE has noted doing so will almost inevitably lead to an increase in trading charges)?

(e) Would international perception of, or public confidence in the New Zealand sharemarket be adversely affected if the capital adequacy requirements and fidelity guarantee fund arrangements were to remain as currently proposed?

(f) Should brokers be required to advise clients of the limitations on the protections provided by the fidelity guarantee fund and a summary of the procedures for making a claim?

(g) In terms of the public interest criteria against which the Conduct Rules are to be assessed, how much weight should this issue be given?

12. Review of the Rules

Given that the Minister has to approve or disapprove each set of Rules as a whole: (a) What are the positive aspects of these Rules that are likely to add to public

confidence in and international perceptions of our capital markets?

(b) What are the negative aspects of these Rules that are likely to detract from public confidence in and international perceptions of our capital markets?

APPENDIX A

COPY OF A LETTER FROM THE MINSTER OF COMMERCE TO THE SECURITIES COMMISSION

Office of Hon Paul Swain, Minister of Commerce

15 November 2001

Jane Diplock

Chairperson

Securities Commission

P O Box 1179

WELLINGTON Dear Ms Diplock

You will be aware that changes proposed in the New Zealand Stock Exchange Restructuring Bill include a new requirement for the approval of stock exchange conduct rules and the ability to disallow any changes to those rules. This requirement has been developed in the context of perceived changes in the incentives on stock exchanges brought about by operating under a corporate structure. An approval requirement for stock exchange rules is consistent with established practice in overseas jurisdictions. Specifically, these legislative requirements result from the demutualisation process and not out of any concern about the content or the operation of the current NZSE rules.

Should the changes be passed by Parliament, this will require me to recommend approval of the rules to the Governor-General. I will seek advice from the Commission to enable me to effectively discharge this function. I am aware of discussions that have taken place between the Commission, the NZSE and the Ministry of Economic Development in relation to the process and timeframes for demutualisation of the NZSE. I understand that in order to achieve the NZSE’s timeframes, work on approval of the rules will need to be commenced now.

I will be required to recommend that the Governor-General, by Order in Council, approve the NZSE’s rules unless I am satisfied that it is not in the public interest to do so. This is a high threshold and I expect that this will be reflected in the process and the level of detail at which the rules will be scrutinised. However, it is important that the Commission’s review of the conduct rules for the purpose of providing the advice I am requesting is robust, measured, transparent and can be seen to have integrity. This will enable me to effectively discharge my function of making a recommendation to the Governor-General.

I consider that there are two key components to the public interest test. These are market intefrity, which I would describe as public confidence in the effective functioning of our capital markets, and international perceptions of New Zealand’s

capital markets. These public interest factors will only be relevant insofar as they affect, or are affected by, the stock exchange rules.

I expect that in assessing the rules for the purpose of this exercise, the Commission will have regard to international and domestic principles, for example principles derived from IOSCO, FIBV and International Capital Markets Group. The Commission may also wish to consider other relevant public interest components within the ambit of stock exchange rules and the Commission’s statutory functions. As stock exchange rules are subject to the Commerce Act, I am not seeking advice from the Commission on any Commerce Act issues that may be associated with the rules.

I expect that, given the high threshold that must apply to justify my not approving the rules, the Commission will prioritise a number of key topics for consideration. I anticipate that the Commission will work closely with the NZSE throughout this exercise and that the Commission may wish to consult both publicly and with the NZSE. This may result in the NZSE making changes to the proposed rules before the Commission’s final advice is provided to me.

Yours sincerely




Hon Paul Swain

Minister of Commerce



APPENDIX B

INTERNATIONAL PRINCIPLES COMPARISON



Identified principles for the regulation of public securities exchanges

(As sourced from the IOSCO “Objectives and Principles of Securities Regulations (1998), the “FIBV Market Principles” (2000), the ICMG “Standards of Self-Regulation of the Securities Markets” 1992, the ASX listing rules and the Foreword to the NZSE’s listing rules.)

Source of principle (Also notes the ICMG “market”, a “regulatory” or “additional” standard)

NZSE Listing Rules/ Business Rules clause

Brief Summary of NZSE rule Alternate source of
rule

Nature of issuer and disclosure requirements (Note: Principles 1-17 are the principles that relate to the relationship between the

NZSE and issuers of securities and are therefore relevant to the Listing Rules.)

  1. Initial listing criteria of certain minimum standards must be met by the issuer (generally as to number shareholders and shares outstanding, demonstration of sufficient investor interest, size, financial performance and level of market capitalisation, and “quality”).


ICMG (A2) M
FIBV (4) ASX NZSE (8)


LR 5.1.2,
5.1.3
LR 5.2.2,
5.2.3

LR 5.3


Listing: Information required; minimum value $5 million
Quotation: Information required; spread requirement (500 to hold 25% of securities)
Discretion of NZSE as to listing and quotation

  1. Maintenance of similar listing criteria standards required as condition for issuer's continued listing.

ICMG (A2) M
FIBV (4) ASX

LR 5.1.2 Signing of Listing Agreement

  1. Initial disclosure of information on business, financial and corporate affairs by intending issuer.


ICMG (A1) R FIBV (4,11) IOSCO (E14) ASX
NZSE (8)


LR 5.1.2
LR 5.2.2
LR 7.1, 7.2,


Listing: Information required (to NZSE) Quotation: Information required (to NZSE) Offering documents and advertisements (prospectus or profile)


Securities Act
1978 and
Regulations
1983

  1. Disclosure to investors of the nature, risk and investment potential of the securities.

FIBV (4) LR 7.1, 7.2,

7.8

Offering documents and advertisements
(investment statement)

Securities Act
1978 and
Regulations
1983

5. Continuing and regular disclosure of price sensitive information after listing. ICMG (A3) R
FIBV (4,11)

IOSCO (E14) ASX

NZSE (8,9)

LR 7.12
LR 10

Announcement of issues and buybacks Disclosure of price sensitive information and half year and full year reports (see LR Appendix 1 re content of periodic reports)

(Minister has regulation making powers under the Securities Markets & Institutions Bill)
Identified principles for the regulation of public securities exchanges
Source of principle
NZSE Listing Rules/
Brief Summary of NZSE rule
Alternate source of rule


Business Rules clause
  1. Trading may be halted pending the announcement or disclosure of information that may affect the markets.
ICMG (A3) M
Reg 6(3)(d)
15 minute trading halt following release of price sensitive information
  1. Exchange to have power to impose trading halts or suspensions if necessary to ensure an orderly market
FIBV (2g,5)
LR 5.4.2,
5.4.3
NZSE has broad discretion to suspend and delist.
(Securities
Commission
has some powers under the Securities Markets & Institutions Bill)
8. Delisting standards and procedures for the issuer and the exchange.
ICMG (A2) M
LR 5.4.1,
5.4.2, 5.4.3
Suspension and cancellation (by issuer or
Exchange)
  1. Foreign issuing companies to be subject to the same rules as domestic issuers.
FIBV (4)
LR 5.1.6
Overseas listed issuers deemed to comply while they comply with their home
exchange rules
Corporate governance requirements
  1. Prohibition of corporate structure and corporate governance practices that are deemed not in the public interest.
ICMG (A4) R
IOSCO (E15) NZSE (7.1)
LR 3, 7, 8, 9
Constitutions, trust deeds and directors (see LR Appendix 6 for requirements of constitution). Director appointments and rotations, remuneration, new issues and buybacks, changes to rights of security
holders, related party transactions.
Companies
Act 1993
11. Securities to be issued in circumstances, and have rights and obligations, which are fair to new and existing security holders. Ownership and voting interests of security holders to be protected.
IOSCO (E15)
ASX
NZSE (7.1,7.3,
7.4)
LR 3
LR 7.3
LR 7.5, 6
LR 8
LR 9
LR 11
Constitutions, trust deeds and directors
Issuers of new equity securities Issues, buybacks; financial assistance Voting rights and rights of equity securities Related parties and major transactions Transfers and statements.
Companies
Act 1993
12. Consultation with security holders on matters of significance.
IOSCO (E15)
ASX
As for 11
above, esp
LRs 7 & 9
Companies
Act 1993





Identified principles for the regulation of public securities exchanges
Source of
principle
NZSE
Listing
Rules/
Brief Summary of NZSE rule
Alternate
source of rule


Business Rules clause
  1. Accounting and auditing standards to be of a high and internationally acceptable quality
IOSCO (E16)
LR 10.6
Financial statements
Financial
Reporting Act
1993
  1. Special requirements may apply to corporate mergers and takeovers (e.g. as to timing and information disclosure).
ICMG (E) A
IOSCO (E15) NZSE (7.5)
LR 4
LR 10.9
Takeovers provisions where not Code
companies
Issuers to provide NZSE with information on substantial security holders
Takeovers
Code; Securities Amendment Act 1988
Waivers
15. Allow waivers where principles not undermined.
ASX
NZSE (11)
LR 1. 7.1
Power to waive. No requirement that waivers be granted only where the
principles aren’t undermined.
Issuer surveillance
  1. The exchange to have broad inspection and enforcement authority. The exchange is to indicate the frequency, scope and consequences of its surveillance. Enforcement must be transparent.
FIBV (2d,10)
LR 2.3
LR 2.4, 2.5
Issuer Surveillance
Constitution of Market Surveillance Panel
17. The exchange is to monitor observance of the listing requirements.
ICMG (B2) M
As for 16
Delegation of power to Market
Surveillance Panel. Primary responsibility
on issuer.
Requirements for the organisation of the exchange (Note: Principles 18 – 37 are the principles that relate to the relationship between the NZSE and its members and are therefore relevant mainly to the Business Rules and the NZSE’s Regulations.)
  1. Domestically recognised legal status as a securities market (i.e. national securities law covering the exchange’s powers and obligations).
FIBV (2a)

Sharebrokers
Amendment Act 1981; Stock Exchange Restructuring Act; (Securities Markets & Institutions Bill)





Identified principles for the regulation of public securities exchanges
Source of
principle
NZSE
Listing
Rules/
Brief Summary of NZSE rule
Alternate
source of rule


Business Rules clause
  1. Rules covering the exchange’s governance, composition of the governing body, constituents from whom members of governing body appointed, mission statement, rules and regulations.
FIBV (2b)
(Will be partly contained within the
constitution of the new NZSE company following demutualisation.)
Sharebrokers
Amendment Act 1981; Stock Exchange Restructuring Act; (Securities Markets & Institutions Bill)
Requirements for the admission of members
  1. Members and their responsible officials, brokers, sales and other key personnel must meet proficiency and experience requirements (including knowledge of trading rules, practices and procedures).
ICMG (B1 a,b,c) R&M
FIBV (2c,3) IOSCO (G21)
BR 2.3
BR 3.14
BR 4.3
BR (B) 2.4
BR (B) 3,4
When Board to designate firm as member
Client advisors and investment advisors to be Approved Representatives
Requirements for establishing new firm When Board to designate as Approved Representative or Accredited Stockbroker Requirements for designation as Approved Representative/Accredited Stockbroker
Sharebrokers
Act 1908
21. Members must meet solvency and capital adequacy standards.
ICMG (B1d) R
FIBV (2c,3) IOSCO (G22)
BR 2.3
BR 3.6
BR 4.3
BR 18
Reg 5
When Board to designate firm as a member
Shareholders funds $1 million
Requirements for establishing new firm
Capital adequacy requirements
Capital adequacy regulations
  1. Foreign market participants who are FIBV members normally to be allowed to participate, adopting mutual recognition of FIBV member market participants.
FIBV (2c,5)






Identified principles for the regulation of public securities exchanges
Source of
principle
NZSE
Listing
Rules/
Brief Summary of NZSE rule
Alternate
source of rule


Business Rules clause
Conduct of business, trading and clearance of settlement rules
  1. Generally accepted business practices for the exchange and for members dealing with customers to be defined. Participants to conduct themselves with honesty, fairness and diligence. Regulates conflicts of interest and insider trading. Members are to act in the best interests of customers and the integrity of the market.
ICMG (C2)
R&M
FIBV (11,12,
13)
IOSCO (G23)
BR 1.1
BR 2.3
BR 3.1, 3.2,
3.3, 3.4, 3.6,
3.9
BR 3.14
BR 7
BR 20
BR 21
BR (B) 3,4
CC Reg 1
Reg 10
Reg 11
Reg 13
Reg 14
Reg 15
Reg 16
Reg 17
Reg 19
Definition of good stockbroking practice:
cross-ref to BRs, Regs, Code of Conduct When Board to designate firm as a member
Firm and employees to observe good stockbroking practice; include good stockbroking practice in constitution
Client advisors and investment advisors to be Approved Representatives
Authority to act on offer to public Short sales to comply with good stockbroking practice
Miscellaneous rules i.e. protection of buyer’s and seller’s rights
Requirements for designation as Approved
Representatives/Accredited Stockbroker
Code of conduct
Disclosure of members’ interests,
members’ duty of care
Protection of benefits in entitlements issues and takeovers
Members to ensure entitled dividends paid Calls to be paid before delivery of shares Rules governing transfers of securities Rules governing trading of options
Rules governing short sale of securities
All member firms to maintain a client funds trust account
Minimum information to be obtained before advice given
Securities
Amendment Act 1988; Privacy Act
1993
  1. The exchange is to have rules governing relationships between the exchange and its members and their employees.
ICMG (C2) M
BR 2.4
BR 5
BR (B) 2.4

BR (B) 6
Rules are contract between NZSE and
members
Powers of the Board
Rules are contract between NZSE and Approved Representatives/Accredited Stockbrokers
Powers of the Board





Identified principles for the regulation of public securities exchanges
Source of
principle
NZSE
Listing
Rules/
Brief Summary of NZSE rule
Alternate
source of rule


Business Rules clause
  1. The technical rules and regulations regarding trading on the exchange are generally aimed at market transparency (e.g. regarding price discovery and the trade execution process).
ICMG (C1) M
FIBV (5,13c) IOSCO (H27)
BR 6.1
BR 9
BR 11
Reg 6
Reg 12
No trading securities where application for
listing only (with exception) Contracts
Trading and transactions reporting; observe good stockbroking practice Reporting of all sales and purchases to the Exchange
Claims
26. Clearing and settlement facilities and rules must provide for the efficient, safe and prompt settlement of transactions (to at least the internationally accepted standards of the G-30 and ISSA).
ICMG (B3) M
FIBV (6, 11) IOSCO (30)
BR 10
Reg 8
Observe good stockbroking practice
Settlement within 3 days, regulated by
Exchange
  1. Maintain guarantee fund to ensure the completion of transaction between members in case of default by a member.
ICMG (B3) M
FIBV (11) IOSCO (G24)
BR 19
Fidelity guarantee fund
Sharebrokers
Amendment
Act 1981
  1. Exchange and members to maintain trade records (for implementation of monitoring activity and to provide information to investors).
ICMG (C2)
R&M
FIBV (5,13c)
BR 9.4
BR 16.1
Issue contract note on client transaction
Members accounts and records
Arbitration and mediation
  1. Arbitration or mediation facilities for customer complaints against members and disputes among members.
ICMG (F)
R&M
FIBV (9)
BR 13
Disputes between members referred to
Board





Identified principles for the regulation of public securities exchanges
Source of
principle
NZSE
Listing
Rules/
Brief Summary of NZSE rule
Alternate
source of rule


Business Rules clause
Self-monitoring, market surveillance and enforcement
  1. Exchange to have broad inspection and enforcement authority. Exchange to indicate the frequency, scope and consequences of its surveillance. Enforcement must be transparent. Members and employees to co-operate with monitoring and enforcement by giving evidence and providing records to the Exchange. Routine inspections may be made of member's offices and records to determine compliance (e.g. with capital adequacy or trading rules).
FIBV (2d,10)
ICMG (B1f)
R&M
BR 5.7
BR 17.1,
17.2
BR (B) 6.2
BR 3.7 -
3.11
BR 12.4
BR 14.5,
14.7
BR 16.2,
16.3, 16.4

BR 17.4
BR 8.1
Reg 2
Reg 3
Reg 4
Board may receive and consider
complaints
Appointment and powers of Inspector
Board may receive and consider complaints
Notice to NZSE re ownership/corporate governance changes, etc
Powers of Disciplinary Committee to require information
Members to report and facilitate enquiries re defaulting member firms
Member to provide audit certificate and report on request; Board power to inspect and take evidence; financial statements to be provided on completion
Supply of information to Inspector
Inspector may examine where member is underwriter
Member firms to maintain sufficient
accounting records
Audit of members’ books
Inspection of members’ records
  1. Maintenance of statistics function by Exchange which allows insights into trading activity.
ICMG (B2) M
FIBV (13a)
(See the NZSE website)
-
  1. Ongoing supervision of the market (preferably in real time) and members and staff by the Exchange to detect questionable activity in listed securities.
ICMG (B1d,2)
R&M
FIBV (2d,13c)


  1. Members required to designate supervisor and monitor compliance and activities of own staff, including undertaking periodic or spot inspections, and report to Exchange.
ICMG (D1,2)
A
BR 3.12,
3.13
BR 17.3
Managing Principal responsible for firm’s compliance
Maintenance of records and internal systems





Identified principles for the regulation of public securities exchanges
Source of
principle
NZSE
Listing
Rules/
Brief Summary of NZSE rule
Alternate
source of rule


Business Rules clause
  1. Ability to establish audit trail regarding details and sequence of transactions on market through maintenance of records by members and Exchange.
ICMG (B2)
R&M
FIBV (10,13c)
As for 30,
31 & 32 above

35. Investors should have access to public transaction data for verification.
FIBV (13c,5)
BR 9.4
Issue contract note on client transaction
  1. Comprehensive procedures may be instituted against members for violation of or non-compliance with any requirements, which could result in disciplinary action (including suspension or expulsion).
ICMG (B1f)
R&M
FIBV (3) NZSE (3)
BR 5.6, 5.8

BR 12

BR 14
BR 15
BR(B)6.1,3
BR(B) 7
BR(B) 8
BR(B) 9
Board may bring charges and discipline through expulsion, suspension, fines and
censure
Discipline through Discipline Committee or Complaints Committee; discipline through expulsion, suspension, fines and censure Defaulting member firms
Suspending and revoking designation as a member firm
Board may bring charges and discipline
Discipline
Suspension
Revocation and re-designation
Sharebrokers
Amendment
Act 1981
  1. Exchange to provide information promptly to regulator or competent legal authorities regarding certain breaches (e.g. insider trading).
ICMG (B1f)
R&M
FIBV (10)
LR 5.4.2
Exchange may refer the conduct or any issuer or director to any statutory or governmental authority
(Security
Markets & Institutions Bill)







Key

ASX The Australian Stock Exchange or, in “source” column, the principles on which the ASX Listing Rules are said, by the ASX in its Introduction to the Listing Rules, to be based.

BR

BR(B)

NZSE Draft Business Rules Part A

NZSE Draft Business Rules Part B

CC The New Zealand Stock Exchange or, in “source” column, the principles on which the NZSE Listing rules are said, by the NZSE in its

Foreword to the Listing Rules, to be based.

FIBV Federation Internationale des Bourses de Valeurs (World Federation of Stock Exchanges ) [Note: The NZSE is a member] or, in the “source”

column, “FIBV Market Principles” from FIBV Annual Report 2000

ICMG International Capital Markets Group (a co-operative arrangement among the International Bar Association Section on Business Law, FIBV and the International Federation of Accountants) or, in “source” column, “Standards of Self-Regulation of the Securities Markets”, Part III, ICMG paper, 1992

Note that an “M” for “market” beside the ICMG clause number indicates that the ICMG consider the principle is best self-regulated by a stock exchange; an “R” for “regulatory” indicates that the ICMG consider the principle may be appropriately regulated by some other body but not necessarily by the stock exchange; and “A” for “additional” indicates that the ICMG consider the principle enables regulation to function more effectively but are above the core standards.

IOSCO International Organisation of Securities Commissions [Note: The Securities Commission is a member] or, in “source” column “Objectives and

Principles of Securities Regulation”, IOSCO document, September 1998.

LR NZSE Listing Rules, with some proposed amendments, notably to section 10 (continuous disclosure) and Appendix 3 (constitution of Panel)

CC NZSE Members' Code of Conduct

Reg NZSE Members’ Regulations

APPENDIX C CONTINUOUS DISCLOSURE REGIME

"Relevant Information" means at any time information received, generated, or held by, or otherwise concerning an Issuer, including information about its undertaking, activities, business environment, prospects, financial position, or financial performance, that a reasonable person would expect, if it were generally available to the market, to affect materially the price or value of the Quoted Securities of the Issuer. For the purpose of this definition:

(a) a reasonable person will be taken to expect information to materially affect the price or value of the Quoted Securities of the Issuer if the information would, or would be likely to, influence persons who commonly invest in Quoted Securities of the same kind in deciding whether or not to subscribe for, or buy or sell, the Securities; and

(b) information will be generally available to the market if: (i) it is information that:

(A) has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in Quoted Securities of the kind whose price or value might be affected by the information; and

(B) since it was made so known, a reasonable period for it to be disseminated among such persons has expired;

(ii) it is likely that persons who commonly invest in Quoted Securities of the kind whose price or value might be affected by the information know of the existence of, and can readily obtain, the information (whether by observation, use of expertise, or any other means); or

(iii) it is information that consists of deductions, conclusions, or inferences made or drawn from either or both of the kinds of information referred to in subparagraphs (i) and (ii).

Listing Rule 10.1.1 Continuous disclosure of Relevant Information: Without limiting any other Rule, every Issuer shall:

(a) release all Relevant Information to the Exchange immediately after the Issuer becomes aware of the Relevant Information, provided that this Rule shall not apply while each of the following applies:

(i) a reasonable person would not expect the information to be disclosed; (ii) the information is confidential; and

(iii) one or more of the following applies:

(A) it would be a breach of law to disclose the information;

(B) the information comprises an incomplete proposal or negotiation; (C) the information comprises matters of supposition or is insufficiently

definite to warrant disclosure;

(D) the information is generated for the internal management purposes of the entity; or

(E) the information is a trade secret.

In this Rule, an Issuer is aware of information if a Director or officer of the Issuer or any of its Subsidiaries has, or ought reasonably to have, come into possession of the information in the course of the performance of his or her duties as a Director or officer.

(b) safeguard all Relevant Information and take all reasonable steps:

(i) to ensure that it is not divulged to persons not entitled to receive it while the proviso to Rule 10.1.1(a) applies; and

(ii) to avoid knowingly letting any person acquire, or remain in, a position of privilege in relation to other holders of prospective holders of Quoted Securities of the Issuer by use of Relevant Information to deal in such Securities while the proviso to Rule 10.1.1(a) applies;

(c) release all Relevant Information to the Exchange no later than it is received by any person who is likely to use it in deciding whether or not to deal with Quoted Securities of the issuer or to divulge it, directly or indirectly, to any such person even if the proviso to Rule 10.1.1(a) applies; and

(d) release Relevant Information to the Exchange to the extent necessary to prevent development or subsistence of a market for its Quoted Securities which is materially influenced by false or misleading information emanating from:

(i) the Issuer or any Associated Person of the Issuer; or

(ii) other persons in circumstances in each case which would given such information substantial credibility,

even if the proviso to Rule 10.1.1(a) applies.




1. The Exchange recognises that too much information and detail can obscure significance and be as misleading as too little.

Accordingly it is acceptable to provide summaries and to invite further reference to papers or documents which it would not be sensible to publish in full. Nevertheless Issuers must ensure that any summary is sufficiently complete so as not to be

misleading by omission.

2. In cases of doubt whether the Exchange should be advised, the Surveillance Executive may be consulted on a confidential basis.

  1. The Exchange recognises that there may be business reasons for leaving business competitors in a state of uncertainty or under mistaken perceptions of value or the strength of a company's negotiating position. Accordingly the Exchange will exercise its discretion, if called upon, to ensure that these disclosure requirements are construed to require fair information to the market generally and not to confer upon particular persons, simply by qualifying as holders of Equity Securities of an Issuer or participants in the market, rights to information which would benefit those persons in particular in their dealings with the Issuer. For the same reason the duty to correct false information in the market is limited so that antagonists cannot force information out of a company simply by generating a false rumour. The market's interest in requiring correction of false rumours is intended to be limited to those which are of a nature or from a source which lends substantial credence to them.

  1. The duty to disclose to the Exchange is not intended to supersede any desirable communication directly with holders of Securities, whether by way of letter or otherwise, and Issuers are reminded of the obligation under Rule 10.8.2 in relation to communications with shareholders. However, Issuers must appreciate that disclosure to holders in bare compliance with any legal obligations is not sufficient for an Issuer.

5. In deciding whether or not to release information, Issuers should have regard to:

(a) Rule 1.1.5, the effect of which is to aggregate a group of entities for disclosure purposes;

(b) section 178 of the Companies Act 1993, dealing with the rights of shareholders to require the provision of information by a company;

(c) Part 1 of the Securities Amendment Act 1988, dealing with insider trading;

(d) the Fair Trading Act 1986, and in particular the sections dealing with the supply of information that is or is likely to be misleading or deceptive; and

(e) section 257 of the Crimes Act 1961, which relates to conspiracies to affect the market price of securities.

  1. The general continuous disclosure requirements in Rule 10.1.1 set out what the Exchange regards as the conditions for satisfying one of the fundamental obligations of Listing. The other disclosure requirements of section 10 address specific types of information and are in addition to and not in limitation of Rule 10.1.1.

  1. The Exchange may waive the obligation of an Issuer under Rule 10.1.1(c) to release Relevant Information supplied during the course of a "due diligence" investigation conducted in respect of that Issuer, if the Exchange is satisfied that proper arrangements have been made:

(a) to protect the confidentiality of the information supplied; and

(b) to ensure that the party conducting the due diligence will not acquire, dispose of, or otherwise deal in Securities of the Issuer, or advise, encourage, or procure others to do so, until any Relevant Information supplied to that party has been released to the market or has ceased to be current or remains within the Rule 10.1.1(a) proviso.

8. Apart from waivers granted under footnote 7 (due diligence), a waiver from an obligation under Rule 10.1.1 will only be given in exceptional circumstances and the Exchange will consult the Securities Commission on the application. The Exchange does not expect this will significantly extend the time taken to consider waiver applications.

APPENDIX D

LISTING RULE 9.2 WAIVER HISTORY





Year

Granted
LR 9.2.2(d) (0.5%) Remuneration

Not
Granted

Total
%
Not
Granted
%
Not Granted (excluding LR 9.2.2(d))
2001
33
9
5
38
13%
17%
2000
33
9
7
40
18%
23%
1999
35
7
8
43
19%
22%
1998
19
6
3
22
14%
19%
1997
31
-
6
37
16%
16%
1996
25
-
2
27
7%
7%
1995
12
-
2
14
14%
14%
1994
6
-
3
9
33%
33%
1993
5
-
6
11
55%
55%

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