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Effects on the Securities Markets of certain statements made in May 2006 concerning telecommunications [2006] NZSecCom 3 (25 July 2006)

Last Updated: 11 November 2014

Effects on the Securities Markets of certain statements made in May 2006 concerning telecommunications
25 July 2006


TABLE OF CONTENTS

EXECUTIVE SUMMARY

  1. The Commission's purpose is to strengthen confidence in New Zealand's capital markets, both in New Zealand and overseas, and to foster capital investment in New Zealand by promoting the efficiency, integrity and cost-effective regulation of those markets. The Commission considers that integrity and efficiency of the markets are best served through a well informed market with a high standard of disclosure, and when investors have equal access to material information, so that they can trade on the same information at the same time. Asymmetries in information in the markets can result in a deterioration of market integrity and investor confidence.
  2. The Commission has conducted an inquiry into the conduct and circumstances surrounding the release of the Government's Telecommunications Stocktake Paper on 3 May 2006 ("the Stocktake paper"), and into comments reportedly made during a media interview on 15 May 2006 by the Communications Minister, Mr David Cunliffe, regarding the dividend policy of Telecom Corporation of New Zealand Limited ("Telecom").
  3. The Terms of Reference of the Commission's inquiry are set out in Appendix A. In its inquiry the Commission considered whether:
    1. any person misused any price-sensitive information relating to securities contained in the Telecommunications Stocktake paper before that information was publicly available;
    2. any Government and/or state sector policies and procedures for handling non-public price-sensitive information relating to securities were appropriate and properly applied; and
    1. any person could or should have taken, or refrained from taking, any actions in respect of these matters to maintain the transparent and orderly functioning of the securities markets in New Zealand or elsewhere.
  4. With regard to the events of 3 May 2006, the Commission has formed the following views:
    1. there was no evidence of any trading or encouragement to trade in securities by persons who knew of the contents of the Stocktake paper before it was made public;
    2. it is the Government's prerogative to announce changes to regulatory policy affecting the businesses of issuers of securities. Similarly it is for Parliament to debate and enact (or decline to enact) legislation. Announcements of Government policy can naturally affect share prices. Accordingly, the fall in the Telecom share price due to the announced change in Government policy, was not of itself a cause for inquiry by the Commission;
    1. that Telecom would receive an unauthorised copy of the paper was unforeseen by either Telecom or the Government, and they each had only a few hours to decide how best to handle the situation. The actions of both Telecom and the Government were understandable in the unusual and difficult circumstances of the day. However, an environment was created in which there was an avoidable asymmetry in the information in the market, for just under 30 minutes while trading was underway on the Australian Stock Exchange ("the ASX"). Both the Government and Telecom could have taken alternative steps to avoid the risk of asymmetry of information in the market;
    1. there are circumstances when it may be appropriate for an issuer to call a trading halt to allow information to be distributed equally to the market, even though the issuer is not aware of the precise content of the information at the time the halt is called. It would have been appropriate for Telecom to have requested a trading halt on the ASX in time for it to be in place when the Minister's announcement of the Stocktake Paper was made at 5.15 p.m. on 3 May;
    2. when the Government or a regulatory agency is about to release non-public price-sensitive information which can be expected to affect the price of the securities of a specific issuer during trading of those securities, it should facilitate that information entering the market in a way which allows trading halts to be called if appropriate. It would have been appropriate for the statement issued by the Minister at his press conference, or at least the fact that price-sensitive information was about to be released by the Government, to have been notified to Telecom and the New Zealand Stock Exchange ("NZX"). This would have allowed the NZX and Telecom to determine whether steps such as a trading halt should have been taken, including on the ASX, to ensure that the information was disseminated to the markets and thereby enabling an orderly and informed adjustment of the Telecom share price;
    3. the Minister and officials acted consistently with the law and with the current Cabinet guidelines for dealing with information relating to publicly listed companies. However the applicable Cabinet guidelines do not provide detailed guidance about announcing regulatory policy that might affect the price of specific listed securities;
    4. the Commission recommends that the Government engage with the NZX with a view to developing procedures and guidelines for disclosure by the Government of information which could be price-sensitive to listed securities, while accommodating the Government's other legitimate concerns. The Commission refers this report to the Prime Minister, as the person responsible for making decisions regarding Cabinet guidance for Ministers, to consider whether the Government wishes to take any action in this regard.
  5. With regard to the Minister's comments to Bloomberg on 15 May 2006 the Commission has formed the following views:
    1. the Minister is entitled to make comments to agencies that serve only a section of the market if the comments made are not based on any confidential or price-sensitive information. This is the case whether or not the Minister has confidential information, so long as this is not the basis of the comments;
    2. the comments made by the Minister on 15 May 2006 in the course of his interview with Bloomberg were not based on any confidential or price-sensitive information about Telecom's intentions or policies, nor did the Bloomberg reports of 16 May 2006 give the impression that they were so based;
    1. it appears that some market participants assumed or guessed that the Minister did have confidential information that would affect Telecom's dividend policy and traded on the basis of this. Trading of this nature occurs and does not of itself mean that the market has been improperly or unequally informed;
    1. the Commission reminds market participants that reported comments may not be a complete or accurate reflection of what was actually said;
    2. as a general point, the Commission recommends that all persons, including Ministers of the Crown, who may be presumed by the market to be in possession of non-public information about a listed issuer, exercise caution when commenting on matters that might affect the price of listed securities. Comments, especially if they are verbal, can be misinterpreted or quoted out of context, and disclaimers and qualifying statements may be overlooked or under-emphasised.

PART I - INTRODUCTION

  1. On 12 May 2006 the Securities Commission announced an inquiry into the conduct and circumstances surrounding the release of the Stocktake paper on 3 May 2006.
  2. On 18 May 2006, after receiving a referral from NZX under the Securities Markets Act 1988, the Commission announced that it had broadened its inquiry to include comments reportedly made during a media interview on 15 May 2006 by the Communications Minister, Mr David Cunliffe, regarding the dividend policy of Telecom.
  3. This is the Commission's report on its inquiry into these matters.

The Commission's inquiry

  1. The NZSX Market is New Zealand's principal market for equity securities. It features the securities of the majority of New Zealand's listed companies and a number of overseas companies. There are currently 179 companies listed on the NZSX with a combined market capitalisation of approximately NZ$67 billion. Telecom is the largest telecommunications company in New Zealand and the largest company listed on the NZSX board. On 3 May 2006 Telecom's market capitalisation was approximately NZ$10.9 billion1 . It is the only company on the NZSX board to have stock exchange listings in New Zealand, Australia and New York. Telecom informs us that as at 30 June 2006, Telecom's shareholders were approximately 26.7% NZ resident, 25.4% Australian resident, and 47.9% resident in other overseas jurisdictions. As a result, any event having a significant impact on Telecom is likely to provoke a high level of comment and reaction amongst investors both in New Zealand and internationally.
  2. On 3 May 2006 Telecom received from an unauthorised source a copy of a confidential paper concerning the Government's Telecommunications Stocktake and informed the Government of this. This paper was a partially masked version of the Cabinet paper that was considered by Cabinet on 1 May 20062 ("masked paper"). The Government became aware that the masked paper contained a near-final version of the Government's regulatory policy concerning telecommunications, the final form of which was approved on the morning of 3 May 2006. The market had been aware for some time that the Government was conducting a review of telecommunications policy, but it was not aware at this time of the outcome of that review.
  3. Throughout the afternoon of 3 May 2006, Telecom executives endeavoured to obtain confirmation from officials of the authenticity and status of the document they had, and to determine their disclosure obligations. At the same time the Minister of Communications and officials were endeavouring to decide how best to deal with the situation. The circumstances for both parties were unusual and difficult, and both had a great deal to consider within a short time.
  4. The events of the day concluded with the Minister releasing the Stocktake paper during a press conference late that afternoon after the New Zealand markets had closed. The Minister's announcement was followed by a sharp drop in Telecom's share price. This occurred immediately on the ASX which was still open at the time of the announcement, and was reflected on the New York Stock Exchange (the "NYSE") when it opened later that evening (NZ time) and the NZX the following morning. It appeared that trading on both the NZX and NYSE was orderly and informed when these two markets opened.
  5. There was immediate and considerable disquiet expressed through the media at the manner and timing of the release of the information. Concern was expressed by various market commentators and participants, including the NZX, that the markets had not been evenly informed and that Australian investors had been advantaged at the expense of New Zealanders. There was speculation about the possibility of improper conduct such as insider trading during this period.
  6. The Commission has a function under the Securities Act 1978 to review practices relating to securities and activities on the securities markets, and to report thereon to any appropriate body. The Commission's stated purpose is to strengthen confidence in New Zealand's capital markets (both domestically and internationally) and to foster capital investment in New Zealand by promoting the efficiency, integrity and cost-effective regulation of New Zealand's markets.
  7. It appeared to the Commission that the events of 3 May 2006 had raised concerns among investors and market participants that were affecting confidence in New Zealand's sharemarket. It appeared that this was particularly so given the domestic and international profile of Telecom stock relative to other New Zealand listed companies and its significance to the capitalisation of the New Zealand sharemarket.
  8. The Commission notes that some of the concerns expressed related to the drop in Telecom's share price per se. It is the Government's prerogative to announce changes to regulatory policy affecting the businesses of issuers of securities. Similarly, it is for Parliament to debate and enact (or decline to enact) legislation. Share prices will naturally rise or fall when price-sensitive information is released. Accordingly, the fall in the Telecom share price due to the change in Government policy is not of itself a cause for inquiry by the Commission. Rather, the focus of the Commission's inquiry is on the manner and timing of the release of the information and whether these matters affected the transparent and orderly functioning of the markets, and confidence in the markets, by creating information asymmetries or opportunities for misuse of the information. As these matters caused widespread concern, and as they involve practices relating to securities and activities on securities markets, the Commission decided that it was necessary and appropriate for it to inquire into these matters.
  9. Markets price securities most efficiently when they have the best available information. This occurs when investors have equal access to material information, so that they can trade on the same information at the same time. Asymmetries in information in the markets can result in a deterioration of market integrity and investor confidence. Accordingly, asymmetries in information should be avoided whenever possible. To this end, most securities exchanges, in particular exchanges belonging to the World Federation of Exchanges, have rules requiring the timely disclosure of material information to the market, with penalties for failure to comply. Most exchanges operate centralised facilities for disseminating announcements to market participants and to the general public.
  10. The NZX and the ASX have similar Listing Rules concerning the disclosure of material information to the market. Where information is material to the price of securities, subject to certain exceptions an issuer is required:
    1. under NZSX Listing Rule 10.1, to immediately release that information to the NZX;
    2. under ASX Listing Rules, Chapter 3.1, to immediately tell the ASX that information.
  11. The Commission notes that although Telecom has securities quoted on the NYSE, the Commission does not propose to outline the relevant NYSE Rules in this report as the NYSE market was closed when the information in question was released.
  12. Most exchanges also provide mechanisms such as trading halts to help ensure that participants will have equal opportunity to become aware of, and evaluate, price-sensitive information when it is disclosed. Trading halts operate as a temporary cessation of trading during which a potentially price-sensitive announcement is made. Orders may be placed and withdrawn during the halt as the information is assimilated into the price of the securities, but cannot be completed until the halt is lifted. The concept is that when the halt is lifted the market will have taken account of the price effect of the information and trades will take place at that price, without trading having occurred in the intervening period on the basis of unequal information.
  13. Under NZSX Listing Rule 5.4.1, an issuer can request a trading halt where it is releasing or intends to release material information to the market. NZX listed issuers may request a trading halt of their quoted securities as a way of managing the disclosure of material information to the market.
  14. There are two common types of trading halts. Where material information is released to the market a brief trading halt, usually 10 to 15 minutes, can provide the market with time to digest the information. This is intended to assist investors to trade on an informed basis. A trading halt may also be implemented whenever an issuer intends to release material information, but is not able to make an immediate announcement under Listing Rules.
  15. The ASX Listing Rules have analogous provisions in respect of trading halts. Under the ASX Listing Rules, Chapter 17.1, an issuer can request a trading halt of its quoted securities.
  16. On 18 May the Commission broadened its inquiry to include comments made by the Minister of Communications during a media interview on 15 May 2006 regarding Telecom's dividend policy. Telecom's share price dropped again following these comments, and further concerns were expressed that the Minister had disclosed price-sensitive information through the media, and this had adversely affected the orderly dissemination of information to the market. This was the subject of a specific reference to the Commission by NZX.
  17. The Terms of Reference of the Commission's inquiry are set out in Appendix A. In its inquiry the Commission considered whether:
    1. any person misused any price-sensitive information relating to securities contained in the Telecommunications Stocktake paper before that information was publicly available;
    2. any Government and/or state sector policies and procedures for handling non-public price-sensitive information relating to securities were appropriate and properly applied; and
    1. any person could or should have taken, or refrained from taking, any actions in respect of these matters to maintain the transparent and orderly functioning of the securities markets in New Zealand or elsewhere.
  18. In terms of (a) above, the Commission inquired into whether any person may have misused the price-sensitive information in the Stocktake paper by trading in securities of Telecom before that information became public or encouraging any person to do so, whether this would have constituted insider trading or tipping under law or otherwise. That inquiry included all those persons who the Commission identified as having had access to the Stocktake paper prior to its announcement, including relevant personnel of both Telecom and the Government. The Commission's inquiries have revealed no evidence to suggest that any such trading or encouragement occurred.
  19. The matters set out in (b) and (c) above concern events and actions on 3 May 2006 in the context of the importance of disclosure of price-sensitive information to the integrity of and investor confidence in the securities markets. The matters set out in (b) and (c) above also concern events and actions surrounding the comments attributed to the Minister of Communications in the Bloomberg reports of 16 May 2006 in the same context. These matters are discussed further in this report.
  20. The Commission's inquiry is concerned with the events that occurred after Telecom had become aware of the nature and contents of the masked paper that had come into its possession. This is the point at which issues arose as to whether disclosure to the markets of the information in the masked paper was required. The conduct of any party or any event which occurred before that time is referred to in this report only by way of background or where necessary to give context to the Commission's comments. The genesis of the events which precipitated the Government's release of the Stocktake paper have been well canvassed by both the media and in the State Services Commission's 16 May 2006 report into the matter. A chronology of the key events which took place in the critical period is set out in Appendix B. Terms defined in the chronology are used with the same meaning in the body of this report.
  21. This inquiry has been carried out under section 10(b), 10(c) and 10(caa) of the Securities Act 1978. These sections provide that it is a function of the Commission to:

10(b) keep under review the law relating to bodies corporate, securities, and unincorporated issuers of securities, and to recommend to the Minister [of Commerce] any changes thereto that it considers necessary

10(c) keep under review practices relating to securities, and to comment thereon to any appropriate body

10(caa) keep under review activities on securities markets, and to comment on those activities to the appropriate body

  1. The Commission considers that the matters under inquiry raise issues of securities markets practice upon which it is appropriate for the Commission to comment. The Commission has decided to comment by way of this report. The Commission does not intend to recommend any changes to the law as a result of its inquiries.

Procedure

  1. The Commission determined the procedures for this inquiry. A division of the Commission was appointed to conduct this inquiry.
  2. In the course of the inquiry the Commission obtained sworn evidence from the following:

The Commission also received correspondence from the NZX and ASX, and a copy of the State Services Commission's report into the disclosure of the paper to Telecom.

  1. Ministers of the Crown cannot be compelled to give evidence in this inquiry. The Commission requested that Mr Cunliffe appear and give evidence at the same time as other persons. The Minister of Communications provided a voluntary affidavit, which was provided after distribution of a confidential draft report and transcripts of evidence.
  2. Having received evidence from these people the Commission prepared a further confidential consultation draft report and invited comment from affected parties. Relevant transcripts of evidence were also given to affected parties. These parties were given the opportunity to respond with submissions and to provide further evidence.
  3. Where an inquiry raises questions about the personal actions and intentions of affected persons it is important for the integrity of the inquiry process that every person with a material interest is afforded the opportunity to appear at a meeting of the Commission. Such an opportunity was given in this case. Confidentiality and privacy orders were in place throughout the inquiry. All witnesses were provided with the opportunity of being represented. Oral evidence was recorded and relevant transcripts were made available to witnesses.
  4. The Commission has carefully considered all the evidence and submissions before it before publishing this report.

Footnotes

  1. Following the release of the Stocktake paper, Telecom's market capitalisation on 4 May 2006 was approximately NZ$9.9 billion.
  2. Telecom received a partially masked version of the Cabinet paper. The paper was masked by Mr Peter Garty, who removed the identifier numbering on the front cover page of the document. The paper received by Mr Garty and passed by him to Telecom included a cover letter from the Minister of Communications to the Prime Minister dated 27 April 2006.

PART II - THE EVENTS OF 3 MAY 2006

Effect on the market

  1. Market data for the trading of Telecom securities in the relevant markets between 3 and 4 May 2006 is set out in Appendix C.
  2. At 4.26 p.m. the Minister's office issued a media advisory announcing the Minister's 5.15 p.m. press conference. This was sent to journalists and posted on the Beehive website3. It was not sent to Telecom, NZX or ASX. There were no apparent irregularities in the trading activity of Telecom securities prior to 4.30 p.m. on 3 May 2006. After 4.30 p.m. there was an increase in trading volume through to the close of the market at 5.00 p.m. compared with the rest of that day's trading activity. However, there does not appear to have been any material price effect. The media advisory was picked up by Reuters and Bloomberg. However, as it was not advised to the NZX it is possible not all market participants picked up the news that the Government was planning an announcement.
  3. The main impact on the markets occurred on the ASX after the Minister's announcement at 5.15 p.m. and before trading was halted at Telecom's request at approximately 5.42 p.m. (NZ time). On the ASX, the share price just prior to the media advisory (2.26 p.m. Sydney time) was A$4.68. For the trading period from 2.26 p.m. through to the Minister's announcement at 3.15 p.m. (Sydney time), the share price dropped to A$4.64 on volume of 364,099 shares. By the time Telecom called a trading halt at 3.42 p.m., a further 1,767,622 shares had traded and the share price had dropped to A$4.43. On the ASX that day 3,043,372 shares were traded.
  4. The information in the Stocktake paper was likely to have caused a decline in Telecom's share price regardless of when or how it was announced. However, the Commission has considered whether the manner and timing of the announcement may have resulted in trading on the ASX on the basis of information that was not equally available to all market participants and investors, and whether anything could or should have been done to prevent that occurring, and whether the media advisory may have created an opportunity for trading by those who saw the advisory or coverage of it.

Findings of the Inquiry

Telecom

  1. Once Telecom became aware of the masked paper, it decided that the proper course of action was to seek confirmation of the authenticity and status of the document from the Government. Telecom sought legal advice both internally and externally. The advice was that Telecom might have continuous disclosure obligations but to avoid misleading the market should not make disclosure without first having the masked paper authenticated by the Government. In this regard, the Commission notes that the copy received by Telecom had a masked front page, and was of the paper that was submitted to Cabinet, and then to the Cabinet Policy Committee which on 3 May 2006 approved the policy with certain changes.
  2. Telecom executives attempted to contact the Minister, the Prime Minister and various officials several times by telephone during the afternoon. Details of the various telephone calls and conversations are set out in the chronology at Appendix B. Some conversations did take place, during which Telecom informed officials that it had a copy of the paper and that it considered that it might be obliged to disclose the information in it if it was genuine and reflected Government policy. However Telecom was not told at any time that the document it had was authentic and contained a near final version of Government policy.
  3. Telecom formed the view that it was reasonably likely that the document it had was a genuine Cabinet paper after the Minister of Communications telephoned Ms Theresa Gattung, CEO of Telecom, at 4.38 p.m. to inform her that he would be holding a press conference about the matter at 5.15 p.m. (although not the content of that press conference nor whether the masked paper was authentic).
  4. Telecom obtained a copy of the Minister's announcement from the Government's "Beehive" website4 at approximately 5.20 p.m. Telecom decided that the contents of the announcement warranted a trading halt on the ASX to allow the market time to absorb the information. Telecom requested and received a trading halt from the ASX from 3.42 p.m. (Sydney time) until opening on the following day. Telecom did not approach the NZX because it had already closed by the time the Minister had made his announcement, nor the NYSE since it had not yet opened. In Telecom's view both of those markets would have time to adjust for the information before the next trading day.
  5. In the Commission's view Telecom's actions in relation to handling its disclosure obligations in relation to the information contained in the masked paper were taken in good faith to comply with the law and were understandable in the circumstances. The Commission accepts that Telecom was concerned not to mislead the market by disclosing information that was likely to be price-sensitive but was not verified as to its authenticity or its status as regulatory policy. The Commission also accepts that the steps taken by Telecom to authenticate the paper and to determine its disclosure obligations were timely and appropriate.
  6. However the Commission considers that it would have been appropriate for Telecom to have sought a trading halt on the ASX once Ms Gattung had been informed by the Minister of the fact of his 5.15 p.m. press conference, whether or not they were certain of the content. As the ASX was the only relevant market open at that time, this would have prevented trading in Telecom securities until the markets had full and equal information. The Commission considers that Telecom had sufficient information at that time to draw a reasonable inference that the Minister's announcement would be price-sensitive. The Commission also considers that Telecom had had sufficient time at that point to have contacted the ASX to arrange for a trading halt to be put in place if and when there was sufficient certainty that one was required.
  7. The Commission does not consider that Telecom deliberately withheld material information from the market, or that it acted negligently or in bad faith. As noted above the Commission considers that Telecom's actions were understandable in what were very difficult circumstances. However requesting a trading halt sooner would have been the better course to take.
  8. The Crown made submissions to the effect that the manner in which the confidential Cabinet paper was given to Telecom meant that Telecom personnel who received the paper were under an obligation to return it to the Government and had no right to use or retain the paper. Accordingly, the Crown has submitted that there was no issue of disclosure for Telecom. This is said to be so because of the legal and constitutional conventions surrounding Cabinet documents, and the confidential status accorded to these.
  9. The Commission considers that once Telecom knew of the contents of the masked paper, it possessed that information regardless of whether it returned the document. Accordingly, any issues regarding continuous disclosure would not have been resolved by returning the paper.
  10. The Commission has concluded that the issue does not need to be addressed within the terms of reference of this inquiry because no disclosure was in fact made by Telecom. On 3 May 2006, both Telecom and the Crown received advice that there might have been a disclosure obligation on Telecom. The actions taken by both parties on that day were influenced by this advice.
  11. Notwithstanding that this issue does not need to be determined within the scope of this inquiry, the Commission considers that the Crown's submissions raise important questions about the obligations on market participants who receive confidential material information from an unauthorised source. The Commission intends to look at these questions further with a view to assessing whether the rules applying to market participants in these situations are sufficiently clear.

The Government

  1. The Stocktake paper was intended to be part of the Government's late-May Budget announcements. The Commission was advised that, with the Budget release not occurring for another 2-3 weeks, the Government had not yet turned its mind to formulating a formal disclosure process for the price-sensitive information contained in the Stocktake paper on 3 May 2006.
  2. On the afternoon of 3 May 2006, it seems that the Minister and officials were conscious of the price-sensitive nature of information in the Stocktake paper. Details of the steps taken by the Government on that afternoon are set out in the chronology at Appendix B.
  3. We note that there is a Cabinet Office Circular ("the Cabinet circular") which provides guidance to Ministers for dealing with information relating to publicly listed companies. A copy of Cabinet Office Circular CO (02) 14 is set out in Appendix D.
  4. The Commission considers that the Government acted consistently with the guidelines set out in the Cabinet circular, and with the law. Although the principles in the Cabinet circular were applicable, the Cabinet circular does not expressly provide guidance about making announcements of regulatory policy that might affect the price of specific listed securities. However, the Commission considers that the Government could have taken alternative steps to avoid the risk of asymmetry in the information in the market.
  5. Government responses to Telecom's calls to Ministers and officials were carefully worded so as not to expressly or implicitly authenticate the document. This appears to have been at least in part to avoid triggering Telecom's disclosure obligations. Also, the Government and officials did not at this time know how Telecom had obtained the masked paper, nor whether any other party had also obtained a copy.
  6. After consulting with policy and legal advisers, it was decided that the Minister would release the Stocktake paper at a press conference at 5.15 p.m., which was after the NZX had closed but in time for the 6.00 p.m. television news. At 4.26 p.m. the Office of the Communications Minister issued a brief media advisory to the effect that the Minister would be making a "major announcement" at 5.15 p.m. The Minister left a voicemail message with the Chief Executive of the NZX by telephone. Further contact with the NZX was not pursued. In the event Telecom, the NZX, and the ASX were not advised at the same time as the media were advised of either the 4.26 p.m. media advisory or of the content of the 5.15 p.m. announcement.
  7. We understand that it was decided to release the Stocktake paper so that the Government could manage the disclosure of its policy. The Commission is conscious that the timing and manner of the release of policy decisions is a matter of Government prerogative. However, as noted in the introduction to this report it is important for the integrity of, and investor confidence in, the capital markets that the established procedures for releasing non-public price-sensitive information are followed, including by the Government, while accommodating the Government's other legitimate interests.
  8. In the Commission's view potentially price-sensitive information should not be delivered solely through the media. The recognised source of information about listed companies is the relevant exchange. The exchanges are equipped to decide whether steps such as trading halts should be taken to ensure market participants are equally informed so that prices adjust in an orderly fashion.
  9. In the present case, it would have been appropriate to have advised both the New Zealand market operator, namely the NZX, and issuers affected, particularly Telecom, in advance before any announcement by the Communications Minister was made to the media that there was going to be an announcement of price-sensitive information. This may have enabled a trading halt to be put in place on both the NZX and the ASX, which would have obviated the need to delay disclosure until the NZX had closed, and ensured that trading on both markets resumed on the basis of equal, complete and up-to-date information.
  10. The Commission accepts that the Minister and officials had less than three hours in which to work through the issues and make decisions in difficult and unusual circumstances, and that they took the actions that they believed were appropriate.

Recommendations

  1. The Commission considers that in most circumstances notice of the information, or at least the fact that price-sensitive information is about to be released by the Government, could be given to the NZX or the affected issuer who can then decide under the Listing Rules whether a particular course of action should be taken. It would then be up to the NZX and/or the issuer to consider the implications of the announcement and the appropriate steps to take to ensure market transparency (for example a decision on whether to initiate a trading halt of the affected securities).
  2. The Government is in a different position from listed issuers and others in the markets in that it must consider the wider national interest as well as the interests of the securities markets when deciding whether to make announcements about policy that might affect particular listed issuers.
  3. The Commission recommends that the Government engage with the NZX with a view to developing procedures and guidelines for disclosure by the Government of information which could be price-sensitive to listed securities, while accommodating the Government's other legitimate concerns. It would be appropriate if these procedures made provision for advising the ASX where affected securities are also traded on the Australian market.
  4. The Commission also considers that it may be appropriate to amend the Cabinet circular to include any procedures and guidelines the Government develops with the NZX regarding the dissemination of price-sensitive information to the market.
  5. The Commission refers this report to the Prime Minister, as the person responsible for making decisions regarding Cabinet guidance for Ministers, to consider whether the Government wishes to take any action regarding the development of procedures and guidelines on the release of market-sensitive announcements by the Government.

Footnotes

  1. www.beehive.govt.nz
  2. www.beehive.govt.nz

PART III - THE EVENTS OF 16 MAY 2006

  1. On 16 May 2006 the Bloomberg news agency ("Bloomberg") published a series of reports of an interview with Mr Cunliffe which included comments attributed to the Minister regarding Telecom's dividend prospects.
  2. Telecom responded to the Bloomberg report later that day with an announcement stating that it had not given any indications of its capital management and future dividend policy to the Minister. Telecom also noted that it had not received any prior advice from the Minister about the comments made to Bloomberg. Telecom stated that it believed that the Minister's comments were not based on any confidential information. Telecom's media release is at Appendix E.
  3. On 17 May 2006 the NZX referred the statements reportedly made by Mr Cunliffe regarding Telecom's dividend policy to the Commission for investigation. NZX referred the matter to the Commission for consideration under section 10(c) and (caa) of the Securities Act 1978. The NZX stated that in its view the comments attributed to the Minister were material and price-sensitive, but were not released to the whole market. Rather, they were carried by a wire service which serves a section of the market, but to which the average retail investor does not have access.

Effect on the market - 16 May 2006

  1. The Telecom share price opened at $4.50, traded briefly at $4.53 and at the time of the first Bloomberg report at 12.26 p.m. was $4.41. Volume from opening until 12.26 p.m. was just over 16.5 million shares. The share price had dropped $0.09 from opening bid throughout the morning. From the release of the first Bloomberg report at 12.26 p.m., the share price dropped by $0.06 to $4.35 within half an hour then continued to drop to its low for the day of $4.31 at 2.31 p.m. It then rose to close at $4.39. Volume for the period 12.26 p.m. through to close was just over 17.6 million shares.
  2. There appears to have been an immediate but immaterial impact on the share price after the Bloomberg announcement, and a recovery towards the end of the day, following Telecom's clarifying statements.
  3. On the ASX Telecom quoted securities opened at A$3.65 and had dropped to A$3.61 at the time of the Bloomberg report at 10.26 a.m. (Sydney time). Following the report the share price dropped to A$3.53 at 12.54 p.m. (Sydney time) and recovered to close at A$3.60. The relevant market data for the trading of Telecom securities is set out in Appendix G.

Findings of the Inquiry

The Bloomberg reports

  1. On 16 May 2006 in an article entitled "Telecom NZ Investors May Face Lower Dividends, Cunliffe Says", Bloomberg quoted Mr Cunliffe as follows:

"Its investment levels have not been high relative, for example, to its dividend flow" Cunliffe said in an interview yesterday in Wellington. Greater competition and increased investment "may mean on the part of shareholders that they need to accept that in the short run there may be somewhat lower dividend flows or lower returns" he said.

  1. The article reported a few lines later that Mr Cunliffe said that the company's dividend policy was a decision for Telecom's board.
  2. The Commission has received a copy of the full transcript of the Minister's interview with Bloomberg. A copy of the transcript is at Appendix F. The interview was quite long and the articles report only a very small part of what the Minister said during the interview. The quotes attributed to the Minister were pieced together from comments made at different points over the course of the interview.
  3. The Minister's comment in respect of Telecom's relatively high investment levels was made in response to a question early in the interview about Telecom's past strategy regarding broadband (see page 2 of the transcript). The Minister stated in his response to that question (and also to the previous question) that such issues were ones that company boards have to manage and wrestle with.
  4. The Minister made his comment in respect of lower dividend flows much later in the interview (see page 6 of the transcript), in the context of a question about the possibility of Telecom restructuring its operations. The Minister's full response to that question is as follows:

I can't comment. I have no information on that but whatever they do, I hope that they will face the future not look backwards. I hope that they will look after their customers, including their wholesale customers, and that they will invest in the best interests of New Zealand and in the best long-term interests of their shareholders. That may mean on the part of shareholders that they need to accept that in the short run there may be somewhat lower dividend flows or lower returns and that just reflects the structural situation that the company and the country are both in.

  1. A further question was asked as to whether the Minister would like to see Telecom return less to shareholders and invest more. The Minister's response to this question was that "dividend decisions are obviously very sensitive decisions and decisions that boards need to make, it's not for Ministers". When asked whether he wanted to "view an opinion" on this point, he responded "no".

No evidence of confidential or price-sensitive information

  1. On the evidence available to it, the Commission accepts that the comments made by the Minister on 15 May 2006 to the Bloomberg news agency were not based on any confidential or price-sensitive information about Telecom's intentions or policies, nor did the Bloomberg reports give the impression that they were so based.
  2. It appears that some market participants assumed or guessed that the Minister's comments did reflect confidential information that would affect Telecom's dividend policy and traded on the basis of this. Trading of this nature occurs in the markets and does not of itself mean that the market has been improperly or unequally informed.
  3. Those market participants may have made those assumptions at least in part because the Minister's communications portfolio has direct influence over the operational activities of Telecom. Also, the Minister had released material information on 3 May 2006, which included recommendations for regulating Telecom's broadband business operations.
  4. The present case serves as a general reminder that market participants may perceive statements made by persons with authority in relation to a listed issuer as being made with the benefit of non-public knowledge or information about the issuer. "Persons with authority" will include directors and senior executives of the issuer, and may also include external parties who have a close association with or influence over the issuer. If such a perception is created about matters that may be price-sensitive, the price of the issuer's quoted securities might be affected. If the perception is incorrect, then the resulting price change may not accurately reflect the value of the affected securities.
  5. The Commission notes that the Bloomberg interview was one of several given to media agencies after the release of the Stocktake paper. It is part of the role of a Minister of the Crown to convey policy decisions and their reasons and consequences to the public through the news media.
  6. The Commission also notes that Bloomberg is a subscription service and so reports only to its subscribers. In the Commission's view the Minister is entitled to make comments to agencies that serve only a section of the market if the comments made are not based on any confidential or price-sensitive information.

Recommendations

  1. The Commission notes that Cabinet Office Circular CO (02) 14 contains relevant guidance for Ministers. At paragraphs 6 and 7 it provides that:

"It is almost impossible to predict the questions and issues that could be raised with Ministers by the media and other third parties on any particular issue at any particular time. Therefore, Ministers and officials should act cautiously when dealing with matters relating to a publicly listed company or a commercial agency in the wider state sector. There could be a perception that the Crown has access to confidential information...Market participants may act on statements by Ministers, even if those statements are made without the benefit of confidential information. Such market participant action may then impact on the market price for the publicly listed company's shares..."

  1. The Commission notes its view that this guidance is appropriate and recommends that it continue to be brought to the attention of Ministers and officials.
  2. Disclosures made by way of a written announcement to the relevant exchange will usually be published verbatim to the market as a whole. Other public comments, especially if they are verbal, can be misinterpreted or quoted out of context, and disclaimers and qualifying statements may be overlooked or under-emphasised. As a general point, the Commission recommends that all persons who may be assumed by the market to be in possession of non-public information about a listed issuer exercise caution when commenting publicly on matters affecting that issuer.
  3. The Commission also reminds market participants that reported comments may not be a complete or accurate reflection of what was actually said.

APPENDIX A

TERMS OF REFERENCE

The Securities Commission ("the Commission") is conducting a review under sections and of the Securities Act 1978 of the conduct and circumstances surrounding:

  1. the release on Wednesday 3 May 2006 of the Government's Telecommunications Stocktake Paper; and
  2. comments reported to have been made on Tuesday 16 May 2006 by the Communications Minister David Cunliffe about Telecom's dividend policy.

In particular, the Commission will consider whether the conduct and circumstances surrounding these matters affected the transparent and orderly functioning of the securities markets.

The purpose is to form a view as to whether such conduct and circumstances give rise to any issues of securities law, practices relating to securities, activities on securities markets.

In particular, the Commission wishes to consider:

  1. whether any person misused any price sensitive information in relation to securities contained in the Paper before that information was publicly available;
  2. whether any Government and/or state sector policies and procedures for handling non-public price sensitive information in relation to securities were appropriate and properly applied in respect of these matters;
  1. whether any person could or should have taken, or refrained from taking, any actions in respect of these matters to maintain the transparent and orderly functioning of the securities markets in New Zealand or elsewhere.

Accordingly the Commission will obtain, consider and utilise information for the purposes of any recommendation, report or comment the Commission may decide to make under sections 10(b), 10(c) or 10(caa) of the Securities Act 1978.

SUBJECT to the Commission's discretion to amend these Terms of Reference as it may consider fit.

May 2006

APPENDIX B

Chronology of key events

(All times have been converted to New Zealand Standard time)

Friday, 28 April 2006

Monday, 1 May 2006

Tuesday, 2 May 2006

A.M.

P.M.

Wednesday, 3 May 2006

A.M.

P.M.

Thursday, 4 May 2006

APPENDIX C

Markey data graph May 03

NZX Price/Volume activity in TEL on 3 May 3006

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ASX Price/Volume activity in TEL on 3 May 3006

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APPENDIX D

Cabinet Office CircularCO (02) 14 15 October 2002

View as PDF file (614KB)

APPENDIX E

Telecom media release 16 May 2006

View as PDF file (74KB)

APPENDIX F

Bloomberg interview

Transcript of an interview with communications minister David Cunliffe in wellngton on May 15 2006 on Telecom by Bloomberg news agency.

view as PDF (832KB)

APPENDIX G

Market data graph - May 16 2006

NZSX Price/Volume activity in TEL on 16 May 3006

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View enlarged image

ASX Price/Volume activity in TEL on 16 May 3006

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View enlarged image

APPENDIX D

CO (02) 14

Cabinet Office Circular

15 October 2002

Enquiries: Kirstie Drake, Ministry of Economic
Development
Ph: 474 2887
Natalie Baird, Cabinet Office
Ph: 471 9741

All Ministers
Parliamentary Under-Secretaries
All Chief Executives
Chief of Staff, Prime Minister's Office
Chief of Staff' Office of Hon Jim Anderton
All Senior Private Secretaries
All Private Secretaries

Copies to:
Speaker of the House of Representatives
Clerk of the House of Representatives
Controller and Auditor-General

Guidance for Dealing with Information Relating to Publicly Listed Companies

Key Points
Ministers and officials should treat information received from commercial entities cautiously. If the Crown holds inside information, and if it is an insider under the insider trading legislation, it will be required to observe insider trading laws. Where the Crown is an insider and holds inside information, Ministers and officials should not:

Introduction

  1. 1 Cabinet has agreed that guidance be issued setting out general principles on dealing with information relating to publicly listed companies. The purpose of this circular is to set out guidance for Ministers and officials dealing with information relating to publicly listed companies including both those in which the Crown has an ownership interest and those in which it does not.
  2. 2 The guidance in this circular sets out a general approach for dealing with information relating to publicly listed companies. Ministers and chief executives should ensure that the relevant government department provides specific advice on individual situations as they arise.

General Principles

  1. The general nature of the relationship between Ministers and publicly listed companies in which the Crown has an ownership stake may be usefully informed by some of the principles underlying the role of Ministers generally. These principles include:

3.1
Ministerial focus should be on government policy and monitoring rather than day-to-day operations.


3.2
Ministers should not endorse any product or service. Ministers should restrict any comment to policy endorsement, not product endorsement.


3.3
Ministers should take care to ensure that no conflict exists or appears to exist between their public duty and their private interests. Perception can often be as important as reality in establishing what is acceptable behaviour.


3.4
As Ministers have the capacity to exercise considerable influence, they should take care to ensure their intentions are not misunderstood, and they do not inadvertently or inappropriately influence third parties, or involve themselves in matters which are not their responsibility.

  1. Further information on these principles can be found at paragraphs 2.46-2.77, 2.160 and 2.170-2.I85 of the Cabinet Manual 2001

Dealing with Commercial Information - Exercise Caution

  1. 6 Ministers should treat information received from commercial entities cautiously. There are more constraints on the use of such information than on information obtained from the core state sector. These constraints include insider trading legislation, consumer legislation (eg the Fair Trading Act 1986), the provisions of the Companies Act 1993, and the terms and conditions of any confidentiality agreement under which the government has received the information. This circular is primarily concerned with the constraints imposed by insider trading legislation.
  2. It is almost impossible to predict the questions and issues that could be raised with Ministers by the media and other third parties on any particular issue at any particular time. Therefore, Ministers and officials should act cautiously when dealing,with matters relating to a publicly listed company or a commercial agency in the wider state sector. There could be a perception that the Crown has access to confidential information. For example, this perception is likely to be strong with respect to Air NZ at this time given the Crown has access to company information under confidentiality agreements with Air NZ.
  3. 7 Market participants may act on statement. by Ministers, even if those statements are made without the benefit of confidential information. Such market participant action may then impact on the market price for the publicly listed company's shares. With respect to any publicly listed company in which the Government may consider trading shares, the Crown may be open to allegations of manipulating the market for its own benefit. Allegations are easily .made and, even if illfounded, damage will have been done.
  4. 8 There is also fiscal risk for the Crown insofar as any drop in the share price of listed companies in which it owns shares (eg Air NZ) will impact on the value of the Crown's shareholding. The Crown, if it breaches insider trading laws, could also face claims for compensation regardless of whether or not it owns shares in the particular company, and possibly court-imposed penalties.

Insider Trading Laws

  1. 9 Part I of the Securities Amendment Act 1988 sets out the provisions relating to insider trading in the shares of publicly listed companies. In general, liability lies under this Act for the buying or selling of shares in publicly listed companies by insiders with inside information, and for tipping on inside information by insiders. The key sections of the Securities Amendment Act 1988, including the definitions of "insider" and "inside information", are annexed to this circular.

Obligations on Publicly Listed Companies

  1. 10 The New Zealand Stock Exchange ('NZSE') Listing Rules govern how and when any material information about a publicly listed company is disclosed to the market. In general, where a company is listed on the NZSE, it is required to disclose all material information that is not generally available to the NZSE, unless the information comes within one of the exceptions in the Listing Rules. The key sections of the Listing Rules in force until 1 December 2002 on the obligation to supply relevant information, and the Listing Rules to come into force on I December 2002 on continuous disclosure of material information, are annexed to this circular.
  2. 11 This means that the publicly listed company is obliged to assess whether to release information to the market. Release should be made through the NZSE. If Ministers provide material information to publicly listed companies (even if the information is general and not specifically related to that company) a company will then be obliged to disclose that information to the market unless the information comes within one of the exceptions in the Listing Rules. If a company is also listed on any other securities exchange in New Zealand or overseas (eg the Australian Stock Exchange) it will also be required to disclose information in accordance with the listing rules of that exchange.

Obligations on the Crown from holding inside information of a Publicly Listed Company

  1. 12 A publicly listed company in which the Crown is a shareholder may make information available to the Crown, but only with appropriate confidentiality agreements in place between the two parties. This information must also fall within the exceptions to the, NZSE Listing Rules or it will have to be disclosed to the market.
  2. 13 In situations where the Crown is a shareholder in a publicly listed company and holds material information relating to that company because it is a shareholder, any disclosure of this material information should be made by the Board of the company itself not by Ministers.
  3. 14 Where the Crown is an insider, the inappropriate use and/or premature disclosure of information that could affect the market for that company's securities could lead to claims of insider trading and bring with it the possibility of inquiry by the Securities Commission or litigation.
  4. 15 Legal risks arise for the Crown if it is an insider, and if it:

15.1
discloses the confidential information it receives to others outside the Crown;


15.2
makes any statements in relation to:


15.2.1
the publicly listed company's value or prospects as a company;


15.2.2
the value of the publicly listed company's shares; or


15.2.3
whether to buy or sell the publicly listed company's shares;


15.3
buys or sells shares in the publicly listed company; or


15.4
encourages others directly or indirectly to buy or sell shares in a publicly listed company

  1. In order to minimise the legal risks, Ministers, advisers and officials should not:

16.1
disclose confidential information of the publicly listed company to, or discuss it with, any person other than those within the Crown that have a legitimate need to know the information (ie Ministers, officials and advisers directly involved in issues relating to the publicly listed company);


16.2
make any public or private statement or comment to anyone (other than Ministers, officials and advisers directly involved in issues relating to the publicly listed company) about:


16.2.1
the value or prospects of the publicly listed company; and


16.2.2
the value of the publicly listed company's shares;


16.2.3
whether or not someone should buy or sell shares in the publicly listed company.


16.3
buy or sell shares in the publicly listed company on behalf of the Crown or in their private capacities or suggest that members of their family or anyone else does so if they are an insider and hold inside information;


16.4
discuss progress on, or the outcome of, any initiatives that are being advanced involving the Crown's interests in the publicly listed company or its business (other than with Ministers, officials and advisers directly involved in issues relating to the publicly listed company);


16.5
suggest to anyone else that they should advise or encourage other people to buy or sell shares in the publicly listed company.

  1. The Official Information Act 1982 applies to all information held by the Crown. Any request under the Official Information Act for public company information held by the Crown should be handled in accordance with the requirements of the Act. The request should be considered in consultation with the relevant publicly listed company. Although each request will be considered as it arises under the terms of the Act, given the sensitive nature of inside information, it is likely such information would be withheld. If the information had already been released onto the market then it could not be withheld.

Legitimate Government Action

  1. There will be times when Ministers feel compelled to comment on or take action with respect to a publicly listed company in the national interest. It would only be appropriate to comment or take action on the publicly listed company's business issues after the company itself has provided the information to the market through the NZSE, and then only to the extent that the company has informed the market,
  2. 19 Where the Government is actively involved in a transaction involving a publicly listed company, Ministers may feel duty-bound to comment publicly. As a first measure, the publicly listed company should communicate the appropriate details of the proposal to the market through the NZSE. Ministers could then make statements about the proposal, the detail of which should go no further than that disclosed to the market by the publicly listed company.
  3. 20 Ministers may consider it in the public interest to address certain issues that the publicly listed company would not (eg national interest issues). Ministers would need to avoid saying anything that would materially affect the market price of the publicly listed company's shares.
  4. 21 Where the Government has a regulatory role in the industry in which a publicly listed company in which is has an interest operates, it is appropriate to undertake regulatory action such as making policy announcements that affect the whole industry. In such circumstances, there should be a clear internal separation of the Government's ownership role and its regulatory role.

Review of Insider Trading Laws

  1. 22 The Government has signalled its intention to carry out a full review of insider trading laws. As legislation changes, so too will the obligations on publicly listed companies and insiders. This guidance will be updated in accordance with any legislative changes.

Further Guidance

  1. 23 Further context-specific guidance should be provided by the relevant Government department in response to individual situations as they arise. Specific advice should cover whether information can or cannot be disclosed, and potential liabilities pertaining to the particular issues at hand. It may also be possible to anticipate and preempt tile questions that might arise from the media.
  2. 24 For further information on the general guidance in this circular, please contact:

24.1
Kirstie Drake in the Ministry of Economic Development; or


24.2
Natalie Baird in the Cabinet Office.

Marie Shroff
Secretary of the Cabinet

ANNEX.

SECURITIES AMENDMENT ACT 1988 [Extract]*
(* The Securities Markets and Institutions Bill, currently before Parliament, may, when enacted change the name of this Act to the Securities Markets Act 1988.)

  1. 2. Interpretation - ...
    "Inside information". in relation to a public issuer, means information which- ,
    1. (a) Is not publicly available; and
    2. (b) Would, or would be likely to, affect materially the price of the securities of the public issuer if it was publicly available:
  2. 3. Meaning of "insider" - (1) For the purposes of Part I of this Act, "insider" in relation to a public issuer, means-
    1. (a) The public issuer:
    2. (b) A person who, by reason of being a principal officer, or an employee, or company secretary of, or a substantial security holder in, the public issuer, has inside. information about the public issuer or another public issuer:
    1. (c) A person who receives inside information in confidence from a person described in paragraph (a) or paragraph (b) of this subsection about the public issuer or another public issuer:
    1. (d) A person who, by reason of being a principal officer, or an employee, or company secretary of, or a substantial security holder in, a person described in paragraph (c) of this subsection, has that inside information:
    2. (e) A person who receives inside information in confidence from a person described in paragraph (c) or paragraph (d) of this subsection about the public issuer or another public issuer:
    3. (f) A person who, by reason of being a principal officer, or an employee, or company secretary of, or a substantial security holder in, a person described in paragraph (e) of this subsection, has that inside information.
  3. 7. Liability of insider who deals in securities of a public issuer - (1) An insider of a public issuer who has inside information about the public issuer and who -
    1. (a) Buys securities of the public issuer from any person; or
    2. (b) Sells securities of the public issuer to any person -

is liable to the persons referred to in subsection (2) of this section. .
(2) The persons to whom the insider is liable are -

  1. (a) In a case where the insider buys securities of the public issuer, any person from whom the securities are bought for any loss incurred by that person in selling them to the insider:
  2. (b) In a case where the insider sells securities of the public issuer, any person to whom the securities are sold for any loss incurred by that person in buying them from the insider:
  1. (c) The public issuer for -
    1. (i) The amount of any gain made or loss avoided by the insider in buying or selling the securities; and
    2. (ii) Any amount which the Court considers to be an appropriate pecuniary penalty.
  1. 9. Liability of insider for tipping about securities of a public issuer - (1) An insider of a public issuer who has inside information about the public issuer and who-
    1. (a) Advises or encourages any person to-
      1. (i) Buy or sell securities of the public issuer; or
      2. (ii) Advise or encourage any other person to buy or sell securities of the public issuer; or
    2. (b) Communicates the information, or causes the information to be disclosed, to a person knowing or believing that person or another person will, or is likely to,-
      1. (i) Buy or sell securities of the public issuer; or
      2. (ii) Advise or encourage another person to buy or sell securities of the public issuer is liable to the persons referred to in subsection (2) of this section.

(2)The persons to whom the insider is liable are -

  1. (a) Any person who sells securities of the public issuer to a person who is advised or encouraged by the insider to buy securities of the public issuer for any loss incurred by that person:
  2. (b) Any person who buys securities of the public issuer from a person who is advised or encouraged by the insider to sell securities of the public issuer for any loss incurred by that person:
  1. (c) Any person who sells securities of the public issuer to a person referred to in subsection (l)(a)(ii) of this section who is advised or encouraged to buy the securities for any loss incurred by that person:
  1. (d) Any person who buys securities of the public issuer from a person referred to in subsection (l)(a)(ii) of this section who is advised or encouraged to sell the securities for any loss incurred by that person:
  2. (e) Any person who sells securities of the public issuer to a person referred to in subsection (l)(b)(i) or (ii) of this section for any loss incurred by that person:
  3. (f) Any person who buys securities of the public issuer from a person referred to in subsection (l)(b)(i) or (ii) of this section for any loss incurred by that person:
  4. (g) The public issuer for-
    1. (i) Any consideration or benefit received by the insider; and
    2. (ii) Any gains made, or losses avoided, by the persons referred to in subsection (2) of this section in buying the securities from or selling them to the persons to whom the insider is liable; and
    3. (iii) Any amount which the Court considers to be an appropriate pecuniary penalty.

NZSE LISTING RULES - in force until 1 December 2002 [Extract]

Rule 1.1.2 Relevant Information means at any time information received or generated and held by an Issuer about its undertaking, activities, business environment, prospects, financial position, or financial performance which is not reasonably available to an informed investor in the market in a form substantially as useable as the form in which it is available to the Issuer, and which upon disclosure to the market would, or would be likely to, affect materially the market price of any of the Issuer's Quoted Securities.

Rule 10.1.1 Obligation to Supply Relevant Information: Without limiting any other Rule, every Issuer shall:

  1. (a) treat all Relevant Information as valuable property of the Issuer, to be used and applied strictly for the overall benefit of the Issuer;
  2. (b) safeguard all Relevant Information and take all reasonable steps:
    1. (i) to ensure that it is not divulged to persons not entitled to receive it; and
    2. (ii) to avoid knowingly letting any person acquire, or remain in, a position of privilege in relation to other holders or prospective holders of Quoted Securities of the Issuer by use of Relevant Information to deal in such Securities;
  1. (c) release all Relevant information to the Exchange immediately it ceases to have greater value to the Issuer (in distinction to its Equity Security holders or any of them) for the information to remain confidential. It shall not be a sufficient reason to withhold relevant information, that release of it may adversely affect the market price of any of the Issuer's Quoted Securities, or its ability to attract and retain debt financing on favourable terms;
  1. (d) release all Relevant Information to the Exchange no later than it is received by:
    1. (i) any person who is not bound by corresponding obligations of confidence with which that person is likely to comply; or
    2. (ii) ally 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; and
  2. (e) 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:
    1. (i) the Issuer or any Associated Person of the Issuer; or
    2. (ii) other persons in circumstances in each case which would give such information substantial credibility.

NZSE LISTING RULES - in force from 1 December 2002 [Extract]

Rule 1.1.2 Material Information in relation to an Issuer is information that:

  1. (a) a reasonable person would expect, if it were generally available to the market, to have a material effect on the price or value of Quoted Securities of the Issuer; and
  2. (b) relates to particular securities, a particular Issuer, or particular Issuers, rather than to securities generally or Issuers generally.

Without limiting what information a reasonable person would expect to have a material effect on the price or value of Quoted Securities of an Issuer, for the purposes of this definition, a reasonable person would be taken to expect information to have a material effect on the price or value of Quoted Securities of an Issuer if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to buy or sell those Quoted Securities.

For the purposes of this definition information is generally available to the market if:

  1. (c) it is information that:
    1. (i) 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 relevant securities; and
    2. (ii) since it was made known, a reasonable period for it to be disseminated among those persons has expired; or
  1. (d) it is likely that persons who commonly invest in relevant securities can readily obtain the information (whether by observation, use of expertise, purchase from other persons, or any other means); or
  2. (e) 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 paragraphs (c) and (d). In this definition, relevant securities means securities of a kind the price or value of which might reasonably be expected to be affected by the information.

Rule 10.1.1 Continuous Disclosure of Material Information: Without limiting any other Rule, every Issuer shall:

  1. (a) once it becomes aware of any Material Information concerning it, immediately release that Material Information to the Exchange, provided that this Rule shall not apply when:
    1. (i) a reasonable person would not expect the information to be disclosed; and
    2. (ii) the information is confidential and its confidentiality is maintained; and
    3. (iii) one or more of the following applies:
      1. (A) the release of information would be a breach of law;
      2. (B) the information concerns an incomplete proposal or negotiation;
      1. (C)the information comprises matters of supposition or is insufficiently definite to warrant disclosure;
      1. (D) the information is generated for the internal management purposes of the Issuer; or
      2. (E) the information is a trade secret.

In this Rule, an Issuer is aware of information if a Director or an executive officer of the Issuer has come into possession of the information in'the course of the performance of his or her duties as a Director or executive officer.

  1. (b) not disclose any Material Information to the public, other Recognised Stock Exchanges (except as contemplated in the footnote to this Rule) or other parties except those parties to whom the proviso to Rule 10.1.1 (a) applies:
    1. (i) prior to disclosing that Material Information to the Exchange; and
    2. (ii) prior to an acknowledgement from the Exchange of receipt of that Material Information.
  1. (c) release Material 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:
    1. (i) the Issuer or any Associated Person of the Issuer; or
    2. (ii) other persons in circumstances in each case which would give such information substantial credibility,
      even if the proviso to Rule 10.1.1 (a) applies.

APPENDIX E

16 May 2006

MEDIA RELEASE

Statement from Telecom in response to reported comments by Communications Ministe David Cunliffe

Telecom said today, as it had previously advised, it would update the market on its capital management plans no later than its fourth quarter announcement in August. Telecom also confirmed, as it said on Friday, it would give an update on the business implications of the Government policy by late June, including guidance on capital expenditure for 2006-07.

Telecom Chairman Roderick Deane said Telecom had not given any indications on capital management and future dividend policy to the Minister of Communications David Cunliffe,

Nor did Telecom receive any prior advice from Mr Cunliffe about the comments he made today.

Dr Deane said Telecom needed to assure the market, the NZX and the Securities Commission that those comments appear to have been speculation on Mr Cunliffe's part.

Dr Deane said Telecom is totally committed to the new direction it outlined last week.

ENDS

For inquiries please contact:
John Goulter
Public Affairs & Government Relations Manager
0272324303

APPENDIX F

ATT1854791

N.Z.'s Cunliffe comments on Telecom, Competition (Transcript)
2006-05-16 23 : 40 (New York)

The following is a transcript of an interview with New Zealand communications Minister David Cunliffe in wellngton on May 15 on Telecom Corp, the government's decision to regulate the company's fixed-line network and the outlook for the industry and high-speed Internet services.

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

Why does the government care about broadband? Why are you getting involved?

It's a critical national infrastructure. New Zealand's overall development strategy is to transform itself from being a primary, commodity-dependent exporter, a farm at the bottom of the South Pacific if you like or a world-class maker of protein products, into a country which across-the-board has industrial sectors enabled by advanced technology . The communication and dissemination route for that is increasingly broadband.

we are in the bottom third of the OECD for broadband penetration and approximately three years behind the OECD average for the uptake curve and that puts us at a competitive disadvantage which we think is unsustainable for a small, smart country.

we think consumers have not, over the last few years, been getting value that they should have got in terms of pricing, service or product choice in the telecommunications sector. The Telecommunications Act requires the minister to act-to the longrun benefit of consumers or end users of telecommunications services .

The prime minister signaled this exercise both in her opening address to Parliament and the Governor General in the speech from the throne at the start of this parliamentary term so as a government you can't put things up in neon light: much more clearly than saying this really matters to us and taking those two steps.

What does it mean for the economy if broadband gets cheaper and faster and we have higher penetration?

There will be a wave of innovation in the technology space and there will be a significant GDP kick that comes with that. We will drop some input-costs to business and to consumers and that will make our companies more competitive. It is impossible to be precise or certain about the exact quantum of that impact.

underlying this cabinet paper there are a-dozen-or so consulting reports and departmental research papers including some quantitative modelling which we will release a little later which demonstrates that the regulatory package that we put together stands the best chance of optimizing our GDP pathway.

How big that affect is, is the subject,of much debate. The Economist Intelligence Unit did a quantitative study of the New zealand economy and measured the difference between the status quo and achieving our digital strategy objectives as being about NZ$14 billion of GDP by 2030. I'm not saying their numbers are right but even if it was half that it would be a big number. Half that is roughly equal to the market cap of Telecom. So it matters.

Ericsson and a consulting firm did a study ,that showed a GDP return of about NZ$8 for every dollar invested in broadband infrastructure. Alcatel and KPMG did a study showing a 0.5 to 2.5 percent GDP increase from meeting the kind of broadband targets we are looking at. The experts differ but there seems to be little doubt that the answer is a very large number, and arguably one of the most obvious things that a government can do to support an economic transformation agenda of the type that we are talking about

Has the government got its own estimate?

we have made Some estimates as well. we haven't put a precise number on it. But what we have got is some quantification underneath the different regulatory scenarios to examine the impacts that they might have on the economy and on the sector so obviously we picked what we think is the optimal combination.

Can you tell me a number?

No, because it's caveated heavily around the fact that the numbers are indicative but we think that the comparison between the scenarios is reasonable so that has given us some confidence that we have probably got a pretty good mix of tools in the tool kit.

Is half of the EIU (Economist Intelligence unit) outcome realistic as to what might happen?

I think taking half the EIU estimate would be relatively conservative.

so at least that?

Yeah, I would have thought.

what do you think of the argument that the reason that New Zealand has poor broadband uptake is because we are not a wealthy country?

I think the Technical term is it's crap. If you do a scatter-plot showing a correlation between GDP and broadband you find there isn't one. There is no regressible correlation. so, case proven. It's also self defeating. If the logic is that broad band is an enabler of economic performance then to say that because we are a poor country we shouldn't try to improve it locks you into being a poor country forever. That's the second-worst argument that's been raised in the debate in my view. The very worst is the property-rights argument, which is utterly spurious when 28 out of 30 OECD countries have a stronger regulatory framework than New Zealand, or at least did, and where risk is priced into the telco stock price by markets and analysts every day of the week. It can't be a sacred cow if people are already estimating the impacts.

Arguably one of the key jobs that the board of any incumbent telco has to do is to manage its relationship with the regulator so that they are optimizing their earnings over a long period of time, not pushing it so hard in the short term that they then incur a reaction in the medium term.

Is that what you think Telecom has done?

The paper that we have written and my own comments are at pains to say that our approach is to be pro-New Zealand and not anti-Telecom, so I am not painting Telecom in a negative space and others in a positive space. I would rather say that companies all make decisions about how they represent best their shareholders' interests and reasonable people can disagree about that.

But the evidence in terms of Telecom's delivery on some of the voluntary commitments that it made last time we discussed unbundling was that arguably only one out of three of them was met, and that taking at least a five-year historical average, its investment levels have not been high relative, for example, to its dividend flow. These are trade offs that boards wrestle with.

what do you think of Telecom's attitude during this process?

We have had quite a number of constructive discussions with Telecom during the stock-take process, as we have with every other player in the market and we have also sought views or obtained views from the investor community and pretty much everybody that matters in telecommunications, including the consumer representative groups.

we have many times invited Telecom to be specific about the future, and the conversations are of course confidential, but with the best will in the world, Telecom was not able to put on the table specific enough commitments that would change our view of the future.

Not enough then?

Not specific enough.

How surprised are you that they didn't see this coming and keep the market better informed?

Any judgment about Telecom's performance in relation to its disclosure obligations is for the market and for Telecom and I'm not going to comment on that. I would be surprised if Telecom was surprised about the fact that unbundling was coming. They may have been more surprised that the package covered off on a number of associated issues all at one time. Part of the reason it was able to do that is that we had the benefit of looking to see what nearly every other country in the OECD had tried and felt that we were able to learn a few of the lessons that others had learnt.

In particular we were attracted to the EU OECD approach which is called the ladder of investment which uses a retail minus pricing principal on the unbundled bitstream products, which usually leaves the incumbent in a rather better position than with local loop unbundling but doing that at the same time that you have a cost based-pricing for LLU has two affects.

It provides an incentive for entrants to invest in their own DSLAMS to get their own circuits running and to thereby to gradually ascend the ladder of investment and to their own competing infrastructure. It provides an incentive for the incumbent to operate a fair and reasonable wholesale market so as to forestall that investment.

we have been able to forestall from what many others have done in setting the incentives for good behavior or at least market-enhancing behavior. It's not the government's desire to be in the position of long-term intervention in this market, rather what we seek to do is a series of shorter-term interventions that improve the quality of the competition in the market and as that competition becomes more intense and the playing field more level we would hope to be able to withdraw some of the regulatory constraints.

when you say withdraw some of the constraints, what do you mean exactly?

The reform package is designed to induce more competition in the market, facilitate the entry of more players. once there are more players with a foothold in the market, once the terms of competitive access to the loop and the vigorous nature of intermodal competition becomes established, arguably there will be less of a role for government intervention as has been seen for example with various commission actions in the last couple of years.

The advantage of a more-competition-based approach is that the regulatory process takes quite a while, a couple of years often, and the product and market cycles are speeding up so it's a fairly blunt instrument, we have tried to future proof the regulator package by allowing the commissioner the powers to proactively identify and recommend measures to address future problems in the market.

on the more recent reaction, how concerned are you about destroying the value in Telecom given it's the, biggest stock on the market and it's held by a lot of overseas investors?

The package is designed to be pro-New Zealand and not anti-Telecom. Analysts I'm sure will have caught up on the fact the fine print of the cabinet paper makes clear the pricing rules for UBS, naked DSL and local loop unbundling, whether they are retail minus or cost plus, all allow Telecom to earn a fair return on capital, to cover its costs and make a return that presumably is around WACC or better.

If markets are rational that would imply that the value loss is attributable to monopoly or economic rents. Nobody has a right earn monopoly rents. They are welfare destroying for the economy as a whole and no regulator wants to see them in the market. The answer to your question is , are markets rational?

Were you surprised at the share price slump?

There is a reasonable chance that the total price fall was accentuated by the timing coincidence of the AAPT results which were unveiled in Australia, of all places, and the regulatory package being announced a couple of days prior. The timing was of course not the government's choosing but having been informed by Telecom that they were in possession of a copy of our cabinet paper we were in a position where we had no option but to make the same information available to the whole market.

Even the day after the release, before the AAPT news was out on the Friday?

It dropped about 50 cents that day. That's not an unexpected amount.

Do you feel any responsibility for that?

I firmly believe based on an extensive amount of research that has been done and underlies this package that we have done absolutely the right thing. I don't see that as value destruction as much as value reallocation from the incumbent to consumers and from the incumbent to entrants and the net result over time should be a more vigorous market, future investment being made and a productivity gain to New Zealand as a whole, so no I have no regrets whatsoever.

what is the state of the company's relationship with the government at the moment?

we are in ongoing discussions with Telecom, as we are with other players on a number of issues and those discussions are quite cordial. I issued a statement last Friday welcoming the statement of the chairman saying that Telecom would cooperate with the regulatory package.

Has it deteriorated at all going through this process, your relationship with Telecom?

The discussions have been quite cordial all the way through the stock-take process. I haven't personally had a discussion with the chief executive or the chairman since the announcement but I look forward to the next time that we get together.

Do you know when that is?

No, we have agreed that the officials' discussions will continue and our officials and their staff will report to their principals at an appropriate time.

There has been suggestion from analysts, investors , the shareholders association that management of the company has to change because they didn't see this coming, didn't do the right things early enough and left it too long and now it's too late. Roderick (Deane) as said he is going early, do you think that Theresa (Gattung) should go?

That's not a question I can answer and frankly my opinion is - my own personal opinion. I would only repeat that there's certainly been no sense from myself or from the government of this space being anti any one company. we have done what we genuinely believed to be right for New Zealand, right for consumers of telecommunication services and right for the productivity needs of the economy as a whole.

I think Telecom has got a very capable management team and they have done what the think is in the interests of the company. Arguably with the benefit of hindsight, they might wish they had done something different. They have had every opportunity to put specific commitments in front of the government.

It seems (Prime Minister) Helen Clark been a bit more strident in saying she thought they should have said more, earlier, to investors and perhaps they weren't as helpful as they could have been?

The prime minister may be freer to express a view here than the minister of communications who has certain statutory responsibilities.

what sort of signals are you looking for from the company now. I'm thinking in terms of what they are going to do with their investment plans going forward, dividend plans because I did note that there were comments about how they had returned a lot to shareholders and not invested enough, so what are you looking to see?

The first thing we will look to see is cooperation from Telecom on the detail design of the regulatory package provision of information, fair and honest disclosure of relevant information. we will look to see the manifestation of the positive attitude that they described last Friday in terms of the treatment of their customers, particularly wholesale customers and quite clearly what we need to see there is non-discriminatory treatment as between Telecom's retail subsidiaries and other retail players in terms of the behavior of networks.

we essentially want a system that is blind to the ownership of the retail provider. Telecom needs to consider how it delivers on that and there are various options. There is at least a very arguable case that the BT approach has been value maximizing in similar circumstances in the UK.

value maximizing for BT you mean?

Value maximizing for BT.

How likely is it that the government will continue on the mooted plan and structurally separate the lines and the retail business?

We just simply haven't formed a view on that because the evidence isn't in but I'm sure the behaviour Telecom in the next months will be some of the factors that we weigh up in addressing that issue a little later on. The advantage of doing it voluntarily is of course they are then more in charge of the terms upon which it is done.

They don't seem to have ruled that out?

No, they don't seem to have ruled it out and indeed they made some internal restructuring decisions before our announcement which could arguably set them up quite well for a move like that. If there are structural features that make discrimination in the wholesale markets less likely it takes some of the burden off the behavioral disciplines that the regulator would need to impose. That's a judgment call that they will need to weigh up, I can't answer that for them.

How would you view it if they did take the BT approach and voluntarily separate?

Provided it was done on fair and non discriminatory terms, I would welcome it .

Do you think it is likely they will do it?

I can't comment. I have no information on that but whatever they do, I hope that they will face the future not look backwards. I hope that they will look after their customers, including their wholesale customers, and that the will invest in the best interests of New Zealand and in the best long-term interests of their shareholders. That may mean on the part of shareholders that they need to accept that in the short run there may-be somewhat lower dividend flows or lower returns and that just reflects the structural situation that the company and country are both in.

Is that one of the things that you are wanting to see, perhaps them reassess their capital structure?

It's a decision for the board to make. Investment in this economy is essential and non-discriminatory treatment of wholesale customers is essential so those are two factors that they will want to weigh up.

And whether you would like to see them perhaps not return so much to shareholders and invest more?

Dividend decisions are obviously very sensitive decisions and decisions that boards need to make, it's not for ministers.

So you wouldn't want to view an opinion on that?

No.

How likely is it do you think that they will defer investment in their network? I spoke to Marko Bogoievski after the earnings in Sydney and he said the may look at how much they spend on their next-gen network and they may not spend as much. He said they need to make sure they get a return.

They do and they also need To make sure that other people don't eat their lunch and the thing about a more competitive market is Telecom is not the only company capable of investing. There are plenty of others lining up to invest in New Zealand so the first reason why Telecom needs to invest is because they don't want to be in a situation where they lose substantial market share in future time periods because they didn't invest now.

The second reason they may want to consider continuing or expanding their investment is because it would be a tangible sign that they are facing forwards and are prepared to go forward into the new era in a positive way and I would argue that that would be in the long-term interests of their shareholders.

So is it fair to say you don't think it's very likely they will defer or delay investment?

we haven't had any certainty about what the counterfactual would have been. I don't know what Telecom's level of investment would have been had the regulatory package not been announced. But let me say again that there are both competitive and regulatory reasons why continuing or expanding investment practices and programs would be a good idea, but that's a decision that Telecom needs to make.

Fair to say you will be watching that closely and monitoring?

we will certainly be watching the investment closely.

You were quoted in an unlimited article before the stock-take was finished where you said that unbundling might not be the solution because they are rolling out this new network which would effectively bypass it?

I have referred, I don't know if it was just in that article, to key limitations with unbundling. It's never a single silver bullet. It seems to be the regulatory tool that the public understands or think they understand the best. But of the dozen or so issues that we have covered off on in the stock-take review, that's just one so let's keep it in context.

If you only unbundled the exchange in an NGN world where fiber bypasses the exchange and ends up in a roadside cabinet, you are not going to have much of an impact on the wholesale market. That's why our package says we will unbundle in the cabinet and by UBS allow access to the backhaul between the cabinet and the exchange, as well as the exchange , itself .

what we won't do, however, is unbundle any fiber that goes out past the cabinet as we do think there would be sensitivity of investment to that.

I'm not a techy, can you explain that further?

currently you have got fiber to the exchange and wire copper from the exchange to the home so the NGN proposal is you put your put fiber past the exchanges to a smaller unit called a cabinet which sits on the side of the road and might service part of a street rather than a suburb. The advantage of that is of course the cabinet is closer to the extension which means that the ADSL2+ or whatever is running on the copper between the cabinet and the home runs at a much, much faster speed than if you had 7 or 8 kilometers from the exchange itself.

Cabinets are a lot smaller and they run a lot less lines off them so The relative economics of a competitor putting a DSLAM in your cabinet are a lot less compelling than putting a DSLAM in the exchange proper. It's a good defensive move from an incumbent and it's value creating for society as a whole because the speed to the consumer is increased.

we don't have a policy problem with Telecom putting fiber to cabinets. We have allowed the unbundling of the cabinet as well as the exchange, however to keep the competitive threat present at both levels and UBS allows people to pick up backhaul traffic between the two.

what we stopped short of doing was unbundling any fiber that might go, for example, if the cabinet is close to a series of homes that it might be economic to run fiber from the cabinet to the home. we haven't unbundled that fiber because we believe that would have had a chilling investment affect at that point. Rivals are having pretty full access to Telecom's fiber unless Telecom outs fiber out beyond the cabinet. The fiber access stops at the cabinet.

what's the main reason for requiring the accounting separation?

the information disclosure operates both at the product level and at the business unit level. they operate at the product level to ensure that there isn't cross subsidisation or discriminatory behavior or excessive returns being made on a product-by-product basis. Accounting separation also operates at the business unit level as between retail and wholesale so that regulators can drill in to the accounts and see the relative performance of both.

They are actually quite different businesses. The wholesale business is a stable, relatively low- risk network business much more akin to an electricity distribution line. The retail business is a high-risk multi-product, fast-innovating, fast life-cycle, consumer-based business where one would expect to earn higher returns to compensate for the risk involved. The dynamics of the two are quite different.

Experience overseas suggests that companies do better when they unmask those different business drivers and we think that accounting separation while it might be a little complex initially will' actually not be a bad thing for Telecom. It will help to unmask those drivers and it will assist the regulator to make sure that there isn't again cross subsidization or discrimination between, say, the wholesale business and the retail business vis-a-vis retail competitors.

The ultimate objective is for a non-discriminatory, fair wholesale market. There is a secondary objective,which is a signaling mechanism vis-a-vis structural separation. We are starting the work now on accounting separation which presumably would make structural separation easier to do later if necessary.

some might interpret that as a gesture of seriousness on our part that we haven't foreclosed a structural option should it become necessary at some later point. Although I would like to repeat, and it's quite important, that the government doesn't have a view one way or the other on that question at this time.

When do you think the first lines will be unbundled?

I don't know exactly but I believe there are entrants buying DSLAMs as we speak.

so when will we see it on the street?

There is a process that needs to be gone through. It's important that both analysts and consumers understand it. we are in the process now of drafting legislation , we have said that we plan to introduce that around the middle of the year, we can't be exact on the date, and it will take I imagine the balance of the year; to get that through Parliament.

we have a solid majority behind it so theres no real .chance it won't go through. Indeed, the National Party is.supporting it to select committee and I hope that that support will continue right throughout. I think that that would be the sensible thing for the main opposition party to do. The ACT party said it will oppose but one kind of expects that to be the case so it's neither here nor there really.

Then the commission, once the bill is enacted, needs to set up the processes and procedures and policies that allow it to, for example, implement accounting separation. They need to spell out in more detail how they want that to work. I imagine that they will start thinking about it concurrently but I would be expecting that work to take probably most of first half of next year, maybe longer.

we would expect to see some of the affects of unbundling in the market from probably late 2007, early 2008. But later in 2008 pretty much the full affect. UBS will be available quicker and we will be watching very closely to see the performance of the wholesale market as it goes through.

Is there a single thing that you think has held New Zealand back in broadband, is there one or two single factors?

Two single factors. Inadequate competitive conditions on the local loop and barriers to entry on intermodal competition.

Have you got an idea of what sort of speed is acceptable, what you want to see in the New Zealand market?

I'm afraid that's a how-long-is-a-piece-of-string kind of question. what we can be sure of is whatever speeds we think of today will seem obsolete by tomorrow. when we wrote the Digital Strategy in May last year we were advocating a baseline by 2010 5mbps and that already looks conservative a year later. I don't think it's appropriate for me in such a dynamic environment to name a number. But we will want to continuously benchmark it against our OECD peers.

what about prices? How much do they have to come down?

That's another interesting question. I'm not the commissioner and that's a question which the commissioner must decide. I note market comment that broadband could easily be available for NZ$10, NZ$ 12 a month, NZ$15 a month i .e. from a half to a third what it is,now at entry level. What you will see is at the top end with higher speeds probably some of the same kind of prices for small business users and advanced residential users but with much much better packages available for the same kind of money. I imagine the market will segment a bit more and that you will see low-cost offerings for those that are very price-sensitive consumers and that you will see much fuller , faster speeds for higher levels of service for those who are less price sensitive.

That NZ$10 a month level, do you agree with that?

The faster, the cheaper, the better, The economists would say that provided that prices,don't fall below the long-run marginal cost of sustainable investment, otherwise it would be temporary.

Can I say that you think NZ$10 a month is a good idea?

I haven't done the analysis on that. I'm noting that there's speculation in the market that that would be a sustainable price point. I'm noting that to the extent that an anyone in the government starts naming-prices: that would be the role of the commissioner not the minister.

At the speech to ICANN, you commented that there were some innovative businesses that hadn't been able to get off the ground or do what they wanted to do are there any that I can name drop? It's good to have real examples behind an anecdote.

There are many names I could name. I'm reluctant to give you their names without asking them first. If that's really important to you we could probably ask some people and get back to you. But let me give you some examples by type. Auckland-based online content producer trying to ship lots of high-density graphics content to the U.S. either having to put it on discs and put people on aircraft or wait till cruise liners came in to Auckland harbour so they could take advantage of the satellite uplinks off the cruise liners.

These are not good stories. A major developing software business saying that their rate of growth has been directly constrained by the shortage of affordable broadband. And it's a very high-growth, high-potential company. Another one sadly which said our broadband environment was a reason for a decision to relocate offshore.

Many New Zealanders offshore have e-mailed me to say how embarrassed they are when others talk about the broadband availability in their home country, and sneer and laugh at New Zealand for the paucity of our environment.

One cap see that outside the specific numbers and the factual business examples, this has a whole look and feel to it of New Zealand being a kind of banana republic, to quote Paul Keating, or a backwater of cyberspace which it should not be. It's not that hard-to provide world standard Internet in New Zealand and we are an innovative people who have every reason to want to take advantage of that environment.

I am really passionate about New zealand moving forward. I'm passionate about the economic development challenge facing New Zealanders and in our generation we will have to meet that challenge or arguably cease to exist as an independent country.

Have you got any personal examples of how you have been hindered by slow broadband or prices, you or your family?

I never kind of mix business with family. I don't think it would be fair to give examples of how long it might have taken me to get broadband hooked up at home.

Are you happy to say which company you use at home?

I use Jetstream for my home broadband, which is provided through ministerial services, .and I use vodafone for my mobile so I try to be fair to the various parties.

The last question is just how important is this whole thing for you personally, for your career, it's a pretty major thing?

You have to ask others-what they think of that. I'm just trying to call it as I see it. I'm trying to do a good job for New Zealand. This has been an important piece of work. It's taken six months, very pleased to have it out in the market, and of course we have got another year's worth of implementation probably ahead of us. And you have my commitment to that being done as expeditiously and professionally as possible.

Anything else you want to add that we haven't covered that you think is crucial and I've missed?

No, I don't think so. I think you've been very well researched and you have covered the ground pretty well. Just one thing, there has been some discussion in the media about the manner in which this had to be put in the public domain and whether the timing had anything to do with the share price performance. I think I should reassure investors that the package as announced was not one word different than it would have been on budget day, partly because all budget material has to be drafted well in advance. so to that extent I doubt that it would have made any difference at all.

***End of transcript***

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APPENDIX G

Market data graph - May 16 2006

NZSX Price/Volume activity in TEL on 16 May 3006

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ASX Price/Volume activity in TEL on 16 May 3006

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NZX Price/Volume activity in TEL on 3 May 3006 - click image to return to report.

ASX Price/Volume activity in TEL on 3 May 3006 - click image to return to report.

NZSX Price/Volume activity in TEL on 16 May 3006 - click image to return to report.

ASX Price/Volume activity in TEL on 16 May 3006 - click image to return to report.

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