There have been some important changes to the regulatory framework governing the New Zealand Stock Exchange (NZSE) in the last six months. The main changes are a new continuous disclosure regime, principally governing continuing disclosure by listed companies to the market of material information about themselves, and demutualization of the NZSE, coupled with legislative changes delineating the regulatory roles of the NZSE and the statutory regulator, the Securities Commission.
The new continuous disclosure regime came into force in December 2002. It comprises new continuous disclosure Listing Rules, and new statutory provisions contained in the renamed Securities Markets Act, 1988. The rules allow the government to replace the continuous disclosure Listing Rules with its own regulations if it is not satisfied with the Listing Rules or the NZSE's administration of them.
The new regime - unlike the old one it replaced - closely follows the equivalent regime in Australia. This may signal that reform of the insider trading laws later this year will also follow the Australian lead.
Some have criticized the new regime for being too onerous, but it remains to be seen how unwieldy it proves to be in practice. The early indications are that some listed companies are erring on the side of caution and disclosing more information, the relevance of much of which is perhaps questionable.
Under the new rules, the definition of material information has been widened, purporting to extend beyond the materially price-sensitive information caught by the old rules to any information that would, or would be likely to, influence persons who commonly invest in securities in deciding to buy or sell the listed company's shares.
Also, the exceptions under the new rules are potentially harder to apply in practice. Non-disclosure is only permitted where all the following criteria are satisfied: a reasonable person would not expect the information to be disclosed; the confidentiality of the information is maintained; release of the information would breach a law, or the information relates to an incomplete proposal or negotiation, is a matter of supposition or is insufficiently definite to warrant disclosure, is generated for internal management purposes, or is a trade secret.
The exception under the old rules permitting non-disclosure of information that had more value to the company than to the company's shareholders has not been retained.
Finally, under the Securities Markets Act, the continuous disclosure Listing Rules have statutory force, unlike the rest of the Listing Rules. New statutory enforcement provisions provide that the Securities Commission may investigate breaches of the continuous disclosure Listing Rules, make disclosure orders, and apply to court to impose a civil penalty of up to NZ$300,000 ($167,000) on the relevant listed company. Shareholders may also apply to court for compensation from a listed company or for orders to vary or cancel affected agreements with the listed company.
In addition, there are new Listing Rules requiring disclosure by directors of their interests in securities issued by their listed companies. These Listing Rules will not have statutory force until later this year, when regulations have been formulated detailing, among other things, the extent to which senior employees will also be required to disclose such interests.
On December 31, the NZSE was converted from a statutory body to a limited liability company. In conjunction with the demutualization, provision was made for greater government involvement in regulating the NZSE's market. Under new provisions added to the Securities Markets Act:
- changes to the NZSE's Conduct Rules, comprising the Listing Rules, and the Business Rules regulating stockbroker firms and individuals, must be approved by the Minister of Commerce;
- the NZSE may not waive any of the continuous disclosure Listing Rules without Securities Commission approval, and the Securities Commission must be consulted, and may give the NZSE binding directions, in relation to NZSE determinations on those rules; and
- the NZSE must notify the Securities Commission of suspected breaches of New Zealand securities laws and the Conduct Rules.
The rationale behind these new provisions is that the NZSE's primary concern should be breaches of its Conduct Rules, while the Securities Commission's primary concern is breaches of New Zealand's securities laws, including insider trading laws and the continuous disclosure regime, and oversight of the NZSE. The NZSE and the Securities Commission have entered into a Memorandum of Understanding setting out the framework for cooperation and communication between them on regulatory matters.
Other changes in the regulatory pipeline include new corporate governance Listing Rules. Proposals made in September included requirements for at least one-third of board members to be non-executive and independent and for listed companies to have audit committees. They also included a voluntary Code of Best Practice (reasons for departure from which would have to be disclosed in the listed company's annual report), which, among other things, provided that a listed company's auditor should not provide non-auditing services to the listed company. A second draft of the proposals is expected this month.
A new Alternative Exchange for small to medium-sized companies has been proposed to replace the New Capital Market and the Unlisted Securities Market. The NZSE is consulting market user groups on revised proposals made in December. Final proposals are not expected before August this year.
Finally, the NZSE is streamlining its enforcement structures. This follows recent criticism of two high-profile decisions of the Market Surveillance Panel not to take enforcement action in respect of breaches of the Listing Rules. The broad thrust of the NZSE's proposals is to give the NZSE more control over the enforcement of its Conduct Rules.