An Inquiry Into the Performance by NZX of its Regulatory Functions as a Registered Exchange During 2003 and 2004 Prior to the Collapse of Access Brokerage

PART I - INTRODUCTION

16. On Friday 3 September 2004 NZX was informed by the majority shareholder of Access Brokerage Limited that there was a significant deficit in the firm's client trust account, and that the company was insolvent. Before trading commenced on Monday 6 September 2004, NZX declared Access a defaulter under the NZX Participant Rules. Access was suspended from trading in NZX markets. Later that day Access was placed in interim liquidation. It was placed in liquidation on 8 September 2004.
17. The events at Access have been investigated by NZX, which must operate its markets in accordance with its Conduct Rules, approved under the Securities Markets Act 1988. NZX has submitted a Statement of Case to NZX Discipline alleging breaches of the Conduct Rules by Access and its Chief Executive, Mr Peter Marshall. There has also been an investigation by the Serious Fraud Office, which has laid charges under the Crimes Act 1961. The work of the liquidator is continuing also.
18. The Securities Commission has an oversight responsibility in respect of securities markets and registered exchanges. The Commission's inquiry did not seek to establish precisely what caused the collapse of Access: that work is being undertaken by other parties. The Commission's inquiry has focussed on the performance by NZX of its regulatory functions as a registered exchange in relation to events leading up to and surrounding the collapse of Access. Accordingly the report does not seek to imply or suggest that NZX was responsible for the collapse of Access, or that there is any causal link between the action or inaction of NZX and the failure of Access.

The Commission's inquiry

19. This inquiry has been carried out under sections 10(b), 10(c) and 10(caa) of the Securities Act 1978. These sections provide that it is a function of the Commission to:

20. A division of the Commission was appointed to conduct this inquiry.
21. The Commission inquired into the performance by NZX of its regulatory functions as a registered exchange under the Securities Markets Act 1988. In particular the Commission considered:
    1. steps taken by NZX since the collapse of Access to ascertain whether there are poor practices among NZX Participants in respect of Participant client fund accounting and reporting;
    2. client fund accounting rules and practices under the NZX Conduct Rules, including the treatment of client fund accounts maintained at financial institutions and the presentation of these to clients;
    3. the rules, procedures, and practices relating to participant supervision and inspection by NZX as these applied in the case of Access Brokerage;
    4. the role, sufficiency, and use of the NZX Fidelity Guarantee Fund.
22. The Terms of Reference of the Commission's inquiry are set out in Appendix A.
23. The Commission considers that the matters under inquiry raise issues of securities law and securities markets practice upon which it is appropriate for the Commission to comment. The Commission has decided to comment by way of this report.

Structure of this report

24. Part II of this report sets out a summary of events in September 2004 concerning the collapse and default of Access. The remainder of the report sets out the findings of the Commission's inquiry.
25. This inquiry has covered a range of matters concerning the workings and management of NZX, the composition and training of its compliance team, and the involvement of management and the Board in NZX's role in regard to broker compliance. The Commission's inquiry has looked specifically at how NZX carried out its regulatory functions in the period prior to the collapse of Access in September 2004. The performance of this role during that period, and today, needs to be seen in the context of the steps taken by NZX since its demutualisation in 2002.
26. In order to provide this context, this report considers, in Part III, the work done by NZX in 2002 and 2003 to overhaul its Participant compliance function, and the composition of the compliance team. The inquiry raised questions for the Commission about reporting lines and supervision of the compliance team at NZX. These issues are also considered in Part III. Part IV discusses issues regarding client funds and the inspection of Access carried out by NZX in August 2003, a year before the firm's collapse. Part V considers the work done following the Access inspection and the competing priorities at NZX at that time. Part VI comments on the involvement of the NZX Board in matters of broker compliance.
27. The steps taken by NZX following the collapse of Access to ascertain whether there was a wider problem with client funds are detailed in Part VII of this report. More general observations regarding client funds accounts and the NZX Fidelity Fund make up Parts VIII and IX of the report. Part X of the report outlines changes that have occurred at NZX since the period under inquiry which address many issues identified in this report, and makes recommendations arising from the Commission's inquiry.

Procedure

28. The Commission determined the procedures for this inquiry.
29. In the course of the inquiry the Commission obtained evidence from the following:
    • Mr Simon Allen, Chairman of NZX;
    • Mr Mark Weldon, Chief Executive Officer of NZX;
    • Ms Elaine Campbell, Head of Regulatory and Public Policy for NZX;
    • Mr Geoff Brown, Head of Markets and Product Development for NZX;
    • Mr Peter Moore, member of the NZX Compliance Team;
    • Mr Simon Smith, member of the NZX Compliance Team;
    • Ms Barbara Baker, former member of the NZX Compliance team;
    • Mr Philip Rodrigues, former member of the NZX Compliance team; and
    • Ms Lynda Koekemoer, former member of the NZX Compliance team.
30. In addition, the Commission received documents and information from:
    • New Zealand Exchange Limited;
    • Deloitte, Chartered Accountants;
    • Russell McVeagh, Barristers & Solicitors;
    • Ferrier Hodgson, Chartered Accountants;
    • Registrar of Companies; and
    • Bank of New Zealand Limited.
31. In respect of part (a) of the Terms of Reference (steps taken to establish whether there was widespread non-compliance with client funds rules), the Commission received a report prepared for NZX by Grant Thornton, Chartered Accountants, Review of NZX Market Participants Client Funds Accounts (31 May 2005). The Commission also received evidence from NZX in relation to this part of its inquiry.
32. As more information became available it was necessary to seek additional evidence from some of the witnesses.
33. Confidentiality and privacy orders were in place throughout the inquiry. NZX witnesses were all represented by counsel throughout the presentation of their evidence. All other witnesses were provided with the opportunity of being represented by counsel. Oral evidence was recorded, and transcripts provided to witnesses.
34. After receiving evidence the Commission prepared a confidential consultative report and invited comment from affected parties. These parties were given the opportunity to respond with submissions and to provide further evidence to the Commission.
35. The Commission has carefully considered all the evidence and submissions before it before publishing this report.
36. Mr Rodrigues, one of the witnesses in the inquiry, is a member of the Commission's staff. At the outset of its inquiry the Commission put in place internal procedures and information controls to ensure the integrity of information and proceedings in this inquiry.



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