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

RECOMMENDATIONS

342. It is a matter for NZX, as front line regulator of its markets, to take responsibility for the design and implementation of its compliance programmes. We recommend that NZX review its procedures in light of the comments in this report. We recognise that a number of changes have already been made.
343. To the extent these do not address the issues identified in this report, the Commission recommends that NZX review the following areas of its operations:

Documentation and Guidance on Inspection Procedures Relating to Client Funds Accounts

Procedures should not be so rigid as to remove the necessary element of professional judgement, but should be sufficiently clear to enable a consistent and thorough assessment of market participants' compliance.

Record-keeping and Recording of Inspection Procedures

NZX indicated in its submissions that it would only expect records to be kept where breaches are found. The Commission recommends that NZX review this. We are of the view that inspectors should make a sufficient record of inspection procedures to allow for meaningful peer or supervisory review of the actual work undertaken in the course of an inspection.

Role of Supervisors

To the extent that NZX maintains that a supervisor's role is only to respond to issues raised by team members, the Commission recommends NZX review its requirements for supervision of its regulatory functions, to ensure that supervisors take an active role in quality assessment of their team's work, and also to ensure that supervisors are receptive and responsive to issues that are raised, whether or not this is done in the context of formal escalation procedures.

Role of the NZX Board

The Commission has expressed the view that the NZX Board should take an active role in monitoring the performance of NZX's regulatory functions, requiring more than exception reporting from executives.

Client Funds

The Commission recommends that NZX initiate a review of its client funds rules by preparation of its intended discussion document to allow input from market participants, and to see whether any improvements are required. The Commission also encourages NZX to continue to give heightened attention to client funds issues in inspections, and to continue its education efforts to ensure that all market participants are aware of their obligations.

Fidelity Fund

The Commission recommends the NZX Board consider its policy relating to the Fidelity Fund, including the likely application and scope of this fund in the future, and the communication of this policy to the investing public.