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OVERSIGHT REVIEW OF NZX 2006

NZX'S FRONTLINE REGULATION

Minimising the risk of non-compliance

37. The Foreword to the NZX Listing Rules states "Risk of non-compliance with the Rules is one of many risks market participants must assess in valuing investments, but compliance is mandatory and NZX will endeavour to minimise the risk of non-compliance", and further, "the Rules are not intended to result in merit regulation by NZX of issuers availing themselves of market facilities. A regulatory approach based on attempted merit assessment of issuers by NZX would offer a spurious assurance to investors."
38. During the course of this oversight review the Commission sought further information on how NZX endeavoured to minimise the risk of non-compliance. It is apparent that, although NZX does not undertake active supervision of the Listing Rules it does endeavour to minimise the risk of non-compliance in a number of ways, including:
    1. issuing reminders of periodic obligations such as Half-Yearly Reports;
    2. using the consequences of breaching the Listing Rules as a deterrent;
    3. encouraging self-reporting of breaches by using this as a mitigating factor when seeking penalties from NZX Discipline;
    4. ensuring that market infrastructure is applied which allows NZX to monitor trading activity and identify potential breaches;
    5. ensuring that Market Participants, the public, and other stakeholders are able to communicate any potential breaches to NZX;
    6. utilising detailed checklists and other documentation to check required disclosure documents.
39. The Commission is satisfied that NZX is endeavouring to minimise the risk of non-compliance with the Listing Rules. We note that NZX does not merit regulate (in that it does not attempt to determine whether a security listed on its markets is a good investment). The Commission considers that this is appropriate and notes that it is consistent with international practice. The Commission believes that the Foreword of the Listing Rules is clear about the scope of NZX's actions and the fact that risk does exist despite the role of NZX as the frontline regulator of the NZX markets.
40. NZX granted waivers and made rulings over the review period. Waivers and rulings minimise the risk of non-compliance as they recognise that the Listing Rules cannot contemplate every commercial arrangement and that technical breaches may therefore arise. The Commission considers that NZX used its discretion to grant waivers and make rulings appropriately during the review period and that the decisions which were released clearly set out the grounds for reaching the decision and any conditions attached. This provides a valuable precedent to other parties who seek similar waivers or rulings. The Commission found that NZX uses these precedents when considering applications, leading to consistency across the decisions.
41. The Commission also notes that during the review period NZX amended Participant Rule 17.10, which now requires market participants to report any breaches by themselves or another market participant. NZX did not consider that instances of self-reporting had increased over the review period.
42. NZX provides ongoing education to Issuers and Market Participants about their obligations under the Listing Rules and Participant Rules, through the Issuer Relation Updates, monthly Market Insight document, seminars, guidance notes, forums such as the Legal and Advisory Board, Listed Companies Association and the Securities Industry Association, and the Top Tips document and practice notes.

Admission of Issuers

43. NZX Regulation is not involved in seeking companies who may wish to have securities quoted on an NZX market. The Market Supervision team reviews documentation required by the Listing Rules to be provided by companies when they seek listing or quotation. There are set procedures and checklists which NZX staff are expected to refer to when reviewing this documentation. Commission staff reviewed several files in relation to listing and are satisfied that NZX staff had access to these procedures and checklists and used them to review the documentation.
44. NZX Regulation staff did attend three listing presentations in the course of the review period. It was clear that these staff were presenting information about the regulatory requirements and obligations of listing.

Approval of Market Participants

45. NZX Participant Compliance has an established procedure for approving Market Participant applications in the form of a checklist and any follow-ups required. During the course of the 2006 review a number of applications were reviewed and there was no deviation from this procedure.
46. The current procedure is the same as was observed during the 2005 review. The Commission is satisfied that these procedures were consistently applied.

Recommendations

47. The Commission does not have any recommendations in this area. NZX is taking appropriate action to minimise the risk of non-compliance through various mechanisms, including waivers, education initiatives and using disciplinary proceedings as a deterrent. The Commission is satisfied that the processes and procedures which NZX uses to enforce compliance with the Listing Rules and Participant Rules in respect of admission of Issuers or approval of Market Participants are satisfactory and applied properly.