
	Advanced Search

OVERSIGHT REVIEW OF NZX 2006

28 June 2007

NZX DISCIPLINE

NZX Discipline is an independent body constituted under the NZX Discipline Rules. Its principal function is to hear and determine, without bias and after giving the parties fair consideration, various matters under NZX Discipline Rule 1.1, including matters involving Market Participants, Issuers, and Futures and Options Participants.
The Commission considered the overall management and processes of NZX Discipline in the course of the 2005 review. The Commission considered that this body should be subject to further review in the course of this oversight review, because of its important role in the NZX regulatory structure.
As noted in the course of the last review, the Commission appreciates the work undertaken by NZX Discipline and the professionalism displayed by its members in addressing issues brought to them for consideration.

Matters considered

It is key to the effective functioning of the NZX regulatory function that NZX Discipline is seen to be acting as an independent tribunal. The Commission is satisfied that NZX Discipline is independent from NZX. However, the Commission did identify some issues in the course of the review.
The Commission reviewed copies of all decisions taken by NZX Discipline and the supporting documentation kept on file by NZX Discipline. In the review period, NZX Discipline considered 10 matters, comprising five matters under the Listing Rules, four under the Participant Rules, and one review of a decision by NZX Regulation. NZX Discipline also published its first Annual Regulatory Report as required by the NZX Discipline Rules.
The Chairman of NZX Discipline noted the outstanding effort by NZX Discipline's members and reported that he considered NZX Discipline had satisfied its functions well during the review period. The Commission also received feedback on the Discipline process from NZX staff members which was generally positive.
The Commission does have some concerns about the amount of information that is available to the public about the role and responsibilities of NZX Discipline. The Commission is of the view that NZX Discipline is a key part of the NZX regulatory structure, and that information regarding NZX Discipline should be readily available to the public on an ongoing basis, rather than just in the Annual Regulatory Report.

Process and procedure

The Commission noted that there had been an increase in the number of cases which NZX was seeking to settle rather than taking to a summary or full hearing by NZX Discipline. It was noted that NZX Discipline plays a role in approving settlements, and the Commission is satisfied that NZX Discipline exercises independent judgment as to the form and quantum of penalties reached by settlement.
Some issues were identified around the length of time NZX Discipline had taken to respond to two issues which required its attention. NZX Discipline recognised that delays had occurred, but this appeared to be related to a lack of resources to deal with the issues (arising in part from the part-time nature of the Discipline members' roles) rather than a lack of knowledge or expertise.
In particular, the Commission notes that NZX Discipline has been in receipt of a policy paper prepared by NZX regarding changes to the NZX Discipline Rules for approximately ten months. The Commission is concerned that NZX Discipline has not yet addressed this issue and considers that the process should be expedited. The second issue involves a third party in the form of an NZSX-listed Issuer, and the Commission is concerned that the delays in the matter may have reflected poorly on NZX Discipline in the market. Apart from these two matters, NZX Discipline adhered to the timeframes set down in the NZX Discipline Rules.
We note that NZX has repeatedly asked NZX Discipline whether it is adequately resourced and that it has not received requests for further resources. The Commission considers that this issue needs to be readdressed by NZX and NZX Discipline.
It was noted in the course of the file review that NZX Discipline was aware of the need to remain independent from NZX when determining the procedure that it would take when considering matters. The Commission observed that in the course of NZX Discipline consulting with parties on matters, NZX and NZX Discipline had occasional differences of opinion on the correct procedure to be followed in a matter and noted that NZX Discipline's response to NZX concerns was robust and measured. NZX Discipline also noted that it had sought and received independent legal counsel where it considered it was necessary.
There was an instance during the review period where NZX Discipline was required to determine the procedure for a matter appearing before it. NZX Discipline formed a view on what the procedure would be and drafted a letter to both NZX and the other party setting out its view. However, before contacting both parties via this original letter, NZX Discipline contacted NZX Regulation, allowing NZX Regulation to express an opinion on the proposed approach before it was communicated to both parties. The Commission believes that this course of action was inadvisable. However, the Commission notes that in the event the other party's submissions on the proposed approach to the procedure were adopted and that NZX Discipline is sensitive to the need to be seen to be acting impartially.

Publication of decisions

Under Part 11 of the NZX Discipline Rules, NZX Discipline has the discretion to hand down various penalties, including a private reprimand and/or issue a public statement regarding the breach. The Commission also refers to Rule 5.17 of the NZX Discipline Rules, which sets out the process for publication of the statement of reasons of NZX Discipline in reaching a decision and awarding a penalty.
It appears to the Commission that rather than applying its discretion under the NZX Discipline Rules, NZX Discipline is instead applying a blanket policy across every decision. NZX Discipline very rarely publishes the names of Market Participants who have breached the Participant Rules and instead generally provides an anonymous notification of the breach to other Market Participants, as well as imposing a monetary penalty against the Market Participant.
NZX Discipline withholds publication of Market Participant details due to concerns about the impact on investor confidence in the profession. NZX Discipline believes that media attention arising from the release of NZX Discipline decisions may be disproportionate to the breach. NZX Discipline is concerned that media attention on breaches by Market Participants may give the impression that the industry has widespread problems and that subsequently investors may be less inclined to rely on firms which have suffered negative press. NZX Discipline considers this may create commercial pressure for firms. However, NZX Discipline publishes the decisions it reaches in respect of Issuers (although we note that it has withheld confidential or commercially sensitive information where appropriate). The Commission does not consider that there are grounds for a distinction to be drawn between Issuers and Market Participants in terms of publication by NZX Discipline.
The Commission considers that publication of the names of Market Participants who are guilty of breaches of the Participant Rules will not have the effect anticipated by NZX Discipline. In fact, the Commission considers that publication has significant benefits. The risk of being publicly censured is a strong deterrent to Market Participants. In addition, public confidence is likely to be advanced if the Participant Rules can be seen to be enforced in respect of particular Market Participants.
The Commission considers that market confidence in the ability of NZX Discipline to properly sanction those Market Participants who commit breaches should be a paramount concern for NZX Discipline. Accordingly, the Commission considers that publication of Market Participant details where they have committed a breach should be the default position, and be deviated from only in exceptional circumstances where serious confidentiality, commercial sensitivity or public interest factors required this, or where the breach is merely trivial. In the interests of transparency, where a Market Participant's details are not published NZX Discipline should disclose its reasons for withholding this information. The Commission does not consider that publication of anonymous cases in the NZX Discipline Annual Regulatory Report is sufficient to satisfy this, as it does not address the question of which Market Participant is responsible for which breach.

Amendments to the NZX Discipline Rules

The Commission noted that during the review period NZX Discipline had reached an interpretation of the NZX Discipline Rules which did not accord with the intention of NZX when the NZX Discipline Rules were drafted. NZX's proposed changes to the NZX Discipline Rules are presently being reviewed by NZX Discipline and the Rule which was the subject of NZX Discipline's interpretation has been redrafted to reflect NZX's intention rather than NZX Discipline's interpretation. The Commission notes that in the absence of an amendment to the NZX Discipline Rules, interpretations by NZX Discipline provide a binding precedent for future applications. The actions of NZX in seeking to amend the NZX Discipline Rules in this way have highlighted to the Commission an unforeseen impact on NZX Discipline's autonomy.
While the Commission recognises that NZX may make amendments to the Listing and Participant Rules, including the NZX Discipline Rules, (subject to ministerial approval and other checks and balances), we are concerned that an otherwise binding interpretation of the NZX Discipline Rules can be overcome in this way. The NZX Discipline Rules do not at present give NZX Discipline any formal role in reviewing amendments. The Commission has concerns about the impact of this on NZX Discipline's autonomy and considers that NZX Discipline should be given an advisory role in determining any changes to the NZX Discipline Rules.
It seems anomalous that NZX, appearing as a party to a discipline proceeding, has the ability to change the rules which govern the processes and procedures of NZX Discipline without the consent of NZX Discipline. The Commission is concerned that the autonomy of NZX Discipline may be adversely affected.
The Commission intends to examine in detail any changes to the NZX Discipline Rules that come before it during the disallowance process, to determine whether such changes may have the tendency to undermine NZX Discipline's autonomy and are therefore not in the public interest. The Commission will seek the views of NZX Discipline in this process. The Commission notes that the NZX Discipline Rules are currently being reviewed and considers that this provides an excellent opportunity for NZX and NZX Discipline to incorporate the changes necessary to give NZX Discipline more input into amendments to its Rules.

Recommendations

The Commission is satisfied that NZX Discipline is independent of NZX and is producing work of a high standard. However, the Commission did identify some issues in the course of the review. In particular, the Commission was concerned to find that NZX Discipline had sought an advance opinion from NZX on the procedure which it proposed to follow in a matter before it. The Commission considers this was inadvisable.
The Commission is concerned that Market Participants who have been found to have breached the Participant Rules are not being identified. Not only is publication a significant tool in deterring breaches, but it is also imperative that NZX Discipline be seen to be sanctioning Market Participants for any breaches. The Commission believes that market confidence will be increased if NZX Discipline is transparent in naming Market Participants who have breached the Participant Rules.
The Commission found during the review that NZX Discipline had ruled on the scope of its review powers under the NZX Discipline Rules. This ruling was contrary to submissions by NZX, which would have narrowed the scope of the review power. Subsequently NZX has sought to amend the relevant NZX Discipline Rule, effectively overturning NZX Discipline's ruling for future cases. The NZX Discipline Rules do not at present give NZX Discipline any formal role in reviewing amendments. The Commission has concerns about the impact of this on NZX Discipline's autonomy and considers that NZX Discipline should be given an advisory role in determining any changes to the NZX Discipline Rules.
It appears to the Commission that although NZX Discipline has stated that it does not feel its access to resources is in any way limited by NZX, and NZX has repeatedly asked NZX Discipline whether it requires further resources, that NZX Discipline in fact requires more resources in order to action non-urgent work within reasonable timeframes. The Commission is concerned at extensive delays which have occurred in two matters in particular, the first of which is the review of the NZX Discipline Rules, and the second of which involves a third party.
The Commission also considers that it would be valuable if information about the role, membership and mandate of NZX Discipline were more readily available to the market. Although information is provided in the Annual Regulatory Report, the Commission does not consider that this is sufficient.

NZX Discipline should ensure that, when determining the procedure to apply to a proceeding before it, it treats all parties evenly.

NZX Discipline should be seen to be transparent in exercising its discretion whether to publish decisions which identify Market Participants who have breached the Participant Rules. Where a Market Participant's details are not published, NZX Discipline should disclose its reasons for withholding this information.

NZX and NZX Discipline should review the NZX Discipline Rules in order to give NZX Discipline more input into its own Rules, and amendments arising from this review should be included in the amendments which are presently being considered by NZX Discipline.

NZX Discipline should review its resource requirements and structure, and communicate its needs to NZX, so that delays in dealing with non-urgent work are minimised or removed.

NZX should provide more information about the role, membership and mandate of NZX Discipline on its website. In particular, the contact details for NZX Discipline should be included on the NZX website.

PREVIOUS | CONTENTS | NEXT...