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OVERSIGHT REVIEW OF NZX 2006

THE SPECIAL DIVISION

75. As in the last review, the Commission found that the Special Division was working well and enforced the separation between the commercial and regulatory functions of NZX. The Special Division acted independently of NZX and did not encounter any resourcing issues over the period. The Special Division also indicated that it was satisfied with the outcome of actions taken in response to the recommendations made in the context of the 2005 oversight review.
76. The Commission noted that NZX should set an example of full compliance with all lawful directions or requests of the Special Division during the 2005 oversight review. We note that this issue did not arise during the 2006 review period.

Independent solicitor and autonomy

77. As a result of the recommendations made by the Commission in the last review, the Special Division contracted an independent solicitor, rather than relying on an NZX Regulation solicitor. In the course of the current oversight review, the Commission queried whether this increase in autonomy had been successful. Both NZX and the Special Division reported that the use of the independent solicitor had been successful in promoting the independence of the Special Division.
78. The Commission had also recommended that a communication strategy about the role of the Special Division should be developed and implemented, including the publication of separate contact details for the Special Division. NZX issued a press release with this information in it. However, the Commission notes that the separate email address has not been utilised, and considers that this reflects the difficulty in finding the email address. The Commission notes that besides a link to the original press release at the very bottom of the NZX homepage there is no other place on the NZX website which sets out the Special Division's contact details, although there is a page which discusses the Special Division and the supervision of NZX. The Commission considers that better dissemination of information about the Special Division would be useful in educating the market about the various and separate roles of NZX, NZX Discipline and the Special Division.

Disciplinary action in respect of NZX

79. During the review period a subsidiary of NZX, Smartshares Limited, breached the Listing Rules by not providing a preliminary announcement or half-yearly report for the six month period ended 30 September 2006 in respect of the NZX Australian 20 Leaders Index Fund (also known as smartOZZY) within the timeframes required under the NZSX Listing Rules. NZX has systems which alert it the day before an Issuer's report is due. In this case however, due to a clerical error, it was not identified for some months that smartOZZY's announcement and report were late. This is a substantial period and the Commission is concerned that this was able to occur. The error was identified by Smartshares and notified to the Special Division.
80. The Special Division initially contacted Smartshares and requested certification from the directors that all material information in respect of smartOZZY had been disclosed to the market. Smartshares was granted two weeks to provide the half-yearly report. The Special Division subsequently suspended trading in smartOZZY securities until the report was provided. The trading halt was used appropriately, in the Commission's view, to encourage production of the report by Smartshares in a timely manner, and did in fact result in such report being published expeditiously. The Special Division took disciplinary proceedings against Smartshares, which were settled. Smartshares was required to pay a $10,000 penalty to an organisation approved by the Special Division for the purpose of market education, and the application of funds was not to relate to expenditure that would customarily be made by Smartshares or NZX.
81. The Commission notes that there was no direct precedent available to the Special Division to draw from as NZX Regulation has not had to deal with a breach by a passive fund. However, it appears that the Special Division endeavoured to act in a way that was consistent with NZX Regulation's approach and further, that it sought advice on the course of action it should take.

Recommendations

82. The Commission is satisfied that the Special Division is operating effectively. In particular, the Commission noted one disciplinary matter regarding a subsidiary of NZX that arose during the review period. It appears that the Special Division endeavoured to act in a way that was consistent with NZX Regulation's approach and further, that it sought advice on the course of action it should take.
83. The Commission considers that it would be valuable if information about the role, membership and mandate of the Special Division were more readily available to the market. Although some information is provided on the NZX website concerning the role of the Special Division, it is not extensive or easy to find.
    
    NZX should increase the amount of information it provides about the Special Division and make it easier to find. In particular, the contact details for the Special Division should be included on the 'Contacts' and 'Supervision of NZX' pages of the NZX website.