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OVERSIGHT REVIEW OF NZX 2006

RECOMMENDATIONS ARISING FROM THE REVIEW OF THE 2005 YEAR

Update on progress made in implementing the recommendations

84. The Commission made a total of 21 recommendations in the course of the 2005 review. We report on NZX, NZX Discipline and the Special Division's progress in implementing these recommendations.
    
    Market Supervision Group (general)
    • NZX should introduce and communicate a formal policy for all Market Supervision staff concerning identifying and declaring personal conflicts of interest.
    NZX has created and communicated a formal policy regarding conflicts of interest within the agreed timeframe.
    
    Supervision of Market Participants
    • NZX should take disciplinary action against Market Participants who commit repeat breaches of the Participant Rules.
    As a general principle NZX agrees that, where a participant has failed to implement an agreed action point related to a breach of the Participant Rules identified on inspection, this is a matter generally deserving disciplinary action. However, there are always going to be circumstances that mean departure from this general principle is desirable. For this reason NZX disagrees with a recommendation that would require all repeat breaches noted on inspection (or otherwise) to be referred to NZX Discipline, and it believes it should deal with matters on a case by case basis.
    
    The Commission's 2006 review of NZX practices in respect of participants satisfies us that NZX is taking an appropriate disciplinary approach to participant compliance.
    
    Supervision of Listed Issuers
    • NZX should consider enlarging the membership of the Listing Subcommittee to address potential issues arising from conflicts of interest.
    NZX appointed two extra members to the Listing Subcommittee within the agreed timeframe.
    • NZX should ensure that NZX Regulation adheres to its established procedures for timely appointment of and consultation with division members, to avoid delays in addressing applications.
    NZX reiterated its policies for appointment of divisions to NZX Regulation staff, and compliance with the process is now monitored by the Group Leader and Business Leader of the Market Supervision Group.
    • NZX should ensure that the delegation of decision-making authority and the accountability for decisions made by NZX Regulation divisions are clearly recorded.
    NZX revised the delegations of decision-making authority and accountability within the agreed timeframe.
    
    NZX Discipline
    • NZX and NZX Discipline should together review the administrative support and resource arrangements in place for NZX Discipline. These resource arrangements should be reviewed regularly to ensure that NZX Discipline receives all the resources it requires to enable it to continue to carry out its functions effectively.
    NZX and the Chairman of NZX Discipline have agreed on a suitable fee for administrative time spent by the Chairman and have created a framework for discussing NZX Discipline's resource requirements.
    • NZX should establish a periodic review of NZX Discipline members' fees and consult with NZX Discipline members on this. The NZX Discipline Rules should entrench that the fees for members of NZX Discipline may not be reduced by NZX.
    The current review of the NZX Discipline Rules incorporates proposed changes to the treatment of Member's fees. The Commission notes that the Chairman of NZX Discipline agrees with this approach. The proposed amendments to the NZX Discipline Rules are currently with the Chairman of NZX Discipline for comments. The proposed changes had not come into effect at the date of this report.
    • NZX Discipline should publish its Annual Regulatory Report annually.
    NZX Discipline agrees that the annual report should be published annually and will advise the Commission if this will not be achievable. The Commission expects that the report will be published annually.
    
    Special Division
    • The Special Division, as a body, should determine whether the Special Division has jurisdiction to deal with matters referred to it. Any delegations from the Special Division to its Chairman should be formally recorded.
    The Special Division has determined that any questions of jurisdiction will be determined by the Division as a whole. Any delegations will be documented.
    • Given the important role of the Special Division in respect of NZX's compliance as a Listed Issuer, the Special Division should take steps to ensure that it is fully aware of the powers available to NZX Regulation under the Listing Rules in respect of other Listed Issuers, and should exercise those powers as appropriate in relation to NZX as a Listed Issuer.
    The members of the Special Division have been provided with all relevant regulatory material by NZX and have stated their willingness to take independent legal advice where necessary.
    • Given NZX's position as both a Listed Issuer and regulator of all other Listed Issuers listed on its markets, NZX should set an example of full compliance with all lawful directions or requests from the Special Division.
    NZX does not believe it must comply with every request or direction from the Special Division. NZX considers that as other Issuers are not required to comply with every direction from NZX, the recommendation amounts to an unequal treatment of NZX. NZX therefore did not agree to implement this recommendation as stated above. However, the Commission is satisfied that during the 2006 review period the relationship between the Special Division and NZX was good, and that NZX provided all information that was requested.
    
    As stated in the 2005 review, the Commission considers that in practice NZX does have the power to compel production of information by refusing to grant waivers if relevant requested information is not provided.
    
    The Commission remains of the view that NZX should set an example of full compliance with all lawful directions or requests of the Special Division.
    • The Special Division should discuss its resource requirements with the Board of NZX. The NZX Board should have a formal guarantee of funding for the Special Division should the Special Division need to take NZX to NZX Discipline.
    The Board of NZX has provided confirmation to the Special Division that it is authorised to incur expenditure on behalf of, or in the name of, NZX.
    • NZX and the Special Division should develop and implement a communication strategy about the role of the Special Division. Communication should include publication of separate contact details for the Special Division.
    NZX has established an email address for the Special Division: info@specialdivision.co.nz. The address is published on the NZX website via a link to the press release at the bottom of the NZX homepage. Email sent to this address is automatically received by all four members of the Special Division and its counsel. The Commission is concerned that this has not been effective and has made recommendations to address this issue again.
    
    A press release concerning the role of Special Division was created by NZX and released via MAP and posted on the NZX website.
    • The Special Division should formalise its delegation to the appointed solicitor and should receive regular reports on work dealt with by the appointed solicitor under delegation.
    The Special Division has engaged the services of a senior lawyer on a contract basis. Certain delegations have been made to this lawyer pursuant to that contract, and the Special Division receives reports from the solicitor in respect of the exercise of those delegations.
    • The Special Division should have and use the same procedures manuals in respect of NZX's compliance as a Listed Issuer that are used by NZX Regulation in respect of all other Listed Issuers. The Special Division should satisfy itself that the appointed solicitor uses the NZX Regulation procedures, including where matters are delegated to that solicitor.
    The lawyer contracted to the Special Division must use the NZX Regulation Solicitor's Handbook and conduct precedent searches in LRS and i-Search. As stated above, the members of the Special Division also have copies of all relevant regulatory material. The solicitor provides overflow assistance to NZX Regulation from time to time and accordingly considers waiver and ruling applications for other Issuers. She is accordingly very familiar with NZX Regulation precedents.
    • The Special Division should settle internal procedures that it would use, including procedures for communicating with the market, in dealing with a serious compliance matter regarding NZX.
    The Special Division has settled procedures that it will use to communicate with the market in the event of a compliance matter regarding NZX.
    
    The Special Division has also settled the procedures for dealing with a breach of the Listing Rules by NZX, including referral to the Securities Commission under the Securities Markets Act 1988.
    • The Special Division should formalise its expectation about the referral of data generated by the SMARTS market surveillance system concerning NZX's listed securities. Where alerts from SMARTS are below the threshold set by the Special Division for referral to it, the appointed solicitor should regularly advise the Special Division of the number of such alerts received in the period and a summary of any alerts that were not referred.
    All SMARTS alerts are to be referred to the Special Division. NZX has amended its procedures manual to reflect this.
    • To avoid a situation of conflict for the appointed solicitor, the appointed solicitor should have no role in matters that raise contentious issues, including complaints handling (beyond an initial transmittal of a matter to the Special Division). The Special Division should engage external advisers to assist it in dealing with such matters and be funded to do so. The external advisers should have access to NZX's facilities and regulatory precedents and be able to consult with NZX Regulation.
    The Special Division has appointed a senior lawyer on a contract basis. No NZX staff provide services to the Special Division.
    • NZX should either formally assure the Special Division that the appointed solicitor will not perform any corporate advisory work for NZX or should revisit the use of an NZX Solicitor for the appointed solicitor role.
    The Special Division has appointed a senior lawyer on a contract basis. No NZX staff provide services to the Special Division.
    • The Special Division should report to NZX Discipline all material findings that it makes. NZX Discipline should incorporate that information into its published Annual Regulatory Report.
    The Special Division will table a written report to NZX Discipline's annual meeting. NZX Discipline and the Special Division will also discuss the nature of the update to be included in the NZX Discipline annual report.
    
    Governance
    
    • Given the risk of lack of clarity regarding roles in responding to a crisis, the Commission recommends that responsibilities of the CEO and Head of Regulation for exercising delegated powers be reconsidered by the Board of NZX to ensure that the responsibilities are clarified.
    NZX continues to be of the opinion that its current delegations are effective in a crisis. The Board will keep the matter under review. In the interim, the Head of Market Supervision is now provided with time during each Board meeting where the CEO is not present, in order to enable her to raise any issues with the non-executive members of the Board. The Commission is comfortable with the progress being made in respect of this matter.