Publications: OVERSIGHT REVIEW OF NZX 2005


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OVERSIGHT REVIEW OF NZX 2005

ARRANGEMENTS FOR SUPERVISION OF LISTED ISSUERS

NZXR's focus

NZXR focuses on applications made under the Listing Rules received from Listed Issuers. NZXR also supports the LCR team, prepares matters for NZX Discipline, provides support to the Special Division (as required) and monitors the regulatory environment and effectiveness of the Listing Rules. Members of the NZXR team also undertake corporate legal work for NZX, including preparing applications to the Special Division on behalf of NZX as a Listed Issuer.
NZXR works in divisions of three solicitors for considering most matters. Generally this process seems to work well, and ensures that decisions are well-canvassed and that a mix of experience and viewpoints are taken into account. We noted that the division process appeared to create certain timing difficulties in some instances. We comment further on the division process below.
NZXR does not initiate investigations regarding compliance with the Listing Rules, absent complaints, and observed or suspected non-compliance. While the Participant Compliance team actively monitors the market, through a programme of inspections and the SMARTS technology, the NZXR work is reactive. Solicitors are approached by issuers or third parties in respect of matters which require their attention, such as document approvals required by the Listing Rules or applications for waivers from the requirements of the Listing Rules. This is consistent with the approach taken by other exchanges.

Approval of listings and delistings

NZX Solicitors have access to a comprehensive listing manual which is intended to provide guidance to the solicitors on the listing process. It was evident from file reviews that the NZX Solicitors were following the processes and checklists contained in the manual. The Market Products Group has a role in promoting and attracting listings, but once a listing application is received by NZXR, the Market Products Group has no involvement in the processing of that application.
As with all NZXR work, an application for listing is assigned to a Lead Solicitor. The Lead Solicitor then works in tandem with the Listing Subcommittee to assess the application and make a decision. Divisions are not used to consider listing applications. NZX's process of using the Listing Subcommittee to consider listing applications is derived from the previous NZSE mutual structure. It is not a requirement of the Listing Rules. The Lead Solicitor and the Subcommittee correspond at length about the issues raised in any particular matter. The Subcommittee's focus is on the financial information disclosed in offer documents.
The Subcommittee has two members. In the event of a conflict, the conflicted member stands down and the Subcommittee is reduced to one member. We recommend that NZX consider enlarging the membership of the Listing Subcommittee to address conflicts.
On one occasion we found the Listing Subcommittee recommended that a draft offer document submitted with a listing application should include information that would have been in breach of the securities laws. Although the Listing Subcommittee's focus is on the financial information included in offer documents we would expect the Listing Subcommittee to be aware of the securities law requirements. We note that the Companies Office also reviews offer documents from a statutory perspective, although NZX and the Companies Office do not have any formal liaison. In interviews, NZX told us that where it discovered an offer document was in breach of Securities Act requirements, it would communicate its concerns to the issuer in the first instance, and would likely also refer the breach to the Companies Office. In its comments on the report NZX said that it would communicate its concerns to the issuer and may refer the matter to the Companies Office or to the Securities Commission. The Commission expects all unresolved breaches to be referred.
Delisting applications were considerably less complicated. It appears that delisting applications are dealt with by a Lead Solicitor working alone. For issuers who had a listing in another jurisdiction the primary concern was that any outstanding obligations were settled by the issuer so that delisting could proceed. NZX was also concerned that communications were undertaken with security holders so that they were informed of their position. NZX advised in submissions that it would be likely to require shareholders' resolutions where a company that did not have a secondary listing with another exchange wanted to delist.

Other approvals under the Listing Rules

NZXR reviews and approves a range of other documents under the Listing Rules, including:
1. Waiver and ruling applications;
2. Approvals of persons to prepare Appraisal Reports;
3. Notices of Meetings; and
4. Approval of the independent solicitor to prepare an opinion on an issuer's constitution.
NZX has a Solicitor's Handbook which contains checklists and guidelines for these matters. It appears from the files reviewed that during the review period NZXR staff followed these checklists and guidelines consistently.

Waiver and ruling applications

Processing of waiver and ruling applications for Listed Issuers followed a consistent process. The Solicitor's Handbook contains a guide to waivers and rulings which sets out the steps of an application for the solicitors. The decisions appeared consistent with those made on similar facts.
Waiver and ruling applications are dealt with by the division process. NZXR solicitors reviewed the applications and identified issues for follow-up with other members of the division, with Business Leaders, and with the applicant. Once a draft decision had been prepared, there was input from the division in terms of proof-reading and content.
Where waiver and ruling applications were made in respect of several Listing Rules, the NZXR solicitors considered the application in respect of each Rule. There was good use of precedents. Many of the published decisions did not refer to the precedents searched. NZX Solicitors advised that NZXR always considers the position of shareholders in considering applications more generally. Statements about the effect on shareholders were in fairly standard form across the decisions we examined. Decisions and conditions appeared consistent across applications.
File reviews indicated that NZXR would consider past compliance issues when determining applications, although each application is determined on a case by case basis.
Applications for waivers and rulings that involve Listing Rule 10.1.1 (continuous disclosure of material information) were dealt with differently to other waiver and ruling applications due to different statutory requirements. A Business Leader dealt with these applications in consultation with the Head of Regulation. This process reflects the experience of the Business Leaders in dealing with this type of application. In some particularly complex applications, external advisers were consulted. In these cases, the Business Leader would consult with the external adviser and Head of Regulation. In the case of one waiver application dealing with Listing Rule 10.1.1, there was active involvement from the CEO. This application was made in the context of an IPO.
It appeared that there were several Listing Rules where a significant number of issuers sought waivers. NZX noted that it had identified that the market had missed the fact of the new obligation for the nomination period for directors, and this had led to widespread non-compliance. To remedy the situation, NZX took positive steps to educate the market, including making announcements and writing to issuers to remind them of the new obligation. NZX has advised that it monitors waivers and rulings and incorporates these into the rule review process.

Timing requirements for approvals

An area of concern was timing in processing applications. Under the Listing Rules, certain documents requiring approval by NZX, and waiver and ruling applications, are to be submitted to NZX at least 10 days before the document is to take effect or a determination is sought. Waivers and rulings can also be sought on an urgent basis. When this occurs, the matter must be dealt with within 10 working days and urgency rates apply. The Commission acknowledges that the quality of applications and information provided by applicants can have an effect on timing. File reviews indicated some delays in addressing applications, with some issuers expressing concerns about this, although in most cases the 10 day timeframe was met. This appears partly to be a side-effect of the division process, as the Lead Solicitor must wait for feedback from other division members. At times this slows down the process. We recommend that more attention be paid to this. File reviews also indicated issues about applications made under urgency which were not dealt with in the expected timeframe. In some cases this caused problems for the issuers, and in one instance led to NZX making representations to the issuer that it would not find an issuer in breach on the basis that NZX had not fully considered the application.

Surveillance: trading halts and price enquiries

There are two types of trading halts: issuer-requested and NZX-initiated. File reviews evidenced that these did not require much action by NZX. Where trading halts were requested, the LCR team actioned them promptly.
Price enquiries arise when SMARTS generates an alert that there has been unusual trading activity, either in the price of the securities being traded, or in the volume. Unusual trading activity may suggest insider trading and may raise questions as to whether the issuer is complying with its continuous disclosure obligations. Where alerts generated by SMARTS warrant further enquiry, a Business Leader will action a price enquiry in conjunction with a member of the Participant Compliance team. A form letter is sent to the issuer, setting out the concern and asking for confirmation that the issuer is complying with Rule 10.1.1. NZX normally releases its letter and the response to the market. NZX also provides information to the Commission under the Securities Markets Act.

Inspections and investigations

NZX has powers to obtain information by exercising its powers of inspection. The Solicitor's Handbook refers to the inspection power in a short note on investigation processes.
File reviews indicated that in some cases, issuers were not forthcoming with documents. NZXR has a range of enforcement tools which it is willing to consider and has indicated it is willing to use its powers of inspection to obtain required documents.
NZXR is able to contract resources, and in the case of suspected breaches, this may be an option in order to determine whether a breach has occurred. This external adviser is managed by the Lead Solicitor on a matter. In some cases the NZX would also refer matters to the Commission. NZXR did note that the extent to which it investigated a matter would need to be determined in terms of the outcomes that would likely be achieved.
On occasion, when NZXR referred breaches to NZX Discipline, some issuers involved expressed their unhappiness with the referral directly to NZXR. We note that NZXR did not make any changes to their approach, despite potential risks to listings, but followed the procedures that NZXR had identified as appropriate.

Disciplinary actions

The Solicitor's Handbook contains a brief note about the NZX Discipline process. It does not contain further specific guidance in relation to disciplinary processes. The matters giving rise to disciplinary actions varied throughout the review period. NZXR followed the same general process in respect of each matter.
The Statement of Case and Notice of Referral to NZX Discipline were drafted by the Lead Solicitor in consultation with the Business Leaders and the Head of Regulation. An external adviser was also used during the review period. The Statements of Case and Notices of Referral followed a standard format and attached relevant documentation.
There was evidence that NZXR was under considerable pressure at times, both from complainants and issuers. NZXR corresponded in a measured way and did not yield to demands from these parties. NZXR was clearly following a process and attempting to ensure that disciplinary matters were dealt with in a considered fashion. The Lead Solicitor sought input from external advisers when drafting responses on these types of matters.
There was some variance between the views of NZXR and NZX Discipline regarding the penalties handed down by NZX Discipline for breaches of the Listing Rules versus the penalties recommended by NZXR. Executive management noted disagreement with some decisions handed down by NZX Discipline but considered this indicated that the process of having NZX Discipline act as the disciplinary body was effective and showed that NZX Discipline was acting independently. Both NZXR and NZX Discipline have regard to the published NZX Discipline Penalty Bands Guidance Note in recommending and setting penalties. The Commission has no comments about consistency in relation to the penalties imposed by NZX Discipline, although we note there have not been a sufficient number of NZX Discipline decisions to identify any clear trend.

Records: practices and procedures

File reviews indicated that NZXR's files appear to be comprehensive, well maintained and clearly identified. It was clear from the files reviewed what process NZXR had undertaken in respect of each application. The NZXR team makes use of a file closing form, which indicates the names of the members of the division, the Rule which the file related to, and the time spent on the matter, as well as other information such as whether an external adviser was engaged.
NZX also has a Legal Reference System, which is essentially a database of all NZXR decisions and includes key items of correspondence and application documents. NZX Solicitors use this information to assess the precedent value of decisions. We understand that every decision is summarised for the Legal Reference System, although the summary may be brief for straightforward matters.

Complaints handling

NZXR maintains a complaints log. This contains a copy of all complaints received and a summary of the responses to those complaints. NZXR uses the complaints manual to process complaints. In the complaints process, NZXR essentially acts as a go-between for the parties. NZX indicated that it would assess whether complaints were frivolous or without substance before entering into the extended complaints process.
Where complaints are made in respect of NZX's compliance as a Listed Issuer, the complaints procedures manual makes it clear the complaint should be referred to the Special Division. The Special Division did not receive any complaints about NZX's, or its related parties, own compliance with the Listing Rules during the review period.
If a complaint concerns NZX as a regulator and market operator, NZXR will respond directly to the complainant.

Education initiatives regarding the Listing Rules

The Business Leaders have involvement in seminar presentations about the Listing Rules. They also provide assistance to issuers on an individual basis regarding clarification of the Rules as requested. One NZX Solicitor who focussed more on the AX Market work undertook a similar role in terms of working with the AX issuers to provide information and clarification as necessary.

Supervisory structure within the NZXR team

The NZX Solicitors report to two Business Leaders, who in turn report to the Head of Regulation. The NZXR team has a clear reporting and supervisory structure, and in the review period staff undertook their roles within that structure. Business Leaders have responsibilities for work allocation to the NZX Solicitors with the assistance of the Head of Regulation. Members of the NZXR team were clear that they would raise any workload issues with the Business Leaders or the Head of Regulation.

Decision-making structure: divisions

Work is allocated to a Lead Solicitor who conducts the initial review of an application matter and records their initial comments. The Lead Solicitor asks for volunteers from the NZXR team to form a division. A division is usually made up of three NZX Solicitors, and may contain a Business Leader or the Head of Regulation, depending on the complexity of the issue. Division members give feedback to the Lead Solicitor through circulation of marked-up draft documents. Meetings are convened if the matter is more complex. Generally the NZXR division process appeared to have worked well in the review period.
Although no deadlocked divisions were experienced during the review period, all NZXR staff stated that the proper procedure would be to escalate the matter and seek the opinion of a Business Leader or the Head of Regulation.
The Lead Solicitor is responsible for timing and procedural matters relating to an application. However, it appears unclear to NZXR staff where accountability lies for the decision made by a division, that is, whether accountability lies with the Lead Solicitor, the division as a whole or the Head of Regulation. We think that this should be clarified. It is also unclear whether the delegation to divisions to decide matters has been formally recorded. We recommend that NZX clarify these matters for the NZXR staff.

Escalation

All NZX Solicitors were clear that if they were unsure how to deal with a matter or needed assistance that the appropriate person to escalate it to was their Business Leader in the first instance, and following that, the Head of Regulation. Business Leaders were clear that they should escalate matters to the Head of Regulation when they needed further assistance or if they considered the Head of Regulation should be made aware of a situation. NZX Solicitors have discretion to deal with issuers or other parties themselves, up until the point they consider escalation is appropriate.

Staff management

All NZX Solicitors and one Business Leader were required to undertake both regulatory and commercial work during the review period. Job descriptions for the relevant staff indicate that the targeted division between regulatory functions and commercial activities was between 20% to 50% allocation to commercial work. This was broadly in line with the amount reported by the NZX Solicitors and Business Leaders. The NZXR team was clear that regulatory work took precedence at all times, and in the event of a time conflict, commercial work would be de-prioritised or dealt with externally. If such a conflict arose it would be escalated to the Head of Regulation to discuss with the Corporate Counsel in terms of managing the shared legal resource.
NZXR staff received mainly on-the-job training during the review period. All NZXR staff reported that they had received induction training and NZX also conducted regular internal seminars for its staff, involving external advisers and experts. NZXR staff are also encouraged at their annual and interim performance reviews to actively seek external training. Staff take up these opportunities as appropriate.

Recommendations

NZXR has adequate processes in place for supervision of Listed Issuers under the Listing Rules and uses its processes consistently. We make the following recommendations.
1. NZX should consider enlarging the membership of the Listing Subcommittee to address potential issues arising from any conflicts of interest.
NZX agrees with this recommendation.

NZX has committed to do this by the end of this calendar year.
1. NZX should ensure that NZXR adheres to its established procedures for timely appointment of and consultation with division members, to avoid delays in addressing applications.
NZX considers that it currently has in place measures to determine compliance with its timing obligations. However, NZX will consider this matter again and has undertaken to report back to the Commission by the end of this calendar year.
1. NZX should ensure that NZXR clearly records the delegation of decision-making authority and the accountability for decisions made by NZXR divisions.
NZX believes that it currently has adequate measures in place.

The Commission considers that these measures need to be more clearly communicated to NZX staff.

NZX will consider this matter again and has undertaken to report back to the Commission by the end of this calendar year.

ARRANGEMENTS FOR RELEASE OF MARKET INFORMATION - LISTED COMPANY RELATIONS

The LCR team members have a systems-based role. A core focus is the accurate and timely release of market information, the administration of the Market Announcement Platform (MAP), and associated administrative activities and systems checks. LCR staff use an extensive procedures manual to assist them in their work. LCR staff work closely as a team.
It appears from the review that the LCR team has a clear and comprehensive understanding of its role and that its activities are carried out to a satisfactory standard.

Recommendation

We make no recommendation in relation to LCR.

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