Publications: OVERSIGHT REVIEW OF NZX 2005


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OVERSIGHT REVIEW OF NZX 2005

DISCIPLINARY ARRANGEMENTS - NZX DISCIPLINE

Role and functions

While maintaining governance authority in a single Board, NZX has created a separate entity, NZX Discipline, to adjudicate on alleged breaches of the NZX Listing Rules and Participant Rules. This was done in 2004. The decision to separate this function was a positive step in terms of managing potential conflicts of interest (both corporate and personal) for Board members.
NZX Discipline is constituted by the NZX Discipline Rules, which form part of the conduct rules of the NZX under the Securities Markets Act. These Rules also set out the procedures of NZX Discipline. NZX Discipline is dependent on NZX for resources. Both NZX Discipline and the Special Division carry out functions under delegation from NZX. Their functions form part of NZX's obligations. While NZX Discipline and the Special Division operate separately from NZX and set their own policies and processes, NZX remains responsible for these bodies because they perform functions for which NZX is responsible under the Securities Markets Act.
NZX Discipline has procedures set out in the Discipline Rules for dealing with conflicts of interest on the part of any of its members. No member of NZX Discipline who has a conflict of interest in respect of a case can consider that matter.
In brief, NZX Discipline acts as a tribunal, hearing cases that are referred to it by NZXR. There are separate procedures for summary and full hearings. NZX Discipline has powers to impose penalties including private reprimands, public censures, suspension or cancellation of listing, suspension or revocation of a Market Participant's designation, monetary penalties, and restitution. NZX Discipline can also consider and determine a referral of any waiver or ruling decision of NZX under the Listing or Participant Rules where the decision is referred to it by the applicant. A determination of NZX Discipline on any matter is binding on NZX in its exercise of its powers to grant waivers or rulings.
NZX Discipline has both independent members and representatives of NZX. Board Members, the CEO, Corporate Counsel, and NZXR personnel are ineligible for appointment. The NZX Board has resolved to remove NZX appointees from NZX Discipline. This will be effected in upcoming changes to the NZX Discipline Rules.

Matters considered

The Commission received copies of all decisions taken by NZX Discipline in the review period, and a copy of the report of NZX Discipline for the two years from its inception in May 2004.
In the review period, NZX Discipline considered 12 matters. These comprised four matters under the Listing Rules, seven under the Participant Rules, and one referral of a waiver decision.
The Chairman of NZX Discipline noted that from May 2005 there was a marked increase in its activities. This had increased the demands on the members and Chairman of NZX Discipline.
The Chairman of NZX Discipline spoke very highly of the members of the disciplinary body, describing their contribution in the review period as "outstanding". He reported that members of NZXR have conducted their activities in a professional manner, and have been supportive of the role undertaken by NZX Discipline. The Chairman of NZX Discipline reported that the concept of NZX Discipline is working well.

Process and decisions

The procedures for NZX Discipline are set out in the Discipline Rules. The Chairman of NZX Discipline reports that during its early stages it worked to "bed-in" its processes. The Chairman has sought to be involved in most hearings to provide consistency and continuity.
The majority of NZX Discipline decisions have been published, consistent with the presumption in favour of publication set out in the Discipline Rules. The Chairman remarked that some decisions were not published where the breaches concerned were relatively minor, because of a concern that this would harm confidence in NZX Participants generally. In these cases, notice of the NZX Discipline decision was given to all Market Participants, without naming the firm concerned.
There is evidence in the cases heard to date of differences of views between NZX in its submissions and NZX Discipline decisions. It seems clear that NZX Discipline takes care to maintain operational independence from NZX.
No cases taken to NZX Discipline were settled in the review period. However the Chairman of NZX Discipline noted that the requirement for NZX Discipline approval of a settlement was an important element of the settlement process. The Commission agrees.
There were instances in the review period of uncertainty about procedure, affecting a review of a waiver application and the preliminary steps for a disciplinary hearing. The latter case also showed some uncertainty as to the extent to which the Chairman of NZX Discipline can give binding procedural directions preliminary to hearings. The Commission thinks this should be clarified. However, such issues are not surprising given the relatively short period for which the Discipline Rules have been in force. We note that NZX has recently announced a review of the Discipline Rules, which should provide a useful opportunity to make improvements based on experience to date.

Resources

NZX Discipline comprises part-time members. It has no secretariat or premises provided by NZX. Hearings to date have been held, at NZX Discipline's election, in premises supplied by NZX Discipline members. The Chairman's personal computer and recording equipment has been used. NZX has supplied teleconference equipment. NZX has advised that premises would be made available to NZX Discipline should it wish to use them.
The Chairman of NZX Discipline noted that he had not asked for further resources during the period. He was confident that these would be supplied if sought. We were told that it would be helpful if some further administrative support could be supplied by NZX. The Chairman has carried out the administrative work himself to date, and has not billed NZX for this time. NZX advised that it was not aware of this and has discussed this with the Chairman.
It became clear to us that the current success of NZX Discipline's operations is largely due to the goodwill and dedication of the Chairman and other members. NZX Discipline has to date coped with its workload, although this has placed significant demands on the time of the Chairman, who acknowledged that this might not have been possible had he been in private practice at the time. File reviews showed that NZXR had expressed concern about the timeliness of the publication of one decision which had been delivered to NZX and the respondent but where publication was delayed.
We are of the view that NZX and NZX Discipline should together review administrative support and other resourcing arrangements, and these matters should be reviewed on a regular basis. We stress that NZX Discipline has operated very well in the review period, but we record also that this appears to be largely dependent on the willingness of the individuals involved to go to significant lengths to ensure the success of the organisation.
Members' fees are set by NZX. NZX and NZX Discipline consulted on this. The fees have not been reviewed since NZX Discipline was established. There is no provision in the Discipline Rules for review of these fees. Given the dependence of NZX Discipline on NZX for its resources, and the importance of continuing to attract high quality members, we think it would be appropriate for NZX to establish a periodic review of NZX Discipline members' fees and to consult with NZX Discipline members on this. NZX has said that it is willing to review the fees regularly. It may also be appropriate, as is the case for judicial officers, to entrench in the Discipline Rules that NZX may not reduce the level of NZX Discipline fees.

Reporting

Most NZX Discipline decisions are published. Where they are not, it is clear that NZX Discipline members have recorded their decision, including the reasons for not publishing.
Under the Discipline Rules, NZX Discipline is required to provide an annual report to NZX on its operations. This report is required to state, among other things, whether NZX Discipline received sufficient resources in the year to date.
We note that no annual report was provided by NZX Discipline to NZX in the review period. The report made in April 2006 covered the first two years of operations. The Chairman of NZX Discipline commented to us that although assistance was offered by NZX during 2005, this was not taken up by NZX Discipline. NZX Discipline intends to make use of available assistance in future. The Commission recommends NZX and NZX Discipline discuss this further, with a view to ensuring that NZX Discipline receives all the resources it requires to enable it to continue to carry out its functions effectively. The Commission recommends that NZX Discipline publish its report annually.

Appeal Panel

Under the NZX Discipline Rules, decisions of NZX Discipline can be appealed to an Appeal Panel. Other than as set out in the NZX Discipline Rules, the Appeal Panel determines its own processes for hearing and determining appeals. This Panel has been established and has met, but has not yet had to consider an appeal. Accordingly we do not comment on it further, other than to note our view that we expect NZX to publish information about the Appeal Panel, including contact details required for lodging an appeal.

Recommendations

NZX Discipline as an organisation has effectively carried out its function in the review period but there are certain gaps in resources and administration. The Commission makes the following recommendations:
1. 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 has advised that administrative and resource arrangements are being discussed with NZX Discipline and are close to being settled. NZX advises that it proposes to review these arrangements annually.

NZX has committed to do this by the end of this calendar year.
1. 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.
NZX is willing to entrench the fees so that they may not be reduced. NZX is willing to review the fees regularly.

NZX has committed to do this by the end of this calendar year.
1. NZX Discipline should publish its Annual Regulatory Report annually.
NZX agrees with and supports this recommendation.

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