Securities Commission identifies NZX conflict

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Potential conflict of interest between NZX's regulatory and commercial functions is highlighted in the annual review of share market operator NZX by the Securities Commission.

NZX gets a good report and the commission notes action on past issues it has raised. NZX now makes available on its website attachments to company announcements without the need to make a request and has abolished the 20 minute waiting period before general release of the details of company announcements.

The report notes concern about the risk of potential conflicts between NZX's regulatory and commercial functions as it expands its commercial activities. 

``While we are not aware of any such conflicts at this time, we will continue to review this issue in our future oversight review of NZX,'' the report said.

Demutualised exchanges around the world have taken different approaches to ensure separation of regulatory and commercial functions. While models differ, a consistent standard is that the head of regulation is completely autonomous from any other executive function. 

The NZX board has made a joint delegation for regulatory activity to the chief executive and the head of supervision. The head of supervision undertakes the day-to-day management of the supervisory function and the chief executive has accountability for the supervisory function.

``This dual delegation remains of concern to the commission. While this delegation is in place, there remains a potential for conflict to exist,'' the report says.

During the period under review the chief executive, under the direction of a committee of the NZX board, exercised fully on occasion the delegation as head of supervision. The function was competently discharged, and no conflict was evident in the discharge of that function.

``However, the commission considers that the dual delegation is inadvisable. In the commission's view the issue which required the exercise of the delegation could have been resolved by the retaining of external counsel or an expert, who could have independently reported to the board, thereby retaining the separation of the commercial and regulatory functions. 

``The NZX disagrees with this perspective but does agree that the process of obtaining a regulatory outcome is important as well as the outcome itself,'' the report said.

The report also notes that current law has no provisions for resolving difference between NZX and the commission, which may be a matter for the Government to consider in a review of the Securities Act next year.

The Capital Markets Development Taskforce final report released this month recommends that a new organisation be created to focus on market conduct, taking on functions of the Securities Commission, NZX, Ministry of Economic Development, Companies Office and government actuary.

It would be similar to the UK's Financial Services Authority minus prudential supervision, which would remain with the central bank. The idea is to avoid uneven regulation being exploited by issuers.

The commission's review found that NZX was discharging its obligations according to its conduct rules and the Securities Markets Act 1988. It covered  the 2008 calendar year, and some  matters which occurred in 2009 relating to NZX's supervision of its markets. It was the fourth oversight review of NZX conducted by the Securities Commission.

- NZPA