News Release
25 July 2006
Report on Effects on the Securities Markets of Statements Concerning Telecommunications
The Securities Commission has released a report of its inquiry into effects on the securities markets of statements made
in May 2006 concerning telecommunications.
The inquiry considered the conduct and circumstances surrounding the release of the Government’s Telecommunications
Stocktake Paper on 3 May 2006 (the Stocktake Paper), and comments reportedly made during a media interview on 15 May
2006 by Communications Minister, Mr David Cunliffe, regarding Telecom’s dividend policy.
The Commission concluded that:
- there was no evidence of any trading or tipping by persons who knew of the contents of the Stocktake Paper before it
was made public;
- the actions of both Telecom and the Government were understandable in the unusual and difficult circumstances of the
day;
- however there was an avoidable asymmetry of information in the market for just under 30 minutes while trading was
underway on the Australian Stock Exchange (ASX). Both Telecom and the Government could have taken steps to avoid this
occurring;
- the Minister and officials acted consistently with the current Cabinet guidelines for dealing with information about
publicly listed companies. However those guidelines do not provide detailed guidance about announcing regulatory policy
that might affect the price of specific listed securities;
- it is the Government’s prerogative to announce changes to regulatory policy, and it must consider the wider national
interest as well as the interests of the securities markets when it does so;
- the comments made by the Minister on 15 May during his interview with Bloomberg were not based on any price-sensitive
or confidential information about Telecom’s intentions or policies, nor did the Bloomberg reports of 16 May give the
impression that his comments were based on information of that nature.
“We recommend that the Government engage with the NZX with a view to developing procedures and guidelines for disclosure
by the Government of information that could be price-sensitive to listed securities, while accommodating the
Government’s other legitimate concerns”, said division chairman Lloyd Kavanagh.
As a general point the Commission also recommends that all persons, including Ministers of the Crown, who may be
presumed by the market to be in possession of non-public information about a listed issuer, exercise caution when
commenting on matters that might affect the price of listed securities. It reminds market participants that reported
comments may not be a complete or accurate reflection of what was actually said.
“The Commission considers that integrity and efficiency of the markets are best served through a well informed market
with a high standard of disclosure, and when investors have equal access to material information, so that they can trade
on the same information at the same time. Asymmetries in information in the markets can result in a deterioration of
market integrity and investor confidence”, said Lloyd Kavanagh.
The Commission refers its report to the Prime Minister, as the person responsible for making decisions regarding Cabinet
guidance for Ministers.
The executive summary of the report follows. A copy of the full report is available at www.sec-com.govt.nz .
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EXECUTIVE SUMMARY
1. The Commission’s purpose is to strengthen confidence in New Zealand's capital markets, both in New Zealand and
overseas, and to foster capital investment in New Zealand by promoting the efficiency, integrity and cost-effective
regulation of those markets. The Commission considers that integrity and efficiency of the markets are best served
through a well informed market with a high standard of disclosure, and when investors have equal access to material
information, so that they can trade on the same information at the same time. Asymmetries in information in the markets
can result in a deterioration of market integrity and investor confidence.
2. The Commission has conducted an inquiry into the conduct and circumstances surrounding the release of the
Government’s Telecommunications Stocktake Paper on 3 May 2006 (“the Stocktake paper”), and into comments reportedly made
during a media interview on 15 May 2006 by the Communications Minister, Mr David Cunliffe, regarding the dividend policy
of Telecom Corporation of New Zealand Limited (“Telecom”).
3. The Terms of Reference of the Commission’s inquiry are set out in Appendix A. In its inquiry the Commission
considered whether:
(a) any person misused any price-sensitive information relating to securities contained in the Telecommunications
Stocktake paper before that information was publicly available;
(b) any Government and/or state sector policies and procedures for handling non-public price-sensitive information
relating to securities were appropriate and properly applied; and
(c) any person could or should have taken, or refrained from taking, any actions in respect of these matters to maintain
the transparent and orderly functioning of the securities markets in New Zealand or elsewhere.
4. With regard to the events of 3 May 2006, the Commission has formed the following views:
(a) there was no evidence of any trading or encouragement to trade in securities by persons who knew of the contents of
the Stocktake paper before it was made public;
(b) it is the Government’s prerogative to announce changes to regulatory policy affecting the businesses of issuers of
securities. Similarly it is for Parliament to debate and enact (or decline to enact) legislation. Announcements of
Government policy can naturally affect share prices. Accordingly, the fall in the Telecom share price due to the
announced change in Government policy, was not of itself a cause for inquiry by the Commission;
(c) that Telecom would receive an unauthorised copy of the paper was unforeseen by either Telecom or the Government, and
they each had only a few hours to decide how best to handle the situation. The actions of both Telecom and the
Government were understandable in the unusual and difficult circumstances of the day. However, an environment was
created in which there was an avoidable asymmetry in the information in the market, for just under 30 minutes while
trading was underway on the Australian Stock Exchange (“the ASX”). Both the Government and Telecom could have taken
alternative steps to avoid the risk of asymmetry of information in the market;
(d) there are circumstances when it may be appropriate for an issuer to call a trading halt to allow information to be
distributed equally to the market, even though the issuer is not aware of the precise content of the information at the
time the halt is called. It would have been appropriate for Telecom to have requested a trading halt on the ASX in time
for it to be in place when the Minister’s announcement of the Stocktake Paper was made at 5.15 p.m. on 3 May;
(e) when the Government or a regulatory agency is about to release non-public price-sensitive information which can be
expected to affect the price of the securities of a specific issuer during trading of those securities, it should
facilitate that information entering the market in a way which allows trading halts to be called if appropriate. It
would have been appropriate for the statement issued by the Minister at his press conference, or at least the fact that
price-sensitive information was about to be released by the Government, to have been notified to Telecom and the New
Zealand Stock Exchange (“NZX”). This would have allowed the NZX and Telecom to determine whether steps such as a trading
halt should have been taken, including on the ASX, to ensure that the information was disseminated to the markets and
thereby enabling an orderly and informed adjustment of the Telecom share price;
(f) the Minister and officials acted consistently with the law and with the current Cabinet guidelines for dealing with
information relating to publicly listed companies. However the applicable Cabinet guidelines do not provide detailed
guidance about announcing regulatory policy that might affect the price of specific listed securities;
(g) the Commission recommends that the Government engage with the NZX with a view to developing procedures and
guidelines for disclosure by the Government of information which could be price-sensitive to listed securities, while
accommodating the Government’s other legitimate concerns. The Commission refers this report to the Prime Minister, as
the person responsible for making decisions regarding Cabinet guidance for Ministers, to consider whether the Government
wishes to take any action in this regard.
5. With regard to the Minister’s comments to Bloomberg on 15 May 2006 the Commission has formed the following views:
(a) the Minister is entitled to make comments to agencies that serve only a section of the market if the comments made
are not based on any confidential or price-sensitive information. This is the case whether or not the Minister has
confidential information, so long as this is not the basis of the comments;
(b) the comments made by the Minister on 15 May 2006 in the course of his interview with Bloomberg were not based on any
confidential or price-sensitive information about Telecom’s intentions or policies, nor did the Bloomberg reports of 16
May 2006 give the impression that they were so based;
(c) it appears that some market participants assumed or guessed that the Minister did have confidential information that
would affect Telecom’s dividend policy and traded on the basis of this. Trading of this nature occurs and does not of
itself mean that the market has been improperly or unequally informed;
(d) the Commission reminds market participants that reported comments may not be a complete or accurate reflection of
what was actually said;
(e) as a general point, the Commission recommends that all persons, including Ministers of the Crown, who may be
presumed by the market to be in possession of non-public information about a listed issuer, exercise caution when
commenting on matters that might affect the price of listed securities. Comments, especially if they are verbal, can be
misinterpreted or quoted out of context, and disclaimers and qualifying statements may be overlooked or
under-emphasised.
ENDS