Gordon F Copeland: Opinion Piece

Continuous Disclosure & the Securities, Markets and Institutions Act

The Bill leading to this new Act had a fairly rocky path through Parliament in November but was finally enacted to take effect from 1 December 2002. Probably the most controversial part of the bill was that relating to the continuous disclosure regime. I would like to mention a few points in relation to that issue, but first some background.

The "big picture" and primary motivation for the Securities, Markets and Institutions Act was to maintain and enhance investor confidence in NZ markets. That will only occur if

§ investors are protected;

§ our markets are known to be fair, efficient and transparent

§ we reduce and indeed minimise systemic risk

§ our markets gain a reputation for honest and ethical standards.

Continuous disclosure needs to be seen against the background of those primary objectives. Interestingly enough, the continuous disclosure provision in the bill was drafted and considered by a select committee before the deluge of accounting scandals and fraudulent tipping advice by security advisors etc. which all but wrecked US securities markets last year. Accordingly, in the light of those events I think everyone is agreed that the Act, together with the new listing rules adopted by the Stock Exchange, represents a major step forward.

That is good. I want New Zealanders to invest in our Stock Exchange. I want New Zealanders to contribute to the capital formation of this country. I also want to see significant new foreign investment flow in so that we can develop our abundant resources for the good of all. Wood processing alone requires $3 billion of new investment to process the wall of wood - 10 million cubic feet - which is about to come on stream.

Notwithstanding these laudable objectives I note that the introduction of the continuous disclosure rules has generated a degree of controversy. Some of that centres round how the provisions of the Act should be interpreted in the market place. I'm not at all surprised about that since I also had some difficulty trying to work out how the provisions of Section 19A(2)(c) would actually work in practice.

That section reads in part "ensuring that the benefits resulting from the continuous disclosure regime justify the costs, including the following costs:

(i) the value that a public issuer gives up if the information is not kept confidential;

(ii) Compliances costs for public issuers and registered exchangers in disclosing the information."

I can see that those words could be open to different interpretations depending on, for example, whether one's background is cost accounting or law. For that reason, very late in the day, I suggested to the Minister of Commerce Lianne Dalziel that the wording of the Act be withdrawn and substituted with the wording contained in Clause 10 of the Stock Exchange Listing Rules which likewise came into effect on 1 December 2002.

Clause 10.1.1 of those rules reads as follows "Continuous disclosure of material information: without limiting any other Rule every Insurer shall

(a) once it becomes aware of any material information concerning it, immediately release that material information to the Exchange, provided that this Rule shall not apply when:

i. a reasonable person would not expect the information to be disclosed:

ii. the information is confidential and its confidentiality is maintained:

iii. one or more of the following applies:

A. the release of information would be a breach of law;

B. the information concerns an incomplete proposal or negotiation;

C. the information comprises matters of supposition or is insufficiently definite to warrant disclosure;

D. the information is generated for the internal management purposes of the Issuer; or

E. the information is a trade secret.

In this Rule an issuer is aware of information if a director or and executive officer of the Issuer has come into possession of the information in the course of the performance of his or her duties as a Director or executive officer".

The Minister judged that it was too late to alter the bill but suggested that during the committee stage of its passage through the House I read the Stock Exchange rule into Hansard. That I proceeded to do.

It is important that the commercial community is aware of that since, should the Courts be called upon to interpret the somewhat ambiguous wording in Section 19(A) of the Act, they will be able to refer to the Hansard record which will lead them in turn to the Stock Exchange Listing Rules.

Minister Lianne Dalziel and myself arranged this with the intention of providing greater certainty of interpretation for the benefit of New Zealand listed companies and that will of course only happen if the background set out above is made known to those companies and their advisors.

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