The Securities Markets Bill takes sharemarket law into cowboy country

Friday 22nd February 2002

It will have surprised no one that this week's report from the Stock Exchange's market surveillance panel gives Air New Zealand a clean, more or less, bill of health.

What may surprise some is the extreme rigour with which the panel approached its task. The report runs, with appendices, to 104 pages, took five months to prepare, and extends way beyond what Air New Zealand did and didn't disclose to the exchange in the run-up to last year's government bail-out.

At first glance the issues seem somewhat arcane, the sort of thing that will interest only regulatory theoreticians and rule-drafters.

But lurking in the background is the government's Securities Markets and Institutions Bill, a piece of legislation that proposes changes that will have a big effect on listed companies and market participants.

Investor and public relations professionals should be paying close attention.

The report makes it clear Air New Zealand, in an admittedly very difficult period up to September 20, struggled to meet the disclosure requirements of the exchange's listing rule 10.1.

The airline squeaked past the panel without attracting censure despite a barrage of criticism at the time that it kept investors in the dark.

The report says it "substantially" complied with 10.1 but notes there was some material it might have disclosed to the exchange but didn't, or disclosed via the news media instead.

The reviewers admit to some "unease" about the way things panned out and recommend the rules be clarified, and practice tightened up, on 12 fronts.

Companies, for example, shouldn't have to "fine tune" public forecasts as they go along but should avoid leaving in the market forecasts that have become misleading because conditions have changed.

That's a comment Fisher & Paykel Healthcare, which just shocked the market with a dog of a third-quarter result, would do well to take on board.

The report provoked a column from The Australian's Bryan Frith, who wondered whether the Australian Stock Exchange would agree with the local panel that Air New Zealand got it substantially right.

Frith pointed out the question was important for Air New Zealand and for the 22-odd other companies that will have to switch, after June 30, from "foreign exempt" ASX listing status to full compliance with Australian rules.

Frith essentially argued New Zealand's rules are too lax and should be toughened up to match the ASX's. And that, presumably, is exactly what the Securities Markets and Institutions Bill is designed to do.

The bill is part of the government's frankly stated push to "harmonise" our competition and securities regulatory regimes with Australia's.

Prime Minister Helen Clark has annoyed some by suggesting this is necessary to remove what she perceives as a Wild West image overseas. But the push is also, quite arguably, a pragmatic one that recognises that minnows like us can't compete for capital in the global market with a set of rules that is different from everyone else's.

Another argument - which, in Shoeshine's opinion, is stronger in regard to competition law than in the securities law arena - is that New Zealand isn't Australia or the US and needs regimes that reflect our unique position.

Whatever, worries are emerging that the disclosure requirements in the Securities Markets Bill go too far, exceeding even what the Aussies require.

In the February edition of Boardroom, the journal of the Institute of Directors, an article by Carl Hansen, a partner in law firm Buddle Findlay, points out 10.1 as it stands allows companies to withhold information where it has "greater value to the issuer ... for the information to remain confidential."

The ASX's rule 3.1 contains similar exceptions, for example, where information is confidential or concerns an incomplete proposal or negotiation.

The proposed new rules, Hansen says, contain no such exceptions, even though some were recommended in the Ministry of Economic Development's discussion paper.

There is a provision allowing companies to apply to the Securities Commission for exemptions but it's unclear how the commission will weigh such applications.

If they aren't granted, Hansen says, companies won't have any legal right not to disclose anything that is "material" - that is, anything "a reasonable person" would expect to influence investors to buy or sell a security.

That's the sort of thing likely to make overseas investors and financiers regard New Zealand's rules as bizarre and completely out of step with normal international practice. The effect will be the exact opposite of what the government intends.

Imagine, for example, explaining to your bankers that you have to disclose publicly highly sensitive financing negotiations because our law requires you to.

"Generally," the panel's report concludes, "the current disclosure rules are sensible and robust." If anything is to be read into that, it's that the panel agrees the bill needs rethinking.

The problem, some market-watchers reckon, is that the government has misunderstood the way the Australian regime was set up.

The ASX's listing rules, they say, were written by the exchange to reflect what market participants in general agreed was the most desirable way of doing things. Politicians then gave those rules statutory backing through the Corporations Law.

Our bill proposes to do things back to front. The politicians have decided what the best rules are, and market users and the exchange will have to live with whatever they decree.

The quality of the debate hasn't been helped by the fact the submissions period ran over the holiday season, closing on February 8.

That may explain why the Finance and Expenditure Committee has received only 15 submissions on what is a complex and wide-ranging piece of legislation with serious ramifications for listed companies and for financial markets.

It's not too late for those who will be affected to make their views known. The committee doesn't report back until June 4 and the bill isn't expected to come into force until the end of the year.

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