Conflict of interest worries for NZX

The New Zealand Exchange's refusal to disclose information on chief executive Mark Weldon's remuneration to its own watchdog has raised Securities Commission concerns about conflicts of interest between the market operator's regulatory and commercial roles.

The commission's first annual review of NZX's regulatory functions found its performance was good overall, but raised concerns about the way NZX regulated itself.

NZX is listed on its own sharemarket but remains the market's front-line regulator through its NZX Regulation division.

In the report, the commission, which co-regulates NZX's equities and debt markets, said it was widely recognised "that a listed exchange company's dual roles create the potential for conflicts of interest".

NZX, which has had an uneasy relationship with the commission, particularly in the wake of the collapse of Access Brokerage in late 2005, does not believe a conflict exists.

However it acknowledges that "the perception" of such conflicts exists "and is held in some quarters".

"While it is inevitable that the parties will not be in complete accord on every matter, we see this as a healthy aspect of the dynamics of the co-regulatory model," said NZX head of regulation Elaine Campbell.

NZX appears to have recognised potential for a conflict of interest by creating an independent Special Division which fulfils NZX Regulation's role in matters related to NZX itself.

But last year NZX sought a waiver from the Special Division to increase Weldon's remuneration, and when the division sought information about the matter, NZX declined to provide it.

NZX argued that it did not have powers to compel disclosure of information from other listed issuers and was therefore not obliged to provide the information itself.

In that instance the division obtained the information by other means and granted a waiver.

The commission said it did not consider it was appropriate for NZX to refuse access to the information.

"NZX should comply fully with all lawful requests and directions from the Special Division."

Commission chairwoman Jane Diplock said while NZX had deemed that the requested information wasn't relevant to Special Division's decision, that was for the division to decide.

The commission also found that "in practice NZXR does have the power to compel production of information by otherwise refusing to grant waivers where relevant and requested information is not provided".

Among its recommendations, the commission said that Special Division should ensure that it was fully aware of the powers available to NZX Regulation in respect of other listed issuers, and should exercise those powers as appropriate in relation to NZX.

Although the commission found that the Special Division had "operated adequately" during the review period, it had "not yet been tested in a significant matter".

"In light of ... NZX's refusal to provide requested information, we have reservations as to how the Special Division would deal with a contentious situation with NZX."

The commission also recommended strengthening the division's independence from NZX by restricting the NZX solicitor who liaises between NZXR and the division from performing corporate advisory work for NZX and also by formalising NZXR's support for Special Division.

Diplock said the "goodwill" of the current chairman had allowed the Special Division to carry out its functions so far. "But we think it needs to be regularised."

NZX is to take action on some of the recommendations with regard to Special Division and other areas of its regulatory activity but will "reconsider its position" on others.


Self-policing

NZX Regulation:
* Supervises the activities of listed companies and other issuers in relation to their compliance with listing rules.

Special Division:
* An independent body which "stands in the shoes" of NZX Regulation in matters relating to NZX.
* Comprises four NZX-appointed members who are approved by the Securities Commission.
* Is dependent on NZX for resources.