NZX is reviewing the penalty provisions available to the NZ Markets Disciplinary Tribunal (Tribunal) and is seeking submissions from interested parties.
The Tribunal is an independent regulatory body whose principal role is to determine whether there have been breaches of NZX’s rules for matters referred to it by NZX Regulation. If the Tribunal determines that a breach has occurred, it must then assess the appropriate penalty.
The objectives of the review are to:
- seek feedback on whether the Tribunal has been imposing appropriate penalties in relation to breaches of NZX’s rules;
- ensure that the Tribunal’s rules and procedures allow for appropriate penalties to be imposed by the Tribunal, and guidance in relation to the application of penalties;
- consider implementing an infringement notice regime to deal with minor breaches; and
- consider implementing a penalty regime imposing personal liability on directors and officers for issuer breaches.
We will be making submissions to NZX on the review, with submissions due by 29 May 2015.
We describe the key points in further detail below.
Penalty bands and financial penalties
NZX can seek financial penalties against issuers, market participants and certain responsible individuals within market participants for breaches of NZX’s rules. The range of financial penalties available is as follows:
- for issuers – a fine up to $500,000; and
- for market participants – a fine up to $500,000, plus an additional fine three times the amount of any profit made by the market participant.
The financial penalty that is imposed by the Tribunal for breaches of NZX’s rules is determined by reference to ‘penalty bands’. Each of the penalty bands provides examples of types of breaches and the recommended financial penalty for such breach. For example, a failure to obtain required approval from NZX falls within penalty band 2 and the recommended range of financial penalty is up to $10,000.
NZX considers that a weakness of the current approach is that it may not always be appropriate for all breaches falling within a particular category to be treated the same way. For example, a one-off failure to obtain required approval may not necessarily be considered serious. But, if this formed one of a number of breaches, then the overall conduct may be viewed more seriously.
NZX has also reviewed the financial penalties applied to breaches referred to the Tribunal and has observed the following:
- penalties imposed by the Tribunal have generally fallen within the lower end of the penalty bands guidance, and the lower end of overall available financial penalties;
- cases referred to the Tribunal can generally be grouped into broad categories. However, these broad categories do not always align with the existing penalty bands and some of the existing penalty bands are not currently being used; and
- the guidance currently available in relation to the application of particular penalty bands is unclear.
Given the above, NZX is proposing to amend the penalty bands according to overall conduct, having regard to the aggravating and mitigating factors, as well as the type of obligation breached. This may be approached as follows:
Penalty band 1 - Minor Breach
Breaches which indicate minor compliance failings and which generally have no material market or shareholder impact
Up to $50,000
Penalty band 2 – Medium Breach
Breaches which indicate more than just a minor compliance failing and which have the potential, but which have not necessarily had, a material market or shareholder impact
Up to $100,000
Penalty band 3 – Serious Breach
Intentional breaches and breaches which indicate significant compliance failings and/or which have had a material market or shareholder impact (such as periodic reporting or failing to obtain shareholder approval for a transaction)
Up to $500,000
This approach is considered to allow greater flexibility in relation to the financial penalty which could be imposed based on an assessment of all of the circumstances of a case (eg the market impact, type of obligation breached, compliance history).
NZX also observes that the broad financial penalties currently available are not significantly out of line with the penalties available to other comparable disciplinary regimes. However, NZX is considering whether it is appropriate to seek financial penalties in all cases referred to the Tribunal. This is because of concerns that financial penalties imposed on issuers can adversely impact shareholders twice (ie from the conduct that caused the breach and the fine imposed) and that there may also be breaches that an issuer has less control over (eg breaches of corporate governance requirements when a director resigns on short notice).
Naming of issuers and marking participants
NZX's current position is that when referring a matter to the Tribunal it will generally seek the public censure of an issuer or market participant in relation to breaches of NZX's rules. However, NZX does not do so in relation to some of the minor breaches referred to the Tribunal. NZX sees two possible options in relation to this position.
The first option is to maintain the existing approach. NZX would retain discretion in relation to when it seeks a public censure and respondents would continue to be able to oppose any request for public naming through the Tribunal process. The Tribunal would also retain discretion in relation to when it uses its powers to censure or name respondents. However, if this approach is maintained, NZX considers that it may be appropriate to incorporate the Tribunal’s existing policy on naming market participants into the NZMDT Rules or NZMDT Procedures.
The second option is to include additional guidance within the NZMDT Rules and NZMDT Procedures outlining when respondents should be named. NZX considers that a benefit of this approach would be that more certainty could be provided in relation to the circumstances in which the Tribunal might impose a public censure (eg specific types of conduct), and therefore more certainty in relation to the circumstances in which NZX would seek such an outcome.
Penalties against directors and officers of issuers
The Tribunal is currently permitted to publicly censure directors or issue public statements that identify directors or officers in relation to breaches by issuers. However, NZX does not generally seek the naming of directors or officers in relation to issuer breaches, except in unique circumstances where the conduct of a director or officer resulted in a breach by the issuer. NZX is considering whether this approach is appropriate and considering whether it should be required to join directors and officers to a proceeding before exercising such powers.
The Tribunal is not currently permitted to impose financial penalties on directors or officers in relation to breaches of NZX's rules. NZX is considering whether it is appropriate, and in what circumstances, a director or officer should be held financially responsible for the actions of an issuer.
NZX notes that a penalty regime imposing personal liability on directors and officers for issuer breaches may act as a disincentive for individuals to participate in the management and governance of listed issuers. Considering that there are other regimes which impose liabilities upon directors (eg the Companies Act 1993 and the Financial Markets Conduct Act 2013), NZX questions whether there is a need for a separate penalty regime for directors within the NZMDT Rules.
Finally, NZX notes that if this proposal was implemented, it would require a significant change to NZX's rules, which would need to be dealt with as part of a broader consultation process.
Infringement notice regime
NZX is proposing to introduce an infringement notice regime to deal with minor breaches of NZX's rules that have the following characteristics:
- there is undisputed evidence of a rule breach;
- a penalty is appropriate in relation to that breach; and
- the breach is less serious and therefore attracts a lower penalty.
Under this regime, NZX would be permitted to impose capped fines on respondents subject to limitations on these powers. NZX notes that a disadvantage with this approach is that respondents would not get an automatic right to a hearing before the Tribunal. However, it considers that this risk could be mitigated with effective controls by ensuring that the breaches which may be dealt with by this approach are restricted to relatively small financial penalties for minor breaches and by creating a process by which a respondent can have a matter reviewed by the Tribunal if it disagreed with the outcome proposed by NZX under this approach.
The proposed changes form part of a review by NZX to ensure that the penalty provisions available to the tribunal remain fit for purpose. In general, the changes are designed to ensure that both issuers and the Tribunal have sufficient guidance when considering matters relating to application of penalties. However, the proposal to financially penalise directors and officers in relation to breaches of NZX rules represents a significant shift in policy which directors and officers should be aware of.
The closing date for submissions is 29 May 2015. Development of any proposed amendments is proposed for June/July 2015 with consultation on proposed rule amendments in Q3 2015. Rule amendments are then estimated to become effective in Q4 2015.
A copy of the review is available on the NZX website.
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