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• 4. Increased Disclosure

• Financial Sector Policy

• Securities Law, Securities Markets Law and Settlement Systems

• Review of Securities Legislation

• Discussion Documents

• Introduction
• Option 1: Statutory Continuous Disclosure
• Option 2: Reporting of Securities Purchases and Sales by Company Officers
• Questions for Submissions

Introduction

4.1 As noted in paragraph 1.6, insider trading involves trading in securities with the benefit of information that is not publicly available. One means of reducing the likelihood of such trading is to increase the obligations on issuers of securities and directors to make price-sensitive information publicly available. Disclosure of material information to the public is already the basis of much of New Zealand's securities laws.

4.2 Increasing the information disclosure requirements will not, of course, be a complete answer, as there will always be circumstances where price-sensitive information is not disclosed either for lawful reasons or despite the law.

4.3 The following non-exclusive options have been identified for improving the disclosure of price-sensitive information by issuers of securities and directors:

Option 1: Statutory continuous disclosure;

Option 2: Reporting of securities purchases and sales by company officers.

Option 1: Statutory Continuous Disclosure

Introduction

4.4 New Zealand law does not presently require continuous disclosure of material information by issuers of securities and company officers, although there is a requirement to disclose all material information while a public issue of securities is open for subscription², and there is provision for a periodic disclosure regime to be implemented by regulations under the Securities Act 1978. The NZSE Listing Rules contain comprehensive requirements relating to the disclosure of price-sensitive information. Australia has a statutory continuous disclosure regime, and this may provide a possible model for adoption in New Zealand.

Present New Zealand requirements

4.5 New Zealand law, and the NZSE Listing Rules, already include a number of information disclosure requirements.

4.6 Under the Securities Act 1978 and the Securities Regulations 1983 -

• companies and other issuers of new securities to the public are required to produce a prospectus³ (which must be registered with the Registrar of Companies) and an investment statement⁴ (which must be given to every investor). The prospectus and investment statement must contain detailed information prescribed in the Securities Regulations;
• issuers of securities to the public must provide specified documents and information to investors and prospective investors on request;
• a periodic disclosure regime is provided for in the Securities Act, but regulations implementing this regime have never been made.

4.7 Under Part II of the SA Act 1988, a person who holds 5% or more of the voting securities of a public issuer must give notice of his or her holding to the public issuer and the NZSE. The person must also notify changes in his or her holding of 1% or more. The public issuer must state the names of all such persons and their holdings in its annual report.

4.8 Under the Companies Act 1993 -

• companies are required to prepare, and send to shareholders, annual reports containing information specified in the Act;
• as noted in paragraph 2.3, directors of companies are required to disclose share dealings to the board, and these disclosures must be entered in the company's interests register and disclosed in the next annual report.

4.9 Under section 10 of the NZSE Listing Rules -

• public issuers have comprehensive obligations to disclose price-sensitive information and other information to the NZSE, which in general will immediately release it to the public. In particular a public issuer must immediately disclose price-sensitive information to the NZSE for public release as soon as -
• the value to the issuer in keeping the information confidential ceases to exceed the value to the issuer's shareholders in having the information; or
• the issuer is unable to keep the information confidential to itself;
• the shareholdings of directors and associated persons in a public issuer must be disclosed in the issuer's annual report.

Australian law

4.10 The Australian Corporations law prohibits a listed company or other entity from intentionally, recklessly or negligently contravening the listing rules of its stock exchange by failing to notify the exchange of information that is not generally available and that a reasonable person would expect to have a material effect on the price of the shares or other securities. Any contravention that is intentional or reckless is an offence.

4.11 The ASX Listing Rules require a listed company or other entity to immediately tell the ASX once it becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price of its shares or other securities. However this rule does not apply if a reasonable person would not expect the information to be disclosed and the information is confidential and -

• it would be a breach of the law to disclose the information; or
• the information concerns an incomplete proposal or negotiation; or
• the information comprises matters of supposition or is insufficiently definite to warrant disclosure; or
• the information is generated for the internal management purposes of the entity; or
• the information is a trade secret.

4.12 The Australian Corporations law creates a similar offence in respect of companies and other entities that are not listed on a stock exchange but that have issued securities of a certain kind.

Comment

4.13 Laws on insider trading are a means to the end of preventing insider trading from occurring. One way to reduce insider trading is for public issuers to publicly disclose all price-sensitive information in a timely manner, thereby reducing the opportunities for those "in the know" to obtain a benefit from the use of undisclosed information.

4.14 Continuous disclosure requirements can assist in achieving both market efficiency and market integrity objectives. The timely disclosure of material information could reduce search costs and assist investors to make informed investment decisions, and could also encourage investors to have confidence in the integrity of the market by helping to counter insider trading, the creation of false markets, and the distortion of markets through rumours.

4.15 It is obviously not reasonable to require public issuers to publicly disclose all material information as soon as they obtain or become aware of it. There are many circumstances where it may be appropriate for a company to keep such information confidential, and this is the reason for the exceptions referred to in paragraph 4.11 from the Australian disclosure requirements. These exceptions may be appropriate for inclusion in any New Zealand law requiring continuous disclosure. The disclosure requirements in the NZSE Listing Rules, which are referred to in paragraph 3.9 should also be noted in this context.

4.16 If a continuous disclosure regime is to be introduced into New Zealand law, the question of remedies and penalties for failure to observe the law will need to be considered. In Australia, there are the following remedies and penalties:

• the ASIC can prohibit trading in the securities;
• the ASX or another person can seek a court order to compel the issuer to disclose the information;
• the ASIC or a person who has suffered loss as a result of the contravention can claim damages. The measure of damages is the amount necessary to place the applicant in the position that it would have been in had the contravention not occurred;
• the court can make orders setting aside transactions that occurred on market at a time when the price of the securities was distorted by the failure to disclose the information;
• a failure to disclose that is intentional or reckless is an offence punishable by a fine or (in the case of a individual) imprisonment.

4.17 The introduction of a statutory continuous disclosure regime in New Zealand may involve additional compliance costs for those issuers to whom the law applies. If the law applies only to listed issuers, then the increase in compliance costs is likely to be minimal as these issuers already have a continuous disclosure obligation under the NZSE Listing Rules. However, if the law is to apply to all issuers, there may be more significant costs for unlisted issuers who are not presently subject to any form of continuous disclosure regime (except while they have a public issue open for subscription - see above).

4.18 If a continuous disclosure regime of the kind included in the Australian Corporations law is to be introduced into New Zealand law, the method of introduction will need to be considered. The options will include -

• adding such a regime to the SA Act. This would mean that the regime would, under the current provisions, apply only in respect of listed issuers, who are already familiar with the concept of continuous disclosure by virtue of the NZSE Listing Rules;
• adding such a regime to the Securities Act 1978. This Act applies to all issuers, including unlisted issuers. The concept of continuous disclosure is not as familiar to unlisted issuers as it is to listed issuers (although, as noted above, unlisted issuers have a form of continuous disclosure obligation while they have a public issue open for subscription).

Option 2: Reporting of Securities Purchases and Sales by Company Officers

Introduction

4.19 New Zealand law already requires company directors to disclose share purchases and sales to the board of the company, which must enter the transactions in the company's interests register and disclose these entries in the company's annual report. Other countries, including Australia, require public disclosure of these transactions at the time they are made. The perceived benefit of this requirement is that immediate public disclosure is a deterrent to improper trading.

Present New Zealand requirements

4.20 Section 148 of the Companies Act 1993 requires a director of a company who acquires or disposes of a relevant interest in shares in the company to forthwith disclose to the board, among other things, the number of shares acquired or disposed of and the consideration paid, and ensure that the particulars disclosed are entered in the company's interests register. Section 208 of the Companies Act requires every company to prepare an annual report and send a copy of the report to each shareholder (unless the shareholder elects not to receive one). An annual report must, among other things, state particulars of entries in the interests register made during the year to which the report relates.

4.21 As noted in paragraph 4.9, the NZSE Listing Rules provide that the shareholdings of directors and associated persons in a public issuer must be disclosed in the issuer's annual report.

Australian law

4.22 The Australian Corporations law requires a director of a listed company to notify the company's stock exchange of the shares or other securities of the company or a related body corporate that the director holds or has a relevant interest in. The director must notify the exchange within 14 days of any change in the director's holdings.

USA law

4.23 In the USA, the Securities Exchange Act 1934 requires that, upon becoming an officer, director, or 10% equity shareholder of a listed issuer, an individual must file with the SEC and any relevant stock exchange, a report disclosing the number of shares beneficially owned. Thereafter, in any month where there is a change in beneficial ownership, a statement must be filed with the SEC and the stock exchange within 10 days of the end of the month. Small acquisitions not exceeding $10,000 in market value are not required to be disclosed in this manner, but must be disclosed on an annual basis.

Comment

4.24 The present New Zealand law requiring disclosure of share transactions applies only to company directors. While "director" has an expanded meaning in the Companies Act, it does not include executives and other employees of a company who do not "occupy the position of" or "exercise the powers of" directors. It could be impracticable to require all employees of a company to disclose share transactions, however, it may be that senior executives should be subject to the same kind of disclosure as directors. If this suggestion were to proceed, it would be necessary to define the class of senior executives to whom this requirement would apply.

4.25 Under present New Zealand law, directors' share transactions are required to be notified to the board of the company "forthwith" but are not required to be notified to shareholders until the company's annual report is distributed, which may be more than a year later. Further, the transactions may not be notified at all to persons who cease to be shareholders after the dates of the transactions but before the annual report is distributed. While the present disclosure requirements may inhibit improper share trading by directors, it is likely that an obligation to forthwith give public notification of such transactions could be a greater restraint on improper trading.

4.26 Any additional disclosure requirement involves some additional cost for those who have to make and receive the disclosure. The costs of the additional disclosure need to be balanced against the perceived advantages of requiring disclosure.

4.27 Under the Companies Act 1993, while a director has an obligation to ensure that the required information relating to his or her share transactions is entered in the company's interests register, failure to comply with this obligation may result in a personal action by a shareholder against the director, but not in a prosecution for an offence. It is doubtful whether any shareholder would have sufficient personal incentive to bring a court action to require compliance with the SA Act except in exceptional circumstances. It has been suggested that failure to comply with this obligation should constitute an offence with a penalty within the range of penalties set out in the Companies Act 1993. This range is a fine of $5,000, a fine of $10,000, a fine of $50,000 or two years' imprisonment, and a fine of $200,000 or five years' imprisonment. The current penalty for failing to disclose interested transactions between directors and the company under section 140 of the Companies Act is a fine of $10,000.

Questions for Submissions