Disclosure of Interests by Directors and Officers: Regulatory Impact and Business Compliance Cost Statement
[ Last Updated 19 October 2007 ]
Regulatory Impact Statement
Glossary
Owing to the technical nature of these proposals, a brief glossary follows:
- public issuer - a party to a listing agreement with a registered exchange, (typically, but not always, a company) that issues securities to the public;
- relevant interest - in regards to a security, ownership of the security, the power to control the voting or disposal of the security, or the ability (now or in the future) to control the security in this way via a trust, nominee company, family members etc.;
- security - any interest or right to participate in any capital, assets, earnings, royalties, or other property of any persons, e.g. an equity security (share) or a debt security (debenture);
Background
Subpart 2 of Part 2 of the Securities Markets Act 1988 ("the Act") introduces a requirement that directors and officers of public issuers disclose relevant interests and dealings in securities of the public issuer and any related body corporate within five trading days of their appointment to the public issuer or any dealings in the securities of that issuer. However, Subpart 2 is not yet in force as time was needed to allow for the development and drafting of regulations that prescribe the form and content of directors' and officers' disclosure.
Statement of the Nature and Magnitude of the Problem and the Need for Government Action
There is a common perception, supported by anecdotal evidence, that insider trading and other manipulative practices take place in the New Zealand securities market, although it is impossible to identify the magnitude of the problem as the activities are carried out in secret. This harms the securities market as some investors are more reluctant to invest, as those "in the know" are able to exploit their advantage at the cost of other investors (or at least perceived to be able to do so). Other manipulative practices, for example, artificial trading to inflate the price of the security, may also damage the price of a security. As a result, the securities market becomes less attractive for public issuers as a means of raising capital than it would be with greater investor confidence. This in turn may impair the growth of public issuers as people are deterred from investing, harming the New Zealand economy generally.
A common method of combating these issues is to require the people who may be in a position to commit market manipulation or possess inside information to disclose both their interests and their trading activities. This helps to deter insider trading and market manipulation, as the dates of trades can be checked against that information enters the public domain. However, the disclosure regimes that are currently in place in New Zealand are inadequate:
The Companies Act 1993 contains provisions requiring the disclosure of directors' interests (sections 139-149). However there are several limitations with this regime:
- only directors are subject to the disclosure requirements, while the management of the company can often hold important information and therefore have an equal opportunity for insider trading;
- although directors disclose transactions to the Board of Directors and enter those details onto the interests register, the information on the register is only available immediately to current security holders, and then only on request. The information is also disclosed to the public in the annual report, however by then its is often out-of-date or irrelevant in terms of insider trading and market manipulation enforcement and to investors;
- the information is not available to past and future security holders;
- there is no set form for disclosure, so compliance costs are higher than necessary;
- the regime only applies to companies, not all issuers of securities; and
- the penalty for breach is a personal action by a security holder, limiting the effective enforcement of the regime.
The Listing Rules of New Zealand Exchange Limited ("NZX") also have requirements for directors of public issuers to disclose their relevant interests. These requirements were introduced following the passage of the Securities Markets Amendment Act. However these rules do not:
- include officers in the disclosure requirements;
- enable public enforcement of the regime by the Securities Commission;
- provide sufficient statutory penalties; nor
- ensure that any future registered exchanges operating in New Zealand have equivalent requirements.
Statement of the Public Policy Objective(s)
To improve the efficiency and effectiveness of the securities market by ensuring that information about insiders' interests in public issuers is up-to-date and useful to the securities market, and where changes have occurred there is sufficient information to enable investors to readily understand the nature of the changes.
Statement of Feasible Options (Regulatory and/or Non-Regulatory) That May Constitute Viable Means for Achieving the Desired Objective(s)
Status Quo - Companies Act 1993
- Only directors must disclose interests in securities;
- The information is disclosed in annual reports and in the company's interests register;
- The information is only available to current security holders;
- There is no set form for disclosure;
- The regime only applies to companies; and
- Breach may result in personal civil actions for damages.
Status Quo - NZX Listing Rules
- Only directors must disclose interests in securities;
- The information must be disclosed to NZX (which makes the information available to the securities market) within five days of acquiring or disposing of an interest;
- The information is available to the securities market generally;
- There is a set form for disclosure;
- The regime applies to all listed entities;
- Breach may result in NZX disciplinary action arising contractually; and
- Based on Subpart 2 of Part 2 of the Securities Markets Act 1988.
Maintaining the status quo will not achieve the policy objective. The disclosure requirements only apply to directors, not officers who often hold inside information too. The status quo does not have effective public enforcement or appropriate penalties to encourage compliance, nor would it cover issuers operating on any registered exchange established in the future.
Preferred Option: Bring Subpart 2 of Part 2 of the Securities Markets Act 1988 into Effect and Create Regulations for the Form and Content of Disclosure by Directors and Officers of Public Issuers
- Both directors and officers of a public issuer must disclose all their interests and trades in securities of that public issuer;
- Officer is defined broadly as anyone "who is concerned or takes part in the management of the public issuer's business," however, this is narrowed by exempting from the definition:
- persons who do not directly report to either:
- the Board of Directors (or equivalent) or
- the Chief Executive Officer (or equivalent);
- persons who do not directly report to anyone described in (a); and
- persons who do not manage a significant business unit, division or function of the public issuer;
- The information must be disclosed to the securities exchange on which the public issuer is registered within five days of: the Subpart coming into force, or any trades in the securities of the public issuer;
- The information will be available to the securities market generally;
- There will be a clear, prescribed form for disclosure;
- Breach may result in criminal sanctions and/or individual security holder actions;
- The regime will be enforced by the Securities Commission; and
- The regulations will contain exemptions for situations where the compliance costs of disclosure are not outweighed by the level of usefulness of the information to the securities market.
No non-regulatory options were considered. NZX's disciplinary power arises contractually through an agreement between it and a public issuer in the course of the public issuer's listing. NZX believes that it cannot extend the disclosure requirements below directors of a public issuer, hence "officers" would not be included in the regime.
Statement of the Net Benefit of the Proposal, Including the Total Regulatory Costs (Administrative, Compliance and Economic Costs) and Benefits (Including Non-Quantifiable Benefits) of the Proposal, and Other Feasible Options
Government
This proposal has no additional fiscal implications for Government. Funding for the Commission's increased enforcement role arising out of the directors' and officers' disclosure regime was included in the $1.056 million funding increase approved in the 2002 Budget to enable the Commission to carry out a range of new functions proposed under the Securities Markets and Institutions Bill. The regime will make it easier for regulators to monitor and enforce insider trading and market manipulation, and bring New Zealand into greater accord with international principles and standards.
Securities Market
The proposed changes will give the securities market more timely and relevant information about directors' and officers' dealings in securities and the nature of those dealings and, in doing so, act as a deterrent to market manipulation and insider trading. The regime will make it easier for regulators to monitor and enforce insider trading and market manipulation, as the dates of trades can be checked against the date the information was released. It also promotes transparency in securities dealings and good corporate governance. Investors should therefore have greater confidence in investing capital. This in turn may make the securities market a more effective and attractive means for entities to raise capital.
Directors will see little change in costs, as they are already required to disclose under NZX Listing Rules, which are based on the statutory requirements. Officers are not currently subject to the regime and so will face increased compliance costs. Although in theory the obligations fall on the individuals, in practice it may often be the public issuer/employer of the individuals that meets the compliance costs of disclosure. This is further discussed in the Business Compliance Cost Statement below.
General Economy
An effective and enforced disclosure regime will increase confidence in the New Zealand securities market. The benefits to investors and public issuers that stem from this will flow through to general economic activity.
Statement of Consultation Undertaken
The proposals were contained in a Ministry of Economic Development discussion document released to the public (including relevant parties in Australia) in May 2003.
The following government departments and agencies were consulted: the Department of the Prime Minister and Cabinet, the Treasury, the Ministry of Justice, Te Puni KÅkiri and the Securities Commission. NZX was also consulted.
All submissions generally supported the proposals. The only major issue was in relation to the exemptions from the "officer" definition. A variety of submissions indicated that, on its own, it is too broad. The eventual exemption chosen addresses these concerns by providing a reasonably high degree of certainty.
Business Compliance Cost Statement
Although the obligations of disclosure theoretically fall on individual directors and officers, in practice the obligations may be met by the public issuer/employer. However, it will be the individual public issuers and its methods of employment that will largely determine who actually meets the obligations. This applies in particular to directors whose direct level of involvement may not be significant. In this sort of situation, it is unlikely the public issuer will file notices on their behalf.
The major compliance costs will be one-off transitional costs involved in becoming familiar with the new system. This also includes (from a public issuer perspective) identifying its "officers," which, depending on the individual public issuer, may be the most significant cost. In a typical scenario, the definition of officer and the exemption proposed should make it quite simple for a public issuer to identify its officers, however less traditional structures may face more costs. There will also be slight ongoing costs in the requirement to complete the requisite form when changes in security holdings occur. Depending on the nature of any individual interest, some persons may wish to seek professional advice in completing a disclosure notice. This should only apply to large or complicated interests.
The proposal will affect all directors and officers of the 217 public issuers, and therefore (depending on the issuer and the method implemented to meet the disclosure requirements) the public issuers themselves.
Compliance costs for directors (either on themselves or their public issuer) will be minimal, as they are already subject to very similar disclosure requirements under NZX Listing Rules. Officers, or public issuers on officers' behalf, will face more substantial costs. Once familiar with the requirements however, the cost of complying for both groups should be minimal. The form for disclosure will be easy to complete and straightforward. The number of times a disclosure notice needs to be filed depends on the trading activity of any individual. Both the New Zealand and Australian Stock Exchanges have indicated compliance costs will be minimal.
Any requirements will be well publicised and explained, with particular emphasis on informing all public issuers. A transition period of three months (minimum) will be given for those affected to understand the new regime before it comes into force. The form for disclosure has been consulted on extensively and should be easy to complete. It is anticipated that NZX will modify its Listing Rules (in relation to directors) and form for disclosure so as to reflect the statutory regime. Therefore a notice filed by a director under either regime will satisfy the requirements of both. Further exemptions from the regime have been included where the compliance costs of disclosing are too onerous and the information provided would not be of use to the securities market, or where there are comparable disclosure requirements under other provisions already in place.
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