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New NZSE disclosure rules to go the full monty


Friday 29th November 2002

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From Sunday, the Stock Exchange will bring in a continuous disclosure regime, a move that could have major ramifications on how much information listed companies must tell the public.

Companies will have to reveal price sensitive information as soon as they becomes aware of it. It will bring the regime into line with Australia.

The aim -- to ensure information does not get out selectively. It is part of a wider Government push to stop insider trading and bolster confidence in the sharemarket.

Elaine Campbell, the Stock Exchange's legal counsel, says previously, companies have been required to make disclosures but not until the information becomes more important to investors than the company itself.

"The existing regime is that... the company is not required to disclose until that information is provided to a person who isn't under an obligation of confidence with respect to the information."

But companies with bad news in the current punishing climate may well have cause to rue the new rules.

Already this month, three New Zealand companies listed in Australia have seen the flipside of that country's eight-year continuous disclosure regime.

Baycorp Advantage shares initially tumbled 45 percent, after it forecast softer earnings growth and revealed a one-off $A10 million ($NZ11.4 million) legal cost.

Tower and Telecom are also reeling from investor beat-ups, Telecom losing 7 percent after foreshadowing a lower than expected first quarter result and Tower shedding 40 percent in one day.

When asked whether she was comfortable with downgraded market earnings estimates, Telecom chief executive Theresa Gattung remarked simply: "Well, the ASX continuous disclosure rules mean that we must at any stage, if we became not confident with the range of estimates, tell the market that."

New Zealand's new rules make it much tougher for a company to be subjective about whether information must be released.

Exceptions must meet a three-pronged test:

* reasonableness -- the material unreasonably hurts the company, or has no real benefit to investors

* confidentiality -- the secret is not in the possession of any person likely to use it on the share market or release it selectively.

* does the information fall in to one of five categories -- a breach of law, an incomplete proposal, a matter of supposition (ie. material that might need to go through an auditor), material generated for internal use, or a trade secret (such as a recipe or patent).

An argument against continuous disclosure is that the market can become more volatile if awash with price sensitive information. The trade-off is a level playing field for all investors.

"The rationale is that transparency enhances investor confidence," says Amy Geddes, a solicitor with Quigg Partners which is conducting seminars on the subject.

"You're closing that window where some people, maybe institutional investors, have information that would affect a price, where a retail investor who is not so sophisticated is coming into the market.

"I believe that there will be a transition period where it might be volatile until the market gets used to it and issuers understand when and what information they need to be releasing."

However, one of its major critics, ACT MP and former Securities Commission member Stephen Franks thinks the Government is wholeheartedly aping parts of complex Australian law which are unnecessary here.

New Securities Commission chairman Jane Diplock -- an Australian formerly with the Australian Securities and Investments Commission -- rejects that claim, but notes the benefits in harmonising with the country's closest neighbour, especially when it is a major source of capital.

"New Zealand needs to increase its domestic capital market and international capital flows into the country," she said.

"To do that we have to lower barriers."

Ms Campbell adds that CER is another factor.

"Given that we are so closely aligned with Australia in terms of dual-listed companies, it makes sense to provide them with a similar regulatory framework here to ease those compliance costs."

However, the need for increased disclosure could have backfire on the Stock Exchange if it's trying to encourage more companies to go public, warns Business Roundtable chief executive Roger Kerr.

"If you're in a high tech company or a biotechnology company, you'd be wanting to protect your R&D investors very carefully... You could easily see companies that wanted to steal marches on competitors might feel very hampered...and forced to go private."

Some in the broking business might also sympathise with the view of one local trader who felt the disclosure regime was a "retrograde step" for those in the consulting business.

"Obviously companies have got to keep the market informed but in terms of guessing what they're going to make or analysing it, that's part of the sharemarket.

"There has to be an opportunity to benefit from better written information and research than for people who don't bother to do it."

But that's not the view of the official body representing senior brokers, fund managers and other financial advisors.

"We're not here to protect the vested interests of individuals, we are here to ensure that markets work properly," said Paul Hocking, executive director of Infinz, the Institute for Financial Professionals.

Company directors also supported the move.

In a recent submission on insider trading, the Institute of Directors said increased disclosure was the "most effective restraint," above better detection, criminal penalties and enhancing the existing rules.

One aspect of the regim e causing contention across the Tasman is the "false market" rule -- a requirement that companies not allow trading to be perpetuated on false rumours.

The rule has always been in force here but in Australia, where disclosure rules are under review, companies are concerned they may have to prematurely reveal secret information just to deny "scuttlebutt".

Gervase Greene, a spokesman for the Australian Stock Exchange, says that's not the case.

"They don't have to unveil everything that's said or done ... It might be just sufficient to say `We're in talks with a few parties but no decision's been made'. Just so the market knows enough."

However, if a fairly detailed proposal is splashed all over a credible newspaper, Mr Greene says the confidentiality argument gets harder to justify.

"We do ask companies to manage their information. Ie. if you're going to brief 30 PR agencies, lawyers, advertising people, etc, etc, there's a fair chance it might leak." Companies are also not required to respond to an "antagonist", trying to force information out of an issuer by generating false information.

Reporters, take note, says Mr Greene, who believes business journalists should always weigh up the motives of anonymous sources .

After eight years, Mr Greene says the ASX does believe continuous disclosure works.

"It doesn't unfairly hobble business. It was never designed to put the shareholder in the boardroom...but you know, it's a balance and will always be a work in progress."

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