Recent Tribunal Decision reinforces the importance of robust compliance practices
A decision from the NZX Markets Disciplinary Tribunal (Tribunal) at the end of July illustrated the importance that the market regulator places on robust compliance practices and processes.
In its decision, the Tribunal pronounced that an inadvertent breach of the rules, or one that does not provide any financial benefit or advantage to the issuer, does not relieve a listed company from its compliance obligations. The penalty for the breaches was a fine of $75,000 plus costs, and a public censure. The decision can be found here.
The matter concerned a company breaching the listing rules by:
- Failing to disclose promptly and without delay, a change in the status of an independent director; and
- Failing to have a majority of independent directors on its Audit Committee for a period of approximately four years.
The breaches were unintentional, and the company fully complied with the Tribunal’s investigation. The investigation stemmed from a complaint registered with NZ RegCo by an institutional investor. This illustrates that professional investors are increasingly aware of these rules, they regard them as being important, and are monitoring them closely.
The decision also reinforces what we have been discussing in recent editions: that an integrated, pro-actively managed and operationalised compliance programme is critically important for listed issuers. The following explanations from the Tribunal are relevant in this regard:
“Given the importance of a properly constituted Audit Committee, the Tribunal considered that [the] failure to comply … was a serious compliance breach which continued for an extended period”
“…the Tribunal was concerned by the ongoing lack of awareness of [the Rules]. [The company] had numerous opportunities to identify its error if compliance checks had been undertaken on the information included in its annual reports during the period it was in breach.”
“The penalty in this case could have been lower but for the deficiencies in [the company’s] compliance practices”
Companies cannot always rely on directors or senior operational management to cover matters like this. Often they are properly focused on strategy and execution, risk and the like, and so their focus is understandably less directed to these kinds of issues.
The Tribunal’s view of the significance and importance of compliance with these rules is illustrated by the ruling that the starting point for penalty considerations was a fine of $150,000. The Tribunal settled on a fine of $75,000 (a 50% discount for early admission; cooperation; good compliance history and steps taken to address the failures post investigation).
So, while some of these rules may feel as though they are simply ‘compliance’, failure to comply is clearly regarded as serious by the authorities that oversee them. And there are several other items within the NZX listing rules, the Companies Act and the Financial Markets Conduct Act that seem innocuous but which, if breached, can have serious consequences. In other words, they matter to investors and the regulators.
And with insurance becoming increasingly expensive, they matter to underwriters who are assessing the level of regulatory compliance risk when considering, structuring, and pricing cover for things like director, officer and statutory liability policies. Where they see non-compliance, they might well question whether underlying processes with respect to risk around matters such as continuous disclosure are in place and properly operationalised.
Here at Computershare, we support listed companies by helping to establish, operationalise and monitor systems that ensure compliance with listing rules. In addition, we perform the requisite checks and reviews of disclosures to give management and boards the confidence that their company secretarial and compliance needs are taken care of. If you would like to discuss our service offering, please contact us directly or through your relationship manager.
Charles Bolt
Head of Governance Services
Charles.bolt@computershare.co.nz
+64 21 889 533.