The Financial Markets Authority’s investigation into the failure of Wynyard Group highlights a gap in the rules around continuous disclosure that could catch out listed issuers if they fail to review disclosure processes ahead of rule changes in January.
The recently released FMA report on the conduct of Wynyard and its directors leading up to the company’s failure has concluded that the regulator will not pursue enforcement action against Wynyard despite concerns that Wynyard may have contravened its continuous disclosure obligations. The decision casts a spotlight on a soon-to-be-closed gap in the NZX Listing Rules where the lack of actual knowledge by directors and senior managers of potentially market-sensitive information has meant continuous disclosure rules have not been breached.
The findings also serve as a warning. Listed issuers that fail to review their own policies and procedures to make sure they will quickly identify relevant information, escalate it and then disclose it to the market will be at risk of falling foul of the FMA once new rules take effect.
New NZX Listing Rules – closing the gap
New NZX Listing Rules that will apply from 1 January 2019 (subject to a six-month transition period) will close the gap through the introduction of a constructive knowledge test.
Under the new rules, issuers will be required to disclose price sensitive information to the market when a director or senior manager “has, or ought reasonably to have, come into possession of the information in the course of performance of their duties”.
The updated NZX Continuous Disclosure Guidance Note states that the introduction of this new constructive knowledge element is to ensure that issuers have appropriate systems and controls in place so that price sensitive information is brought to the attention of senior management efficiently.
The Wynyard Report
The report contains some useful insights into the FMA’s views on how it expects issuers to engage with their continuous disclosure obligations and includes a number of recommendations, particularly for early stage issuers. Some of the key points raised include:
Substantive board discussions: formal processes and external advice are not a substitute for upfront, detailed and considered assessment by the board as to whether or not particular information is price sensitive.
"Enquiring mind": the board must apply an “enquiring mind” to information received from management. The board must turn its mind to the market's expectations and should proactively anticipate the (potentially changing) information needs of the market at any given time. This is of particular relevance to early stage issuers who have a limited track record and high-growth aspirations. Equally, the threshold for materiality will be significantly lowered for issuers in financial difficulty where incremental changes could have significant importance.
Adequate minutes: contemporaneous minutes should adequately record the discussion that has occurred about continuous disclosure. The record of finely-balanced decisions will necessarily be more fulsome. Detailed minutes provide an important piece of assurance that comprehensive discussion occurred; otherwise, failure to record the discussion exposes the board to the risk that it will not be able to demonstrate compliance at a later date.
Sufficient context: announcements should provide sufficient context. Early stage issuers should provide appropriate context to the market. This will include at times considering a range of potential scenarios which sit behind any guidance.
What steps should issuers take to ensure compliance?
The FMA's findings from its investigation into Wynyard Group's compliance with its continuous disclosure obligations and the impending changes to the NZX Listing Rules will require all issuers to review and re-assess how they manage their own continuous disclosure obligations.
We recommend issuers:
review their market disclosure policies and systems to ensure that adequate procedures, systems and controls are in place to ensure potentially price sensitive information is identified, considered by the right people and then, if necessary, disclosed promptly and without delay;
review their minute-recording processes to ensure that sufficient internal documentation recording the discussions and decisions made by the board and the executive team are retained;
review their reporting lines to ensure information is sifted and disseminated upwards in a timely manner;
review their internal training so that all employees are aware of the importance of reporting information in their business area to the correct person;
consider implementing whistle-blowing protocols for employees to report breaches of internal controls so as to minimise the risks of information being hidden; and
consider creating a continuous disclosure committee to ensure an efficient consideration and approval process for announcements responding to unexpected developments.
We would be happy to discuss these recommendations with you in more detail, and assist you with transitioning to the new listing rules regime. Please contact your usual Bell Gully adviser or any of the partners listed above.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.