Inquiry begins into NZX flip-flop

File photo / Kenny Rodger

The Securities Commission has begun an investigation into the trading of Allied Farmers shares after the New Zealand Exchange released information on the company joining the top 50 index to a select group of subscribers and then changed its mind, sending the share price on a roller coaster ride.

NZX told institutional investors who subscribe to its pay-per-view NZX Index Memo service last Monday that Allied Farmers would be promoted to the NZX-50 and related indices effective from February 22.

The company's share price soared last week as institutional investors bought up shares in anticipation of the promotion to the index but then plummeted after the NZX rescinded on its decision on Friday.

Allied Farmers was a relatively small company until it took over Hanover in a debt-for-equity exchange last year.

Most of its shareholders are ordinary investors, some of which have never invested in shares before.

A spokesman for the Securities Commission said it was investigating issues relating to the release of information by the NZX on Allied Farmers.

"NZX regulation is referring the matter to us."

He said it was too soon to comment on the nature of the investigation.

A spokeswoman for the NZX said it had made the referral because it wanted to ensure that the Securities Commission had an "adequate view" of the situation.

It was the first time the stock market regulator had referred itself to the commission, she said, although it talked to the commission on a regular basis.

Asked why it had referred this issue she said: "We thought, well, there has been enough interest so we ought to refer it to the commission."

New Zealand Shareholders Association chairman Bruce Sheppard said the case had put the issue of price-sensitive information being sold in sharp relief and he had written to NZX chairman Andrew Harmos about it and other matters.

The matter exposed the conflict between NZX being a commercial company and a market regulator and the conflict in its regulation of itself.

In its second attempt to explain its change of heart with the index decision, NZX said the monthly index memo was distributed to a wide group and the distribution of index-related information via these channels was a common global practice.

"Index information does not originate from the issuer. As such it falls into the category of broader market-related information that is factored into investment decisions and or recommendations."

Allied Farmers' chief executive Rob Alloway said information which was material to security should not be included in a subscriber service unless it was also distributed publicly.

"As a market operator you can't sell that stuff," he said.

The Government is investigating the idea of merging the Companies Office, Securities Commission, and the NZX Disciplinary Tribunal into a new market conduct regulator because the existing agencies failed to protect investors from finance companies' collapses. The idea was suggested by the Capital Market Development Taskforce.

Allied Farmers shares closed down 0.5c to 10.5c yesterday while NZX shares closed down 1c on $2.03.