Between the lines: Increased disclosure a step in the right direction

After countless discussion papers, submissions and Government promises, the insider trading regulations are finally going to be overhauled.

The proposed adjustments are not radical but they are a step in the right direction.

The main emphasis of the new legislation is increased disclosure. The New Zealand Stock Exchange has a continuous disclosure regime but it does not have the force of law.

Under the proposals, companies will be subject to statutory requirements and any breaches will be penalised. This will give disclosure rules far more teeth.

A requirement for directors to disclose their share dealings when they occur, instead of once a year in the annual report, is also a step in the right direction.

This is in line with overseas rules and will give investors a much better picture of whether directors are positive or negative about their firm.

The NZ Stock Exchange will also have a statutory obligation to provide information about breaches of securities law to the Securities Commission.

This sounds great in theory but the two organisations have often had a fractious relationship, particularly over insider trading.

Some years ago they had a heated debate over due diligence. They both supported due diligence but the commission argued that price-sensitive information supplied to one party during this process should be made available to all shareholders. The exchange believed that there was no need to make it public.

The exchange's requirement to provide information regarding regulatory breaches to the commission will be effective only if a good working relationship develops between the two organisations.

Finally, the commission will be given a public enforcement agency role in relation to insider trading. This is a radical development because the commission was moving away from its enforcement role under the chairmanship of Euan Abernethy.

The problem was funding. Enforcement is a costly business and the Government allocation was only $2.3 million last year. The Australian Securities and Investment Commission received $A135 million ($163 million ) and spent $A73 million on regulatory and enforcement issues.

As the Securities Commission has also taken on the secretarial functions of the Takeovers Panel, it will need at least $5 million to effectively fulfil its different roles.

Mr Abernethy retires at the end of June and it is critical that a determined and energetic individual replaces him.

If the new insider trading legislation is given teeth, the Securities Commission is well financed and a dynamic chairman appointed, then insider trading should become a far less serious problem in New Zealand.