Effects of T'comms Statements on Securities Mkt

News Release

25 July 2006

Report on Effects on the Securities Markets of Statements Concerning Telecommunications

The Securities Commission has released a report of its inquiry into effects on the securities markets of statements made in May 2006 concerning telecommunications.

The inquiry considered the conduct and circumstances surrounding the release of the Government’s Telecommunications Stocktake Paper on 3 May 2006 (the Stocktake Paper), and comments reportedly made during a media interview on 15 May 2006 by Communications Minister, Mr David Cunliffe, regarding Telecom’s dividend policy.

The Commission concluded that:

- there was no evidence of any trading or tipping by persons who knew of the contents of the Stocktake Paper before it was made public;

- the actions of both Telecom and the Government were understandable in the unusual and difficult circumstances of the day;

- however there was an avoidable asymmetry of information in the market for just under 30 minutes while trading was underway on the Australian Stock Exchange (ASX). Both Telecom and the Government could have taken steps to avoid this occurring;

- the Minister and officials acted consistently with the current Cabinet guidelines for dealing with information about publicly listed companies. However those guidelines do not provide detailed guidance about announcing regulatory policy that might affect the price of specific listed securities;

- it is the Government’s prerogative to announce changes to regulatory policy, and it must consider the wider national interest as well as the interests of the securities markets when it does so;

- the comments made by the Minister on 15 May during his interview with Bloomberg were not based on any price-sensitive or confidential information about Telecom’s intentions or policies, nor did the Bloomberg reports of 16 May give the impression that his comments were based on information of that nature.

“We recommend that the Government engage with the NZX with a view to developing procedures and guidelines for disclosure by the Government of information that could be price-sensitive to listed securities, while accommodating the Government’s other legitimate concerns”, said division chairman Lloyd Kavanagh.

As a general point the Commission also recommends that all persons, including Ministers of the Crown, who may be presumed by the market to be in possession of non-public information about a listed issuer, exercise caution when commenting on matters that might affect the price of listed securities. It reminds market participants that reported comments may not be a complete or accurate reflection of what was actually said.

“The Commission considers that integrity and efficiency of the markets are best served through a well informed market with a high standard of disclosure, and when investors have equal access to material information, so that they can trade on the same information at the same time. Asymmetries in information in the markets can result in a deterioration of market integrity and investor confidence”, said Lloyd Kavanagh.

The Commission refers its report to the Prime Minister, as the person responsible for making decisions regarding Cabinet guidance for Ministers.

The executive summary of the report follows. A copy of the full report is available at www.sec-com.govt.nz .

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EXECUTIVE SUMMARY

1. The Commission’s purpose is to strengthen confidence in New Zealand's capital markets, both in New Zealand and overseas, and to foster capital investment in New Zealand by promoting the efficiency, integrity and cost-effective regulation of those markets. The Commission considers that integrity and efficiency of the markets are best served through a well informed market with a high standard of disclosure, and when investors have equal access to material information, so that they can trade on the same information at the same time. Asymmetries in information in the markets can result in a deterioration of market integrity and investor confidence.

2. The Commission has conducted an inquiry into the conduct and circumstances surrounding the release of the Government’s Telecommunications Stocktake Paper on 3 May 2006 (“the Stocktake paper”), and into comments reportedly made during a media interview on 15 May 2006 by the Communications Minister, Mr David Cunliffe, regarding the dividend policy of Telecom Corporation of New Zealand Limited (“Telecom”).

3. The Terms of Reference of the Commission’s inquiry are set out in Appendix A. In its inquiry the Commission considered whether:

(a) any person misused any price-sensitive information relating to securities contained in the Telecommunications Stocktake paper before that information was publicly available;

(b) any Government and/or state sector policies and procedures for handling non-public price-sensitive information relating to securities were appropriate and properly applied; and

(c) any person could or should have taken, or refrained from taking, any actions in respect of these matters to maintain the transparent and orderly functioning of the securities markets in New Zealand or elsewhere.

4. With regard to the events of 3 May 2006, the Commission has formed the following views:

(a) there was no evidence of any trading or encouragement to trade in securities by persons who knew of the contents of the Stocktake paper before it was made public;

(b) it is the Government’s prerogative to announce changes to regulatory policy affecting the businesses of issuers of securities. Similarly it is for Parliament to debate and enact (or decline to enact) legislation. Announcements of Government policy can naturally affect share prices. Accordingly, the fall in the Telecom share price due to the announced change in Government policy, was not of itself a cause for inquiry by the Commission;

(c) that Telecom would receive an unauthorised copy of the paper was unforeseen by either Telecom or the Government, and they each had only a few hours to decide how best to handle the situation. The actions of both Telecom and the Government were understandable in the unusual and difficult circumstances of the day. However, an environment was created in which there was an avoidable asymmetry in the information in the market, for just under 30 minutes while trading was underway on the Australian Stock Exchange (“the ASX”). Both the Government and Telecom could have taken alternative steps to avoid the risk of asymmetry of information in the market;

(d) there are circumstances when it may be appropriate for an issuer to call a trading halt to allow information to be distributed equally to the market, even though the issuer is not aware of the precise content of the information at the time the halt is called. It would have been appropriate for Telecom to have requested a trading halt on the ASX in time for it to be in place when the Minister’s announcement of the Stocktake Paper was made at 5.15 p.m. on 3 May;

(e) when the Government or a regulatory agency is about to release non-public price-sensitive information which can be expected to affect the price of the securities of a specific issuer during trading of those securities, it should facilitate that information entering the market in a way which allows trading halts to be called if appropriate. It would have been appropriate for the statement issued by the Minister at his press conference, or at least the fact that price-sensitive information was about to be released by the Government, to have been notified to Telecom and the New Zealand Stock Exchange (“NZX”). This would have allowed the NZX and Telecom to determine whether steps such as a trading halt should have been taken, including on the ASX, to ensure that the information was disseminated to the markets and thereby enabling an orderly and informed adjustment of the Telecom share price;

(f) the Minister and officials acted consistently with the law and with the current Cabinet guidelines for dealing with information relating to publicly listed companies. However the applicable Cabinet guidelines do not provide detailed

guidance about announcing regulatory policy that might affect the price of specific listed securities;

(g) the Commission recommends that the Government engage with the NZX with a view to developing procedures and guidelines for disclosure by the Government of information which could be price-sensitive to listed securities, while accommodating the Government’s other legitimate concerns. The Commission refers this report to the Prime Minister, as the person responsible for making decisions regarding Cabinet guidance for Ministers, to consider whether the Government wishes to take any action in this regard.

5. With regard to the Minister’s comments to Bloomberg on 15 May 2006 the Commission has formed the following views:

(a) the Minister is entitled to make comments to agencies that serve only a section of the market if the comments made are not based on any confidential or price-sensitive information. This is the case whether or not the Minister has confidential information, so long as this is not the basis of the comments;

(b) the comments made by the Minister on 15 May 2006 in the course of his interview with Bloomberg were not based on any confidential or price-sensitive information about Telecom’s intentions or policies, nor did the Bloomberg reports of 16 May 2006 give the impression that they were so based;

(c) it appears that some market participants assumed or guessed that the Minister did have confidential information that would affect Telecom’s dividend policy and traded on the basis of this. Trading of this nature occurs and does not of itself mean that the market has been improperly or unequally informed;

(d) the Commission reminds market participants that reported comments may not be a complete or accurate reflection of what was actually said;

(e) as a general point, the Commission recommends that all persons, including Ministers of the Crown, who may be presumed by the market to be in possession of non-public information about a listed issuer, exercise caution when commenting on matters that might affect the price of listed securities. Comments, especially if they are verbal, can be misinterpreted or quoted out of context, and disclaimers and qualifying statements may be overlooked or under-emphasised.

ENDS

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