Proposed securities regulation changes released

Changes to make it easier for businesses to raise capital are a step closer with the government's release in April 2009 of a discussion document on proposed changes to securities regulations. The discussion document, which highlights proposals to improve flexibility for issuers, is a response to the recommendations of the government-appointed Capital Market Development Taskforce. In this article, consultant Andrew Brown and senior associate Stephen Layburn outline the proposed changes.

The discussion document addresses both the Capital Market Development (CMD) Taskforce's headline recommendations aimed at making securities disclosure more meaningful, as well as the CMD Taskforce's recommendation for urgent implementation of the Securities Commission's modernisation study and resulting recommendations dating back to 1999-2000.

KEY CHANGES

The major amendments proposed in the discussion document are outlined below.

Financial statements

The discussion document proposes that the Securities Regulations be changed to require financial statements used in prospectuses for offers of equity, debt or participatory securities to be prepared in accordance with New Zealand International Financial Reporting Standards (NZIFRS), which is the requirement under the Financial Reporting Act 1993. Currently, the content requirement prescribed by the Securities Regulations for the financial statements that are to be contained in a prospectus differ from those under the Financial Reporting Act. This can lead to issuers having to prepare two different sets of financial statements. The change is expected to be welcomed, and should reduce compliance costs.

Definition of borrowing group

In the context of an offer of debt securities, the Securities Regulations currently require disclosures in relation to the borrowing group - being the issuer of the debt securities and any guaranteeing subsidiaries. However, many issues of debt securities include guarantees by parent and sister entities, which do not presently fall within the meaning of the "borrowing group". Consequently, a change is proposed to the Securities Regulations to include disclosure about guaranteeing parent and sister entities to ensure proper disclosure about all entities that are guaranteeing the issuer's obligations.

Prospective financial information

The Securities Regulations currently require prospectuses for initial offerings of equity securities to contain a prospective statement of cash flows for the next 12 months, rather than full prospective financial statements. This requirement has been heavily criticised on a variety of levels, including that it does not provide meaningful information. A recommendation has been made to require full prospective financial statements.

Disclosure of interests

A proposed change to ensure that the disclosure of directors', promoters' and managers' interests is consistent across all types of securities offerings (including equity, debt, unit trusts, life insurance policies and superannuation schemes) has been recommended. At present, differing disclosure obligations for different kinds of issuers contributes to a lack of uniformity, and allegations that it hampers meaningful comparison between different investment products.

Consideration for securities

A change is recommended to provide for the Securities Regulations to enable the price/consideration payable for securities to be determined by a formula, so long as the formula is set out in full and clearly explained. The absence of such flexibility is an example of the need to bring the content requirements up to date because the disclosure of price/consideration payable routinely leads to requests for exemptions by the Securities Commission.

Flexibility in advertisements

The Securities Regulations also prescribe the content requirements for promotional material covering securities offers. Among the proposals are measures designed to provide more flexibility about the financial information that may be contained in advertisements. First, it is proposed to relax the current restriction that only allows securities advertisements to contain prospective information that is included in the relevant prospectus for the securities, including by allowing references to commentary or analysis of prospective financial information. Secondly, a proposal to allow advertisements to include information from interim or unaudited financial statements regarding the net assets and assets and liabilities of the issuer. This development is to address the difficulties encountered where the audited (annual) financial statements are not the most recently published financial information available.

Modernisation

Measures to address a number of known problems with the Securities Regulations, including by closing a loop-hole over distribution of advertisements via the internet. Other changes are proposed by way of a limited re-write of the Securities Regulations to rid them of outdated terminology, unclear definitions and otherwise undertake a modernisation exercise. The re-write is not intended to change the substantive effect of the Securities Regulations.

SIMPLIFIED DISCLOSURE - PROSPECTUS REGULATIONS

The draft regulations required to implement the simplified disclosure prospectus (SDP) (which features in amendments to the Securities Act 1978 contained in the Securities Disclosure and Financial Advisers Amendment Bill now before Parliament) were not included as part of this discussion document. However, the discussion document did seek views on whether the use of a SDP should be restricted to "non-complex" products such as shares, preference shares, securities that convert into ordinary shares of the same issuer and debt securities.

A draft of the SDP regulations was released by MED in May 2009 for consultation.

MUCH-WELCOMED CHANGE

A number of the proposals contained in the discussion document represent a much-welcomed update to detailed content requirements which are out-of-date and/or unwieldy.

The closing date for submissions was 8 May 2009, but there is no indication yet as to when MED is likely to implement the proposals. The discussion document and the consequential changes to the Securities Regulations are very much a stop-gap measure pending a more thorough review of the Securities Act which, we understand, is scheduled for later this year.

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.