Securities law discussion document: a clearer picture of possible reforms

By Glenn Joblin, Partner | Wednesday 23 June 2010

Yesterday the Ministry of Economic Development (MED) released a 200 page discussion document on proposed reforms to New Zealand's securities laws. A complete overhaul of current legislation is proposed, with the introduction of a new Act to replace the Securities Act 1978 and the Securities Markets Act 1988, and amendments to a range of other legislation dealing with aspects of securities law. This makes for a welcome change to the fragmented approach taken in previous attempts to improve securities laws.

The new Act will set out what offers of financial products are to be regulated, how they will be regulated, and how this regulation will be enforced.

ISSUES OPEN FOR DISCUSSION

As expected, the discussion document addresses many of the recommendations of the Capital Market Development Taskforce and supports other recent changes that have been made or are in the process of being implemented to improve New Zealand's capital markets, such as the Financial Advisers Act 2008, the Financial Service Providers (Registration and Dispute Resolution) Act, the Securities Trustees and Statutory Supervisors Bill, and the proposed creation of a single market regulatory body, the Financial Markets Authority (FMA).

The discussion document is divided into five chapters which deal with the following matters:

• Defining regulated financial products

  Chapter 1 covers the categories of financial products that will be subject to regulation under the new Act. MED proposes expressly targeting four specified categories of financial products: equity, debt, collective investment schemes and derivatives.

  These products are to be defined by their economic substance, rather than by their legal form, although it is proposed that the FMA will be able to "call in" products that are substantively similar to the four products that fall outside a strict reading of the definitions.

• Offers to exempt investors

  Chapter 2 covers the statutory exemptions for offers to particular classes of investors who do not require all the protections of the Act. The list of proposed exemptions is said to be based on current exemptions, proposals from overseas, the work of the CMD Taskforce and other work streams. The core exemptions proposed are for offers to:

  • Investment businesses;
  • Sophisticated investors (as determined by minimum quantified levels of investment activity and experience);
  • Large entities (as determined by minimum assets, income and employees);
  • Individuals making investments of $500,000 or more;
  • Relatives; and
  • Personal friends and close business associates, including directors, senior management, major shareholders of the issuer or related companies, and close relatives of these persons.

  The discussion paper also seeks feedback on other potential exemptions, including offers to investors who have obtained recommendations from independent financial advisers and offers of small investments using a "20 by 12" formula borrowed from Australia (that is, offers to obtain up to $2 million from not more than 20 investors in any 12 month period). This latter recommendation is long overdue and recognises the needs of SMEs.

• Disclosure

  Chapter 3 covers disclosure obligations of issuers before sale, ongoing obligations over the life of the financial product, and regulation of advertising.

  One of the main changes being proposed is a shift to a single product disclosure statement (PDS) to meet one of the key objectives of the Securities Act review, namely to ensure that investors get all relevant information, but no more than they need. The proposed design of a PDS is intended to take a product-by-product approach to address the characteristics of specific financial products.

  A PDS is to be divided into two sections:

  • a 2-page summary of the nature of the investment and the risks associated with it; and
  • the additional disclosure necessary to enable investors to decide whether to invest.

  It is proposed that a PDS will be required to contain a simple risk rating set by the issuer and checked by the regulator (FMA) as part of a document vetting process.

  To keep the length of a PDS manageable and address concerns about details that vary over time, it is proposed that additional disclosure information will sit behind a PDS – by being posted to the new register of securities which is expected to be implemented later this year. This additional information could include full financial statements.

  Chapter 3 also contains a number of proposals for ongoing disclosure by issuers. For example, debt issuers are to be required to notify investors of material changes to matters that may have a bearing on the likelihood of default (e.g. changes to credit ratings or changes to trust deeds and guarantees). By contrast, it is suggested that disclosure by collective investment schemes should focus on regular reporting matters (performance and financial position as well as a list of enquires relevant to investors in such financial products).

  This chapter also raises for discussion the possibility of making changes to the definition of a "promoter" and the civil and criminal liability that attaches to promoters. The "promoter" concept is relatively unique to New Zealand securities laws. In particular, it is not a concept included in Australian securities laws.

• Collective investment schemes

  Chapter 4 covers regulation of collective investment schemes, such as managed funds, including the governance of funds and the duties owed to investors. MED is proposing that a standard framework is applied to all collective investment schemes regardless of their legal form, with the FMA taking an oversight and enforcement role. This includes a requirement that all collective investment schemes have an external supervisor, to be licensed under the regime to be established under the Securities Trustees and Statutory Supervisors Bill that is presently before Parliament.

• Other matters

  Chapter 5 considers other matters that may require reform under the new Act, including additional powers for the FMA, offences and penalties, and the establishment of a specialist civil judicial-type body to deal with civil breaches of securities law and other laws enforced by the FMA.

  Comment is sought by MED on whether public enforcement of directors' duties should be introduced and if so, whether criminal offence provisions should be included.

NEXT STEPS

A wide range of substantive changes are envisaged in the discussion document. The discussion document provides some guidance as to the future outlook for our securities law – the detail will become more apparent in the next round of consultation. Bell Gully will be actively involved in each phase of the consultation process.

Submissions on this first round of proposed reforms (which are being sought in the form of a Q&A format) close on 20 August 2010, with the intention that new legislation will be passed before the close of the current Parliamentary term next year.

Bell Gully will provide updates on developments arising from the discussion document. In the meantime, if you would like to discuss any aspect of the discussion document, please contact your usual Bell Gully adviser.

A copy of the discussion document is available here.