FMA finalises its Effective Disclosure Guidance Note

Glenn Joblin, Partner | Monday 11 June 2012

The Financial Markets Authority (FMA) has released the final version of its new regulatory guide on improving disclosure in prospectuses and investment statements. This follows on from extensive industry consultations after the release of FMA's proposed guidance in January and revised proposed guidance in April this year [see our earlier updates here and here for details]. The new regulatory guide is Guidance Note: Effective Disclosure.

The guidance note is intended to provide issuers and their directors and advisers with guidance on FMA's role and approach to the review of disclosure documents and to outline issues that FMA considers are important for producing high quality disclosure documents. It includes FMA's views on good practice for ensuring that such documents are "readily understandable" to their intended audience.

To FMA's credit, the consultation process has demonstrated that FMA is willing to listen, and respond, to industry feedback constructively. The end result is a guidance note that will be useful for those involved in the preparation of disclosure documents and which, overall, is likely to produce better disclosure documents for investors.

What was the outcome of the final consultation round?

There have been no further fundamental changes to the draft guidance note as a result of the latest consultation round, with most submitters noting that the updated guidance note released in April had substantively addressed their comments [see the submissions here and FMA's commentary on those submissions here]. However, there are still some notable changes that have been made to the final version, including:

• Further clarification of which aspects of the guidance apply to prospectuses, investment statements or to both (for example, the material information disclosure guidance applies to prospectuses only) and clarification that the guidance also applies to 'combined' investment statements and prospectuses;

• An acknowledgement that registered banks have different disclosure requirements for some products and clarification of how the guidance will apply - for example to their investment statements;

• Clarification that what FMA means by 'materiality' is the same as that established by recent case law, namely, "information that is likely to affect the judgment of an intending investor when making a decision whether or not to invest";

• In the context of the suggested inclusion of a 'Key Information Section':

  • clarification that a Key Information Section in any disclosure document is optional but that FMA regards it as good practice;

  • confirmation that the customary important notices/disclaimers section can be included before a Key Information Section; and

  • introducing a requirement that a Key Information Section should contain a brief but prominent statement making it clear to readers that it is a summary only;

• Amendments to the 'Material Information' section, including:

  • changes to the reference to auditors' independence, recognising that directors of issuers may not always have the information to make an assessment of an auditor's independence and also that this will be disclosed in audit reports;

  • some refinements to the 'Risks' section to provide some guidance about the links between the summary of principal risks (which must be in an investment statement) and material risks to be disclosed in a prospectus and to include additional examples of risks suggested by submitters; and

  • a more principle based approach to related party transactions so issuers look at the substance of relationships in addition to relevant accounting and legal definitions and standards;

• Guidance that in limited circumstances, an investment statement can cross-refer to a prospectus (or disclosure statement if applicable);

• Clarification that inclusion of cross-references (to another document) in a prospectus does not meet the requirement to include 'all other material matters' under the Securities Act; and

• A new statement that application forms should be placed at the end of documents to ensure intending investors first read and understand important information before filling in an application form.

When does the guidance note take effect?

The guidance note will be used by FMA from 9 July 2012 as part of its risk-based assessment of newly-issued disclosure documents.

Continuous issuers are also encouraged by FMA to review their disclosure documents as soon as practicable, and, in any event, should revise disclosure documents in the light of the guidance note the first time they issue a new investment statement or register a new prospectus after 1 January 2013.

Does the guidance note preclude discussions with FMA prior to registration?

Although FMA's pre-vetting service has ended, the guidance note emphasises that the FMA is keen to engage with issuers before they register disclosure documents on novel products, strategic issues, complex or big issues or significant issues of securities (for example major IPOs). Issuers are encouraged to contact FMA as early as possible but are told to be selective about the issues that they raise (for the simple reason that FMA does not have the resources to engage on every offer or concern).

FMA has indicated that over time, it will "share examples of good practice – and poor practice – in a variety of ways".

Will the guidance note result in 'new look' disclosure documents?

It is unlikely that the guidance note will result in radically different disclosure documents appearing in the market. But, it should serve to ensure that the overall standard of disclosure documents released to the market is raised.

In this regard, Australia provides a useful guide as to what the likely outcome might be, as similar guidance was released in Australia last year. ASIC's deputy chairman has noted that they are "seeing some prospectuses that clearly advise retail investors about what information they should focus on, in language they can understand. We're also seeing prospectuses that explain key risks from the investors' perspective, a big improvement on prospectuses that list every conceivable risk but give no useful information on any of them."

Like New Zealand, ASIC's guidance emphasises the importance of including a 'Key Information Section' (referred to as an 'investment overview') to provide a meaningful summary of information that is key to a retail investor's investment decision.

A more significant overhaul of the structure and content of disclosure documents will follow from the introduction of the proposed product disclosure statement under the Financial Markets Conduct Bill (which is currently before the Commerce Select Committee).