MBIE consults on amendments to the Financial Markets Conduct Regulations

​This week MBIE called for submissions on proposed amendments to the Financial Markets Conduct Regulations 2014 (FMC Regulations) and related regulations issued for the Financial Markets Conduct Act 2013 (FMCA) regime.

Copies of the consultation document and the exposure drafts of the proposed amendment regulations are available here. Submissions close on 2 July 2015.

Summary

A number of the proposed amendments address matters which were deferred when the FMC Regulations were put in place for the 1 December 2014 FMCA implementation date. The proposed regulations also address implementation issues that have been raised, and make a number of minor improvements to ensure the regulations apply appropriately.

The key amendments include:

• new short-form disclosure for offers of shares or other products that rank equally or in priority to existing quoted financial products (which is an addition to the FMCA Schedule 1 disclosure exclusion for offers of financial products of the same class as quoted financial products);

• bespoke disclosure requirements for offers of convertible financial products; and

• different forms of managed fund disclosure.

MBIE are also seeking feedback on various matters relating to offers of options by way of issue for financial products.

Further details on the proposed amendments are set out below.

Timing of proposed amendments

The amendments are expected to be made in the third quarter of 2015, and MBIE have indicated that some may be in force by 1 December 2015 to permit short-form offers and convertible offers to be made under the FMCA using the proposed relief.

A longer transitional period is being proposed for other disclosure requirements where more business changes may be needed for implementation.

Overview of proposed amendments

Short form disclosure

The exposure draft of the Financial Markets Conduct Amendment Regulations 2015 carry over the short-form disclosure relief that was available under the previous Securities Act regime for offers of debt or equity securities that rank equally or in priority to products that have been quoted. This is in addition to the disclosure exclusion in clause 19 of Schedule 1 of the FMCA for follow-on offers of existing quoted equity and debt securities.

The proposed changes will apply to offers of debt or equity securities that rank equally or in priority to products that have been quoted for at least three months on a licensed market. Instead of meeting the full disclosure requirements in Part 3 of the FMCA, MBIE is proposing that these offers would be made under a short-form offer document or “simplified disclosure PDS” (accompanied by a “cleansing notice”). In addition, they will not need to comply with the requirement for the register entry to include all “material information” not in the PDS.

MBIE are seeking feedback on whether the proposed simplified disclosure PDS provides the right balance of information for investors, while reducing disclosure burdens on issuers. They are also seeking feedback on whether the proposed cleansing notice process works appropriately for these offers.

“Rights” components of offers

The simplified disclosure PDS proposals cover offers of options by way of issue over existing quoted products. However, MBIE note that it has been suggested that the “same class” offers exclusion (in clause 19 of Schedule 1 of the FMCA) would be a more appropriate form of relief for these option offers. Accordingly, MBIE are interested in further feedback on whether there are significant benefits in extending this exclusion to cover options by way of issue and whether this would result in less useful information being available to investors.

Extending short form disclosure to offers by unlisted issuers

MBIE are interested in receiving feedback on whether there are significant benefits to unlisted issuers in reducing disclosure requirements for offers to existing holders of products. In particular, the question is whether the generic PDS requirements, now that they are shorter, result in disclosure that is markedly more burdensome for unlisted issuers, and less useful for investors, than the previous short-form requirements under the Securities Act regime.

Offers of convertible products and options

MBIE is of the view that there is value in moving beyond reliance on Financial Markets Authority (FMA) exemptions for convertible offers and setting the convertible offer document requirements in the regulations. The current proposals in the exposure draft:

• set the base disclosure document and register entry according to the nature of the convertible product;

• require additional disclosure on certain matters relating to the new product (with less required when the new product is quoted);

• require some of the prescribed statements to be amended to deal with the new products;

• give a “permission” to include extra information about the new product (or new issuing group) where the issuer reasonably considers it useful to investors; and

• provide relief from the obligation to include “all material information” on the register if the new product is quoted, to the extent that that information has previously been disclosed to the market.

MBIE are however seeking feedback on whether this approach is suitable for all convertibles, and query whether a better approach may be to rely on the FMA to continue to set more bespoke offer document requirements via FMA exemptions.

Bank regulatory capital products are the most common type of convertible offering currently in the market. The current offer document requirements are set by the Securities Act (Banks’ Regulatory Capital) Exemption Notice 2014. The proposed regulations continue key elements of that offer document by requiring additional warnings to be included, alerting investors to the complex and high risk nature of the products to the bank PDS in Schedule 9 of the FMC Regulations.

Options by way of issue

The exposure draft of the regulations does not deal extensively with offers of options, by way of issue, for financial products. MBIE query whether there is any practical benefit in making further modifications to deal specifically with options. In its view, given that an option is the same kind of financial product as the underlying product, the usual product PDS (or simplified disclosure PDS) could be used for the option and underlying product together.

MBIE also do not expect that options by way of issue will commonly require Part 3 FMCA disclosure. For example, they point out that options over unquoted products are used within employee share schemes and in this case will likely use the employee share scheme exclusion in Schedule 1 of the FMCA.

MBIE are interested in feedback as to whether there are practical problems with using the usual PDS disclosure for options by way of issue that the regulations should address.

Managed funds

The exposure draft of the regulations address a range of managed fund situations which were not fully catered for in the FMC Regulations including:  

• providing for disclosure needs for multiple employer schemes and defined benefit schemes;

• providing a version of the fund update for multi-fund investment options;

• providing for use of fund updates at the “point-of-sale” to supplement, or form part of, the PDS for managed funds; and

• ensuring disclosure works for debt offered by managed investment schemes.

Other substantive changes

Other key changes proposed in the exposure draft include:

• Financial statements for acquired businesses: Additional changes are being proposed for the selected financial information table required in debt and equity PDSs to address issues relating to multiple acquisitions of other businesses;

• On-going client reporting for derivatives: On-going client reporting obligations for derivatives issuers which are based on the reporting obligations set out in the first exposure draft of the FMC Regulations (released in October 2013) are to be added to Part 6 of the FMC Regulations;

• Pre-offer advertising of mutual recognition offers: Offers under the mutual recognition regime with Australia must comply with Australian pre-offer advertising requirements. However, in some cases there are exemptions or other relief given from those requirements. The proposed amendments allow that relief to also be recognised for the purposes of the mutual recognition regime in New Zealand.

Remedial changes

The exposure drafts of the amendment regulations contain a number of minor improvements to ensure the regulations apply appropriately. This includes:

• removing the need for a provider of discretionary investment management services (DIMS) to process transactions through an independent person, whether they are providing DIMS under the FMCA or the Financial Advisers Act 2008 (FAA);

• removing the overlap for unlicensed derivatives issuers in respect of their trust obligations under the FMC Regulations and their equivalent general obligations under the FAA;

• addressing known problems with Schedules 8 and 9 of the FMC Regulations (which set limited disclosure requirements for offers made under the FMCA Schedule 1 exclusions);

• adjusting technical aspects of derivatives issuer regulations;

• improving the FMC Regulations alignment with the practical operation of the online register, Disclose, and the functionality of the Disclose register; and

• making some fund update improvements based on feedback received from the FMA as a result of its consultation on the template for the fund update.

Further changes still to come

MBIE acknowledge that the proposed amendments do not resolve all implementation issues that have been raised, and have indicated that they will publish a list of further issues that they are currently working on their website (which will be updated periodically).

In addition, MBIE is seeking to address a number of remedial changes to the FMCA in the Regulations Systems Bill. For a list of the issues for which approval has been obtained click here.

FMA is also currently considering submissions on its March consultation on exemptions under the FMCA, which, as MBIE point out, need to be viewed alongside the FMCA and FMC Regulations for a full picture of the regime.