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Review of Securities Law

By Melissa Higham - 6 May 2011

Over the last few years there has been wide ranging reform of the legislation that governs the financial sector. This reform has been timely following the global economic crisis and the failure of many New Zealand finance companies. The next step in the reform is the comprehensive review of the securities law. The Government has recently released Cabinet's paper setting out its recommendations on changes to the Securities Act 1978. The main recommendations are highlighted in this note.

Securities law in New Zealand

Securities law in New Zealand is primarily governed by two Acts; the Securities Act 1978 (which regulates primary markets where securities are issued to investors) and the Securities Markets Act 1988 (which regulates secondary markets, where existing securities are traded, and derivatives).

The paper proposes to repeal the two existing Acts and enact a new securities act as a single piece of legislation.  The changes will also require subsequent amendments to other legislation including the Companies Act 1993, the Reserve Bank of New Zealand Act 1989 and the KiwiSaver Act 2006.

The Financial Markets Authority (FMA) (recently established under the Financial Markets Authority Act 2011) will be the regulating body under the new securities law.

Key policy decisions by Cabinet

Financial products that are regulated under securities law

The current Securities Act defines security as "any interest or right to participate in any capital, assets, earnings, royalties or other property of any person".  Securities may fall under one of six categories set out in the Act; equity, debt, units in unit trusts, interests in superannuation schemes, life insurance policies, and participatory securities.

The definitions in the Securities Act are largely based on the legal form of the security.  In some cases this has resulted in financial products not being categorised correctly.  If a product is not categorised correctly then it is not governed by the appropriate legal requirements.

The paper proposes that the definition of securities moves to a more principle based classification of financial products that focuses on the economic substance of the product.  The proposed changes set out four categories of regulated financial products; equity securities, debt securities, collective investment schemes, and derivatives.

Where there is uncertainty as to which category a financial product will fall under, the FMA will have the power to determine the category.  These designations will not be retrospective and will only apply to future allotments of the financial product.

Offers of financial products covered by securities law

Currently all offers of securities to the public are covered by the Securities Regulations unless they are exempt.  These exemptions include offers that are not made to the public, offers to wealthy investors and offers to experienced persons.  The scope of these exemptions is currently unclear and there can be disproportionate consequences for accidentally including a member of the public in a private offer.

The paper proposes that all offers of regulated financial products be covered by the new securities law unless they are specifically exempt.  The proposed exemptions would be for the following classes of offer:

  1. Offers to sophisticated investors;
  2. Offers to persons with a close personal relationship to the issuer;
  3. Offers of equity as part of an employee share scheme;
  4. Small offers of equity or debt securities; and
  5. A number of more narrow exemptions relating to specific entities or products.

These exempt offers would be subject to liability for false and misleading statements and aside from offers to investors and small offers, which will have minimal disclosure requirements, the offers will be exempt from all other regulatory requirements.

Disclosure requirements

The Securities Act provides for disclosure to potential investors in the form of a prospectus (to be registered and offered to subscribers when an offer of securities is made to the public) and an investment statement (to be provided to an investor before subscribing for the security).

Prospectuses and investment statements have become increasingly lengthy and the content is often duplicated between them.  This makes it hard for investors to readily compare documents to make an informed investment decision.

The paper proposes to replace the existing requirements with a requirement to prepare a single product disclosure statement (PDS) tailored to retail investors.  The content and length of the PDS would be heavily prescribed and tailored to fit specific financial products.  The PDS would be divided into two parts; the first part would be a short (one to two pages) summary of key information that can be easily compared with other investments, the second part would be more detailed and contain all of the essential information.

An electronic register of securities offerings has been established by the Financial Markets (Regulations and KiwiSaver) Bill.  The paper proposes that more detailed information about an offer be placed on the register which may include full financial statements.

The paper also proposes additional ongoing disclosure requirements, simpler advertising requirements and the possible regulation of celebrity endorsements.  

Licensing of derivative dealers and intermediaries

The paper proposes that all persons who are in the business of dealing in derivatives be required to be licensed by the FMA.  There will be a statutory exemption from the requirement for dealers in foreign exchange.

The paper also proposes a licensing regime for intermediaries.  A licensed intermediary would be able to take responsibility for certain regulatory requirements on behalf of an issuer.

Collective investment schemes

A collective investment scheme is a scheme under which an investor gives money to someone else to invest on their behalf.  These are the most common investment schemes for retail investors and allow investors to access investment products reserved for sophisticated investors and institutions which require large investment amounts.  Collective investment schemes can be in the form of a unit trust, superannuation scheme, trust or partnership.  These different forms can lead to inconsistencies between the rights of investors and duties of fund managers.

The paper proposes creating a single collective investment scheme regime.  Under this regime schemes would be free to adopt any form but would be required to comply with a common set of requirements to ensure an adequate level of investor protection.

All collective investment schemes would be required to have an external supervisor who would be responsible for the custodianship of the assets of the scheme and supervising the manager. 

The regime would require that all fund managers (including directors, senior managers and controlling owners) be registered and meet a fit and proper person test.

Existing workplace superannuation savings schemes and existing insurance contracts with investment components will be exempt from the regime.  However it is proposed that workplace superannuation savings schemes be required to appoint an independent trustee.

Liability regime

The liability regime under the current securities law is complex and contains a number of overlapping civil and criminal liability provisions that are set out in a number of different Acts.

The paper proposes that a simplified, more comprehensive liability regime be adopted.  It is proposed that the liability framework focuses on civil remedies and obtaining compensation for investors.  Only egregious violations of securities law would be the subject of serious criminal offences.  Egregious violations will arise when a breach of the provisions is deliberate or reckless.  Egregious violations of directors' duties will be publicly enforceable by the FMA and the Registrar of Companies.

The Registrar of Companies currently has the power to prohibit a person from managing a company for up to five years where a director is at least partly responsible for a company's financial difficulties.  The paper proposes that the maximum period that can be imposed be extended to ten years and to allow the High Court to impose orders for an indefinite period.

The next step

A draft proposal is expected to be issued for public consultation in August.  Officials will consult with industry participants during the drafting of the legislation.  The Bill is expected to be introduced to Parliament by the end of the year.


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