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:
- Offers to sophisticated investors;
- Offers to persons with a close personal relationship to the
issuer;
- Offers of equity as part of an employee share scheme;
- Small offers of equity or debt securities; and
- 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.