On the 17th of March, the Minister of Commerce released a Cabinet Paper (Paper) outlining the proposed reform of New Zealand's securities law. This Paper follows on from the Review of Securities Law Discussion Document released by the Ministry of Economic Development in June 2010. A regulatory impact statement containing an analysis of available options to improve securities law has also been released.
The Paper contains numerous proposals containing significant amendments to the structure of New Zealand securities law. Given the breadth of the proposals contained in the Paper, this Bulletin summarises what we consider to be the most significant of the reforms proposed, and sets out some guidance as to the expected timing of the reforms proposed in the Paper.
The key areas of focus for the proposals contained in the Paper are:
- Definition of security
- Exemptions from the securities law regime
- Disclosure requirements for issuers
- Governance of collective investment schemes
- Liability regime for breaches of securities law
- Public enforcement of directors' duties.
Changes will be reflected in new legislation to replace the Securities Act 1978 (and regulations under that Act).
Significant changes proposed in the Paper
Definition of security – A new definition of 'security' is proposed, with four distinct categories of financial products to be covered by the regime: equity securities, debt securities, collective investment schemes and derivatives. The Financial Markets Authority (FMA) will have the power to designate which products fall within those categories.
Removal of wholesale carve-out – The Paper proposes five specific exemptions to the coverage of the regime. Notably, the current wholesale carve-out is not proposed to be carried forward to the new regime. The five exemptions proposed are:
- Sophisticated investors – a principle-based definition, with certain safe-harbours (for example where a person invests over a set amount such as $500,000).
- Persons with a close relationship to the issuer – relatives and close business associates.
- Equity as part of employee share schemes – employee share schemes meeting certain criteria to be exempt from most disclosure and governance requirements, but still required to provide short-form disclosure.
- Small offers of equity or debt – a new exemption under the new regime, using a similar definition to that in Australia. A basic disclosure document would still be required. Small offers would be limited to, within a 12 month period, $2 million raised and up to 20 investors, with a cap of $100,000 per investor (unless sophisticated).
- Narrow exemptions for specific entities / products.
Introduction of product disclosure statement (PDS) – The Paper sets out recommendations for the introduction of a heavily prescribed PDS to replace the current two-tiered regime, in order to promote comparability between financial products. What is required would depend on the type of product and type of offer, with content to be prescribed in regulations under the new Act. The PDS would have two parts – a two page key information summary, followed by the body of the PDS containing more detailed information on the product (being information that is crucial to an investor's decision to invest). Other information, additional to the prescribed content, may be disclosed on the new Register of Securities (to be established by the Financial Markets (Regulators and KiwiSaver) Bill).
More regular ongoing disclosure will also be required.
Consideration is being given to liability for celebrity endorsements, similar to the existing liability for experts, if untrue statements are made.
Review of Collective Investment Schemes – A single collective investment scheme regime is proposed, to introduce standardised governance and compliance for different pooled investment products, regardless of their legal form. This would require all such schemes to have a manager and an independent licensed supervisor. Insurance products with an investment component issued after the new regime is enacted would be subject to the collective investment scheme regime.
Introduction of open-ended investment companies (OEICs) – The Paper, recognising that New Zealand lags behind other jurisdictions in this area, recommends the introduction of a special class of OEIC under the new regime, which would be governed by the generic collective investment scheme regime proposed in the Paper.
Authorisation of fund managers – The Paper proposes, in light of the pivotal role that fund managers play in collective investment schemes, that an authorisation regime for fund managers be introduced. This would require the FMA to register all fund managers (directors, senior managers and controlling owners), which must meet fit and proper requirements, with a good character test for key personnel.
Special requirements for workplace schemes – Recognising the decline in customised workplace savings schemes in the last decade, the paper recommends:
- that workplace schemes that use a master trust structure and all future workplace schemes (regardless of structure) be covered by the collective investment scheme regime proposed in the Paper;
- that existing company-specific 'not-for-profit'
workplace savings schemes, where all benefits accrue to members,
not being master trust products:
- are grandfathered, but remain open to new employee members (with certain criteria to be introduced). This recognises concern that to exclude new members completely would lead to the closure of such schemes; and
- are required to appoint an independent trustee with investment management skill and experience (to be approved by the FMA); and
- be subject to a limit of 5% investment in any one asset or in any employer related parties.
A new liability code is proposed setting out an escalating hierarchy of liability. Deliberate or reckless violations would be serious criminal offences with less serious breaches attracting civil penalties.
In addition, offences will be created where directors of companies intentionally breach certain duties, including the duty to act in good faith and in the best interests of the company, to avoid carrying out the business of the company in a manner likely to create risk of serious loss to creditors, and the duty to avoid incurring an obligation unless the director believes on reasonable grounds that the company will be able to perform it.
The Paper also considers other matters such as permitting the FMA to issue binding rulings, regulating access to company registers in an attempt to dissuade predatory offers or unwanted unsolicited approaches, and allowing existing special partnerships to transition to limited partnerships without being wound up.
We anticipate that the extent of the changes contained in the Paper will necessitate an approximate two to three year implementation period.
The regulatory impact statement (RIS) indicates the new regime is expected to come into force 12 months after most of the other reforms currently underway (i.e. those contained in the Financial Markets (Regulators and KiwiSaver) Bill) are implemented.
Following commencement of the new regime, transitional arrangements will then be worked through, with the RIS indicating we can expect a staggered lead-in period of six to eighteen months after the commencement of the new legislation before issuers will need to comply.
There is likely to be an industry working group established to help the Ministry of Economic Development formulate regulations under the new primary legislation over the next 18 months.
A detailed budget on the implementation of the new securities law regime is expected to be submitted to Cabinet separately by 31 May 2011.
- Further information on securities law reform can be found on the Ministry of Economic Development website, here: http:// www.med.govt.nz/templates/StandardSummary____43742. aspx
- The full Cabinet Paper can be accessed here: http://www. med.govt.nz/upload/76654/Cabinet%20paper-Securities%20 law%20reform.pdf
- The RIS can be accessed here: http://www.med.govt.nz/ templates/MultipageDocumentTOC____45789.aspx
- The June 2010 Review of Securities Law Discussion Document can be accessed here: http://www.med.govt.nz/ upload/73375/discussion-document.pdf
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