17 Section 71 prohibits unsolicited offers of financial products made to any person who is acting otherwise than "in trade". Section 71(3) provides various exceptions, including one for offers made through authorised financial advisers or QFE advisers.
Remove "in trade"
18 Section 71(1) should be amended to remove the reference that the prohibition only applies to persons acting "otherwise than in trade". This concept is borrowed from the Fair Trading Act, and is an undesirable import into this section.
19 Instead the current exclusion in section 71(3)(a) – for offers for which disclosure is not required because of an exclusion under Schedule 1 (other than clause 12 or 16) – should be imported into the operative provision (section 71):
19.1 the effect would be that unsolicited offers would be permitted in those circumstances where an exception in Schedule 1 applies, but would not be permitted in other circumstances, and
19.2 this outcome means more certainty, and also aligns with the regulated offer/unregulated offer boundary established in Schedule 1.
20 This balances the need to protect vulnerable investors, for whom disclosure should otherwise be required, while recognising that legitimate discussions should be allowed for offers to wholesale clients and in other instances where disclosure is not required.
Unsolicited offers compliant with FAA should be
21 Section 71(3)(c) provides an exclusion for unsolicited offers made through an authorised financial adviser (AFA) or QFE advisers.
22 This exclusion should be extended to enable unsolicited offers to be made through registered entities and qualifying financial entities (QFEs) that are able to provide "class services" to "retail clients" under section 19 of the FAA.
23 Without this amendment, QFEs and other registered persons would be unable to issue material such as research notes to their existing client base. We expect that this outcome is unintended – particularly given the debate in the lead up to the FAA, where industry was concerned that "house" research notes (i.e. those issued by a corporate) would have been unlawful. Limiting the exclusion from unsolicited offers to AFAs or QFE advisers would present a similar issue in the context of the Bill.
24 Making this change would, therefore, align section 71 with the policy settings in the FAA.
Remove all possibility of void securities
25 The "void allotments" regime in section 62 (applying where statements regarding quotation are not fulfilled) should be deleted. The experience with the existing Securities Act has been that allotments which are void ab initio create significant market uncertainty, particularly where the void securities have been dealt with subsequently (for example, transferred or redeemed).
26 This is a vestige of our old regime, which has been abandoned in many other jurisdictions, and should be in New Zealand also. There is adequate protection in sections 63 and 64 if a quotation statement is unfulfilled – investors must either be repaid or given the opportunity to withdraw. The void remedy is unnecessary.
27 We remain of the view that the requirement for the relationship to be "close" is unnecessary and troublingly vague. The key functional requirements are those specified in (a) and (b). Requiring that the relationship also be "close" seems to achieve little benefit. We submit "pre-existing" would be a better word.
Clause 8 – employee share
28 Clause 8 of Schedule 1 is an improvement on the Exposure Draft, in as much as it extends to labour-only contractors and no longer requires the share offers to be part of remuneration. However, the requirement for the offer to be "separate from any other offer" remains, and continues to be problematic. An employer may well wish to make contemporaneous offers to more than one employee. It is not clear why this should not be permitted. An employer may also wish to make an offer to an employee at the same time as making a widespread offer. Given the other limits in clause 8 (particularly the requirement that capital raising not be a primary purpose of the offer) we submit that this should not be excluded.
29 Clause 8(1)(c)(ii) is problematic where a separate class of security is, or has been, established for employee share scheme purposes. It would be preferable to tie the measure (if one is required) to the entity?s main voting securities (e.g. what they are likely to convert into on exercise, if options or convertibles), as the NZSX Listing Rules do.
Clause 9 – offers to persons under control
should be extended
30 The express extension of exemptions to controlled entities is sensible.
31 However, as indicated in our submission on the Exposure Draft, it does not include typical family trusts, which are very common in New Zealand.
32 Typically, the relevant individual will be a trustee and discretionary beneficiary but will not "control" the trust. In our view, it would be appropriate to extend clause 9 to include trusts of which the relevant person (or an entity controlled by the relevant person) is a trustee and of which the relevant person is a beneficiary – at least in respect of the exemptions for close business associates, relatives, and employee share schemes.
33 We also consider it would be appropriate to:
33.1 give consideration to extending clause 9 (as so amended) to include offers to persons who are in the investment business (clause 33), large persons (clause 35) and eligible investors (clause 37)
33.2 give consideration to extending both clauses 4 (close business associates) and 8 (employee share schemes) in the same manner, and
33.3 if these changes are made, insert appropriate "anti-avoidance" provisions to exclude any controlled entities which are intended not to remain under such control and any trusts which are primarily intended to benefit persons who are not relatives of the relevant person.
34 It is not clear that offers to a small number of persons should nonetheless require the offerees to be in a position to obtain full information. We submit it would be appropriate for such persons to be able to agree carve-outs to this, acknowledging voluntarily accepted limits on the information available (for example, where the acquirer is happy to take some risk on disclosure in return for getting a quick deal at a good price).
35 Clause 29(2) should be amended to add the words "or governing documents of the issuer, or a pre-emptive rights agreement between product holders" after "constitution of the issuer" given the sale provisions extend beyond equity securities (e.g. governing documents for convertible notes may also contain pre-emptive right agreements) and that pre-emptive rights are often contained in shareholders? agreements (or limited partnership agreements) between holders instead of, or as well as, the issuer?s constitution.
36 "Large" as defined is very large by New Zealand standards. The appropriate threshold is people who are "big enough and ugly enough to fend for themselves". We submit that consideration is given to whether that point is reached before the levels currently specified.
Clauses 40 and 43 –
37 As indicated in our submission on the Exposure Draft, the intention of providing greater certainty by inclusion of "brightline" certification tests is, as noted above, welcome.
38 However, clauses 40 and 43 could undermine the efficacy of these provisions by excluding reliance based on "reasonable grounds to believe" that the certification is incorrect. The risk of hindsight reassessment of what might constitute "reasonable grounds" may induce a reluctance to rely on such certificates at all. In our view, thought should be given to excluding only persons who have actual knowledge that a certificate is incorrect (and, perhaps, those who are "willfully blind" to a certificate?s incorrectness).
39 In addition, we submit that the ability to confirm a certification should be extended beyond AFAs to include QFE advisers, QFEs and registered entities that are independent of the issuer. Although we understand officials are of the view that the certifier must have accountability, and that is achieved through using AFAs only, in our mind QFE advisers, QFEs and registered entities can equally have accountability for those certificates through the obligations in that context under the FAA.
- Financial Market Conduct Bill - Part 1 – Preliminary Provisions
- Financial Markets Conduct Bill - Part 2 - Misleading or deceptive conduct or false or misleading representations
- Financial Markets Conduct Bill - Part 4 – Governance of financial products
- Financial Markets Conduct Bill - Part 5 – Dealing in financial products on markets
- Financial Markets Conduct Bill - Part 6 – Licensing and other regulation of market services
- Financial Markets Conduct Bill - Part 7 – Enforcement, liability and appeals
- Financial Markets Conduct Bill - Part 9 – Repeals, amendments, and transitional provisions
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.