A navigational guide to the Financial Markets Conduct Bill - Financial Services

This Brief Counsel provides an overview of the key components of the exposure draft Financial Markets Conduct Bill (draft Bill) and assists you to navigate the detail. Chapman Tripp has produced other detailed commentaries on the draft Bill which are available here.

Submissions on the draft Bill close on 6 September, with the Ministry of Economic Development (MED) encouraging earlier responses.

Purposes

Main purposes

The main purposes of the draft Bill are to:

promote the confident and informed participation of businesses, investors, and consumers in the financial markets, and
promote and facilitate the development of fair, efficient, and transparent financial markets.

Additional purposes

In addition the draft Bill is intended to:

provide for timely, accurate and understandable information to be provided to persons to assist those persons to make decisions relating to financial products or the provision of financial services
ensure that appropriate governance arrangements apply to financial products and market services that allow for effective monitoring and reduce governance risks
avoid unnecessary compliance costs, and
promote innovation and flexibility in the financial markets.

These purposes are consistent with the main objectives of the Financial Markets Authority Act 2011 and key functions of the Financial Markets Authority (FMA). As noted with the FMA legislation, we agree that facilitating capital market activity is a fundamental purpose of securities regulation and complements investor interests.

Commencement and transitional arrangements

The draft Bill is intended to be finalised for introduction to Parliament by 6 October 2011. Beyond that we expect:

the Bill to be referred to Select Committee for public submissions from February 2012
draft regulations to be developed and consulted on throughout 2012 / early 2013
the new legislation to commence in early 2013
a transitional period before full commencement of the new law for at least six months (issuers will be able to elect to make securities offers under old law during this period)
existing approvals and authorisations to be deemed to apply for two years from commencement (licences will need to be obtained thereafter).

Part 1 – Preliminary provisions

Key definitions

Part 1 defines the key term financial product as comprising a

debt security
equity security
managed investment product, or
derivative

in that order of priority. The definitions focus more on the economic substance of the financial product not just its legal form. For example, a redeemable preference share is treated as a debt security rather than equity.
Under Part 8, the FMA can:

'call in' a security that might otherwise (as a matter of form) escape the net, if necessary or desirable to promote the purposes of the legislation, and
re-designate a financial product from one category to another (with prospective effect).

These powers would be exercised where a product does not fall neatly within one category, or where the economic substance of the product requires it. For example, a 'Blue Chip' type property investment scheme could be brought into the regime even if it is structured as an investment in land and ordinarily would be excluded.

Part 2 – Misleading or deceptive conduct for false or misleading representations

Part 2 prohibits misleading or deceptive conduct and false or misleading representations, in trade in relation to dealings in financial products and provision of financial services. The provisions are modeled on the Fair Trading Act 1986 (FTA) and will be enforced by the FMA rather than the Commerce Commission.

Misstatements in product disclosure documents (PDS) (see below) are carved out of Part 2, as they are regulated by specific requirements in Part 3. The FTA will no longer apply to conduct that contravenes Part 2.

Part 3 – Disclosure of offers of financial products

The basic rule in Part 3 is that offers of financial products for issue, and certain offers for sale, require disclosure using a PDS unless the investor or the issuer is exempted under Schedule 1.

The purpose of the PDS is to provide key information to investors to help them make investment decisions. Most of the content is to be prescribed by regulations – allowing for differing disclosure requirements depending on the financial product.

The draft Bill provides for other material information relating to the offer to be contained in a register entry for the offer (the register entry) in an online register of offers of financial products.

MED is seeking feedback on two alternative definitions of material information:

Option A: information that a reasonable person would expect, if it were publicly disclosed, to have a material effect on the demand for the financial product on offer.
Option B: information that a reasonable person would expect would, or would be likely to, influence persons who commonly invest in financial products in deciding whether to acquire the products on offer.

In either case, information would only be material if it relates to the financial products on offer, or particular issuer or offeror, rather than financial products, issuers or offerors generally.

The proposed tests are drawn from definitions applying to continuous disclosure by listed issuers in Australia. In our view, thought should be given to applying different "materiality" requirements to different types of product – what is appropriate for genuine (equity) fundraising is not automatically appropriate for managed investment products and derivatives.

Part 3 also contains detailed rules on offer advertisements. Despite a decision in the February cabinet paper to eliminate pre-prospectus publicity rules, the draft Bill contains a number of prescribed restrictions drawn from Australian provisions.

More significantly, Part 3 contains a mechanism for ongoing disclosure by issuers, intended to be focused on debt and managed investment products:

a duty to notify the Registrar of relevant changes to keep the register up to date – particularly relevant to continuous issuers
a duty to disclose information to particular investors (on request or in prescribed circumstances), and
a duty to make information publicly known in prescribed circumstances.

These obligations are intended to take the pressure off point of sale disclosure documents (as investors will be informed of the status of their investment on an ongoing basis) and may facilitate more accurate pricing of the investment where there is a secondary market for trading.

Part 4 – Governance of financial products

Part 4 provides for:

the governance of debt securities (including the need for a trust deed and a supervisor)
the registration of managed investment schemes
the powers of intervention to enable the supervision of debt securities and managed investment schemes by a licensed supervisor or the FMA
ongoing duties of issuers of all regulated products (for example, to maintain registers of regulated products and keep proper accounting records), and
duties of persons associated with regulated products to make protected disclosures.

We discussed the application of these requirements to managed investment schemes in our recent Brief Counsel.

Part 5 - Dealing in financial products on markets

Part 5 provides for matters relating to dealing in financial products on markets, including:

prohibiting insider trading and market manipulation
providing for continuous disclosure by listed issuers
providing for the disclosure of interests of substantial product holders in listed issuers
providing for disclosure of relevant interests by directors and senior managers of listed issuers
providing for the licensing of markets for trading financial products
providing for the transfer of financial products, and
the making of regulations setting rules for unsolicited offers to purchase financial products.

Apart from beefed-up requirements for the licensing of financial markets, most of Part 5 carries forward the Securities Markets Act 1988, with some improvements.

We are shortly publishing a Brief Counsel on the most significant changes for listed issuers.

Part 6 – Licensing and other regulation of market services

Part 6 regulates certain financial market services, including:

the licensing of certain financial market service providers (for example, managers of registered schemes, certain issuers of derivatives, and providers of intermediary services)
providing for disclosure obligations and obligations in respect of client agreements in connection with some of those financial market services
imposing other conduct obligations on licensees providing discretionary investment management services and on their custodians, and
providing for the making of regulations regulating the holding and application of investor funds and property by issuers of derivatives.

Part 7 – Enforcement and liability

Part 7 addresses enforcement and liability, including:

providing the FMA and the High Court with certain powers to avoid, remedy, or mitigate any actual or likely adverse effects of contraventions of the legislation
the imposition of civil remedies (including pecuniary penalty orders and compensation orders), and
offences.

The focus in the draft Bill sanctions provisions is on civil remedies, including pecuniary penalties. Serious criminal offences are reserved for the most egregious conduct. An infringement notice regime is intended to provide more effective means of enforcing minor breaches.

We are shortly publishing a Brief Counsel on the new liability regime.

Part 8 – Regulations and exemptions

Part 8 provides for:

regulations and exemptions, including powers to prescribe matters relating to the form and content of product disclosure statements, and
powers for the FMA to designate financial products and offers, and to grant exemptions, where this is necessary or desirable in order to promote the purposes of the legislation.

Part 9 – Miscellaneous provisions

Part 9 provides for:

appeals from the FMA's decisions
the repeal of the Securities Act 1978, the Securities Markets Act 1988 and certain other enactments, and for consequential amendments
transitional provisions, and
various miscellaneous matters.

Schedule 1 – Exclusions and extension to certain sale offers

Schedule 1:

specifies that offers to particular persons do not require disclosure under Part 3 (although disclosure to other persons may be required) or compliance with certain governance requirements under Part 4
specifies that certain offers as a whole do not require disclosure under Part 3, whether as a result of the nature of the offer (for example, a small offer) or the nature of the issuer (for example, an offer by the Crown), and
extends application of the legislation to offers for sale of certain existing financial products.

The exclusions have been changed to include more 'bright line' tests. Issuers will be able to rely on self-certification by wholesale investors that are exempt unless they know, or ought to know, the certification is untrue.

We are shortly publishing a Brief Counsel describing the key exclusions.

Schedule 2 – Registers

Schedule 2:

establishes the register of offers of financial products
establishes the register of management investment schemes, and
contains procedural requirements for maintaining, searching, and lodgment of documents on the registers.

Schedule 3 – Self-managed superannuation schemes

Schedule 3 provides for the statutory recognition of single person self-managed superannuation schemes.

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.