19 October, 2011

Introduction

The Financial Markets Conduct Bill was introduced to Parliament last week as part of a series of releases by retiring Commerce Minister Simon Power.

The bill is the next step in the process described in our earlier bulletins of undertaking a ‘root and branch’ review of New Zealand’s securities laws. In the previous phase of the review process, the Ministry of Economic Development (MED) circulated an exposure draft of the proposed new legislation and provided a short window of opportunity for high-level submissions.

Those submissions were then used by MED to further refine the thinking about a number of key policy decisions review, that are embodied in a bill which was described by Mr Power as overhauling securities law to improve financial market conduct and restore investor confidence in New Zealand’s financial markets.

Weighing in at 560 pages, the bill was also described by the Minister as the completion stage of a series of work streams on reforming regulation of the financial sector, including implementing the financial adviser regime, introducing auditor regulation and the licensing of trustees and statutory supervisors and establishing the Financial Markets Authority (FMA).

Key policy decisions

As noted in our earlier bulletins, the key policy decisions reflected in the bill include:

• replacing the requirement for issuers to prepare a prospectus and investment statement with a requirement to prepare a single product disclosure statement tailored to retail investors;
  
  
• introducing civil pecuniary penalties of up to $1 million for individuals and $5 million for companies if they make misleading statements in product disclosure statements and advertisements;
  
  
• modifying the liability framework for breaches of securities law – with a system of escalating liability from infringement notices (‘speeding tickets’) for minor breaches through to criminal penalties of up to 10 years’ imprisonment and fines of up to $1 million for individuals and $5 million for companies for the most egregious conduct;
  
  
• increasing the maximum period for prohibition by the FMA or the Registrar of Companies of a person from managing a company from 5 years to 10 years, and allowing the High Court to impose orders for an indefinite period;
  
  
• establishing licensing regimes for specific financial sector participants such as fund managers, independent trustees of workplace superannuation schemes and derivatives dealers; and
  
  
• introducing stricter requirements for managed investment schemes, including new duties for fund managers and supervisors.

The Minister again described the bill as seizing a once-in-a generation opportunity to re-write our securities law and play a crucial role in restoring investor confidence by providing better information and protections for mum and dad investors, as well as setting clearer rules for businesses seeking to raise capital.

Sensible reform

As we have previously noted, one of the long overdue elements signalled in the previous phases of the reform process and now embodied in the bill is a much more workable series of exclusions from disclosure requirements for investors who are considered to be capable of accessing the information they need (for example, due to their size and experience or their relationship with the issuer) and also for small offers. This is couple with greater certainty, in the form of more ‘brightline’ tests and safe harbours for these exclusions and the ability of investors to self-certify that they meet these exclusion thresholds.

Of particular interest in a variety of contexts is the exclusion for certain ‘small offers’, borrowing from the ’20 x 12’ exemption in Australia, to help SMEs to raise capital by enabling them to make offers to not more than 20 people in any 12-month period for not more than $2 million.

Other changes include provision for more limited disclosure or other obligations to be prescribed in some circumstances to, for example, to allow ‘term sheet’ disclosure for some small offers in an effort to ensure that investors receive some basic information, whilst keeping compliance costs to a manageable level. Also, the sudden death elements of non-compliance (where failure to provide a single investor with the required disclosure documents can result in the entire offer being void) are to be replaced with an emphasis on refunds and compensation without impacting the offer as a whole.

Next steps

As Parliament is due to rise shortly prior to the November 26 general election, the timeline for implementing the bill is a matter for the next Government. However, it seems likely that the opportunity to comment on the bill will proceed with a select committee process early in 2012 with the objective of the bill being passed in the second half of next year.

The machinery that underpins the bill will take the form of a raft of new regulations – which will also be the subject of public consultation and the likelihood that the new regime will come into effect by late 2012 / early 2013.

Further Information

For further information about the bill please contact any member of Hesketh Henry’s Corporate & Commercial team.