Auckland District Law Society seminar on the Financial

Report
FINANCIAL MARKETS CONDUCT ACT
Seminar given in conjunction with the Auckland District Law Society
Auckland – 17 September 2013
INTRODUCTION
• An overview of the new disclosure framework for regulated offers
of financial products
• Licensing and who must apply for a licence
• Changes to the regulation of providers of discretionary investment
management services (DIMS)
• Fair dealing provisions
• What issuers and their advisers can be thinking about now
AN OVERVIEW OF THE NEW DISCLOSURE
FRAMEWORK FOR REGULATED OFFERS OF
FINANCIAL PRODUCTS
WHAT IS A REGULATED OFFER?
The new Act delineates what types of offers fall within the scope of the new
disclosure regime, and what offers do not.
An offeror must comply with the disclosure regime imposed by the Act if the
following criteria are met:
•
There is an offer of financial products for “issue”, or the offer of a discretionary
investment management service (DIMS).
•
There is an offer of financial products for “sale” which arrangements fall within
the terms prescribed by the Act.
•
The financial product or DIMS has been offered in New Zealand;
•
The offer is made to a “retail investor”.
WHAT IS A FINANCIAL PRODUCT AND WHAT IS CAUGHT
BY THE NEW REGIME?
The Act provides that four categories of securities and products constitute
“financial products”. Those categories are:
• Equity Securities;
• Debt Securities;
• Managed investment products (MIS); and
• Derivatives.
Although not strictly a product, discretionary investment management
services (DIMS) are also captured by the regime.
Definitions of the above classes of financial products are provided in
Appendix 1.
WHEN IS AN OFFER NOT A REGULATED OFFER?
•
An offer of financial products “for issue”, meaning new issues of financial products,
will not fall within the ambit of the prescribed disclosure regime applicable to
regulated offers if the offer falls within the exclusions prescribed in Part 1 of
Schedule 1 of the Act.
•
Details of these exclusions are provided in Appendix 2.
•
The Act preserves the ability of the Crown to prescribe, through Regulation, the
provision of a disclosure document to an offeree in respect of an offer that falls
within one of the exclusions to a regulated offer.
•
The offer of financial products for sale (ie in the context of a previously allotted
financial product) will generally not fall within the scope of a regulated offer.
HOW TO MAKE A REGULATED OFFER
Product Disclosure Statement
• The Prospectus and Investment Statement regime is abolished.
• A regulated offer must in the future be made through the issue of a single
Product Disclosure Statement, or a PDS, and the entry created on the
register of financial products.
• The purpose of the PDS is to provide key information to prudent but not
expert investors to help them decide whether or not to acquire financial
products.
• The PDS is to be tailored to retail investors in conjunction with the entry of
other material information on a register for offers of financial products.
Product disclosure statement - continued
Exposure draft of Regulations to be published in October and finalised
in March 2014. Key considerations for PDS are:
• PDS to be divided into two parts - a “key information summary” and
a more detailed description of information that is essential to an
investor’s decision;
• the content of each PDS will be prescribed having regard to the
nature of the financial product being offered;
• the length of the PDS will be prescribed as will the font size for the
PDS;
Issuers will be under an obligation to ensure that the content of the
PDS remains accurate at all times.
HOW TO MAKE A REGULATED OFFER
Online Registers
• The development of the online register of financial products is a critical
component of the Act.
• A move to an online environment for business and investor interactions
with government, and to provide investors with access to important
information about financial products.
• Registers will contain much of the information collateral to an offer that is
not contained in a PDS.
• Detail regarding the registers is still to be prescribed in the Regulations.
Other matters
The Act also regulates:
• Pre and post PDS lodgement advertising in respect of a prospective offer;
• On-going disclosures to be made by issuers.
HOW TO MAKE A REGULATED OFFER
• Disclosure by Managed Investment Schemes (MIS)
• Disclosure by Derivatives Issuers
• Discretionary Investment Management Services (DIMS)
LICENSING AND WHO MUST APPLY
FOR A LICENCE
WHO MUST BE LICENSED
• Providers of Discretionary Investment Management (DIMS).
• Derivatives issuers.
• Independent trustees of restricted schemes.
• Fund managers.
• A voluntary licensing regime for prescribed intermediaries
(including peer to peer lenders and providers of crowd funding
services).
THE LICENSING PROCESS
• The licensing criteria and process are to be prescribed in the
Regulations.
• The Act’s licensing regime has two main parts – eligibility criteria
and licensing conditions.
• Licensing under the Act is expected to be relatively light given the
legislators do not wish to create too higher barriers to entry for
market participants;
• The FMA will have discretion to take a risk based approach to
licensing.
LICENSING AND WHO MUST APPLY FOR A LICENCE
Eligibility Criteria
Eligibility criteria are the minimum standards that service providers
must meet before they can be granted a licence. The main eligibility
criteria for all licensees will be:
•
Directors, senior managers and controllers must be “fit and proper” persons to
hold their respective positions;
•
The applicant must be capable of effectively performing that service (having regard
to the proposed conditions of licence);
•
There is no reason to believe that the applicant will not comply with the market
services licensee obligations.
LICENSING AND WHO MUST APPLY FOR A LICENCE
Licensing Conditions
Licensing conditions are the on-going obligations that licensees must abide by
post licensing.
The following licensing conditions are likely to be applied across all licences
granted under the Act:
•
Licensees must hold insurance that covers costs and claims that could arise
from civil proceedings;
•
Standard reporting by licensees to the FMA of significant events that impact
upon the licensee’s business and authorised related bodies - a combination of
prescribed events, together with certain events that trigger a “qualitative”
threshold;
•
On-going disclosure requirements.
LICENSING AND WHO MUST APPLY FOR A LICENCE
• Terms implied into MIS and DIMS arrangements.
• Licensing of banks, non-bank deposit takers and licensed issuers for
activities under Part 6 of the Act – such as fund management
activities.
• Derivative issuers.
• Person to person lending.
• Crowd funding.
CHANGES TO THE REGULATION OF
PROVIDERS OF DISCRETIONARY
INVESTMENT MANAGEMENTS SERVICES
(DIMS)
WHAT ARE DIMS?
DIMS involve a provider of discretionary investment management
services.
A person (A) provides DIMS if:
• A decides which financial products to acquire or dispose of on
behalf of an investor (B); and
• A, in doing so is acting under an authority granted to A to manage
some or all of B’s holdings of financial products; or
• Provides financial advice in the ordinary course of, and incidentally
to, providing the discretionary investment management service
above,
irrespective of whether B has the right to be consulted on, or to
countermand A’s decisions.
What are the changes for the providers of DIMS
The Act imposes similar legal duties on the providers of DIMS as it does for fund managers.
The Act introduces a new regime for the providers of retail DIMS to retail investors. The principal terms
of the new regime as applicable to retail DIMS are as follows:
•
A DIMS provider who provides a class DIMS on a “corporate scale” must be licensed with the FMA. ;
•
A licensee that provides a retail DIMS must have in place a client agreement;
•
A DIMS that is a retail service must have in place an investment authority with the client;
•
A DIMS provider must generally ensure that all investor funds and property is held by an
independent custodian;
•
A DIMS provider must ensure that a Service Disclosure Statement is provided to each retail investor
who receives the DIMS;
•
A DIMS provider will be required to maintain records of all acquisitions and disposals of financial
products relating to the service, together with all documents required to be produced in terms of
the Act and its Regulations for a period of at least 7 years.
FAIR DEALING PROVISIONS
FAIR DEALING PROVISIONS
• Prohibitions against misleading and deceptive conduct, the making of false
or misleading representations, and the making of unfounded
representations in connection with the dealing in financial products, or
the supply of financial services.
• The term “financial products” is broader than the definition of the term as
it is defined in the Act. It also includes any class or classes of financial
product defined in section 5 of the Financial Advisers Act 2008.
• Restriction on the offer of financial products during unsolicited meetings.
• FMA is the prevailing enforcement authority – not the Commerce
Commission.
WHAT ISSUERS AND THEIR ADVISERS
CAN BE THINKING ABOUT NOW
WHAT ISSUERS AND THEIR ADVISERS CAN BE THINKING
ABOUT NOW
•
Determine whether the services that a market participant undertakes (if any) fall within the scope
of the Act.
•
Determine which category of financial products the market participant issues, offers or sells.
•
Determine the applicable regime within the Act.
•
Review and comment upon the exposure draft of the Regulations to the Act.
•
Consider how financial products and/or services can be communicated to the market effectively in
accordance with the requirements of the new regime.
•
Determine whether the market participant needs to be licensed, and if so:
– Understand the application of the new legislative regime to the market participant’s
operations and what the requirements are for the market participant under that regime;
– Start work on getting their “house in order” in preparation of the implementation of the new
regime;
– Ensure that it will be able to meet the licensing eligibility criteria and have the systems in
place to meet the on-going licensing conditions.
APPENDIX 1 – definitions of “financial products”
Equity securities means:
• A share in a company;
• A share in an industrial and provident fund;
• A share in a building society.
• An equity security does not include a debt security.
Debt securities means:
• a financial product that is a right to be repaid money, or paid interest on money that is,
or is to be, deposited with, lent to, or otherwise owing by, any person;
• A debt security includes debentures, bonds, notes, convertible notes and redeemable
preference shares.
• Products that are excluded from the definition of Debt Securities include:
• Notes or bonds that are only redeemable at the option of the issuer, ie perpetual notes
or bonds;
• Certain types of shares in co-operative companies;
• A derivative or an interest in a registered managed investment scheme.
Definition of “financial products” continued
Managed investment products: A managed investment product is an interest in a
managed investment scheme, which interest is a right to participate in, or receive,
financial benefits produced principally by the efforts of another person under the
scheme, whether the right is actual, prospective, or contingent, and whether
enforceable or not.
A managed investment product does not include a debt security.
Derivatives: A derivative is an agreement under which a party must, or may be
required to, provide at some future time consideration of a particular kind or
kinds to another person and the amount of the consideration or the value of the
consideration or the value of the agreement, is ultimately determined, derived
from, or varies by reference to the value or amount of something else including:
an asset, a rate, and index or a commodity.
A derivative includes: Futures contract or forward contract, Certain options,
Swaps, Contracts for difference, Margin contracts, Rolling spot contracts, Caps,
Collars, Floors and Spreads.
APPENDIX 2
– Exclusions from the prescribed disclosure regime
An offer of financial products “for issue”, meaning new issues of financial products, will not fall within
the ambit of the prescribed disclosure regime applicable to regulated offers if that the offer falls within
the exclusions prescribed in Part 1 of Schedule 1 of the Act. These exclusions include:
• Offers made to “wholesale investors”. A person is a “wholesale investor” if:
– the person is an investment business as defined in clause 35 of Schedule 1;
– the person meets the investment activity criteria specified in clause 36 of Schedule 1;
– the person is large as defined in clause 37 of Schedule 1;
– the person is a government agency as defined in clause 38 of Schedule 1;
– the person is an eligible investor as defined in clause 39 of Schedule 1;
– in relation to an offer of financial products for issue or sale,—
– the minimum amount payable by the person on acceptance of the offer is at least $500,000;
or
– the amount payable by the person on acceptance of the offer plus the amounts previously
paid by the person for financial products of the issuer of the same class that are held by the
person add up to at least $500,000; or
– it is proposed that the person will acquire the financial products under a bona fide
underwriting or sub-underwriting agreement; or
– in relation to an offer of a derivative for issue or sale, the notional value of the derivative is at
least $5 million.
Exclusions from the prescribed disclosure regime continued
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Offers to close business associates;
Offers to relatives;
Offers of through licensed intermediaries and DIMS licensees;
Offers under employee share purchase schemes;
Offers to persons under control of the offeror;
Dividend reinvestment plans;
Offers of financial products for no consideration;
Small offers of new or existing debt or equity securities, ie not more than $2 million of debt or equity
being issued to not more than 20 specified investors within a prescribed 12 month period;
Offers of controlling interests of equity securities where there are 5 or fewer investors;
Exclusions for small schemes;
Offers of financial products of the same class as quoted financial products;
Certain offers of derivatives;
Offers of category 2 products or debt securities registered banks;
Offers by the Crown, local authorities etc;
Offers by retirement villages;
Offers of renewals or variations;
Offers of interests in contributory mortgages offered by lawyers.
Notwithstanding the above exceptions, clause 26 of Part 1 of Schedule 1 of the Act preserves the ability of
the Crown to prescribe, through Regulation, the provision of a disclosure document to an offeree in
respect of an offer that falls within one of the exclusions to a regulated offer. The disclosure document will
need to contain certain minimum disclosure requirements delineated by the Regulations.
SEAN JOYCE – CORPORATE COUNSEL
Sean is the principal of Sean Joyce – Corporate Counsel, an Auckland based corporate law firm.
Sean regularly advises within the corporate and commercial sector with a particular focus on the
capital markets and securities laws – regulatory compliance, fund raising and investments,
offerings of debt, equity and participatory securities in New Zealand.
Sean has been involved in a significant number of initial public offerings, reverse listings and
compliance listings in New Zealand and Australia.
Sean is an accredited NZX Sponsor and regularly assists small and medium sized enterprises in
listing on the NZSX or NZAX markets.
Sean is also a non-executive director of a number of companies listed on the NZAX and NZSX
markets. He is also a non-executive director of a consumer finance company and a funds
management firm.
www.seanjoyce.co.nz

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