FINANCIAL MARKETS CONDUCT ACTSeminar 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 mattersThe 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 CriteriaEligibility 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 ConditionsLicensing 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

• 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 COUNSELSean 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