• News & Events
• News
• News Archive
• Media Contact

New Zealand securities law under scrutiny

2 August 2010

By Bruno Bordignon, Partner & James Chapman, Senior Solicitor

New Zealand’s securities law is set for a well overdue shake-up, with criticism that the current regime is often subjective and ambiguous.

The Ministry of Economic Development (MED) proposes to substantially revise the current legislation, replacing both the Securities Act 1978 and the Securities Markets Act 1988 as well as amending a range of other legislation.

The new regime proposes to remedy many of the problems by using clear definitions backed up with “bright-line” or objective tests to ensure clarity. The proposals also aim to make it easier for small-medium enterprises (SMEs) to raise capital from the public.

Defining Regulated Financial Products
It is proposed that the act will regulate only financial products for which generating a financial return or hedging a financial risk is a significant feature.

The types of financial products that will be covered by the new act will be split into four categories:

• Debt;
• Equity;
• Collective investment schemes; and
• Derivatives.

The first three categories will be restricted to investments. The definition of derivatives will require that they be either investments or used for hedging financial risk. The proposed definition of investments is arrangements in which money or other financial assets are paid to someone else and a material feature is the possibility of earning a positive financial return.

An important element of the proposed new regime will be the ability to “call in” products that are substantively similar to the four regulated products, but fall outside a strict reading of the regulations. There will be a focus on the economic substance of a product rather than its legal form (it is currently believed that some investments that should be regulated avoid regulation through careful structuring).

Offers to Exempt Investors
The Securities Act 1978 provides exemptions for offers of securities to specific classes of investors. However, there is a great deal of uncertainty about the interpretation of the exemption provisions and the consequences of mistakenly making an offer to a member of the public can be severe (void offers or criminal charges). This has led to a very cautious interpretation of the exemption provisions by issuers and their advisers.

The new proposals aim to remove this uncertainty by clearly defining the people to whom the new regime will not apply. It is proposed that there be exemptions for offers to the following:

• Investment businesses, being those whose primary business is investment or related activities;
• Sophisticated investors, as determined by minimum quantified levels of investment activity and experience;
• Large entities, as determined by minimum assets, income and employees;
• Individuals making investments of $500,000 or more;
• Relatives;
• Personal friends and close business associates; and
• Employees, with up to 15% of assets.

An initial discussion paper also sought feedback on additional proposed exemptions being:

• Offers to investors who have obtained a recommendation to buy a financial product from an independent financial adviser;
• Small investments up to $2million and 20 persons over 12 months (based on the equivalent Australian exemption); and
• Other potential exemptions, for example, retaining wealthy investors, or allowing an opt-out for those who have sought independent legal advice and signed a prescribed statement declaring the Securities Act will not apply to the investment.

It is proposed that any exemptions contained within the new act be backed up by bright-line tests to provide certainty as to whether an exemption can be relied upon. An example could be defining a sophisticated investor as a person who is able to satisfy at least two of the following:

• The person owns or manages a portfolio of financial products of at least $1 million;
• The person has carried out 10 or more financial product transactions per quarter of over $2,000 in the last eight quarters; or
• The person (a director or employee with a key role in the investment decision) works or has worked for an investment business (defined above) for at least one year in a professional role that requires significant knowledge of investment financial products.

The discussion paper also suggested that the definition of a sophisticated investor could be extended to a person with three years experience in business management, accounting, finance or commercial law.

Disclosure
A move away is also mooted from the current two-document disclosure regime in favour of a single product disclosure statement (PDS). The PDS would be backed by additional disclosures, for example full financial statements, posted on an internet based Register of Securities (expected to be implemented by the Companies Office later this year). This additional disclosure is likely to retain the concept of “all other material matters” that is found in the Securities Act 1978. The aim is to provide investors with all the information relevant to their investment, but no more than they need. It is recognised that at present prospectuses are expensive to produce, contain much unnecessary information and are often not read by investors.

The PDS will be divided into two sections; a summary of the nature of the investment and the risks associated with it, and the additional disclosure necessary to enable investors to decide whether to invest. The PDS will contain a simple risk rating set by the issuer and checked by the regulator (the Financial Markets Authority) as part of the document vetting process. It is hoped that this simplified disclosure regime will assist investors in comparing different investments and to allocate their money to the investment that best suits their needs.

The paper also looked at proposals for ongoing disclosure by issuers. Debt issuers may be required to notify investors of material changes in matters that may have a bearing on the likelihood of default. Collective investment schemes may be required to produce quarterly reports covering: 1) changes to fees and charges; 2) asset holdings; 3) conflicts of interest; and 4) fund returns.

It is also proposed that the regulation of advertising be moved to a purely principles based approach (i.e. advertisements must not be misleading or deceptive and must not be inconsistent with the PDS). There may also be changes to the liability regime for promoters and experts.

Collective Investment Schemes
The discussion paper proposes that a standard framework be applied to all collective investment schemes regardless of their legal form (which could include companies, trusts or partnerships amongst others). The framework would require all collective investment schemes to have an external supervisor who would be licensed under the licensing regime established by the Securities Trustees and Statutory Supervisors Bill (currently before Parliament).

Oversight for collective investment schemes would be handled by the Financial Markets Authority.

Other Matters
The discussion paper also deals with a number of other matters including:

• A duty to treat retail investors (currently known as “members of the public”) fairly;
• The treatment of unregistered and lightly registered securities exchanges;
• Public enforcement of directors’ duties, management bans and culpable bankruptcy; and
• Expanding the powers of the Financial Markets Authority to take cases on behalf of investors, gather information from issuers, and issue infringement notices and administrative penalties.

Australian entities operating directly or through subsidiaries on the New Zealand side of the Tasman should be made aware of the changes being mooted, and keep abreast of the submissions process being led by the MED (www.med.govt.nz).

• By Bruno Bordingon, partner, and James Chapman, senior solicitor, who specialise in corporate law at Duncan Cotterill which has offices in Australia and New Zealand. Qualified in New Zealand, Australia and the UK, Bruno advises a range of local and trans-Tasman clients including, public and private companies, government departments, investment groups and telecommunications providers; b.bordignon@DuncanCotterill.com, j.chapman@DuncanCotterill.com

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.