Chapman Tripp made detailed submissions on the proposed Guidance Note on effective disclosure issued in January for consultation by the Financial Markets Authority (FMA).
We commented on both the Note’s contents and on the FMA’s decision-making process. In particular, we asked the FMA to consider a second round of consultations before finalising the Note. We are pleased that the FMA has now announced that it will issue a revised draft of its Note by 2 April for further submission and that this Note will be “markedly different to the first draft”.
Plain advice from the regulator on what it expects in prospectuses and investment statements. What’s not to like?
Nothing, at least not in principle. The decision by the Financial Markets Authority to issue a draft Guidance Note on effective disclosure represents a good use of the FMA’s mandate to educate the market regarding its expectations – something that its predecessor organisation, the Securities Commission, was not always very good at.
And much of what the FMA is proposing is sensible and uncontroversial. But in places it oversteps its authority by seeking to prescribe requirements which are not prescribed by legislation or by seeking to impose obligations which are unnecessarily cumbersome and meddlesome.
Fortunately, these are proposals only at this stage as the FMA has put out its ideas for consultation and – judging by the level of discussion the paper is generating – can expect a strong response. The Institute of Directors’ submission will no doubt be influential, given the engagement of the Institute’s newly-formed Significant Interests Group.
The FMA intends that the new rules will apply to disclosure documents issued after 1 May, and to existing documents by 1 January next year. We think that this timeline may prove over-ambitious as a similar consultative exercise last year by the Australian Securities and Investment Commission (ASIC) took seven months to finalise.
The two “fundamental components” that the FMA will expect in all offer documents are:
- truthful and complete information about the offer and the issuer, and
- “clear, concise and effective” wording and presentation (with specific advice on how these values are to be achieved).
Again, not much to argue with, at least not in principle. So where do we think that the draft Note needs refinement, and why?
Let’s start with the requirement to be “clear, concise and effective”. Obviously these are desirable qualities in any writing but they should be given the status of an objective rather than an obligation. This is because the legal test in the Securities Act 1978, which is the prevailing legislation, is only that information should not mislead or deceive.
In fairness, we are in something of a regulatory halfway house at present. We have the new regulator in the form of the FMA but we will not have the new regime the FMA is to enforce until the Financial Markets Conduct Bill comes into effect, probably next year.
The FMC Bill will introduce new documentation – a Product Disclosure Statement (PDS) to replace the investment statement and on-line entries on a public register to replace the prospectus. To an extent the Note anticipates these changes as the Bill sets a “clear, concise and effective” standard for PDS, but not for the register which is specifically intended to contain a broader range of information for a more expert audience.
Ideally, the Note will be amended to draw this distinction. Ideally also, it will specify - as do the ASIC guidelines - that each of the three values qualifies the other two and that none should be sacrificed to the others. This would avoid the risk of complex information being omitted in the interests of clarity and conciseness even though the omission will render the document a less effective communication tool.
Our other major concern is with the disclosure requirements which the Note proposes and, in particular, the FMA’s failure to take a horses for courses approach.
It is proposed that all disclosure documents explain “as a minimum”:
- key information about the overall nature of the investment
- the business model underlying the investment
- the directors and senior managers involved in the business
- risks associated with the investment
- related party transactions, and
- credit ratings, where relevant.
All of this information may be material to equity IPO offers but not all of it will be relevant to other products, such as debt capital or fund management offerings. And the inclusion of details about senior managers may require that the documentation be updated every time there is a change in personnel, even when an individual is replaced by someone of equal qualification and experience. Similar problems arise with quite narrow financial information and ratios FMA says debt issuers should include.
Far better in our view would be that the Note identify these as matters which should be considered for insertion rather than as minimum requirements as they will not always be relevant or material.
The FMA has said that it will review its Guidance Note once the FMC Bill is enacted. This will provide a valuable second opportunity to fine-tune the guidelines after they have been test-driven as the Note will have been in place for at least a year before the Bill becomes law.
Roger Wallis is a partner at Chapman Tripp specialising in securities law. He is also a member of the Takeovers Panel.