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Brief Counsel

FMA Bill better for select committee make-over

03 March 2011

The Financial Markets (Regulators and KiwiSaver) Bill has emerged from the select committee a more balanced and effective piece of legislation. 

The committee has pulled some of the teeth the original Bill gave the Financial Markets Authority (FMA) but has sharpened the FMA’s bite in other areas – particularly in relation to unsolicited low-ball offers.

This Brief Counsel comments on the committee’s key financial market recommendations.  We will comment later on the KiwiSaver changes.

Objectives and functions of the FMA

The FMA’s “main objective”, stated in a replacement clause 8 in the Bill, is now “to promote and facilitate the development of fair, efficient and transparent financial markets”. 

The committee stated in its commentary to the Bill that the facilitation of capital market activity is a “fundamental purpose” of securities regulation and signalled that the same concept would be reflected in the purpose statement of the legislation to emerge from the broader securities law review.  We commend the change, which provides an important complement to the FMA’s responsibility to protect investor and consumer interests.

Powers

Power to exercise an investor’s right of action

One of the most controversial aspects of the Bill was the proposal to give the FMA ASIC-like powers to take a person’s legal action on behalf of investors.  The FMA could, for example, take a breach of fiduciary, contractual, tortious or other duty claim against an issuer’s directors, auditors or trustee.

A number of submitters, including Chapman Tripp, had reservations about legislating for such a major change at this stage without the benefit of the wider securities law review. But the committee saw the measure as “an important addition to the FMA’s regulatory toolbox” so has ploughed ahead.  It has, however, proposed a series of changes the effect of which is to achieve a more appropriate balance between the FMA’s ability to intervene in a person’s affairs and the rights of an individual investor.

  • The FMA will now require the person’s consent before exercising that person’s right of action, and the time allowed for persons to register their objection has been increased from 10 working days to 30 (although the FMA will be able to act earlier where the person has given consent in writing to the proceeding).  These restrictions will apply to individuals only, not to companies or other bodies corporate (except, we would hope, where the company or corporate is an investor).
  • Originally the costs of any civil actions taken by the FMA were to be borne in part or in whole by the issuer (and, indirectly, by investors).  This has been amended to provide that the FMA’s costs may be the first call on any monies secured from the defendant as a consequence of the action.
  • The Bill clarifies that the new right of action will be applicable retrospectively – i.e. to conduct which pre-dates the coming into force of the new Act.  This was unclear in the initial Bill.

Unsolicited low ball offers

The committee has used the opportunity created by the Bill to deal with the issue of unsolicited low ball offers, along the lines recommended by Chapman Tripp in a supplementary submission on the subject.  The committee’s solution is two fold:

  • to include a regulation-making power in the Act to allow rules to be set for unsolicited offers (e.g. requiring that the market price be quoted, or a fair estimate of value for an unlisted security, and to require a “pause period” before acceptances can take effect), and
  • to require a warning from the FMA to be published on the low ball offeror’s website or, where there is no website, in the offer documents.

The new obligations will be given teeth by the inclusion of civil remedies to allow restraining or corrective orders to be made by the FMA, and civil penalties and compensation to be sought from the Court for offeror breaches.

Information gathering powers

The Bill has been brought into closer alignment with the Search and Surveillance Bill and will now allow the FMA to search a thing or a vehicle (including aircraft, trains, ships and bicycles!) in addition to a place.

Limitation period

The Bill will extend the limitation period for seeking civil penalties for future breaches of the Securities Act from two years to three years after a breach should reasonably have been discovered. 

While this change will bring the Securities Act into alignment with the limitation periods in the Securities Markets Act and the Commerce Act, in practice it may also help the FMA better manage its caseload.  The Securities Commission recently reported it had more than 25 ongoing investigations into failed finance companies.

Levies

The levy powers relating to financial advisers, auditors, trustees and statutory supervisors are all to be brought within the FMA legislation.  The FMA will also potentially have the power to extend levies beyond financial market participants to building and friendly societies and to New Zealand and overseas companies registered under the Companies Act.  This would not mean that all such people would be levied or that they would be levied at the same rate.

A consultation document will be issued on the design of the levy system and on the level at which levies should be set.

Definition of ‘financial markets participant’

The committee recommends that the FMA’s jurisdiction be expanded to catch people who might otherwise have escaped it; notably persons that do not need to register as financial service providers such as overseas participants.  They are now clearly covered.

Securities registration process

The committee has pushed ahead with the proposal to replace the current pre-vetting regime (in which the Registrar of Companies considers each prospectus for compliance with the Act prior to registration) in favour of a ‘notice and pause’ system based on the Australian model.

Again, however, it has listened to the concerns raised and introduced significant changes:

  • a statutory exemption from the ‘pause’ period for continuous issuers (which will exempt all KiwiSaver, managed fund and superannuation schemes except for their first prospectus; in practice the majority of issuers), and
  • an open-ended ‘transitional provision’ during which the FMA will continue to conduct the sort of pre-registration scrutiny of prospectuses which is now undertaken by the Registrar of Companies.

Amendments to the Securities Markets Act

The changes the Bill makes in relation to the oversight and conduct of the listed securities and authorised futures markets have been wound back significantly or deferred for the securities law review.

Canned are the proposed statutory Securities Markets Rulings Panel (which would have taken over the role of the New Zealand Markets Disciplinary Tribunal) and the proposal that the Minister of Commerce be able to make separate market integrity regulations. 

The committee has refocused the regulation on particular markets, rather than the exchange operator, and specified more detailed criteria for markets to be exempted.  This could open the door to enable NZX to seek an exemption to operate an unregulated market in competition with Unlisted.

The Bill also now includes recognition of the desirability of growth and innovation in capital markets among the criteria for FMA consideration of market rules.  This, together with exemptions, could facilitate less strict regulation being applied to specialist or feeder markets, or ‘private’ markets.

Other relevant commentary

Earlier Chapman Tripp commentaries on the FMA and the Bill are available here and here.

Chapman Tripp partner, Frank McLaughlin, is a member of the FMA Establishment Board.

Our thanks to Roger Wallis for writing this Brief Counsel.

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