The revised draft guidance note on effective disclosure, released today by the Financial Markets Authority, shows that the FMA has taken on board the criticisms made of its first effort. The FMA has also released a detailed summary of its response to submissions.
As this is the first significant consultation process that the new regulator has run, it was always going to be something of a test case. A failure to listen may have undermined market confidence in the FMA - but it has now successfully dodged that bullet.
The changes the FMA has made are welcome and address many of the concerns submitters, including Chapman Tripp, raised.
The FMA seeks high level feedback on its overall approach and drafting comments by Thursday 10 May 2012. It then plans to finalise the guidance by 31 May.
- The FMA is now explicit that the guidance note does not, and cannot, change the legal requirements for disclosure documents but is intended to assist people to comply with those requirements. The guidance usefully contains cross-references to many of the requirements currently prescribed by law and recent judicial observations on the legal tests.
- It has sought to avoid leading people into applying a “tick the boxes” approach by emphasising that disclosure documents should be considered “holistically” and outlining the steps directors should take to bring their knowledge and experience to ensuring the adequacy and accuracy of each individual disclosure in the document.
- It has put a greater emphasis on the materiality of information which is disclosed, stating: “We discourage you from including immaterial factors, including the ones referred to in this guidance note, unless the Act or the Regulations expressly require them or they are required to avoid a statement in a disclosure document being misleading. It is for you to judge whether a factor is material in the context of your particular offer”.
- It plans to publish the finalised guidance by 31 May, and is asking continuous issuers to review their disclosure documents in light of the note as they issue a new investment statement or register a new prospectus rather than having to update documents outside their regular review timetable.
- It has softened its earlier hard line stance which would have banned the use of brand information, photographs and other images in the first few pages of an offer document to guidance that such material should not be allowed to dominate disclosure documents. This is a much more sensible approach. Chapman Tripp and others submitted that the proposed ban might be counterproductive as, if the documents were not attractively presented, investors would be less inclined to read them.
Chapman Tripp comments
We are pleased that the FMA has clearly carefully considered the 62 submissions received, and has been willing to make significant changes to its initial views. The response document is a useful summary of the industry feedback, and explanation of the changes the FMA has made.
The FMA has addressed our most significant concerns. It has:
- clarified the legal status of the guidance, and dropped the prescriptive tone of the first draft
- reframed much of its guidance as good practice, where FMA’s comments exceed existing legal requirements, and
- is more flexible, to take account of the nature of the financial products, issuer and circumstances.
While a few drafting issues remain, the finalised guidance should play a valuable role in making offer documents more effective and providing a measure of comfort and security to both issuers and investors, without adding overly burdensome additional compliance costs.