Although the provisions in the draft Financial Markets Conduct Bill (draft Bill) are less dramatic for listed issuers than for other market participants, useful improvements are proposed for secondary market rules, with potential for more cost effective fund raising rules.
The draft Bill requires a broad range of securities market facilities to be licensed, but with scope to relax some requirements to facilitate the emergence of ‘stepping stone’ exchanges short of full stock exchange listing.
In this Brief Counsel we provide an overview of the proposals affecting listed issuers and prospective issuers.
Insider trading and market manipulation
Part 5 of the draft Bill carries forward much of Parts 1 and 2 of the Securities Markets Act (SMA), reflecting the extensive recent securities trading law reforms of February 2008. Thus, insider trading and market manipulation remain a crime, for serious misconduct.
Usefully, the Ministry of Economic Development (MED) proposes to leave behind section 8D(b) of the SMA, prohibiting disclosure of information where a person may continue to hold listed securities – the ‘tipping to hold’ prohibition - which is unworkable if strictly applied.
MED asks whether the insider trading prohibition should be extended to trading in non-quoted financial products, or OTC derivatives where the underlying is a quoted financial product. We think this would be a mistake, and that the correct policy choice was made in the recent securities trading reforms to differentiate from Australia and focus the New Zealand regime on listed market integrity. OTC derivatives should remain privately negotiated transactions, even when the underlying subject matter is listed.
Secondary market disclosure
The continuous disclosure and substantial security holder (now called substantial product holder) regimes are largely untouched. But several useful changes are proposed for the director and officer disclosure regime:
- the focus will be on directors and “senior managers” – those persons who occupy a position that allows them to exercise significant influence over the management or administration of the issuer (for example, a chief executive, or chief financial officer) - rather than the broader ‘officer’ concept of those concerned in, or that take part in, the management of the issuer (currently narrowed by regulations to exclude officers more than two direct reports from the CEO)
- the regime will be limited to interests in quoted financial products, rather than any securities, and
- a number of exemptions in regulations and an exemption notice will be included in the primary legislation, making the exceptions more accessible.
Our submissions on the draft Bill suggest narrowing the regime further by removing the requirement to disclose interests in quoted financial products of related bodies corporate – which unnecessarily requires directors or senior managers of special purpose debt issuers to make disclosures relating to listed parent company shares in circumstances where the managers are not otherwise directors, nor qualify as senior managers, of the listed parent.
The Australian regime does not extend to related bodies corporate and, in our view, the extension generates unnecessary compliance costs and does not serve the purposes of deterring and assisting in the monitoring of insider conduct and market manipulation.
As noted in our Brief Counsel on exemptions, Schedule 1 of the draft Bill contains clearer brightlines for private placements to wholesale investors, offers through intermediaries, under employee share purchase schemes, and small personalised offers.
Regulated offer disclosure
The draft Bill does not carry forward a detailed separate ‘simplified disclosure prospectus’ regime. Instead, for regulated offers all issuers will need to prepare a product disclosure statement (PDS) and maintain appropriate register entries in an online register of offers of financial products. However, clause 39(3) recognises that regulations may simplify the disclosure requirements where information about an offer is available by the continuous disclosure rules.
As noted in our recent Brief Counsel on liability, we think the liability regime for fund raising applies to a broader range of market participants than necessary, which may undermine the draft Bill objective of developing New Zealand’s capital markets.
Licensed financial product markets
The draft Bill modifies the current regulatory regime by replacing the registered securities exchange and authorised futures exchange regimes with a licensing regime for significant non-wholesale securities markets.
NZX should be automatically licensed under the draft Bill transitional provisions. The Unlisted trading facility, and any other facility with more than 100 transactions per annum exceeding $2 million in total value will need to seek a licence.
As currently drafted, the licensing regime could capture single issuer facilities, although our submission suggests an exception should be included unless they want to apply for licence.
The draft Bill seeks to implement the Capital Market Development Taskforce recommendation to encourage development of ‘stepping stone’ exchanges for smaller companies by providing some flexibility to relax rules, as part of the licensing.
For example, market rules might prescribe periodic and event disclosure in place of continuous disclosure, or additional exceptions to insider trading might be permitted if processes are followed to limit insider trading to defined periods after disclosure of financial results and other material information.
Register access and unsolicited offers
The Bill has stopped short of restricting access to financial products registers except for a ‘proper purpose’. However:
- requesters for copies will need to provide a statement of the intended use of the copy
- issuers will have to provide the copy within five working days of payment of the prescribed fee (this is likely to be adjusted from the current 20c per page). Issuers will be able to extend this period to 10 working days, if they decide to refer the requester’s stated use to the FMA and seek a notice from the FMA that they are not required to comply with the request
- the draft Bill contains a prohibition on using information obtained from a register for direct mail advertising of unrelated material (with a civil penalty for breach), and
- regulations could be made restricting use of the information for additional purposes. This probably will not extend to exclude unsolicited ‘low ball’ financial product offers, as the draft Bill proposes to carry forward regulation-making powers for unsolicited offer disclosure and cooling-off period requirements.
The FMA will continue to have power to make warnings about unsolicited offerors.
Following consideration of submissions, the draft Bill is expected to be introduced to Parliament in early October and enacted in mid-late 2012 with commencement in early 2013.