The regulatory waters will lap higher and colder from 1 May when the new Financial Markets Authority (FMA) is established and related legislative reforms affecting the operation of capital markets commence.
However, with minor exceptions, the KiwiSaver changes will not apply until 1 October next year (or earlier when a scheme’s trustee elects to adopt them).
This Brief Counsel provides a quick overview of the new landscape and looks at some of the practical implications for financial services.
The FMA will be a bigger and more powerful regulator than the Securities Commission which it will replace. It will have new powers to:
- exercise an investor’s right of action (provided it judges this is in the public interest and is an appropriate use of resources, and if individual investors do not object. This power can be applied retrospectively to conduct pre-dating the new FMA regime)
- prevent products being structured to avoid the FMA’s supervision
- publish warnings, and require warnings to be disclosed by financial market participants, and
- undertake search and surveillance, including the power to search a bicycle!
It will also have oversight of registered exchange markets and new weapons to deal with unsolicited low ball offers.
The FMA will be chaired by Simon Allen. The CEO is Sean Hughes. Initial board members are: Shelley Cave, Colin Giffney, Mary Holm, Murray Jack, James Miller, Justine Smyth, Michael Webb and Mark Verbiest. Associate members are: Bruce Sheppard, Rebecca Eele and Arthur Grimes.
The new regime and your business
The changes which will impact most on financial services business practice arise from amendments to the Securities Act and to the KiwiSaver Act.
Securities Act amendments
Prospectus registration and review
Prospectus registration and review will comprise two stages:
- a largely ‘tick-box’ process in which the Registrar of Financial Service Providers registers a prospectus on delivery unless it does not meet certain narrow procedural requirements (e.g. is incorrectly signed or dated), followed by
- a substantive review by the FMA during which time issuers may not allot or accept subscriptions. This is expected to be five working days, extendable to ten. (Issuers will be advised if the review is to take more or less than five working days).
Within five working days of registration, issuers will be required to notify the registration on their website and direct investors to where they can find a copy of the prospectus. Compliance with this requirement will require issuers to have a live website at the time of registration.
The FMA may also require issuers to deliver prospectuses for registration in a prescribed manner and form, which could potentially signal a move to electronic prospectus registration.
The FMA may elect not to review a prospectus at all, and may at any time prohibit allotment under, or cancel registration of a prospectus which it believes is materially misleading or does not otherwise comply with the Securities Act and Securities Regulations.
Continuous issue prospectuses will not be subject to the post-registration stand-down period (except for any classes of continuous issue prospectuses determined by the FMA).
It may become more common for issuers to register amendments to prospectuses after the prospectus is registered, in order to accommodate subsequent FMA comments.
To ease the transition to the new system, the FMA will continue the pre-vetting function on a temporary basis (it is not clear for how long).
Printing and mailing timeframes
Issuers with compressed offer timeframes will need to be mindful that the FMA may require amendments to the prospectus post-registration. Particularly where combined prospectus and investment statements are prepared, print and mail out timeframes built around the registration date may now run the risk that subsequent amendments will be required (or that the offer will need to be withdrawn and remade).
Issuers will also need to build the post-registration stand-down into their offer timetable. This means that offer documents will need to accommodate a flexible opening date for the offer, and issuers will need to have processes in place to ensure subscriptions are not processed before expiry of the consideration period.
Statements in prospectus
Statements customarily included in offering documents about registration mechanics will need to be revised to reflect the new regime (e.g. prospectuses will now be delivered to the Registrar of Financial Service Providers for registration and some description of the consideration period may be required).
Register of Securities Offers
No time is set for when the Register of Securities Offers will be established. Once it goes live, issuers will have to provide the Registrar with prescribed information and documents (including investment statements), and update the Registrar of any changes material to their offer(s).
Issuers of existing prospectuses will have 40 working days to provide the requisite material and will have to update statements regarding the availability of documentation to reflect the information on the Register.
Only class exemptions of general application will have to be published as formal regulations. Individual exemptions will be published on the FMA’s website, and notified in the Gazette after they have been granted.
For the moment, the Government has decided against introducing a ‘proper purpose’ test, à la Australia, which would have enabled companies to refuse to supply securities register information in circumstances where they think it will be used for improper purposes.
It has, however, given the FMA new tools to deal with unsolicited low ball offers. The FMA will be able to require the offeror to publish an FMA warning about unsolicited offers in the offer documents. There is also a regulation-making power in the Act to allow rules to be set such as requiring that the market price be quoted in the document, or a fair estimate of value for an unlisted security, and requiring a ‘pause period’ before acceptances can take effect.
We outlined the key KiwiSaver changes last month.
Adopting these changes (whereby a retail scheme manager becomes the issuer of membership interests and the trustee becomes a statutory supervisor) will require:
- detailed trust deed amendments prescribed with FMA consent
- information documents (posted to websites) explaining the material scheme changes to existing and prospective members, and
- notices to existing members.
Schemes will also need to replace existing prospectuses and investment statements.
Although the KiwiSaver Amendment Act will take effect on 1 May, a scheme will have until 30 September 2012 to adopt the new legislation. Until it does so, all existing KiwiSaver Act provisions will continue applying as if they had not been amended, with the exception of:
- amended scheme wind-up provisions, and
- replacing all references to the Government Actuary with references to the FMA.
The offer restrictions prescribed for restricted schemes will also apply from 1 May.
We are yet to see supporting regulations prescribing:
- the necessary changes for KiwiSaver investment statements
- the new KiwiSaver-specific schedule to the Securities Regulations 2009 (which we expect will blend the details prescribed for unit trusts and superannuation schemes), or
- revised content requirements for KiwiSaver schemes’ annual reports.
Again though, none of these new regulations will apply until schemes adopt the KiwiSaver governance changes (or until 1 October 2012). We understand that the regulations will likely be drafted over the next four to six weeks and that industry participants will be consulted on the annual reporting requirements.
The trustee licensing legislation, including proposed regulations which we understand may shortly be released in exposure draft form, now extends to retail KiwiSaver scheme trustees. It will take effect on 1 October 2011 and all trustees will be granted an automatic temporary licence expiring no later than 30 September 2012.
Where a scheme adopts the new KiwiSaver regime before 1 October 2011, its trustee will need to apply for a permanent licence by no later than 31 October 2011. If the scheme adopts the legislation at a later date, its trustee will have one month to apply. Restricted schemes are unaffected by these trustee licensing requirements.
With regulations not yet prescribed, it may be impracticable for many schemes to adopt the KiwiSaver changes in the run-up to this year’s (as opposed to the 2012) prospectus renewal.
Securities Trustees and Statutory Supervisors Act
All corporate trustees will be required to be licensed as will certain statutory supervisors, including for retirement villages (although they are already covered by the Retirement Villages Act).
The Act will not come into effect until 1 October 2011 and provides for a one year transitional regime.
Earlier Chapman Tripp commentaries on the FMA and the Bill are available here
Our thanks to Asha Trotter, Roger Wallis and Mike Woodbury for writing this Brief Counsel. For further information, please contact the lawyers featured.