To cap a week in which a torrent of financial sector regulation proposals poured out of Wellington, the new Securities Regulations 2009 were published late yesterday.
Chapman Tripp is preparing an analysis of the latest financial regulation announcements for circulation to clients next week. This Brief Counsel focuses on some of the key features of the new regulations which commence on 1 October 2009.
Context of the 2009 regulations
The Securities Regulations 1983 currently provide detailed content rules for registered prospectuses, investment statements, and “advertisements” – disclosure documents for new issues of securities offered to members of the public under the Securities Act 1978.
The Act and 1983 Regulations have been tinkered with over time, most notably through extensions to cover managed funds and the introduction of investment statements in 1997. However the detailed disclosure regulations have not been comprehensively updated since they first became operative more than 25 years ago.
Despite the current update the disclosure regulations continue to be out-of-date in some respects (or at least at variance with accepted securities law practices in other countries). We may need to await outcomes from the review of the Securities Act, targeted for commencement in 2011, for more significant change.
According to the Cabinet paper, the aim of the new regulations is to:
reduce compliance costs for issuers and simplify offer documents for investors, and
fill gaps, correct inconsistencies and make other improvements.
Most of the changes can be traced to the consultation kicked off in 2000 by the Ministry of Economic Development and the Securities Commission, and refreshed in a discussion paper issued in April 2009.
Chapman Tripp provided detailed submissions both on the discussion paper and on draft regulations sent to us for targeted consultation in July. Almost all of our submissions have been accepted.
The new regulations commence on 1 October 2009. However, issuers can generally elect to continue to comply with the 1983 Regulations until 30 June 2010 as an alternative means of compliance. This is an “all or nothing” choice, so issuers will need to assess whether the benefits available under the 2009 Regulations outweigh the costs of transitioning early (for example, by having to prepare updated documents, and abandon existing stock of printed documents).
Chapman Tripp is particularly well placed to advise on these considerations.
The 2009 Regulations continue to prescribe:
the content of prospectuses that must be registered under the Act
the content of investment statements that must be provided to subscribers before subscription
rules and restrictions relating to advertisements
the information that must be disclosed by issuers on request, and
the content of trust deeds (for debt securities) and deeds of participation (for participatory securities).
The key changes
Simplified disclosure prospectuses
The 2009 Regulations provide detailed rules governing the use of simplified disclosure prospectuses (SDP).
The idea of reduced disclosure for listed issuers was promoted by the Cameron Taskforce and NZX in November last year. Chapman Tripp welcomed the idea then.
The regime finally became a reality (although not in the form envisaged by Cameron and NZX) with enactment of the Securities (Disclosure) Amendment Act 2009 last month.
The SDP regime allows listed issuers (companies and unit trusts) which are already subject to continuous disclosure requirements to produce only one disclosure document, instead of a full prospectus and an investment statement. The SDP can be used for:
offers of securities of the same class as listed securities (which will rely more strongly on continuous disclosure), and
offers of securities that rank equally or in priority to listed securities (which will rely on continuous disclosure to a slightly lesser extent).
Listed unit trusts can use an SDP for offers of additional listed securities, and to offer higher ranking debt securities.
Changes relating to prospectuses
In addition to providing for the use of simplified disclosure prospectuses, the new regulations also:
extend the short form prospectus requirements to cover offers of units in unit trusts
modify the requirements relating to short form prospectuses to include certain features of the Securities Act (Short Form Prospectus) Exemption Notice 2009 (for example, changes to requirements to enable companies that have relied on the notice provisions in section 209 of the Companies Act 1993 to use a short form prospectus), and
require disclosure of additional matters relating to a valuer's potential conflicts of interest in providing valuations for a registered prospectus.
Changes relating to investment statements
The 2009 Regulations:
permit cross-referencing of contact details in the investment statement, so as to require less unnecessary repetition within an investment statement, and
clarify that investment statements are subject to the advertisement provisions.
Changes relating to advertisements
require an advertisement not to be inconsistent with an investment statement. In addition, the regulation that concerns consistency clarifies that it relates to the investment statement, prospectus, or disclosure statement for the securities to which the advertisement relates (rather than a document referred to in the advertisement)
apply existing restrictions on references to assets in advertisements to participatory schemes, unit trusts, life insurance companies, and superannuation schemes. However new exceptions to the restrictions allow advertisements to state amounts of assets and liabilities if these amounts are contained in an interim statement of financial position, contained in a registered prospectus or attached to a certificate that extends the life of a prospectus under section 37A(1A) of the Act
clarify that advertisements may contain or refer to a statement of financial position or summary statement of financial position prepared in accordance with generally accepted accounting practice – adopting a submission made by Chapman Tripp
restrict statements in advertisements that securities are secured for all kinds of securities, not just for participatory securities
allow, in the case of an advertisement containing prospective financial information, the principal assumptions and method of calculation to be contained in the advertisement rather than requiring those matters to be in the prospectus
enable a director to authorise an agent to sign the certificate required for advertisements on his or her behalf
amend the provision that provides exceptions from the requirement for a certificate for an advertisement (regulation 31) to clarify that the advertisement must contain all of the specified information that is applicable (but no other information). The exception is also amended to ensure that the requirement to provide contact details is technologically neutral, and
provide that a publisher, an operator of a broadcasting station, or an exhibitor of a film who distributes an advertisement is liable under regulation 33 only when the person knows, or ought reasonably to know, that a certificate has not been completed for the advertisement. This change reverses the current burden of proof. The offence is also extended to cover distributions of an advertisement by means of an Internet site.
Changes relating to restrictions on content of registered prospectuses and advertisements
The 2009 Regulations:
prohibit a registered prospectus or an advertisement from implying (as well as stating) that investments in securities are safe or free from risk
prohibit a registered prospectus or an advertisement from stating or implying that the prospectus, advertisement, or offer has been approved by the Securities Commission or Registrar of Companies
revoke the prohibition on prospectuses or advertisements referring to securities as mortgage debentures
extend the provision relating to rates of interest and taxation of interest to cover all returns in the nature of income. The final regulations have abandoned a more restrictive proposed regulation, which would have limited references to returns adjusted for taxation – following submissions from Chapman Tripp
clarify that an advertisement must not refer to any tax advantages in holding the securities unless a registered prospectus or disclosure statement that is referred to in the advertisement sets out a full statement of those advantages, and
replace regulation 23 of the 1983 Regulations with a less prescriptive provision that is directed at any securities market (regulation 39), not just listed securities markets.
Changes to schedules relating to content of full registered prospectuses
The schedules to the 2009 Regulations implement a number of common changes with the following effects:
disclosure of the price or other consideration to be paid or provided for the securities has been made more flexible to deal with situations where the price or other consideration is not a fixed amount
disclosure of the statute or other authority by or under which the issuer is incorporated or registered is required in some cases
the information that must be disclosed for directors, promoters, auditors, and advisers is made consistent for each type of security
only restrictions on directors' powers need to be disclosed, not modifications and exceptions. This requirement is extended to other issuers as well as issuers that are companies under the Companies Act 1993
the requirements for disclosure of the nature and use of assets of the issuer are extended to all principal assets, not just principal fixed assets. Whether or not the assets are subject to obligations in favour of third parties that affect the issuer's right to dispose of the assets must also be disclosed
disclosure is now also required of fundamental uncertainties stated in an auditor's report, and not only of qualifications
the requirements for disclosure of interests of directors, promoters, and managers are now consistent for each type of security
the prescriptive requirements as to the contents of financial statements for prospectuses for equity, debt, and participatory securities are removed. Instead, financial statements must comply with the Financial Reporting Act 1993 and, accordingly, must comply with generally accepted accounting practice and be audited
summary financial statements must be prepared in accordance with FRS-43 (except in the case of superannuation schemes) requiring more detailed summary information. In the case of superannuation schemes, the requirement to distinguish between realised and unrealised net gains or losses on investments is removed, and
interim financial statements must now comply with NZ IAS 34, and statements must also be included as to material changes since the audited financial statements and as to material related party transactions.
In addition to these common changes, there are some further specific changes to these schedules as follows:
registered prospectuses for equity securities must disclose the method of removal of directors and other methods by which directors may vacate office (as well as the method of appointment) if those methods are materially different from the method set out in the Companies Act 1993 (unless the issuer is a party to a listing agreement with a registered exchange)
registered prospectuses for initial public offers of equity securities and participatory securities must now contain a full set of prospective financial statements in circumstances where only a prospective statement of cash flows was required under the 1983 regulations. However, prospective financial statements are not required if the directors of the issuer are of the opinion that those statements would be misleading – adopting a key submission made by Chapman Tripp, and
the requirement for registered prospectuses for participatory securities to provide all terms of the deed of participation is replaced with a requirement to state the date of the deed and a summary of its principal terms.
Changes to schedule on investment statements
This schedule is changed as follows:
the names of directors of the issuer and of the manager must be disclosed in the investment statement
the investment statement must disclose the method by which a subscriber must pay any money, rather than the place at which payment must be made. This ensures that the disclosure requirement is technologically neutral
the statement to the effect that the prospectus, and financial statements and other documents of, or relating to, the issuer or scheme are filed on a public register at the Companies Office now refers to the Internet site of the Companies Office, and
it is made clear that clause 20(a) (which relates to a statement describing the type of information that is required to be, or otherwise will be, available on request from the issuer) concerns information that relates to the issuer or the securities being offered.
In addition the required compliance certificate for advertisements is amended to require reference to the investment statement.
Provisions deemed to be implied into trust deeds are extended to issuers that have previously continuously offered debt securities to the public in their ordinary course of business (unless they are in liquidation, receivership, or statutory management) - this will apply to finance companies in moratoria and require additional financial reporting and audit/review of their half year financial statements.
The 2009 Exemptions eliminate the need for a number of the Securities Commission's exemption notices. However, the Commission will still need to carry forward some exemptions before the new regulations can become practically effective.
How can we help
For further information, please contact Roger Wallis, John Strowger, Tim Tubman, Tim Williams, Penny Sheerin, Geof Shirtcliffe, Bradley Kidd or John Holland.