The third exposure draft regulations for Phase 2 of the Financial Markets Conduct Act (FMCA), released last week, cover the content of the PDS, the offer register and ongoing disclosure requirements, such as quarterly fund updates.
We give you a practical overview of some of the more significant issues affecting managed funds (including, among others, all KiwiSaver schemes, unit trusts and superannuation schemes).
Submissions close on 20 June 2014.
Much of the content of the proposed regulations was consulted on last October.
This third exposure draft and commentary reflects the submissions from that consultation round and further thinking by the Ministry of Business, Innovation and Employment (MBIE) and FMA.
Highly prescribed and standardised PDS for managed funds
The PDSs for managed funds will be short, highly prescribed and standardised, more so than PDSs for other financial products. This is to support comparability between various funds and to promote investor familiarity over time.
The PDS must contain the information prescribed by regulations.
MBIE has decided not to prescribe an expiry date for PDSs, but fund managers must ensure that the PDS remains accurate and provide regular confirmations to the Registrar. Matters that are subject to frequent change (e.g. fund performance) will be in the quarterly fund updates and the online register.
PDS page length restrictions
The draft regulations propose a hard page limit of 12 pages (or 7,200 words) for managed funds.
Although the earlier consultation included a full mock-up of the PDS for managed funds, the regulations do not propose to set a template. The PDS is, however, required to follow certain headings and content is required to be put in the order of those headings. The PDS must also use certain prescribed tables, diagrams, and charts (e.g. fees tables) and contain various prescribed statements, for example those used to explain the nature and effect of financial information.
Minor changes are allowed to the prescribed statements when the statement does not apply to a particular offer or where changes are needed to ensure that the statement is not false, misleading or confusing.
MBIE recognises that some providers of KiwiSaver schemes may wish to add further “investor education” matters in the PDS, such as describing the benefits of joining KiwiSaver generally and emphasising the importance of selecting the right investment option to cater for the long term nature of KiwiSaver.
MBIE is therefore asking for feedback on the benefits of having a KiwiSaver specific version of the PDS with standardised KiwiSaver disclosures.
PDS can cover more than one fund
The previous draft regulations allowed a PDS to cover only one scheme with a number of different funds. This raised various issues with fund managers who submitted that there needed to be more flexibility about the content of the PDS.
The third exposure draft now allows fund managers to include a number of different managed investment schemes in a single PDS. This may, however, be challenging considering the strict page/word limit. Fund managers may also include information about only some of the funds from a scheme in a PDS.
In addition, MBIE is seeking feedback on two further options:
- permitting PDSs for the scheme only, or for the scheme and a core set of funds, and a separate fund update for each fund under the scheme, or
- combining the front end of the PDS with the content from fund updates for specific funds. This would allow the inclusion of more extensive fund information (such as historic performance and specific assets held by the fund) in the PDS.
Key Information Summary (KIS)
Each PDS will start with a prescribed KIS, which must be no more than two pages (or 1,200 words) for managed funds.
The purpose of the KIS is to provide the issuer’s assessment of the most significant aspects of the offer that are relevant to a retail investor, and there are defined categories which must be covered.
Information can be incorporated by reference
Information that is required to be in the PDS or the register entry can be incorporated by a reference in some circumstances. This will be particularly helpful in respect of continuous offers when the information needs to be kept up-to-date.
Where a fund manager incorporates material by reference, the PDS must contain a brief description of the information and a link or other identification of the relevant document. Generally these documents must also be placed on the offer register.
The risk indicator introduced in the previous draft regulations has been retained. It adopts the UCITS model (rather than the Australian approach). The risk indicator is essentially a number between 1 and 7 which measures the volatility of a fund’s unit price over the past five years. We have previously commented that this is a fairly crude measure of the risks involved, but its attractiveness is its standardisation across funds from different providers.
The draft regulations include guidance on how to calculate the risk indicator. It is envisaged that this guidance will be supplemented with FMA frameworks and methodologies.
Fund managers will be required to recalculate risk indicators on an ongoing basis and update them if necessary. MBIE has noted that a change in the risk indicator for a fund by one risk class would not generally require an update to the PDS.
The latest risk indicator must also be provided in each quarterly fund update. It is expected that FMA will issue guidance on updates relating to changes in the risk indicator.
Standardised fee disclosure
The draft regulations require various fees to be disclosed using standardised categories and tables. Examples must also be provided.
Lifecycle and other investment options treated as funds
The draft Regulations treat lifestyle and other investment options as separate funds for disclosure purposes (and require separate disclosures in the PDS, but not quarterly updates, for them). Feedback is sought on this proposal.
Additional information can be included
The PDS can include additional information in the main part of the PDS only if it does not detract from the prominence of the information that is required to be included by the FMCA or the Regulations.
Additional information can always be added after the main parts of the PDS, provided the PDS meets the length restrictions.
PDS for other managed investment schemes
The draft regulations provide for different disclosure requirements for managed funds and other managed investment schemes.
Other managed investment schemes tend to be less liquid, investing in a smaller number of unlisted assets (or just one asset), such as property syndicates, forestry partnerships, limited partnerships and other closed-ended funds.
The proposed PDS for other managed investment schemes is therefore less prescribed and more similar to the PDS for equity securities with the same length restriction (60 pages or 36,000 words). Instead of focusing on the scheme’s investment philosophy and objectives (as is the case with the PDS for managed funds), the emphasis will be on the assets underlying the scheme and how the assets will be managed.
The requirements for the register entry are set out in the Schedules to the draft regulations. Some information will need to be inputted in certain standardised fields, which will allow investors to search and compare offers, such as minimum investments and offer dates.
Fund updates and other ongoing disclosure
The draft regulations contain ongoing disclosure obligations, with content requirements for fund updates and annual reports for managed investment schemes.
The purpose of the fund updates is to provide a summary of key information about the fund at the end of each quarter. The fund update must follow a template to be set by the FMA and include up-to-date information on the fund such as performance figures, fees, top 10 investments and key personnel.
The quarterly fund update is intended to replace the current KiwiSaver periodic disclosure statements (which the fund update mirrors, with changes noted in the commentary on page 31). It will be required, however, for all managed funds (not just KiwiSaver schemes).
Trans-Tasman mutual recognition scheme
The regulations for the trans-Tasman mutual recognition scheme have been carried over from the Securities (Mutual Recognition of Securities Offerings — Australia) Regulations 2008 (which will be repealed). The draft regulations allow an offeror to offer interests in managed investment schemes in Australia and New Zealand upon notification to FMA and ASIC, and by using the disclosure document prepared under the requirements of its home country, with certain warning statements.
The draft regulations are still subject to negotiations with the Australian Treasury and the Australian Securities and Investments Commission.
The full set of regulations for the FMCA will be made in mid-2014 and come into force on 1 December 2014.