The provisions in the Unit Trusts Act will be extended to all CIS with the effect that:
investors holding 10% of the value of the scheme’s assets will be able to call a meeting, and
resolutions at meetings will be passed provided the people who vote hold at least 25% by value of the scheme’s assets and that they vote 75% by value in support of the resolution.
Electronic voting will be permitted, consistent with best practice overseas.
Where there has been a breach of duty by the fund manager, investors will be able to call a meeting and (provided the support threshold is met) remove the fund manager or direct the fund manager to take certain action.
Consistent with the existing whistleblower duties and protections in the Superannuation Schemes and KiwiSaver Acts, investment managers, actuaries or auditors will be required to disclose to the FMA any reasons they have to suspect that there is a serious problem with the CIS. Such disclosures will attract protection from liability if made in good faith.
Related party transactions
Disclosure of all related party transactions will be required. Fund managers will also be required to report to the external supervisor (and the supervisor will be required, in turn, to report to the FMA) any related party transaction which exceeds 10% of assets.
The Government decided against tighter regulation on the basis that this would be unduly burdensome (given that related-party dealing is an important feature of many business structures).
The idea is to encourage product innovation and facilitate greater share market participation by retail investors. OEICs will be run like a traditional company except that they:
will be subject to the CIS regime, and
will have specialised rules relating to the issue and redemption of shares to allow investors to enter and exit the market efficiently.
Regulation of fund managers and wrap-account providers
All fund managers (meaning their directors, senior managers and controlling owners) will have to be registered by the FMA.
The Cabinet Paper also proposes the regulation of non-pooled investment schemes, including wrap accounts, with the likelihood that there will be disclosure requirements imposed.
Details of what the FMA will take into account in determining eligibility will be set out in regulations but the Ministry of Economic Development has indicated that the ‘fit and proper’ person test will be less stringent than that applying to non-bank bank deposit takers and under the new insurance prudential supervision regime.
Insurance products and exchange-traded funds
Existing insurance contracts with an investment component will be exempted as most are legacy products and it is difficult to separate out the investment component. Further, the insurance/investment split is specific to the policy holder rather than generic.
Any new such contracts will be expected to comply with the CIS regime.
Exchange-traded funds are a relatively new product offering but are rapidly evolving. As these are becoming more complex and actively-managed, further work is required as to what disclosure requirements they should apply to them. These are expected to be addressed in the next report-back to Cabinet prior to 31 May 2011.
Our thanks to Jamie Hoyle and Emma Harding for writing this Brief Counsel.
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