The Government has recently released the proposed draft Financial Markets Conduct Bill (Bill). The Bill represents a comprehensive review of securities law. It will replace the existing Securities Act.
The Bill removes the troublesome concept of “offer to the public”. Instead, unless an exemption applies, disclosure is required. Disclosure is made using a single product disclosure statement (PDS). This replaces the two-tier approach of a prospectus and an investment statement.
Financial products are re-classified as debt securities, equity securities, managed investment schemes and derivatives. The concept of “managed investment scheme” replaces unit trusts, group investment funds and, to a large extent, superannuation schemes.
The proposed exemptions provide more clarity than the current Act. In particular, the vague “habitual investor” exclusion has been replaced with defined investment activity criteria. Exclusions are also provided for wholesale investors and persons with a close relationship to the issuer. Perhaps most helpfully, a new exemption has been introduced for “small offers”, being offers with no more than 20 investors and $2,000,000 being raised. This is a very positive development which will be particularly useful, particularly for small equity investments.
The Bill goes much further than the Securities Act. Financial Products must meet a number of governance requirements. The Bill also provides for licencing of fund managers and other service providers. In addition, there are restrictions on related party transactions and rules governing pricing errors for managed investment schemes.
As with most reforms in this area, the liability regime has been significantly beefed up. In particular, there are now four categories of offences. At the lower level “tier one” infringement offences, may be proceeded with by the issue of an infringement notice. At the other end, “tier four” offences impose a maximum imprisonment term of 10 years, and a fine exceeding $1,000,000. For corporate offenders, the maximum penalty is a fine not exceeding $5,000,000. Despite the increased criminal sanctions, the intent of the new law is that the FMA will deal with less serious contraventions using a range of civil remedies.
The Bill anticipates that many requirements will be prescribed by regulation, including the content of PDSs and governance of financial products.
The Ministry of Economic Development (MED) imposed a very short frame for comments on the drafting of the Bill. We generally advised clients that there was little to be gained by provided detail submissions on drafting at this stage. The Bill is likely to be considered by the Finance and Expenditure Select Committee either later this year or early next year. Our view is that more focussed Select Committee submissions provide a greater opportunity to influence the shape of the Bill.
MED has also started work on regulations covering the content requirements for PDSs. They will consult on these regulations over the coming year. This consultation provides another opportunity for input on the new securities law.