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Corporate Advisory

12 Aug 2009

Progress Report from CMD Taskforce

The Capital Market Development Taskforce (CMD Taskforce) has released a progress report to the Government. The report identifies perceived shortcomings in New Zealand's capital markets and suggests a number of legislative and regulatory changes. In addition, the CMD Taskforce recommends legislative changes to reduce the cost of raising capital for SMEs and private market participants.

Regulatory Proposals

The CMD Taskforce’s regulatory proposals would have significant consequences for adviser/client relationships and the form and content of offer documents. These proposals include the following:

requiring that firms in the retail investment market treat customers “fairly”. The “fairness” approach is based on the "Treating Customers Fairly" regime in the United Kingdom. Effective monitoring will be necessary for “fairness” standards to be meaningful, which would need to tie in with the existing safeguards aimed at achieving similar ends, eg, the NZX Participant Rules and the conduct obligations under the Investment Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008;
imposing an express fiduciary duty on financial advisers in dealings with clients; and
replacing an investment statement with a standardised one or two page disclosure document. The disclosure document would contain only information required for an investor to assess the risk/return of the product, how the product will meet the needs and diversification requirements of that investor, and how the product compares to similar products. There is a similar document being considered in Europe for collective investment products but not for directly held investments in securities. An important issue in New Zealand will be whether the contents of the document would be assessed externally by a government agency, with the associated time and cost implications, or whether issuer-based assessment should be retained.

Measures to Reduce Capital Raising Barriers

The CMD Taskforce has proposed additional changes to reduce the regulatory burden and costs of capital raising, primarily at the SME level.

The proposed measures include:

removing restrictions on pre-prospectus publicity to allow for the testing of product demand. This proposal would be a significant advance on the limited pre-prospectus publicity currently permitted;
limiting the extent to which an allotment is void if the offer is made to someone who is not covered by an exemption. Rather than avoiding the entire offer, only the offers to the affected persons are avoided. Alternatively, the Securities Commission could be given powers to validate such offers without resorting to the courts for relief as currently required;
exempting employee share schemes, subject to caps;
allowing a prospectus to remain valid where there have been material and adverse changes, if a memorandum of amendments is prepared inserting new interim financial statements and an explanatory statement relating to the changes;
clarifying that certification as a 'wealthy' person for the eligible persons exemption is by reference to the 12 prior to subscription rather than prior to an offer;
allowing the $500,000 minimum subscription for a non-public offer to be paid in instalments;
expediting the Securities Commission exemption process by allowing exemptions to come into force on signing rather than by gazetting;
removing liability for vendor shareholders in initial public offerings; and
reinstating the $20 million assets test and providing that joint shareholders be treated as a single shareholder when determining if an unlisted company is a code company under the Takeovers Code or, alternatively, removing the requirement for smaller firms to provide independent advisers' reports when undertaking a rights issue.