Corporate Advisory

21 Dec 2009

Taskforce Reports on Capital Markets

On 16 December, the Capital Market Development Taskforce (CMD Taskforce) released its much awaited final report to the Government. The report follows 18 months of consultation with participants in the financial sector aimed at developing a “blueprint” for New Zealand's capital markets. 

A range of recommendations has been put forward by the CMD Taskforce for implementation over the next three years. Although it is unlikely that all of the CMD Taskforce's proposals will be adopted, the Government has signalled that execution of the report's recommendations is a high priority. Even if implemented only in part, the report will have a significant impact on the operation, design and regulatory landscape of our capital markets.

In this FYI we discuss a number of the recommendations which we consider to be of particular interest.

Offer Documents

The report's product disclosure recommendations would have significant consequences for the form and content of offer documents. 

The most significant proposal would see the replacement of the investment statement with a short form disclosure document aimed at less sophisticated investors. This recommendation develops on one first raised in the CMD Taskforce's interim report earlier in the year. The initial proposal was for the disclosure document to be limited to one or two pages in a standardised format. In the final report, the CMD Taskforce has recommended adopting  a standardised two-part disclosure document. 

The first part would be a key information summary of one or two pages. This summary would be limited to information required by an investor to assess the risk/return profile of the product, how the product will meet the needs and diversification requirements of the investor and how the product compares to similar products. The contents of the second part would will be limited to information supporting that set out in the first part. 

Importantly, the report does not address the key issue of whether the contents of the disclosure document would be assessed by a government agency or by the issuer as is currently the case with investment statements.

In addition to the disclosure document proposals, the CMD Taskforce has recommended that a “warning label” be included on offer documents for investment products considered complex or risky.

Financial Advisers

As expected, the report pays particular attention to the regulation of financial service providers, given the recent media attention and public criticism levelled at the competency and independence of financial advisers. 

Key recommendations of the CMD Taskforce include:

• limiting the application of the Financial Advisers Act 2008 (Financial Advisers Act) to those providing financial advice to retail investors. The report criticises the extent of the authorisation regime and recommends that those advising investors falling outside the scope of the Securities Act 1978 (Securities Act) should be exempted from obligations under the Financial Advisers Act;
• limiting designation as an "independent adviser" to advisers who do not receive remuneration from issuers and are not restrained from advising on certain product types by providers. The report proposes that financial advisers, holding themselves out as independent, should, in addition to the obligations they will have under the Code of Professional Conduct, be subject to legislative fiduciary duties in their dealings with clients; and
• introducing standardised duties owed to investors by fund managers and trustees/supervisors. These are intended to include a requirement for both fund managers and supervisors to have a direct legal relationship with individual investors, a duty to act in their best interest and a fiduciary duty of care to those investors.

Registered and Unregistered Exchanges

The report suggests New Zealand follow international developments in establishing alternative listing platforms to provide additional methods of raising capital for small and medium-sized enterprises. In particular, it recommends that:

• unregistered exchanges be retained, and that exchanges exempt from the requirements of the Securities Markets Act 1988 (Securities Markets Act) be established. In both cases the report recommends such exchanges be allowed to develop their own listing rules; and
• registered exchanges, such as NZX, be allowed to own and operate both unregistered and exempt exchanges by removing the current restrictions under the Securities Markets Act.

Securities Regulation

The CMD Taskforce has previously released a number of regulatory proposals aimed at reducing the cost of capital raising. In the final report, it has recommended further legislative changes to improve access to private market funding.

The report proposes to do away with the current fragmented exemption regime under the Securities Act and replace it with a framework which, amongst other things, introduces an explicit test for exempt small offers and which permits investors to opt out of the protections afforded by the Securities Act.

It is proposed that the following classes of investors be exempt from the Securities Act:

• "registered investors" if they confirm in writing they understand the Securities Act offer regime and that its investor protections will not apply to them;
• professional investors satisfying prescribed quantitative tests; and
  those investors whose investment decision is based on a recommendation from an authorised independent adviser.

The current requirement for third party certification would also be replaced with a self-certification process if investors meet the quantitative criteria to allow exemption from the Securities Act.

In addition, the CMD Taskforce recommends adopting a “bright line” test for excluding from the scope of the Securities Act offers made to only a certain number of people, or for a limited aggregate issue size. This would mark a significant departure from the existing regime which has never had a "small offer" exemption.

The report is critical of the Ministry of Economic Development's recent proposal to require larger private companies to publicly file their accounts. The CMD Taskforce recommends that this reporting obligation should not be imposed on companies who have opted to remain private and so are distinguishable from their more widely held public counterparts.

Regulatory Institutions

A number of recent industry papers have proposed consolidating the functions of New Zealand's various capital market regulatory agencies. The report's approach is in line with those suggestions and recommends New Zealand move to a "twin-peaks" model. This model aims to avoid duplication of functions and conflicts of interest by establishing separate market conduct and prudential regulators. 

For the regulation of market conduct this may involve consolidating the Securities Commission, certain regulatory and enforcement functions of NZX (including NZX Disciplinary Tribunal), the Government Actuary and some of the work of the Registrar of Companies. The NZX would still play an important role in monitoring listed issuers but regulatory oversight would be conducted by the market conduct regulator on a referral basis.

Tax

Given the overlap in membership between certain members of the CMD Taskforce and the Victoria University of Wellington Tax Working Group it is perhaps not surprising that the report contains substantive commentary on the taxation of investment products. While we have not analysed the report's tax recommendations in this FYI, any tax initiatives will need to take into account the Tax Working Group's review. The "elephant in the room" is of course the Henry review of Australian taxation.

Market participants will now have to wait until the new year to see how the Government intends to pursue the CMD Taskforce's recommendations. The expected discussion paper on the review of the Securities Act is likely to be a key indicator of the Government's intentions. 

Authors

Kevin Jaffe

Partner - Corporate & Commercial

DDI: +64 9 977 5057

Mobile: +64 21 987 430

Email:

View Profile

Shelley Cave

Partner - Corporate & Commercial

DDI: +64 9 977 5260

Mobile: +64 21 660 090

Email:

View Profile

Peter Hinton

Partner - Corporate & Commercial

DDI: +64 9 977 5056

Mobile: +64 21 446 866

Email:

View Profile

Don Holborow

Partner - Corporate & Commercial

DDI: +64 4 924 3423

Mobile: +64 29 924 3423

Email:

View Profile

Michael Pollard

Partner - Corporate & Commercial

DDI: +64 9 977 5432

Mobile: +64 21 400 852

Email:

View Profile

Joanna Lim

Senior Associate - Corporate & Commercial

DDI: +64 3 365 0958

Mobile: +64 21 359 407

Email:

View Profile

Joost van Amelsfort

Senior Associate - Corporate & Commercial

DDI: +64 4 924 3433

Mobile: +64 21 918 427

Email:

View Profile