KEY CHANGES AT A GLANCE
- The select committee has recommended that the initial powers of the FMA include the power to exercise a person’s right of action.
- Individual claimants (but not corporate claimants) will be free to opt-out and take their own action.
- The proposal to introduce a “consideration period” process for prospectuses is to be retained, but not for continuous issuers.
- A number of proposals with respect to regulation of registered exchanges (e.g. market integrity regulations and the establishment of a statutory Rulings Panel) have been withdrawn from the Bill and will be considered further as part of the review of securities law.
- The FMA will be funded through levies, with a consultation process to be undertaken on the details of levy funding.
The Financial Markets (Regulators and KiwiSaver) Bill has now been through the select committee stage and is expected to pass through its final stages of the Parliamentary process later this month. In its report released yesterday, the Commerce Select Committee has recommended that the Bill be passed, but with some notable amendments.
SOME KEY CONCERNS HAVE BEEN ADDRESSED
The select committee received 33 submissions on the Bill and it is pleasing to see that the committee has addressed some of the key concerns expressed by Bell Gully and other submitters, particularly in relation to:
- the FMA’s power to exercise a person’s right of action;
- the proposal to change from a prevetting to a post-registration prospectus consideration period for securities offers, particularly in relation to continuous issuers; and
- the proposed changes to the Securities Markets Act regarding registered exchanges and securities markets.
Power to exercise a person’s right of action
One of the more controversial aspects of the Bill is the power given to the FMA to exercise a person’s right to bring a civil action against a financial market participant, or to take over existing proceedings, where it considers it to be in the public interest to do so.
Bell Gully and others argued that the issue should be left to be considered as part of the more comprehensive review of securities laws. The select committee has recommended that this new power be retained in the Bill.
The select committee has, however, recognised that the new power requires some changes to strengthen the rights of individuals and to further align the new regime with the existing regime under Australian legislation. This is to be achieved by:
- preventing the FMA from seeking the leave of the High Court to exercise an individual’s right of action, or take over existing proceedings, if an individual objects. This will mean that individuals will be free to opt-out and take their own action. However, if the party is a company or other body corporate, the High Court will still be able to grant leave. This is consistent with the position in Australia and is considered by the select committee to be necessary, for example, in cases where the FMA is exercising the power to enforce directors’ duties;
- increasing the time allowed for a person to object to the FMA exercising this power from 10 to 30 working days, although the FMA would be able to act earlier if the person consented;
- removing the ability for the FMA to apply to the court for costs from the person whose right of action is exercised and, instead, providing for the FMA to seek costs from the defendant in the course of the litigation and enabling the court to order that the FMA’s actual costs are paid out of any compensatory damages awarded; and
- requiring the FMA to consult with a person on whose behalf it is taking action as to the conduct of the proceedings to the extent considered appropriate, unless doing so might prejudice its ability to conduct the proceedings.
The select committee has removed any doubt that this power may be applied in the case of previous company failures. The Bill now includes a provision to make it clear that the FMA may exercise its powers to exercise a person’s right of action in relation to causes of action or proceedings that occurred prior to commencement of the legislation.
Prospectus registration process
Another part of the Bill which received strong criticism from submitters is the proposal to change the prospectus registration process for securities offers under the Securities Act. This would replace the current pre-registration vetting process with a process based on post-registration consideration of prospectuses by the FMA during a “consideration period” during which the securities can not be issued.
Although the select committee has recommended that the new process be implemented, it has proposed a number of amendments to the process to improve its workability, particularly to address concerns that the process might increase costs and uncertainty, and might not work well in the case of continuously issued securities.
The changes recommended by the select committee include:
- a statutory exemption from the “consideration period” process for continuous issuers, except in particular circumstances prescribed by the FMA;
- removing the provision that provides that the consideration period applies to an amendment to a prospectus;
- ensuring that it is clear that, in all other cases, allotment can continue under a valid registered prospectus even if the consideration period applies to any replacement prospectus; and
- providing that the FMA may carry out the process currently undertaken by the Registrar of Companies of reviewing prospectuses prior to registration on either a formal or informal basis, to smooth the transition for issuers to the new regime.
Amendments to Securities Markets Act 1988
One of our key submissions to the select committee on the FMA Bill was that the proposed changes to the Securities Markets Act (in Part 6 of the Bill) that were not essential for the effective operation of the FMA be removed from the Bill so they could be fully considered as part of the It is pleasing to see that the select committee has decided to limit Part 6 of the Bill to certain core provisions connected with the establishment of the FMA, its role, and its interactions with regulated exchanges.
The core provisions being retained in the Bill are:
- responsibility for approval of rules governing registered exchanges will shift from the Minister to the FMA;
- the oversight regimes for registered exchanges; and
- the power for the FMA to request rules (with some adjustments to ensure that power is not overused).
The select committee, on the advice of MED, has decided to remove:
- the power to impose market integrity regulations; and
- the provisions establishing a statutory Rulings Panel, although every registered exchange must ensure it has a sufficiently independent body to consider contraventions of the exchange’s rules, which the FMA will assess as part of its oversight review. Both of these proposals will be considered further in the review of the securities law.
FMA FUNDING THROUGH LEVIES
The select committee has recommended consolidating provisions for levy funding in other legislation (such as the Financial Advisers Act 2008) into the Bill.
The report of the select committee reaffirms the Government’s view that it is appropriate that those who benefit from the FMA’s activities and oversight should contribute to its funding. Consultation is to be undertaken on the details of levy funding before regulations are made.
The select committee has recognised that there must be a sufficient link between the FMA functions being funded and those being levied – different levies may be imposed on different persons.
NEW PROVISIONS DEALING WITH LOWBALL UNSOLICITED OFFERS
The select committee has introduced new provisions in the Bill that target unsolicited offers to purchase securities. These measures were being considered as part of MED’s review of securities law but have now been brought forward as part of the Bill.
The Bill now includes a regulation-making power that will enable greater regulation of unsolicited offers. The regulations could require offers to disclose the current market price of a security or a fair estimate of the value of an unquoted security and that a “pause period” apply to allow investors who have accepted an offer to reconsider their decision. In addition, the Bill enables the FMA to require a warning about a low-ball offer to be published on the internet site of the person making the offer and also provides for the FMA to require its warning to be included in the offer documents of any person, or their associates, making the offer.