The creation of the Financial Markets Authority (FMA) advanced another step on 1 March 2011, when the legislation governing the FMA was reported back from Select Committee.
The Commerce Committee (Committee) has reported back the Financial Markets (Regulators and KiwiSaver) Bill (Bill) with significant changes. The changes address some of the more controversial elements of the Bill. Some important new regulatory measures have also been introduced, including a regulation-making power to deal with low-ball offers.
This FYI describes some of the more notable changes.
Power to exercise a right of action
The FMA's power to exercise a person's right of action against a financial market participant, or take over existing proceedings, is one of the more controversial elements of the Bill. The provisions apply to proceedings under financial markets legislation or which seek damages or other relief in connection with activities the FMA is investigating.
The Committee has made a number of changes to these provisions.
The Committee has removed the High Court's power to allow the FMA to bring or take over proceedings where an individual has objected. Individuals (as opposed to corporates) will be able to stop the FMA exercising their right of action.
These restrictions on the High Court's power only apply to individuals. The High Court can still grant leave to the FMA to bring or take over proceedings if the party is a company or body corporate. The Committee stated it was important to retain this power, so the FMA could pursue negligent directors on behalf of shareholders without the relevant company (board, receiver or liquidator) being able to object. The Committee's proposals further align the New Zealand and Australian regimes in this area.
The FMA is now required to consult on the conduct of the proceedings with the person whose proceedings are brought or taken over by the FMA.
The Committee has removed the provision allowing the FMA to recover costs from the person whose proceedings are brought or taken over by the FMA. The Committee indicated it would be more appropriate for the FMA to seek to recover costs from the defendant in the proceedings.
New prospectus registration procedure
The Bill introduces a new process for registering securities offers, based on consideration of a prospectus by the FMA after it is registered. The FMA would have five working days from the date of registration of a prospectus to consider it (or ten working days, if the FMA gives notice to the issuer). The FMA would use this time to assess the prospectus and, if required, impose a stop order. The provisions align the New Zealand process with its Australian equivalent.
The Committee has introduced a number of amendments to the new registration regime, to improve its workability. Most importantly, the Committee has introduced a statutory exemption from the consideration period for continuous issuers. An allotment of securities can continue under a valid registered prospectus while a replacement prospectus is subject to scrutiny.
The Committee also introduced transitional provisions, enabling the FMA to carry out the pre-registration scrutiny of prospectuses currently carried out by the Registrar of Companies.
The Committee responded to the low-ball unsolicited offers circulated to some investors over the 2010 Christmas period. The original Bill provided the FMA with a 'warning power', to require a warning about a low-ball offer or the person making it to be published on the website of the person making the offer. The Committee recommended extending this power by allowing the FMA to require its warning to be included in offer documents.
The Committee also introduced a new regulation-making power to deal with unsolicited offers. Using this power, the FMA could introduce regulations requiring unsolicited offers to disclose the current market price of a quoted security or a fair estimate of the value of an unquoted security. The FMA could also impose a 'pause period', during which no acceptance would be effective and no transfer could be made. Investors who receive such an offer could then reconsider any decision to accept.
Securities Law Review
Work continues on the wider securities law review, and it is very likely there will be significant reforms arising out of this review.
Class Action Bill
The Committee indicated it would like to see a class action bill progressed. The bill could allow a body, eg the FMA, to take action on behalf of aggrieved security holders. This would replace or alter the FMA's power to exercise a person's right of action.
Establishment of the FMA
The FMA will be established in May 2011, subject to the passage of the Bill. Simon Allen is the Chair, and Sean Hughes is the Chief Executive. Further board appointments will be made in the coming weeks.