The scope of amendments proposed by the Securities Markets Amendment Act 2011, which comes into force on 1 May, has been narrowed from the original proposals in the Financial Markets (Regulators and KiwiSaver) Bill. In particular, the proposal in the Bill to replace the NZ Markets Disciplinary Tribunal with a statutory Rulings Panel has been dropped (for now), as has the proposal to introduce a regulation-making power for market integrity regulations (which is not likely to be reintroduced until there is a credible plan by an alternative trading platform to enter the New Zealand market).

Nevertheless, the Act makes a number of substantive changes to the Securities Markets Act 1988 (SMA), including:

  • a shift in focus from registration and regulation of exchanges to the markets operated by them;
  • a more prescriptive registration, obligation and oversight regime for securities and futures markets;
  • a new streamlined rule approval regime for registered markets, which includes a power for the FMA to request changes to market rules (subject to specific criteria to ensure this power in not overused);
  • providing the FMA with access to registered exchanges real-time data feeds and access to information in real-time;
  • new provisions governing unsolicited offers; and
  • changes to the exemption powers under the SMA.

Registration, obligations and oversight of registered exchanges

Measures introduced to create a more level playing field for NZX

The Act introduces new registration and market rule provisions for securities and futures markets. Included in these changes is a shift in focus for the legislative framework of the SMA in so far as registration under Part 2B of the SMA (and authorisation of other securities and futures markets under the SMA) is now in respect of particular markets rather than the body corporate generally. Under the new provisions, rule approval, oversight and other regulation in the SMA (such as the disclosure obligations in Part 2) are in respect of an exchange’s registered markets and not the registered exchange.

This change has been introduced to address concerns that the SMA creates an unlevel playing field for registered exchanges in respect of competition from overseas exchanges and local unregulated exchanges. As a result, it is now possible for a registered exchange to operate an unregistered market if they obtain an exemption from the registration requirement for that market.

FMA to approve market registrations and is given formal oversight role

Applications for registration of a market will be made to the FMA, and not to the Minister of Commerce.

New general obligations (based on Australian equivalents) have been introduced for registered exchanges which require them, to the extent that is reasonably practical, to ensure that registered markets are fair, orderly and transparent. They must also have adequate arrangements for handling conflicts of interest and to monitor conduct of exchange participants, and sufficient resources to supervise them. An exchange must provide an annual report to the FMA and the Minister of Commerce on the extent to which it has complied with those obligations.

The FMA has been given a formal oversight role over registered exchanges to review how well a registered exchange is meeting its obligations, with related powers to inspect documents and interview staff of an exchange. This extends the powers previously given to the Securities Commission in terms of its annual oversight review of NZX.

If a registered exchange fails to meet its general obligations, the FMA can require it to submit an action plan, specifying actions the FMA considers that the exchange should take to remedy the failing. If the exchange submits a plan that is acceptable to the FMA, it becomes enforceable. If it refuses to submit a plan, or the plan is unacceptable to the FMA, then ultimately the Minister of Commerce may direct, on the recommendation of the FMA, the exchange to take certain actions.

New market rule regime

A new market rule regime has been introduced to replace the existing conduct rules in the SMA. At present, the SMA requires the rules to be approved (or not disallowed) by the Minister of Commerce. This process is being replaced so that all new market rules or changes to existing market rules must be pre-approved by the FMA. A new power has also been given to the FMA to request (but not compel) changes to market rules on certain matters. This power is however only to be exercised after it has carried out a general obligations review or if it believes on reasonable grounds that the rule change is urgent.

Statutory criteria for the approval of market rules have been included as part of the SMA, including a criterion “encouraging growth and innovation in New Zealand’s securities and futures markets”. This opens the way for specialist or feeder markets to develop, although the criterion will have to be weighed against various other criteria relevant to the market in question.

Access to real-time information

In order to carry out its role effectively, the FMA is being given the power to request registered exchanges to give it access to information that is necessary to enable the FMA to carry out real-time surveillance of the operation of the exchange’s registered markets.

Unsolicited offers – dealing with Mr Whimp’s offers

New provisions have been included in the SMA to assist the FMA to deal with unsolicited offers to purchase securities. The priority given to this issue is in response to recent offers made by limited partnerships associated with Mr Bernard Whimp.

The FMA will be able to make an order to restrain an offeror from acquiring securities. This power is in addition to the powers inserted as part of the Financial Markets Authority Act to deal with unsolicited offers, which include the FMA being able to require the offeror to publish a FMA warning about the unsolicited offer in the offer documents.

New exemption making powers

To provide more flexibility around the granting of individual exemptions made by the FMA under the SMA, as with the changes made to the Securities Act exemption powers, such exemptions will no longer be drafted and published by the Parliamentary Council Office, and instead will just be published on the FMA’s website, notified in the Gazette and be available for purchase. Class exemptions will continue to be regulations requiring drafting by the Parliamentary Council Office and publication.