The Financial Markets Authority (FMA) has been busy heading into the end of the year. Amongst other things, the FMA has:
- Released consultation papers on an exemption to enable personalised digital advice and updates to its corporate governance handbook
- Issued a formal AML/CFT warning to Fullerton Markets
- Published its first peer-to-peer/crowdfunding statistical returns
- Released a new KiwiSaver tracker
- Released its investigation into trading conduct of Goldman Sachs
- Published a report (together with the External Reporting Board) of an analysis of key audit matters
It is difficult to keep up while trying to finish tasks and wrap up matters before the Christmas and New Year's break. We set out below a couple of observations on the updates to the Corporate Governance Handbook and Goldman Sachs investigation which may be of interest.
FMA Corporate Governance Handbook
You have a week to submit on the consultation to update the FMA Corporate Governance Handbook (Handbook). The last update to the Handbook was in 2014 and applied to both listed and unlisted companies. As the NZX has now published its updated corporate governance code for listed companies (see our previous update here), the Handbook refocuses its principles to "companies and entities with an economic impact in New Zealand or to companies and entities which, because of their involvement in our financial markets, are accountable to the New Zealand public”. Consequently, once finalised, the Handbook will apply to a very broad group of entities including public sector entities.
Unsurprisingly, many of the changes proposed flow from this shift in focus. For example, while the recommendations for board selection, composition and assessment are less rigorous, there is a suggestion that entities should still be able to explain to shareholders how the skills and experiences of appointees will support the achievement of the entity’s strategic objectives.
The principles in the 2014 Handbook on reporting hardly touched on non-financial reporting. The updated version specifically recommends that boards determine the appropriate level of non-financial reporting, considering the interests of all their stakeholders and all relevant environmental, social and governance (ESG) factors. It also recommends that any ESG reporting is readily available to interested investors and stakeholders.
These changes illustrate how the relative importance of ESG reporting has shifted over the last few years.
The revised Handbook also broadens accountability wider than investors and includes guidelines that encourage entities to recognise the interests of other stakeholders, including customers, employees, the public, the government and anyone affected by the business.
We have reviewed the revised draft in some detail and would be happy to answer any questions you may have on the proposed changes to the Handbook, or to assist with any last-minute submissions.
FMA’s recent report on its investigation into possible market manipulation misconduct by Goldman Sachs NZ Ltd
It is also worth drawing attention to the FMA’s recent report on its investigation into two allegations of possible market manipulation misconduct by Goldman Sachs NZ Ltd. Although ultimately the FMA was not convinced that the behaviour engaged by Goldman Sachs in relation to trading in FPH and ATM shares (which were the subject of the Warminger case) was for the genuine purpose of client facilitation, it has determined not to take regulatory action in this case. A number of factors are listed for coming to this conclusion including that a proportionate response would have been a referral by the NZX to its disciplinary tribunal (the NZMDT), which the FMA recommended several times, given that Goldman Sachs was within the jurisdiction of the NZMDT as an NXZ participant at that time (Goldman Sachs ceased operating as trading participant in the NZ market in 2016). This same referral was not available with regard to Mark Warminger (or Milford) because they were not NZX participants.
Instead, the FMA has determined to take the following non-enforcement actions:
- Engage with fund managers to raise awareness and understanding on the market manipulation prohibition and to encourage all market participants to assess existing governance and controls
- Work with the NZX to review client facilitation practices (including conducting spot checks of trading on a risk-assessed basis)
- Engage with the MBIE to allow the FMA to refer matters directly to the NZDMT or another disciplinary tribunal
- Advocate for the use of voice recording by trading participants to improve the evidence available (the NZX has agreed to amend its participant rules to provide for this)
We have been discussing market conduct generally, and manipulation specifically, with a number of market participants and it is clearly front of mind. In many cases it will be clear what conduct is intended, or likely to move the price or give a false appearance of trading. Other times, it may not be so clear. What is clear is that the purpose and considerations about the context of each trade must be at the centre of trading decisions.