Power outlines securities law shake-up

Commerce Minister Simon Power. Photo / Mark Mitchell

The biggest shake-up of fundamental securities law in a generation is under way, with the issue yesterday by Commerce Minister Simon Power of a discussion document covering the Securities Act 1978 and Securities Markets Act 1988.

The review is necessary to overhaul 30 year-old securities law that needs to catch up with the times, and is another big plank in the wide-ranging securities and financial markets reform that Power inherited and has expanded on to try and restore trust and confidence in New Zealand's financial markets.

The document proposes securities law target no more than four specified categories of financial products: equity, debt, collective investment schemes, and derivatives, and only those where "a financial return or hedging financial risk is a significant feature."

It is proposed the revised Act would not apply to new classes of investors who were deemed to be "sophisticated or related to the issuer". That definition is likely to spark debate since such investors are apparently caught up in the Hubbard/Aorangi Securities statutory management.

Submissions are sought by Friday, August 20.

The new Financial Markets Authority will be able to call in products that are substantially similar to any of the four securities categories, to avoid the current potential for investment instruments to be restructured to avoid regulation. The definitions of "security" and "futures contract" - key phrases in the two Acts - would be updated.

New, simplified investment disclosure documents are also envisaged, along with a range of other reforms, many foreshadowed by the Capital Markets Development Taskforce.

Among key recommendations in the review :

• "Economic substance" will prevail over "legal form" for definitions, which will draw on accounting rules and "overseas definitions;

• A "bright-line test" for defining when a deemed "sophisticated" investor is covered and not covered, "rather than the current tests, which in some cases are highly subjective."

• A two document disclosure regime in which a two page summary disclosure document would be backed by a single product disclosure statement (PDS) with additional disclosures on the Register of Securities;

• PDS's will include a simple "risk rating" set by an agreed process and checked by the regulator;

• Requirement to disclose material changes, including redefinition of materiality and retaining "all other material matters disclosure requirements", and to report quarterly where collective investment schemes are involved;

• Advertising will shift to a "purely principles based approach", that it not be misleading or deceptive;

• Companies, trusts and partnerships should all be treated under a standard legal framework. All collective investment schemes, as they would be defined, would require an external supervisor licenced under the Securities Trustees and Statutory Supervisors Bill regime;

• Create a "clear fiduciary duty to investors" for supervisors and managers of such entities.

The paper also seeks views on whether fund managers should be licenced, and proposes a "fairness" overlay to the approach to all customers, irrespective of where they sit in the company's customer "value chain".

It discusses expanding the powers of the FMA "to take on cases on behalf of investors, gather information from issuers, and issue infringement notices and administrative penalties."

The FMA's new Rulings Panel could also expand its jurisdiction to include the disciplinary committee appointed under the Financial Advisers Act.