Capital Markets Development Taskforce report

The Capital Markets Development Taskforce reported in 2009 [2]   and made various suggestions to restore confidence in New Zealand’s financial markets. That report made several recommendations to improve the quality of the products available to retail investors. The Bill provides for changes in reporting requirements and the structures of institutional enforcement agencies.

Overview

“The key change in the Bill is the establishment of the Financial Markets Authority (FMA). The FMA will be focused on promoting fair, efficient, and transparent financial markets, will have a more active surveillance and enforcement role in relation to those markets, and will have additional functions and powers”.

“The FMA will take over the existing regulatory functions of the Securities Commission (the current market conduct regulator) and the Government Actuary (the current regulator of superannuation and KiwiSaver schemes), and certain regulatory functions of the Ministry of Economic Development (mainly prospectus review and enforcement of governance laws that apply to financial markets participants) and the Minister of Commerce (exchange rule approval)” [3]   .

The Securities Commissions and Office of the Government Actuary are to be disestablished.

Financial Markets Authority (the FMA)

The Bill establishes establish the FMA as a Crown entity under the Crown Entities Act 2004 with the main objective of promoting fair, efficient, and transparent financial markets by:

• performing and exercising the functions, powers, and duties conferred or imposed on it by or under the legislation specified in Schedule 1 to the Bill (financial markets legislation);

• monitoring compliance with, investigating contraventions of, and enforcing that legislation;

• promoting confident and informed participation in the financial markets, including by providing information or research, issuing warnings, reports, or guidelines, •providing, or facilitating the provision of, education about any matter relating to those markets (including education about investing);

• monitoring, and conducting inquiries and investigations into any matter relating to, financial markets and the activities of financial markets participants and other persons engaged in dealings in securities;

• keeping the relevant law under review;

• co-operating with other law enforcement or regulatory agencies (for example, the Registrar of Companies, the Commerce Commission, and the Serious Fraud Office) and with overseas regulators.

The Bill provides for the membership of the FMA (not fewer than 5, and not more than 9, members and up to 5 associate members may be appointed in relation to a matter or a class of matters to be specified in the member's notice of appointment (Part 2, Clauses 6-24).

General information-gathering and enforcement powers

The Bill sets out the powers of the FMA and also various offences which are:

• failing, without reasonable excuse, to comply with certain notices under Clause 25 (i.e. a notice by the FMA to supply information, produce documents, or give evidence);

• in purported compliance with a notice under clause 25, supplying information, or producing a document, or giving evidence, knowing it to be false or misleading;

• wilfully acting in contravention of any order made by the FMA under clause 42 “confidentiality orders”);

• failing, without reasonable excuse, to comply with an order made by the FMA under clause 47 (“FMA may require its warning to be disclosed”);

The penalty for such an offence is a fine not exceeding $300,000 (Part 3, Clauses 25-61).

Greater protection for directors

Amongst the more significant provisions in this Bill are those contained in Clauses 488 and 489 (described on Page 7 of this Bills Digest), which have the tendency to reduce the liability of directors of finance companies.

List of more significant reforms

Many of the provisions of the Bill are carried over from the repealed legislation. In relation to the main reforms, the Bill:

• defines four types of financial product (debt, equity, managed investment products, and derivatives) in a manner intended to provide for treatment based on their underlying substance, while providing a degree of certainty around the treatment of common products, with powers for the Financial Markets Authority (FMA) to designate products as falling within the appropriate category;

• general prohibitions on misleading and deceptive conduct are adapted from the Fair Trading Act 1986 to apply to financial markets and are to be dealt with under this Bill by the Financial Markets Authority, rather than by the Commerce Commission under the Fair Trading Act 1986;

• offers of financial products for issue (and some offers for sale) are regulated with exclusions from disclosure requirements provided for investors who are considered to be capable of accessing the information they need (for example, due to their size and experience or their relationship with the issuer) and also for small offers of debt and equity (for example, through “angel networks” [3]   ) and under employee share purchase schemes;

• provides more “bright-line safe harbours” [4]   for the above exclusions from the disclosure requirements and provides that investors may self-certify that they meet appropriate thresholds;

• provides that investors may certify, with confirmation from a professional adviser, that they have the knowledge and experience to assess offers and issuers may rely on these certificates unless they knew or have reasonable grounds to believe that they are incorrect;

• provides that disclosure is required for offers where no exclusion applies;

• to replace the current regime of investment statements and prospectuses, provides for a short product disclosure statement (PDS) (regulations may be made to prescribe PDS contents) containing key information for retail investors with information on an Internet-based register of offers of financial products;

• provides for more limited disclosure in relation to offers subject to exclusions;

• changes the present situation where failure to provide an investor with the required disclosure documents may result in the entire offer being void, to the situation where investors who do not receive disclosure are entitled to a refund of their subscription and compensation, but the impact on the offer to others is limited;

• changes the governance of financial products and services and in relation to general registration requirements;

• provides for additional governance and registration requirements for specific types of managed investment schemes, including KiwiSaver and superannuation schemes;

• provides that Superannuation schemes must be primarily for the purpose of retirement and any other benefits paid or early withdrawal provisions being ancillary to that purpose (Clause 116);

• provides that Superannuation schemes must limit new membership to persons with a specified link to New Zealand (for example, employed by a New Zealand employer or residency) or schemes must meet prescribed requirements including in relation to lock-in and transfer;

• provides that managers of managed investment schemes must be licensed by the Financial Markets Authority and must comply with general duties, including the duty to act in the best interests of scheme participants;

• provides that Supervisors of managed investment schemes must comply with certain statutory duties;

• regulates related party transactions in relation to managed investment schemes, generally requiring these to be in the best interests of investors, made on arm’s length terms or in certain regulated products;

• provides that restricted managed investment schemes, including employer superannuation schemes, must have a 5% limit on related party transactions, except for investments in registered schemes or in some bank products, to protect employee interests in Superannuation schemes on the failure of employers;

• regulate financial product markets and activities, largely continuing existing requirements for “large markets” but making particular provision for “stepping stone markets” under which disclosure requirements and conduct rules may be adapted to the particular market, issuers, and investors involved or in respect of markets on which only certain types of products are traded, such as exchange-traded funds;

• requires that persons operating financial product markets must be licensed (with their rules approved by the Financial Markets Authority) unless exempt (by regulation or where it is not of a prescribed size);

• provides that licensed markets must have their rules approved by the Financial Markets Authority;

• provides that, in respect of unsolicited offers to purchase financial markets products made “off-market”, regulations may be made specifying disclosure requirements to ensure that offerees are informed as to the value of their holdings and any warnings that have been issued by the Financial Markets Authority;

• makes provision for the licensing of different types of financial market participants such as (with particular metier prescription prescribed in Regulations): managers of managed investment schemes; providers of discretionary investment management services; derivatives issuers; and independent trustees of restricted managed investment schemes;

• aims to simplify the offence provisions by “including all relevant liability provisions to the extent possible, and by providing an escalating hierarchy of liability” [5]   ;

• enables the Financial Markets Authority to make orders to prohibit further action in respect of offers of financial products that are likely to deceive, mislead, or confuse, and other contraventions of the Bill;

• introduces an infringement notice regime;

• increases emphasis on civil liability for contraventions and enables the Financial Markets Authority to take civil pecuniary penalty proceedings in many situations and restricts serious criminal offences (carrying penalties of imprisonment) to more serious misbehaviour involving knowledge or recklessness;

• changes the current regime under the Securities Act 1978 in respect of compensation where there is defective disclosure by replacing the requirement for each investor to prove actual reliance on the misstatement that caused the loss with the provision that the investor must be treated as suffering loss unless the decline in value of the investment is shown to have been caused by a matter other than the defect;

Regulatory impact statement

http://www.med.govt.nz/templates/MultipageDocumentTOC____45789.aspx

http://www.med.govt.nz/templates/MultipageDocumentTOC____45999.aspx

http://www.treasury.govt.nz/publications/informationreleases/ris

Purpose and status

The Bill is aimed at promoting and facilitating the development of fair, efficient, and transparent financial markets and promoting the confident and informed participation of businesses, investors, and consumers in the financial markets. The Bill has additional purposes relating to the provision of information to investors, appropriate governance arrangements, effective monitoring, avoidance of unnecessary compliance costs and the promotion of innovation and flexibility in financial markets. The Bill provides that it binds the Crown and that it has effect despite anything to the contrary in any other enactment or in any agreement, deed, application, product disclosure statement (PDS) or other disclosure document, or advertisement (Part 1, Clause 3-15).

Misleading or deceptive conduct or false or misleading representations

The Bill prohibits misleading or deceptive conduct, and false or misleading representations, in connection with dealings in financial products and the supply of financial services. The term “in trade” is used often in the relevant provisions. The term means “any trade, business, industry, profession, occupation, activity of commerce, or undertaking” (Clause 16(2)). In particular:

• a person in trade is prohibited from engaging in conduct that is misleading or deceptive or likely to mislead or deceive (Clause 16);

• a person in trade is prohibited from engaging in conduct that is liable to mislead the public as to the nature, characteristics, suitability for a purpose, or quantity of financial products or services (Clauses 17 and 18);

• a person in trade is prohibited from making various false or misleading representations in connection with the offer or supply of financial products or services (Clause 19).

The Bill makes other provision in relation to such conduct. For example it provides some protection to publishers of newspapers or magazines, broadcasters, and other persons who publish information and also establishes a defence where the contravention was due to reasonable reliance on information that has been supplied by another person (Part 2, Clauses 20-26).

Comment

“A contravention of Clauses 17 to 19 may give rise to a pecuniary penalty, compensation, or another civil remedy order under Part 7”. “The provisions in this Part are based on equivalent provisions in the Fair Trading Act 1986, but have been customised for the financial markets context” [6]   .

Disclosure of offers of financial products

The Bill provides that an offer of financial products for issue requires disclosure to an investor under Part 3 of the Bill unless there is an applicable exclusion under Part 1 of Schedule 1. Schedule 1 describes the exclusions in great detail (Part 3, Subpart 1, Clauses 27-34: cf. Schedule 1, Part 1, (“Provisions relating to when disclosure is required and exclusions”), clauses 1-28).

Procedure for making offers

The Bill requires a product disclosure statement (PDS) to be prepared (as prescribed in regulations for different kinds of financial products) for regulated offers (a regulated offer is one where there must be disclosure (Section 29)) to provide key information to investors to help them make investment decisions. Other information relating to the regulated offer must be contained in a register entry for the offer (the register entry) on the register of offers of financial products. The Bill sets out in detail the requirements of, registration procedure for, offences relating to, and other matters relating to, the PDS. Provision is made in relation to advertising and publicity, ongoing disclosure and the updating of registers. The Bill specifies the provisions of Part 3 of the Bill that may give rise to a pecuniary penalty, compensation, or another civil remedy under Part 7 in the event of a contravention. The Bill also sets out the penalties involved. In relation to misleading or deceptive statements, and new matters requiring disclosure, see below (Part 3, Subparts 2-5, Clauses 35-84).

Prohibition of offers where defective disclosure in PDS or register entry

The Bill sets out new rules in relation to this matter. Where conditions specified in the PDS are not satisfied or disclosure under the PDS or register entry is defective in some way (for example, where the PDS is misleading or deceptive, prescribed information has been omitted, or a circumstance has arisen since the PDS was lodged that would have been required to be disclosed in the PDS if it had arisen before lodgement), the Bill provides as follows:

• if applications have been received and have not yet resulted in an issue or transfer of the financial products, the offeror must either repay the subscriptions, or correct the deficiency and give investors 1 month to confirm whether they still want to acquire the products. A failure to comply may give rise to a civil remedy;
• the offeror must not offer or continue to offer the financial products under the regulated offer (to any person whether or not the person requires disclosure);
• requires certain persons involved in the offer to notify the offeror of disclosure deficiencies (for example, directors or proposed directors of the offeror or a person who has consented (Part 3, Subpart 2, Clauses 65 and 66).

Governance of financial products

The Bill applies to financial products offered under a regulated offer and managed investment products in a registered scheme (whether or not there has been a regulated offer). The Bill makes extensive provision in respect of debt securities providing that there must be a trust deed for regulated offers of debt securities and a licensed supervisor who is the trustee under that trust deed. The Bill specifies the governing documents requirements (including the contents and governance of the trust deed) and also, subject to a trust deed, the role of the supervisor (“a person designated or appointed as a supervisor in relation to a debt security or managed investment scheme for the purposes of any financial markets legislation”), including his or her or its power to call meetings of product holders. The Bill also deals with the registration of managed investment schemes (Part 4, Subparts 1-3, Clauses 85-181).

Intervention in debt securities or registered schemes

The Bill provides for interventions in relation to regulated offers of debt securities or registered schemes. Many of these duties apply currently and are being consolidated in this Bill. The different types of interventions are numerous and extend, ultimately to the powers of the High Court to appoint a new manager of a registered scheme, confer additional powers on a manager, and otherwise deal with changes in managers. The court may also replace a manager if the original manager has contravened an issuer obligation or is insolvent. The High Court may order the winding up of a registered scheme if the manager is insolvent, the manager has persistently or seriously failed to comply with this Bill or any other financial markets legislation, no permanent manager has been appointed, no supervisor has been appointed, or it is just and equitable that the scheme be wound up (Part 4, Subpart 4, Clauses 182-199).

Registers in relation to regulated products

The Bill requires an issuer of regulated products to ensure that there is kept in New Zealand a register of those regulated products and of all financial products that are of the same class as those regulated products of which it is the issuer. Regulations may be made in relation to particular information that must be kept in relation to types of financial products. The Bill also requires issuers of regulated products to keep proper accounting records (Part 4, Subparts 5 and 6, Clauses 200-222).

Dealing in financial products on markets

The Bill carries over provisions relating to dealing in the range of financial product markets and deals , in particular with issues of insider trading, market manipulation and continuous disclosure rules (which provides for listed issuers to comply with the continuous disclosure provisions of the listing rules of the relevant licensed market, and, in particular, the duty of a listed issuer to notify information about events or matters as they arise for the purpose of making the information available to participants in the licensed market), and the managing of interests of substantial product holders in listed issuers

This subpart relates to the disclosure of interests of substantial product holders in listed issuers (in order to promote an informed market, and to deter insider conduct, market manipulation, and secret dealings in potential takeover bids). The Rules relating to the disclosure of relevant interests in quoted financial products by directors of listed issuers are carried over but also extended to senior managers of those listed issuers. The licensing of markets for trading financial products is dealt with and provision made for the operation of those licensed markets including provisions for the transfer of transferable financial products (including their transfer by electronic means) The Bill makes provision in respect of the making of unsolicited offers to purchase financial products. Regulations may be made for various purposes with the overall objective of preventing unfair practices in the making of unsolicited offers (Part 5 (replacing various parts of the Securities Markets Act 1988 and the Securities Transfer Act 1991), Subparts 1-10, Clauses 224-285).

Licensing and other regulation of market services

The Bill specifies when a provider of market services must be licensed and provides for the issue

of licences, their conditions, their duration and for their monitoring and enforcement. The disclosure obligations (including disclosure statements) for licensees providing market services to retail investors are extensively provided for. The Bill requires licensed providers of discretionary investment management services, licensed derivatives issuers, and licensed providers of prescribed intermediary services to provide those services to retail investors under a client agreement. Regulations may be made requiring client agreements to deal with certain matters or implying terms into those client agreements. There are also additional conduct obligations applying to the providers of discretionary investment management services who are licensed under the Bill (and to custodians under those services). The additional conduct obligations imposed in this Bill include a professional standard of care, duties of a fiduciary nature, requirements for an agreed investment mandate that makes it clear what are the limits (and reporting on limit breaks), prohibitions on certain related party transactions, and requirements for investor money to be held in trust and for the investor property of retail investors to be held by custodians. Such custodians have all the obligations imposed on a broker by the Financial Advisers Act 2008. The Bill provides for regulations that may apply to a derivatives issuer whether or not it is licensed and whether or not it makes any regulated offer. The regulations may, for example, regulate the receipt of money and property from investors by derivatives issuers and the application of that money and property and prescribe requirements relating to the deposit of that money and property in separate investors’ funds accounts or safe custody (Part 6, Subparts 1-8, Clauses 386-446).

Enforcement and liability

The Bill imposes criminal or civil liability where a person “contravenes” certain provisions in the Bill. The term is defined as “a contravention of a provision” but is extended to include attempts to contravene, aiding, abetting, counselling, or procuring any other person to contravene, being in any way, directly or indirectly, knowingly concerned in, or a party to, the contravention by any other person, or conspiring with any other person to contravene a provision. The Bill sets out the enforcement powers of the FMA in relation to stop orders, direction orders or unsolicited offer orders. The High Court may grant an injunction to restrain a person from engaging in conduct that contravenes a provision of the Bill or the regulations and, generally, make any order that the FMA and may grant civil remedies which include: declarations of contravention; civil pecuniary penalty orders and compensatory orders. The High Court has a broad discretion to make any order it thinks just to compensate an aggrieved person for loss or damage or to prevent or reduce loss or damage. In particular, this order may require a person to pay to an aggrieved person the amount of loss or damage suffered by the person. Other civil remedies, include varying or cancelling agreements, restraining the exercise of rights attaching to financial products, restraining the issue or transfer of financial products, and directing the disposal of financial products (Part 7, Clause 447; Subparts 1- 3, Clauses 448-487).

Offences of knowingly or recklessly contravening disclosure provisions

The Bill contains an offence for a contravention of Clause 65 (described at the top of page 6 of this Bills Digest, under the heading: “Prohibition of offers where defective disclosure in PDS or register entry”) A breach of that offer prohibition may result in an offence, a pecuniary penalty, or a claim for compensation from a person who has suffered loss or damage. This offence has a maximum penalty (in the case of an individual) of imprisonment for a term not exceeding 10 years or a fine not exceeding $1 million or (in any other case) a fine not exceeding $5 million. This is not a strict liability offence and requires knowledge or recklessness (Part 7, Subpart 4, Clauses 488 and 489).

Comment

This provision generally reduces the liability of directors. The recently-convicted directors of Lombard, for example, may have been better protected from liability if they had been prosecuted under a provision such as this. Unlike similar “strict liability offences” [7]   in the Securities Act 1978, this offence requires knowledge or recklessness. In addition, there is more emphasis on issuer liability. A director may, however, be liable if the director also contravenes Clause 65 in terms of Clause 447 (i.e. the definition of “contravene” discussed above) and may also be liable to pay a pecuniary penalty or compensation under Part 7, Subpart 3).

Infringement offences

The Bill provides for infringement offence for less serious contraventions of the Bill. The infringement fee is set by regulations (but must not exceed $20,000). If these offences are proceeded with summarily, the maximum fine is $50,000. A conviction may not be entered for these contraventions (Part 7, Subpart 5, Clauses 490-493).

Banning orders

The Bill provides that the High Court may make banning orders, for a period of years specifed by the Court or permanently, for various circumstances, including where a person is subject to a pecuniary penalty order and is then convicted of an offence under the financial markets legislation, he, she or it (as the case may be) has persistently contravened that legislation, or has been convicted of a crime involving dishonesty. A banning order may prohibit or restrict a person (without the leave of the court) from being a director or promoter of, or in any way being concerned or taking part in the management of, an entity (Part 7, Subpart 6, Clauses 494-498).

Comment

The power to ban a person from providing financial adviser services or broking services has been carried over from section 137D of the Financial Advisers Act 2008. Previously these bans (under the Securities Act 1978, the Securities Markets Act 1988, and the Financial Advisers Act 2008) were for up to 10 years. Now the bans can be permanent or for a period specified by the court. Section 383 of the Companies Act 1993 and section 44G of the Takeovers Act 1993 (which also relate to management bans) have been consequentially amended for consistency. In addition, the period for which the Registrar or the FMA may prohibit a person from managing a company under section 385 of the Companies Act 1993 has been extended from 5 years to 10 years.

Protection orders where there are financial markets investigations or proceedings

The Bill provides that the High Court may make certain orders to protect the interests of aggrieved persons in the case of financial markets investigations, criminal or civil proceedings involving the contravention of financial markets legislation, or civil proceedings involving the offer, issue, transfer, supply, or use of financial products or financial services. The orders, which may be made in relation to the money, financial products, or other property of the person that is the subject of the investigation or the criminal or civil proceedings (or an associated person), may include an order to:

• prohibit the relevant person from transferring, charging, or otherwise dealing with the money, financial products, or other property;

• prohibit a person who is indebted to the relevant person from making a payment in discharge of the debt to the relevant person;

• prohibit a person who holds property on behalf of the relevant person from transferring, or otherwise parting with possession of, the property;

• prohibit the taking or sending out of New Zealand of the relevant person's money (Part 7, Subpart 7, Clauses 499-502).

Indemnities or insurance for directors, employees, and auditors of issuers and offerors

The Bill provides that generally an issuer or offeror must not indemnify, or effect insurance for, a director, employee, or auditor of the issuer or offeror in respect of:

• liability for any negligence, default, breach of duty, or breach of trust in his or her capacity as a director, employee, or auditor; or

• costs incurred by that director, employee, or auditor in defending or settling any claim or proceeding relating to that liability.

However, some indemnities or insurance are permitted (including an indemnity for costs incurred in defending or settling a proceeding if judgment is given in the person's favour or if he or she is acquitted or the proceeding is discontinued, and insurance for liability other than criminal liability) (Part 7, Subpart 8, Clauses 503-506).

Comment

Sections 61 to 61C of the Securities Act 1978 are carried over with the following changes:

• the restriction is limited to liability for negligence, default, breach of duty, or breach of trust in connection with conduct regulated by the financial markets legislation;

• the restriction is extended to associated persons of the issuer or offeror (to prevent avoidance)

Appeals to High Court and status of High Court in the Bill

The Bill provides that a person may appeal to the High Court against a decision of the FMA under Part 6 of the Bill to:

• decline to issue a licence to the person;

• impose conditions on the person's licence or proposed licence or to vary, revoke, add to, or substitute any conditions on the person's licence;

• decline an application to vary the conditions of the person's licence; or

• exercise a power in respect of the person under Section 412 or 416 (the FMA's powers in the case of contraventions and other things).

An appeal to the High Court also lies against certain decisions of the FMA on the ground that they are wrong in law. Such appeals, which must be on a question of law only, may be made in respect of the following matters:

• a refusal to give a certificate under Section 112(2)(f)(iii) (certificate that the FMA is satisfied that a scheme complies with certain requirements);

• a decision under section 121 (direction to change a registration);

• a decision under Section 177(1)(a) (removal of a supervisor of a registered scheme);

• a decision under Section 180 (cancellation of the registration of a scheme);

• a decision under Section 189 (direction to the supervisor or issuer);

• a decision under Section 361 (direction to a licensed market operator); or

• a decision under subpart 1 (FMA's enforcement powers).

The Bill also provides that the High Court has exclusive jurisdiction to hear and determine proceedings in New Zealand under this Bill, other than proceedings for offences (Part 7, Subparts 8 (Clauses 507 and 508) and 9 (Clause 510)).

State of mind of corporate body

The Bill specifies when the state of mind of directors, employees, or agents may be attributed to the body corporate or another principal and it also specifies when the conduct of directors, employees, or agents may be attributed to the body corporate or another principal (Part 7, Subpart 10, Clauses 514 ad 515).

Regulations and exemptions

The Bill provides for regulations to be made for the purposes of the Bill. Different matters may be prescribed in respect of different kinds or classes of financial products, services, persons, or other circumstances. Provision is also made for the FMA to grant exemptions from the substantive parts of the Bill (i.e. Parts 2 to 6), various transitional provisions, and the regulations. The FMA is provided with power to designate financial products and offers and to make certain other declarations and may also issue frameworks and methodologies relating to various technical matters. General provision is made in relation to certain FMA instrument (Part 8, Subparts 1-5, Clauses 517-542).

Recognition and application regimes

The Bill provides for recognition and application regimes, to be implemented by regulations, to allow offers of financial products to be made in New Zealand in accordance with the laws of designated countries and to allow offers of financial products may be made in designated countries in accordance with New Zealand law (Part 8, Subpart 6, Clauses 543-551).

Enforcement of overseas pecuniary penalties under application regime

The Bill provides that regulations may be made relating to the enforcement of overseas pecuniary penalties under an application regime for a country designated in the regulations to allow an overseas judgment that is registered in accordance under the Bill and its appropriate regulations has the same force and effect, and may give rise to the same proceedings by way of enforcement, as if the judgment had been given by the High Court of New Zealand (Part 8, Subpart 7, Clauses 552-563).

Benefits of the Bill

A media release accompanying the introduction of this Bill states that it “overhauls financial reporting rules and cuts compliance costs for small and medium-sized companies”.

Hon. Mr Foss, the Minister of Commerce, said that “these smaller companies shouldn’t necessarily have to produce the same complex financial statements that are required from large companies.” The media release also states that the Bill “simplifies compliance obligations for charities, and includes a new power which allows the External Reporting Board to issue accounting standards for registered charities”

Mr Foss said that “this power will provide clarity for charities that are required to file financial statement” and that it would “remove uncertainty, improve the quality of reporting and increase comparability between charities” [1]   .

Notable features of the Bill are:

• the removal of a requirement for “non-large”, “non-issuer” companies to prepare general-purpose financial reports;

• giving power to the External Reporting Board to issue financial reporting standards for a range of entities, including registered charities;

• the placing of the substantive reporting requirements in their relevant Acts under the following principles:

• “all substantive reporting requirements and the related offence provisions will be included in sector, industry, and entity-specific Acts” [2]   ;

• core financial reporting principles and definitions that are intended to apply to all reporting entities (for example, the meaning of generally accepted accounting practice) or to some classes of reporting entities (for example, the meaning of large) are consolidated in this Bill which repeals and replaces the 1993 Act. “This will include retaining or modifying some existing 1993 Act principles and definitions, adding new ones, and transferring standard provisions relating to auditing from the Companies Act 1993 to the new Financial Reporting Act. There will be cross-references to those principles and definitions in sector, industry, and entity-specific legislation” [3]   .

Supplementary Order Paper No 93

Supplementary Order Paper No 93 (released by the Minister on 31 July 2012) “aligns breaches of financial reporting requirements for financial markets participants with the liability regime in the Financial Markets Conduct Bill” [4]   . The Financial Markets Conduct Bill 2011, reported from the Commerce Select Committee on 7 September 2012, is described in Bills Digest No 1963.

SOP No 93 proposes particular reporting provisions in relation to issuers and other financial market participants to be inserted into the Financial Markets Conduct Bill.

Regulatory impact statements

• http://www.med.govt.nz/business/business-law/pdf-docs-library/financial-reporting-framework/RIS-RFRF.pdf

• http://www.med.govt.nz/about-us/publications/publications-by-topic/regulatory-impact-statements/ministry-of-economic-development-regulatory-impact-statements

• http://www.treasury.govt.nz/publications/informationreleases/ris

The Bill applies to reporting entities

The Bill largely applies to any “reporting entity”. A reporting entity is an entity whose financial statements or group financial statements are required by any enactment to comply, or be prepared in accordance, with generally accepted accounting principles (i.e. GAAP standards) or non-GAAP standards [5]   . The term “non-GAAP standard” means a financial reporting standard that is stated in the standard to be a non-GAAP standard (Part 1 Clause 5(1), definitions of “reporting entity” and “non-GAAP standard”; Clause 8).

External Reporting Board

The Bill continues the existence of the External Reporting Board which is an independent Crown entity. The functions of the Board are:

• to prepare and issue financial reporting standards and auditing and assurance standards;

• to issue authoritative notices, which provide for matters not covered by standards for the purposes of the definition of GAAP (a new function);

• to develop and implement strategies for the issue of standards; and

• to liaise with international or national organisations that perform functions that correspond with, or are similar to, those conferred on the Board (Part 2, Clauses 10-11).

Financial reporting standards and auditing and assurance standards

The Bill includes detailed provisions relating to the issue of financial reporting standards and assurance standards (Part 2, Subpart 2, Clauses 14-32).

Standard provisions relating to auditor qualifications and access to information

The Bill provides for the qualifications of auditors for the purposes of various enactments. The obligations of entities to provide information to auditors are set out and the rights of auditors to obtain information are described (Part 2, Subpart 3, Clauses 33-38).

Amendments to other Acts

Amends many other Acts in relation to the particular financial reporting requirements of entities subject to each Act (Part 4, Subparts 1-11, Clauses 61-162; Schedule 1 and Schedule 2).

Copyright: © NZ Parliamentary Library, 2012

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The need for the Bill

A recent media release [3]   , issued by the Minister of Commerce, Hon Simon Power, stated that this Bill is aimed at simplifying the implementation of the Financial Advisers Act and reducing costs while encouraging public confidence in the industry. The Bill makes technical amendments to the Financial Service Providers (Registration and Dispute Resolution) Act and the Financial Advisers Act, focusing on changes to the qualifying financial entity (QFE) model. A QFE is a company approved by the Securities Commission to take responsibility for the advice provided by its employees and contractors on a limited range of products, instead of those people each requiring their own licence.

The media release stated that the proposed changes in the Bill include:

• requiring a QFE to name individual contractors whose advice it will take responsibility for, instead of automatically being responsible for advice from all its contractors;
• allowing a QFE's employees and named contractors to provide financial adviser services on the QFE's category 1 products (complex products such as shares), without being individually licensed (currently permitted only for the QFE's employees);
• permitting the employees and named contractors to provide financial adviser services for products for which the QFE is a promoter under the Securities Act (currently, the Financial Advisers Act allows this only if the QFE is the issuer of the product).
• The Minister foreshadowed further amendments to the Financial Advisers Act in relation to the way investment transactions are regulated following recent targeted consultation with industry. He said that he " ... expects to be able to make announcements in the new year on the results of targeted consultation on the best approach to regulating investment transactions."

This Bill makes many technical amendments which are explained in detail in the explanatory note to the Bill. The following amendments appear to be the more noteworthy.

Financial Advisers Act 2008

New definitions

The Bill provides several new definitions which include "bonus bonds", "call building society share", "call debt security", "term life insurance policy", "promoter", "insurance product", and "nominated representative".

The Bill defines the term "category 2 product", which is a low-risk type of investment product for which the requirements of the principal Act are less stringent. and includes: bank term deposits, bonus bonds, call building society shares, a call debt security, a consumer credit contract as defined in Section 11 of the Credit Contracts and Consumer Finance Act 2003 and an insurance product, including a term life insurance policy.

The Bill also provides a definition of "nominated representative" which is an individual who is formally nominated by a QFE in accordance with New Section 68A to perform financial adviser services in respect of that QFE (Part 1, Clause 6, amending Section 5 of the Act by inserting these definitions).

Certain activities not financial adviser services

The Act provides that activities performed by certain classes of person do not amount to financial adviser services.

The Bill makes clarificatory amendments and provides for a new exemption for advice that forms part of, or is connected with, ratings given by rating agencies that have been approved under the Reserve Bank of New Zealand Act 1989 or under insurance legislation (Part 1, Clause 8, amending Section 12 of the Act).

Employers and principals of financial advisers to be registered

The Act requires employers and principals of financial advisers to be registered.

The Bill provides that QFEs must to be registered and maintain their QFE status while a nomination of a nominated representative is in effect (Part 1, Clause 10, substituting Section 18 of the Act).

Disciplinary processes

The Bill provides that complaints need to be referred to the disciplinary committee only if the Securities Commission has first investigated the complaint (Part 1, Clause 21, substituting Section 98 of the Act).

Defences

In relation to the offence of performing a financial adviser service without being registered, the Act allows defendants charged with the offence to prove that the financial adviser service was performed by the defendant's employee or agent and that the employee or agent was registered. The Bill redrafts this defence so that it is merely that the act in question was performed by a registered financial adviser, regardless of that adviser's status as employee or agent (Part 1, Clause 22, amending Section 114 of the Act).

In relation to the offence of performing a financial adviser service without being authorised, the Bill in like manner simplifies the defence to being if the person charged proves on a balance of probabilities that the financial adviser service to which the charge relates was performed by an individual who is an authorised financial adviser regardless of that adviser's status as employee or agent (Part 1, Clause 23, amending Section 115 of the Act).

Financial Service Providers (Registration and Dispute Resolution) Act 2008

Who is a broker and what is broking service?

SOP No 113 proposes that a broker [5]   is an individual or an entity who carries on a business of providing or offering to provide a broking service (whether or not the business is the provider's only business or the provider's principal business). A broking service is the receipt, holding, or payment of client money or client property by a person acting on behalf of a client, but the mere transmission of a non-negotiable instrument payable to another person is not a broking service.

A person does not provide a broking service in the following cases:

• a lawyer or incorporated law firm providing a broking service in the course of professional practice in providing legal services if the broking is a necessary incident of legal practice; or
• a conveyancing practitioner providing a broking service in the course of professional practice in providing conveyancing services if the broking is a necessary incident of conveyancing practice; or
• a chartered accountant providing a broking service in the course of professional practice as a chartered accountant if the broking is a necessary incident of professional accounting practice; or
• a tax agent providing a broking service in the course of professional practice as a tax agent if the broking is a necessary incident of professional tax agency; or
• a real estate agent providing a broking service in the course of the agent's occupation as a real estate agent if the broking is a necessary incident of working as a real estate agent; or
• a designated settlement system under section 156N of the Reserve Bank of New Zealand Act 1989, and any operator of that system, receiving, holding, or paying client money or client property in accordance with the rules of the settlement system; or
• a Crown organisation or an employee of a Crown organisation providing a broking service in the course of its functions; or
• the Reserve Bank of New Zealand (the Reserve Bank), a member of the board of the Reserve Bank, or an employee of the Reserve Bank providing a broking service in the course of the functions of the Reserve Bank; or
• an employee receiving, holding, or paying money or property of his or her employer in the course of his or her employment; or
• an employer, or an employee of the employer, providing assistance to a person who is an employee of the employer with the implementation of a decision to acquire or dispose of a financial product made available through the person's workplace; or
• a company or an employee of a company providing a broking service, in the course of the company's business, on behalf of no person other than a related company; or
• any other person or class of persons specified in the regulations providing a broking service in circumstances specified in the regulations (Clause 18A, inserting New Part 3A into the FAA, New Sections 77A-77C).

Brokers' disclosure obligations

SOP No 113 proposes generally that a broker must make disclosure to a client, in accordance with the FAA and regulations, before (or if not practicable before, as soon as practicable after) receiving client money or client property from the client.

• The details of disclosure would be provided for in regulations which, in relation to the broker and, if the broker is an entity, each principal officer, may prescribe disclosure in relation to any or all of the following: criminal convictions, disciplinary proceedings, adverse findings by a court or the Securities Commission, bankruptcy or other insolvency proceedings. Regulations may also be made in relation to procedures for handling client money or client property, fees, indemnity insurance, dispute resolution arrangements, location of business premises, telephone, email, and fax details. It is enjoined that disclosure under a disclosure obligation must not be misleading, deceptive, or confusing at the time that the disclosure is made. It is made clear that previous disclosure does not discharge a broker from a disclosure obligation if the previous disclosure is out of date when the client money or client property is received by the broker. A previous disclosure is out of date if:
• since the date of the disclosure, there has been a material change in any matter that must be disclosed; and
• a reasonable person in the position of the client would consider that the change would materially affect any of the following decisions by the client:
• to proceed with the broking service by the broker in question (B);
• to postpone or countermand the performance of a broking service by B (Clause 18A, inserting New Part 3A into the FAA, New Sections 77D-77I).

Brokers' conduct obligations

• Supplementary Order Paper No 113 proposes that a broker must, when providing a broking service, exercise the care, diligence, and skill that a reasonable broker would exercise in the same circumstances, taking into account, but without limitation, the nature and requirements of the client and the nature of the services performed for the client.
• The SOP sets out such conduct obligations as:
• a broker must not engage in misleading or deceptive conduct;
• advertisement of broking services must not be misleading, deceptive, or confusing;
• the term sharebroker must not be used in connection with a person in any advertising or promotional material unless the person, or the person's employer, is a member of a registered exchange;
• a broker must not receive client money if offer for subscription illegal;
• a broker must pay client money into separate trust account;
• a broker must account for client money and client property;
• a broker must keep records of client money and client property;
• a broker must keep the records required by the FAA, or ensure that they are kept, in a manner that enables those records to be conveniently and properly audited or inspected;
• a person must not use or apply client money or client property received or held on trust for a client by a broker in any way except as expressly directed by the client (Clause 18A, inserting New Part 3A into the FAA, New Sections 77J-77S).

Protection of client money and client property held on trust

• The Bill generally provides that client money or client property that is received or held by a broker on trust for a client is not available for the payment of the debts of any other creditor of the broker and is not liable to be attached or taken in execution under the order or process of any court at the instance of another creditor of the broker. This does not apply to any lawful lien or claim that a broker who holds client money has against the client money (Clause 18A, inserting New Part 3A into the FAA, New Section 77T).

Securities Commission may direct broker on disclosure or conduct obligations

• Supplementary Order Paper No 113 proposes that where the Commission has reason to believe that a broker is in breach of a disclosure or conduct obligation, it may give the broker notice of his or her alleged breach and, if the Commission does give a notice of breach, the Commission must also give the broker a reasonable opportunity to respond. If the Commission concludes, after considering the broker's response, that the broker is in breach, the Commission may give the broker a direction in writing:
• to comply with the disclosure or conduct obligation;
• stipulate any steps that the broker must take in order to comply with the obligation;
• require the broker to report to the Commission within 28 days of the date of the direction stating how and when the Commission's direction will be implemented (Clause 18A, inserting New Part 3A into the FAA, New Section 77V).

Offences

The Bill adjusts the current offences that apply to authorised financial advisers carrying out investment transactions so that they apply to brokers that are entities as well as to individuals (Clause 24D, substituting Sections 118-120 of the FAA; Clause 26A, inserting New Sections 134A-134F into the FAA).

Registration of fishing vessels

The Bill amends the provisions relating to the registration of fishing vessels and provides that all the conditions of registration (including conditions added in the chief executive's consent to registration) of the vessel become conditions of registration. The conditions of registration of a vessel may include conditions relating to fisheries management, employment, or vessel safety. Conditions of consent to the registration of a vessel (which is required if the vessel is owned or operated by an overseas person) may be amended or revoked. In considering whether to consent to the registration of a vessel owned or operated by an overseas person, the chief executive must have regard to any risk associated with fisheries management, employment, or vessel safety that he or she considers would be likely to result if the vessel were to be registered (Part 1, Clause 4, amending Section 103 of the Act (“Fishing vessels must be registered”)).

Suspending of vessel’s registration

The Bill enables the chief executive to suspend a vessel's registration if he or she is satisfied that:

• its registration for the time being posed a risk of a breach of fisheries management, employment, or vessel safety laws justifying that action; or

• there was a breach of any condition of its registration.

The chief executive is required to give the operator a preliminary notice that suspension is being considered and give the operator of a vessel at least 48 hours to undertake or cease the relevant action. If the chief executive decided to proceed with the suspension, he or she must give the operator notice of intention to proceed with the suspension and must also give the operator notice of actual suspension (Part 1, Clause 5, inserting New Section 106A into the principal Act).

Cancellation of fishing vessels registration

The Bill provides that a vessels registration may be cancelled if:

• the operator has not complied with any conditions and requirements of the suspension of the vessel's registration; or

• the vessel’s owner, operator, foreign charter party, or notified user is convicted in New Zealand or another country of an offence relating to fishing or transportation in the fisheries jurisdiction of New Zealand or that other country; or

• the vessel is forfeit to the Crown.

When a notice of intention to cancel a vessel's registration on the first ground listed above is received by the operator, the vessel must not be used to take fish, aquatic life, or seaweed for sale (Part 1, Clause 6, amending Section 107 of the Act).

Offences

The Bill creates a new offence against New Section 106A (using vessel while registration suspended) and a new offence against New Section 107(10) (using vessel after operator notified of intention to cancel registration). Persons convicted against these offences are liable to a fine not exceeding $100,000 (Part 1, Clause 7, amending Section 252 of the Act).

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Section 13 of the Fisheries Act 1996

Section 13(1) provides that the Minister of Fisheries must, by notice in the Gazette, set in respect of the quota management area relating to each quota management stock a total allowable catch for that stock, and that total allowable catch continues to apply in each fishing year for that stock unless varied or until an alteration of the quota management area for that stock takes effect in accordance with Section 25 ("Alteration of quota management areas") and Section 26 ("Effect on quota if quota management area altered").

Section 13(2) provides that the Minister must set a total allowable catch that:

• maintains the stock at or above a level that can produce the maximum sustainable yield, having regard to the interdependence of stocks (Paragraph (a)); or
• enables the level of any stock whose current level is below that which can produce the maximum sustainable yield to be altered: in a way and at a rate that will result in the stock being restored to or above a level that can produce the maximum sustainable yield, having regard to the interdependence of stocks; and within a period appropriate to the stock, having regard to the biological characteristics of the stock and any environmental conditions affecting the stock (Paragraph (b)); or
• enables the level of any stock whose current level is above that which can produce the maximum sustainable yield to be altered in a way and at a rate that will result in the stock moving towards or above a level that can produce the maximum sustainable yield, having regard to the interdependence of stocks (Paragraph (c)).

Section 13(3) provides that ,in considering the way in which and rate at which a stock is moved towards or above a level that can produce maximum sustainable yield under paragraph (b) or paragraph (c) of subsection (2) of this section, the Minister shall have regard to such social, cultural, and economic factors as he or she considers relevant. Section 13(4) gives the Minister the power, by notice in the Gazette, to vary any total allowable catch set for any quota management stock under Section 13 by increasing or reducing the total allowable catch. However, when considering any variation, the Minister is to have regard to the matters specified in Section 13(2) and (3).]

Maximum sustainable yield

The Bill provides that for the purposes of setting a total allowable catch under Section 13 of hte Act " ...if the Minister considers that the current level of the stock or the level of the stock that can produce the maximum sustainable yield is not able to be estimated reliably using the best available information, the Minister must:

• ... not use the absence of, or any uncertainty in , that information as a reason for postponing or failing to set a total allowable catch for the stock;
• ... have regard to the interdependence of stocks, the biological characteristics of the stock, and any environmental conditions affecting the stock; and
• ... set a total allowable catch ... using the best available information ... and ... that is not inconsistent with the objective of maintaining the stock at or above, or moving the stock towards or above, a level that can produce the maximum sustainable yield" (Clause 4, amending Section 13 of the Act by inserting new subsection (2A)).

Preservation of legal situation before the case

• The Bill provides that, in respect of consultation undertaken before the commencement of this Bill under Section 12 of the principal Act for the purpose of setting or varying a total allowable catch for a quota management stock under Section 13 of the Act after the commencement of this Bill, the consultation is to be treated as complying with Section 12, if, had it been undertaken after the commencement of this Bill, it would have complied with Section 12 of the principal Act (Clause 5 of the Bill).

Relationship between this Bill and the Animal Products Act 1999 and the Wine Act 2003

The Select Committee has recommended that the relationship between this Bill and the Animal Products Act 1999 and the Wine Act 2003 be clarified. Except for particular provision made (for example relating to winemaking operations applied to be included under a registered food control plan or national plan), those Acts prevail where there is any conflict, duplication or inconsistency in the requirement made or the powers given under them (Part 1, Subpart 1, inserting New Clause 5A; Part 2, Subpart 1, inserting New Section 24A; deleting Clauses 42 and 43).

Food control plans

The Select Committee has recommended a more detailed regulation-making power for the Governor-General in Council in respect of food control plans and has also recommended a redrafting of the process for amending food control plans (Part 2, Subpart 1, inserting New Clause 35A (and deleting Part 5, Subpart 4, Clause 347(1)); substituting Clauses 36-40 and inserting New Clause 40A).

“Charitable purpose” or “personal development purpose”

The Bill as introduced provides an exemption from the requirement to operate under a registered food control plan or a national programme for persons not ordinarily in the business of trading in food but who, in general, organise or conduct “a community-based fund raising activity”.

The Select Committee has replaced this description with the expression “trades for a charitable purpose” and has recommended a definition of “charitable purpose” (which is based on the general charitable purpose in the law) as follows: “charitable purpose included every charitable purpose, whether it relates to the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community”. The Select Committee has also recommended the same exemption for trading in food for personal development purposes which is defined as “a purpose that relates to the intellectual, emotional, physical, social, cultural or other personal development of a person or members of a group” (Part 2, Subpart 5, substituting Clause 94 and inserting New Section 24A).

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