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FMC Act – Phase 1 Implementation begins today

by Stephen on April 1st, 2014

1 April 2014

FMC Act – Phase 1 Implementation begins today


Today heralds the beginning of Phase 1 implementation of the Financial Markets Conduct Act 2013 and the culmination of a series of changes affecting capital-raising that began with Rob Cameron’s Capital Market Developments Taskforce that was established in 2008.

In addition, a number of complementary measures begin to take affect from 1 April, including:

• key parts of the Financial Reporting Act 2013; and
• changes that affect persons who carry on the business of providing custodial services – largely to implement lessons learned from the sad case of Ross Asset Management .

The detail required to implement the core parts of the FMC Act is contained in a thicket of regulations – much of which is still undergoing consultation with the objective of being completed in time for Phase 2 of the new regulatory framework to come into force from 1 December 2014.

The core parts of the FMC Act will form part of the Phase 2 implementation scheduled for 1 December 2014. Central to the changes is the replacement of the securities disclosure regime – with the old prospectus/investment statement being replaced by a single ‘Product Disclosure Statement’.

My last bulletin (in mid-March) summarised the effect of the regulations made for the purposes of Phase 1 implementation. Set out below is a brief snapshot of the key parts of the FMC Act taking effect today

Part 1 (Preliminary provisions)

The preliminary provisions include definitions, such that of ‘financial product’, which means:

• a debt security; or
• an equity security; or
• a managed investment product; or
• a derivative.

Part 2 (Fair dealing)

Part 2 (fair dealing), including the key prohibition on misleading and deceptive conduct, other than those relating to:

• unsubstantiated representations – which is due to commence in June, at the same time as corresponding changes to the Fair Trading Act for unsubstantiated representations (other than for financial services governed by the FMC Act); and
• offers in the course of unsolicited meetings – which are to be part of Phase 2 implementation.

The prohibition on misleading and deceptive conduct has a wide-reaching effect, much like section 9 of the Fair Trading Act, and applies to all aspects of conduct in relation to financial products, except to the extent that there is a specific regulation that applies to the relevant matter (such as the content requirements for a product disclosure statement or the detailed provisions governing the advertising of financial products).

The prohibitions in Part 2 are backstopped by a range of powers in the hands of the FMA which will be able to make stop orders, or require corrective / additional disclosures. Failure to comply with directions or orders by the FMA will trigger a range of offence provisions.

Part 6 (licensing and other regulation of market services)

A number of carve-outs, including those relating to the new regime for the provision of discretionary investment management services (DIMs), apply. The new regimes for:

• DIMs providers, including disclosure requirements – are scheduled to come into effect as part of Phase 2 implementation (to coincide with the licensing of DIMs providers).

• Similarly, the new requirements for derivatives issuers are scheduled to be part of Phase 2 implementation.

The early implementation of rules enabling the provision of crowd funding and peer-to-peer lending services – will require providers to be licenced (as the provider of ‘prescribed intermediary services’) so that the disclosure exclusions for offers made under these platforms can be made from 1 April 2014.

Part 8 (enforcement, liability, and appeals)

The new enforcement regime comes into force – with some carve-outs including the offence provisions for defective disclosure (which will be part of Phase 2 implementation).

Schedule 1 (provisions relating to exclusions)

The following provisions of Schedule 1 come into force:

Clause 6 (offers of financial products through licensed intermediaries): Fast-tracking the exclusions for offers by means of crowd funding services and peer-to-peer lending services.

Clause 8 (offers under employee share purchase schemes): The new regime applies regardless of size or scale but is most likely to be attractive to closely-held companies, including start-ups, which will be able to issue equity securities for up to 10% of the shares on issue without a formal disclosure document (i.e. a prospectus / investment statement under the Securities Act or a product disclosure statement under the FMC Act).

Under this exclusion, all that will need to be provided to employees is:

o a health warning about the employee share purchase scheme and the impact of the disclosure exclusion;
o basic information about the scheme (i.e. terms and conditions); and
o a means of access to the issuer’s (employer’s) most recent annual report and financial statements – if any.

Clause 10 (offers of financial products under dividend reinvestment plans): The existing class exemption under the Securities Act is being replaced. Importantly, because the offer under the DRP will not be a ‘regulated offer’ for the purposes of the FMC Act, the plan document will not be an ‘advertisement’ – thereby lessening both the compliance burden and risks of exposure to liability and offence provisions.

Clauses 12 to 14 (small offers / 20 x 12 exclusion): Implementing the 20 x 12 exclusion for offers equity securities or debt securities to up to 20 investors; and $2 million, in any 12-month period without the need for a disclosure document.

Significantly, the 20 x 12 exclusion runs in parallel with other exclusions (e.g. those for friends and family or habitual investors under the Securities Act), but any moneys raised by means of a crowd-funding platform can operate to reduce the $2 million cap. It is also important to note that a small offer under the 20 x 12 exclusion cannot be widely advertised. However, this restriction aside, the compliance burden is low – with would-be investors having to be given a health statement.

Clause 19 (exclusion for offers of financial products of same class as quoted financial products): This will further streamline the process for listed issuers to make rights issues (of equity securities, or debt securities, of the same class as already listed securities) through market announcements – using the example of a ‘cleansing notice’ in Australia rather than a simplified disclosure prospectus.

The Australian experience would indicate that issues can be made to retail investors quickly, reducing compliance costs, and making much greater use of online communications. The new regime also provides for removal of residual concerns about unfairness – because retail investors will be able to participate in more transactions (e.g. placements or ‘block trades’) as well as enabling rights issues and share purchase plans to be undertaken on a ‘low doc’ basis. As a result, the focus of directors becomes the adequacy of the issuer’s continuous disclosure (updated by the issue of a ‘cleansing notice’) rather than an extensive and time-consuming due diligence process.

The Financial Reporting Act 2013

Progressive implementation of the Financial Reporting Act also begins. For most entities, the new requirements will only begin to become relevant when they are considering their financial reporting obligations for the new financial year that begins today. From a practical point of view, this means that they will only start to think about the impact close to or after balance date – on 31 March 2015.

Some entities (issuers and other licensed entities under the FMC Act) will become ‘FMC reporting entities’ and become subject to the new (ongoing) compliance obligations inserted as the new Part 7 of the FMC Act by Financial Reporting (Amendments to Other Enactments) Act 2013.

A noteworthy change that comes into effect today is the changes to the solvency test as they relate to distributions and amalgamations. Specifically, the requirement that when the directors are considering the balance sheet limb of the test, must have regard to:

• the most recent financial statements of the company; and
• all other circumstances that the directors know or ought to know affect, or may affect, the value of the company’s assets and the value of the company’s liabilities, including its contingent liabilities,

has been replaced by a requirement to have regard to:

• the most recent financial statements of the company; and
• the accounting records of the company.

Further work

As noted above, Phase 2 implementation of the FMC Act is timetabled for 1 December 2014 – and will be subject to a transition period of 2 years. Drafts of the regulations required for Phase 2 implementation have been subject to two rounds of consultation – and it is understood that the entire suite of regulations will be finalised by the end of the 3rd quarter of this year. The progress to date on Phase 1 and the various Ministerial announcements give cause to be confident that the brave new world on securities law reform that starts today – will be get fully under way from 1 December.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.

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