FMC Act – Third Round Consultation on Offer Documents

23 May 2014

FMC Act – Third Round Consultation on Offer Documents

Introduction

Earlier this week the Ministry of Business, Innovation and Employment (MBIE) released the material for its third round of consultation on the regulations that specify the core content requirements for offer documents. The regulations are needed in order to enable the Phase 2 implementation of the FMC Act to proceed on 1 December 2014.

Much of the material in this third round of consultation (containing a third exposure draft of regulations) has been the subject of earlier consultation and, as a result, the content requirements reflects that earlier work- including submissions from market participants and refinements by both MBIE and the FMA. Usefully, a roadmap to some of that earlier work is provided in the form of a commentary that accompanies the exposure draft of the proposed regulations.

Core content requirements

The focus of the consultation is the core content of disclosure for financial products. Primarily this means the content of the Product Disclosure Statement (PDS). However, it also extends to the detail to be contained in the offer register (that effectively sits behind the PDS) as well as the ongoing disclosure requirements of issuers.

The proposed content requirements cover five types of financial products:

• equity securities;
• debt securities;
• managed funds;
• other managed investment schemes (such as forestry partnerships); and
• derivatives.

The first point to note about the core content requirements is that MBIE is continuing to advocate limits on the size of a PDS (i.e. page limits) in an effort to require issuers to use shorter offer documents. As a result, it is proposed that a PDS will contain a ‘Key Information Summary’ (at the front) of 2-4 pages and then the overall product length limits proposed are (with page and word limits being alternatives):

• equity securities – 60 pages / 36,000 words;
• debt securities – 30 pages / 18,000 words;
• managed funds – 12 pages / 7,200 words;
• other managed investment schemes – 60 pages / 36,000 words; and
• derivatives – 30 pages / 18,000 words.

In addition, the earlier work by the FMA, providing guidance that was designed to ensure that offer documents are clear, concise and effective will also become a content requirement.

These draft regulations are not the full picture for disclosure. Some regulations on disclosure processes (and some content, such as client reporting by derivatives issuers) were consulted on in the first round of consultation and others such as the service disclosure statements for DIMS providers, some exceptions and variations as well as consequential amendments and transitional provisions are part of other work streams – and may also be the subject of (separate) further consultation.

Interestingly, MBIE notes that the exposure draft will not be completely right and that it is continuing to work on addressing inconsistencies and gaps. However, it says that the purpose of the consultation is to obtain public and industry input on key queries and technical detail (whether there are any technical issues with the regulations which will mean they do not achieve the desired effect or may have unintended consequences.

Main disclosure-related regulations

The main disclosure-related regulations in the exposure draft are:

• Part 1 – general disclosure-related regulations;
• Part 2 – regulations for the mutual recognition of offerings with Australia;
• a series of Schedules (1-5) covering the disclosure requirements (PDS, register and some ongoing) for each type of financial product; and
• a schedule of warning statements for Australia offers using the mutual recognition regime.

The matters in Part 1 (general disclosure-related regulations) apply across all of the disclosure requirements for each type of financial product set out in the 5 schedules. These matters are described as important to make sense of the schedules, as they cover key general rules for content and presentation of the PDS, register entry and other disclosure documents for managed investment schemes.

The draft regulations provide that, in addition to the two core rules for disclosure content , the additional rules in Part 1 include:

• There must be standardised covering information and a key information summary (KIS) at the start of each PDS. The purpose of the KIS is to provide the issuer’s assessment of the most significant aspects of the offer relevant to a retail investor.
• The PDS length limits described above.
• The PDS can include information that is not required (i.e. additional information) only if it does not detract from the prominence of the information that is required to be included by the FMC Act or regulations.
• Information that is required to be in the PDS or the register entry can be incorporated by reference (where the regulations expressly permit it). These permissions mostly occur where the offer is continuous and the information should be kept up-to-date. In such a case – the PDS must contain a brief description of the information and a link or other identification of the relevant document.
• If a matter that is required to be contained in a PDS is not applicable to the offer, it can be omitted from the PDS.
• PDSs may cover more than 1 offer if the issuer considers it useful to investors. This is likely to be most relevant to managed funds and derivative PDSs.

The general approach to the PDS structure is to set required headings, require particular information under those headings, and require content to be put in the order of those headings as well as requiring a PDS to use prescribed tables, diagrams
and charts. A PDS must also contain various prescribed statements (e.g. those used to explain the nature and effect of financial information).

However, in general, no specific template is set by the regulations – although it is noted that it would be possible for government or the private sector to develop templates based on the regulations to assist issuers in preparing PDSs.

Financial measures

One of the key issues highlighted by earlier rounds of consultation was the extent to which selected financial information and financial statements need to comply with generally accepted accounting practice (GAAP) and be audited. The proposals for equity securities are:

• The selected financial information in the PDS covers three years of historic information and, for IPOs, at least two years of prospective financial information (unless prospective financial information would be likely to mislead or deceive); and
• The selected financial information must be in accordance with GAAP (apart from where non-GAAP measures are expressly permitted), but need not be derived from audited financial statements, and information from GAAP statements does not need to be restated where there have been changes to GAAP.

At a glance, this seems to be a practical softening of the (apparently strict) line taken by the FMA in its September 2012 guidance note on the disclosure of use of non-GAAP financial information.

Trans-Tasman mutual recognition

It is proposed that the existing regime affecting trans-Tasman mutual recognition will be carried over, with some modifications, enabling an offeror to offer securities (including interests in managed investment schemes) in New Zealand or Australia by means of the disclosure document that meets the requirements of its home jurisdiction.

Next steps

It is understood that, in addition to this third round of consultation, more targeted consultation for specialist product categories (e.g. those offered by banks) is also planned as well as further work by FMA – particularly in relation to matters such as class exemptions, over the coming weeks.

Submissions on this third round of consultation close on 20 June 2014. The targeted outcome is a full set of FMC Act regulations being ready for phase 2 implementation on 1 December 2014.

Further information

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