Buddle Findlay Submission - Financial Markets Authority

Dear Simone
Submission on Effective Disclosure
1. Introduction
WGTN_DOCS\1078665\4
To
Simone Robbers
Manager, Regulatory Policy
Financial Markets Authority
From
Sacha Judd
Adam Jackson
By
Email: consultation@fma.govt.nz
Date
9 March 2012
1.1 We refer to the Financial Markets Authority ("FMA") proposed guidance note on
"effective disclosure". Thank you for the opportunity to review and provide comments
on the proposed guidance note, and meeting with us on 7 March 2012. We welcome
the FMA's initiative in issuing guidance notes in order to facilitate compliance with
financial regulation obligations.
1.2 Buddle Findlay is one of New Zealand's leading commercial and public law firms with
offices in Auckland, Wellington and Christchurch. Buddle Findlay acts for a number
of clients affected by the proposed guidance note, including banks and financial
institutions; equity, debt and derivatives issuers; listed companies; trustees and
trustee companies; and managed investment schemes and fund managers. While
this submission builds on our experiences with these clients, this submission reflects
our own views and not those of any particular client or group of clients.
1.3 We would be happy to discuss any aspect of this submission with you if that would
be helpful. In particular, we would be happy to review any revisions to the proposed
guidance note, whether arising out of our submissions or those of others. If you have
any queries or would like to discuss, please contact either:
Sacha Judd
Partner
Direct dial: +64-9-363 0632
Email: sacha.judd@buddlefindlay.com
Adam Jackson
Partner
Direct dial: +64-4-498 7346
Email: adam.jackson@buddlefindlay.com
1.4 We would also find it very helpful if the FMA were able to provide a debrief once it
has a chance to consider all submissions. It would be very helpful for us to better

understand why particular submissions were or were not incorporated. The Ministry
of Economic Development recently adopted this approach as part of the consultation
on the Financial Markets Conduct Bill (the "Bill"). We and our clients have found this
approach invaluable, and we are certain that the FMA taking a similar approach
would be welcomed by the market.
2. Confidentiality
2.1 We confirm that we have no objection to the FMA publishing this submission on the
FMA's website.
3. Structure of this submission
3.1 This letter sets out our general observations and comments on the proposed
guidance note. Where appropriate, we have also responded directly to certain
questions in the attached annex to this letter.
4. Status of the guidance note
4.1 We suggest that it would be useful to clarify the status of the requirements of the
guidance note. Section B (clear, concise and effective) and the first part of section D
(past financial information) appear to be in the nature of genuine guidance as to
existing legal requirements. Section C (key information), the second part of section D
(prospective financial information) and section E (sector specific issues) on the other
hand appear to prescribe more detailed requirements than those set out in the
Securities Act 1978 (the "Act") and Securities Regulations 2009 (the "Regulations"),
and also appear to express such requirements as being mandatory.
4.2 For example, we consider the list of matters set out at paragraph 87 / table XIII to be
broadly appropriate for non-bank deposit taker debt securities. However these
requirements appear to be more in the nature of mandatory requirements than
guidance. We suggest that if it is the intention to impose new detailed mandatory
requirements (as opposed to guidance in relation to existing obligations), then it
would be more appropriate that these requirements be inserted into the Securities
Regulations rather than via a guidance note.. In relation to non-bank deposit taker
disclosure in particular, including these detailed requirements here would also
appear to cut across the work currently being undertaken by the Reserve Bank and
the Ministry of Economic Development in relation to prudential disclosure by non-
bank deposit takers.
4.3 Following our discussion of 7 March, we understand that your intention is not to
prescribe new mandatory requirements, rather to clarify existing requirements.
However given the FMA's position as the enforcer of securities regulation, anything
which has the appearance of a set of mandatory requirements will likely be treated
as such by the market. We believe that the wording in the guidance note could be
clarified accordingly.
WGTN_DOCS\1078665\4 Page 2

5. Applicability to "non-IPO" offers
5.1 As a general comment that relates to the more detailed requirements set out in the
guidance note, it appears to us that the guidance note has been drafted largely from
an initial public offer ("IPO") perspective. Subject to our other comments in this
submission, we believe the proposed requirements of the guidance note are broadly
appropriate for IPOs or large-scale retail offers of equity securities. The proposed
requirements may also be applicable to quasi-equity offers (for example, some
finance company debt securities), and perhaps to a lesser extent, corporate debt
offers.
5.2 There are however a wide range of offers where at least some of the detailed
requirements do not appear to be so relevant ("non-IPO offers"). This may include
managed funds and "ordinary course of business" offers by banks and financial
institutions (for example, deposit products and KiwiSaver schemes).
5.3 By way of example, paragraphs 34 to 38 of the guidance note propose requiring
information as to particular business models and director and senior officer curricula
vitae. However it is not clear what a managed fund's business model would be, other
than perhaps the investment strategy for a particular fund. A bank's business model
(while perhaps relevant to an IPO of bank equity securities) would likely have little
bearing on a term deposit product. Similarly, a bank's senior managers (chief
executive and direct reports) may have little relevance to a particular deposit product.
For example, a bank's head of human resources or information technology are
unlikely to be relevant to a simple term deposit.
5.4 Our understanding of the Australian position is that banks (or "authorised deposit-
taking institutions") are not subject to the equivalent Australian guidance in respect of
their debt securities and ordinary deposit products, as an Australian prospectus is not
required for such offers. Similarly, we understand that managed funds are not directly
subject to the equivalent Australian guidance, as again a prospectus is not required.
Instead, ASIC has published additional sector specific guidance for various types of
managed funds.
5.5 We therefore suggest that the guidance note clarify the position of such non-IPO
offers, either by excluding such offers from the scope of some or all of the guidance
note, or providing additional sector specific guidance.
5.6 Following our discussion of 7 March, we understand that you do not intend the
guidance to apply to every situation and type of offer, and that you expect the market
to make a judgment about appropriateness and materiality in each case. However
this is not clear in the current drafting of the guidance note, which appears to impose
the requirements in all cases, regardless of how appropriate or material they are.
6. Investment statements and prospectuses
6.1 The guidance note refers expressly to investment statements and prospectuses in
certain paragraphs, but in other paragraphs simply refers to "disclosure documents".
WGTN_DOCS\1078665\4 Page 3

As a general point, it would be useful to clarify in such cases whether you consider
such matters to apply to the investment statement, the prospectus, or both.
6.2 We also consider it necessary for the guidance note to clarify the effect of the various
exemptions from the Act, including the statutory exemptions and the FMA exemption
notices. For example, the following offers are fully or partially exempt from either the
requirement for an investment statement, prospectus, or both:
(a) offers of bank term deposits;
(b) simplified disclosure offers;
(c) Australian offers; and
(d) offers of cooperative member shares.
6.3 Would it be necessary for an offer exempt from the investment statement
requirement to include all the information the guidance note suggests should be in an
investment statement in its prospectus? Similarly, is an offer that is exempt from
most (but not all) of the prospectus requirements still obliged to include the required
guidance note information for prospectuses? Is an issuer that is entirely exempt from
the investment statement and prospectus requirements nevertheless required to
include some or all of the information in whatever replacement document is used?
7. Further guidance notes
7.1 We welcome the FMA's initiative in issuing guidance notes in order to facilitate
compliance with financial regulation obligations, and look forward to further guidance
notes in the future. As a matter of priority, we suggest that the FMA consider issuing
a guidance note on the "formalities" expected for the registration of offer documents,
particularly in light of the impending removal of the pre-vetting facility.
7.2 One of our clients recently had a significant issue in relation to its agent authority
forms. As is common, the directors of the issuer had appointed one director as their
agent to sign a prospectus. The agent authority forms were duly executed and the
prospectus signed by the named director as agent. However, the Companies Office
subsequently declined to register the prospectus as, in its view, the agent authority
forms were technically inadequate. While we did not share the Companies Office
view, we amended the agent authority forms and resubmitted the prospectus for
registration. We were able to resolve the issue, but this very nearly caused a
significant timing impact; and if the situation had not been speedily resolved, our
client may have technically been allotting securities in breach of the Act.
7.3 In our view, this is a relatively trivial issue, but one that had extremely significant
potential implications for our client. We would, of course, have been happy to use
any form of agent authority that had been communicated to us. The issue in this case
was that this requirement was only communicated to us at the very last minute (and
was compounded by the fact we had used identical agent authority forms many times
previously). If the FMA does have views or requirements for technical matters such
as agent authority forms and other formalities required for registration, we would
WGTN_DOCS\1078665\4 Page 4

suggest that these should be encapsulated in a guidance note for the benefit of the
market.
7.4 Based on our previous experience, such a guidance note may include guidance on:
(a) The required form of agent authority;
(b) The requirements (if any) for original documents, or whether copies are
sufficient in all cases;
(c) The requirements for electronic filing (for example, file formats and file size
limits);
(d) The FMA's/Companies Office's approach to electronic receipt of filed
documents;
(e) The requirements for amendments to existing offer documents (for example,
whether marked up changes are acceptable, or whether it is necessary to
describe all changes using insert/delete/replace language);
(f) Placement and requirement of a contents page and glossary;
(g) Date of registration; and
(h) The meaning of "material contracts" and "contracts entered into in the ordinary
course of business".
7.5 Some useful information in this regard is available on the FMA and Companies Office
websites. We consider however this information could be made more useful by
consolidating it into a guidance note that provided comprehensive guidance on any
such technical matters or other formalities.
8. Pre-registration review
8.1 We support the removal of the existing pre-registration facility, which has become
less useful over time. We would however prefer that the FMA implement some form
of arrangement whereby issuers could submit drafts of offer documents to ascertain
the FMA's views, rather than the FMA relying solely on its powers to suspend or
cancel after registration. There is currently significant uncertainty in the financial
markets, and a form of pre-registration review would alleviate this uncertainty.
9. Timing
9.1 Finally, we are concerned with the timing of the guidance note's requirements in light
of the impending Bill. Requiring issuers to restate their offer documents in light of the
guidance note, followed by restatement after the Bill comes into force (along with an
additional restatement for issuers of KiwiSaver schemes in relation to the transition of
the issuer from trustee to manager) imposes a significant cost on issuers.
9.2 Some of the guidance note's requirements will generate greater compliance costs
that others, as they will require a greater degree of redrafting of current documents.
We suggest that FMA should evaluate each of the guidance note's requirements
WGTN_DOCS\1078665\4 Page 5

against the likely benefits to determine whether the benefit to investors justifies
introducing that requirement immediately. For example, the requirement to use "you"
and "we" throughout documents will require significant redrafting of many documents
for no obvious benefit in the majority of cases. In contrast, as requirement to use
larger fonts or reduce branding can be made very easily.
10. Concluding remarks
10.1 Thank you again for the opportunity to review the proposed guidance note. We are
happy to discuss any matter in this submission further with you if that would be
helpful.
BUDDLE FINDLAY
Sacha Judd
Partner
Direct dial: +64-9-363 0632
Email: sacha.judd@buddlefindlay.com
Adam Jackson
Partner
Direct dial: +64-4-498 7346
Email: adam.jackson@buddlefindlay.com
WGTN_DOCS\1078665\4 Page 6

Annex: Responses to individual questions
Note that our responses below should be read in light of our general comments in the covering letter to this submission. Many of the issues could be resolved,
for example, by excluding or clarifying the status of certain specific types of offer. Further, our view is that some of the more detailed mandatory requirements
should be prescribed in the Securities Regulations, rather than a guidance note. However, we have endeavoured to respond to the queries substantively.
Guidance note
reference
WGTN_DOCS\1078665\4
Consultation
paper question
Submission Recommendation
Para 22 Question 3 While we agree that the clear, concise and effective test is a
good one, it is not clear what "small" print is, what is "in the
back of" the document, or when something is "prominent".
Para 24 Question 4 While we agree that the clear, concise and effective test is a
good one, the explanation about the use of brand
information seems a bit vague and therefore hard to follow.
Our specific points include:
- the use of "relevant to your offer" instead of "appropriate
to your offer", as is used elsewhere in the guidance note
is not consistent or appropriate; and
- it is commercially unfair for certain businesses (e.g.
banks) to not promote their brand, as that is exactly why
investors invest with them.
State the smallest font size
allowed, state what "back"
means (e.g. the last 5 pages of
the investment statement), and
what "prominent means (e.g. in
the first 5 pages of the
investment statement).
More specific direction around
when branding can be used
(e.g. a logo can be used on
every page, but other images
can only be used on the first
and last page), Specifically:
Change fourth bullet point to
read "…should only be used if it
is appropriate to your
business…".
Carve out relevant businesses
Statutory
references

Para 31 Question 8 The definition of "senior management" chosen is broader
than is appropriate, as it potentially encompasses senior
managers such as a human resources manager (which is
not relevant to an issue of securities).
Para 34 Question 9 Several of the business model topics are commercially
sensitive (such as competition, barriers to entry, key
dependencies), and therefore should not be disclosed in
such public documents.
Para 37 Question 11 While we agree incentives such as commissions should be
disclosed, remuneration of a senior manager is also
commercially sensitive.
Para 62 Question 30 In our view it would be inappropriate (if not impossible) for
many types of offers to include prospective financial
information; including a statement purporting to explain why
no prospective financial information is included may merely
lead to investor confusion.
WGTN_DOCS\1078665\4 Page 8
from the sixth bullet point.
Use the definition of "senior
management" from the
Financial Services Providers
(Registration and Dispute
Resolution) Act 2008 that refers
to exercising "significant
influence". This will focus the
disclosure requirements on the
key decision makers.
Remove these requirements or
make them broader, so nothing
commercially sensitive needs to
be disclosed publically.
Remove this requirement or
only require a salary bracket to
be disclosed and/or description
of the type of remuneration (e.g.
salary)..
Limit requirement for
prospective financial
information / "if not, why not" to
equity IPOs. For example, insert
this requirement into the
Securities Regulations,

For example, it is difficult to see how managed funds could
provide any sort of realistic prospective financial information.
In other cases (for example, bank deposit products)…
However for other cases (e.g. equity IPOs), we consider the
"if not, why not" approach appropriate.
WGTN_DOCS\1078665\4 Page 9
Schedule 1.