FMA consults on revised Effective Disclosure Guidance Note

Haydn Wong, Partner | Wednesday 11 April 2012

Last week, the Financial Market Authority (FMA) released a revised draft of its proposed Effective Disclosure Guidance Note and has invited feedback on the revised draft by 10 May 2012. A copy of the revised guidance note is available here.

As the FMA acknowledges in its press release, the revised guidance note is markedly different from the initial draft, largely as a result of the feedback it received from various market participants (which included industry groups, consumer groups, issuers, law firms, accountancy firms, fund managers, investment banks and registered banks). In this regard, the FMA is to be congratulated for the careful consideration it has given to the submissions it received and, in particular, for its willingness to address specific concerns raised by stakeholders during the first consultation round.

What key concerns have been addressed?

Most submitters (including Bell Gully) supported the FMA's initiative to provide guidance on the presentation of prospectuses and investment statements. The guidance note has the potential to be a very useful tool for issuers and advisers and should, once finalised, assist in improving the standard of New Zealand offer documents prior to the implementation of the Financial Markets Conduct Bill 2011 which is currently making its way through the parliamentary process. However, a number of concerns were expressed by Bell Gully and other submitters about the application and implications of the guidance note. For the most part, these concerns have been addressed in the revised draft of the note, including:

• Status of the guidance note: The FMA has made it clear that the guidance note is not intended to create new 'legal requirements', rather it aims to help issuers comply with existing legal requirements and address some of the FMA's key concerns. Changes have been made to the guidance note's language, tone and content to highlight that the guidance given is not mandatory. In particular the guidance note now makes it clear that the factors referred to in Section C (Key information), new Section D (Material information) and Section F (Sector specific issues) are not required to be included in disclosure documents on a 'tick box' basis, simply because they are mentioned in the guidance note. Where specific content is included, the guidance note emphasises that issuers "should turn their minds to these and all other matters which may be material to an offer and form a view as to whether they are in fact material and whether they should be disclosed".

• New "clear, concise and effective" disclosure requirement: The guidance note has been reframed to clarify that the FMA views 'clear, concise, and effective' disclosure as representing good practice (rather than a legal requirement). Other changes also include replacing references to 'plain English' with references to plain language so issuers do not feel under an obligation to engage plain English experts, and providing further explanation on what the FMA considers 'effective' to mean.

• Qualifications on use of brand information: The FMA has acknowledged that brand information (which includes photographs and images) can be used to make a disclosure document clear, concise and effective. It also acknowledges that it is important for disclosure documents to be attractively presented. Accordingly brand information will be able to be used if it does not dominate, or distract or detract from, the legal disclosures.

• Confusion over use of key information section: The revised guidance note makes it clear that it is not compulsory to have a key information section (although the FMA considers that a key information section will help to achieve clear, concise and effective documents). This section of the initial draft note has been divided into two sections in the revised draft to provide examples of information likely to be both material and key.

• Not a 'one size fits all' approach: The FMA has provided further clarification that all aspects of the guidance note do not apply to all offers: issuers are asked to exercise judgment on this aspect. The issuer and its directors need to decide what information is material and therefore must be disclosed in respect of an offer.

• Effect on exempt offers: The FMA has provided further clarification on how the guidance note applies to those offers already exempt from some or all of the requirements of the disclosure regime.

• Continuous issuers: The FMA has acknowledged that continuous issuers will need time to consider their disclosure documents without incurring disproportionate expense and have made it clear that continuous issuers need not prepare updated disclosure documents outside of their regular review timetable. The FMA expects that this should be possible for any new prospectus or offer document from 1 January 2013.

The revised guidance note also provides more context for the specific guidance given, with references to recent case law arising from the finance company collapses prosecutions and, where appropriate, links to legislative provisions. In particular, special emphasis is placed on the responsibilities of issuers and directors to take total 'ownership' of the task of ensuring that the disclosure documents meet all legal requirements, including that they include all material matters and are holistically true.

For further details of the concerns raised by submitters and the FMA's response to those concerns see the 'Response document and invitation to provide feedback' on the FMA's website. Copies of the 62 submissions the FMA received are also available here.

FMA will not re-instate the pre-registration vetting service

The pre-registration vetting service previously provided by the Ministry of Economic Development for prospectuses ended on 30 March 2012. Many submitters considered that it would be useful for this service to be continued by the FMA to allow time for the market to adjust to the proposed guidance note, but the FMA has decided that this will not be necessary. In its view the comfort market participants and their advisers took from this service "was perhaps greater than was merited by the limited nature of the service".

Instead, the revised guidance note emphasises that the FMA is keen to engage with issuers before they register disclosure documents on novel products, strategic issues, complex or big issues or significant issues of securities (for example major IPOs). In such cases issuers are encouraged to contact the FMA as early as possible but are told to be selective about the issues that they raise (for the simple reason that the FMA does not have the resources to engage on every offer or concern).

Enforcement policy includes emphasis on education

The FMA also appears to have taken note of submitters concerns regarding its approach to enforcement. The revised draft of the guidance note indicates that the FMA will not move immediately to cancel or prohibit disclosure documents, except where a disclosure document fails to comply with legal requirements to such a degree that urgent action is required to protect the interests of intending investors. Pleasingly, the FMA has indicated that it will engage with and educate issuers before taking further action.

Future guidance for advertisements likely

The proposed guidance note continues to apply only to prospectuses and investment statements. However, the FMA has indicated that it intends to issue guidance on advertisements (including websites) later this year.

New timeframe for guidance note

The FMA proposes to issue a final version of the guidance note before the end of May 2012, with a view to the guidance note being used by the FMA from 1 June 2012 as part of its risk-based assessment of newly-issued disclosure documents.

As noted above, continuous issuers are encouraged to review their disclosure documents as soon as practicable, but are no longer required to do so until the next time they issue a new investment statement or register a new prospectus for the issue after 1 January 2013. Previously, the guidance note required continuous issuers to have updated all disclosure documents by 1 January 2013.

What is the FMA consulting on this time?

The FMA is seeking feedback on four topics for the revised draft guidance. These are:

• the proposed new timeframe;

• the status of the revised guidance, and how the FMA will use the guidance in reviewing disclosure documents;

• whether the revised guidance continues to encourage inclusion of additional, and immaterial, information; and

• whether there are any remaining respects in which it is not clear how the FMA will work with issuers to understand the rationale for their views, before deciding whether it will be appropriate to exercise statutory powers in particular cases.

The 'Response document and invitation to provide feedback' sets out full details of the questions and the submission process. Submissions close on 10 May 2012.