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New Zealand Securities Commission |
Last Updated: 9 November 2014
Securities Commission Policy in Respect of Approval of Trustees and Statutory Supervisors
DISCLOSURE BY FINANCE COMPANIES
A DISCUSSION PAPER
SECURITIES
COMMISSION
24 September 2004
Contents:
Background to the discussion
paper
Issue areas
SECTION 1 - KEY
PROVISIONS OF THE ACT AND REGULATIONS
Investment statement
Registered Prospectus
SECTION 2 - RISK DISCLOSURE AND
RETURNS
The risk/return relationship of the investment must be made clear to
investors
Principal
risks for disclosure in the investment statement
Disclosure about risk and company activities in the investment
statement
Risk and disclosure
about related party lending
Conduit issuers and funding
vehicles
Possible distortion
of the risk/return relationship
Risk
and finance company policies on lending and outstanding debts
Risks and
the use of rating information by finance companies
SECTION 3 - RANKING OF SECURITIES
Description of
ranking of securities in advertisements
Disclosure about prior claims and equal ranking claims in the
investment statement
SECTION 4 - OTHER DISCLOSURE
ISSUES
Consistency between the investment statement and the registered
prospectus
Maturity of investments
"How do I cash in my investment?" - disclosure about the effects of
early termination
Date of investment statement
How much do I pay?
Ordering of
information within the investment statement
Information on request
SECTION 5 - ADVERTISING
Key
provisions of the Act and Regulations relating to advertising
Areas of common
non-compliance concerning advertisements
Prominence of
required information in advertisements
Use of
advertising or marketing agencies to prepare advertising
The
advertisement does not refer to investment statement
Statements in advertisements
about assets
Statements in advertisements about how the securities are
secured
Statements as to safety
Statements in
advertisements about the interest rate
CONCLUDING COMMENTS
The Securities Commission is an independent statutory body. The Commission has an enforcement function in relation to registered prospectuses, investment statements, and advertisements for securities offered to the public in New Zealand.
We invite comment on the matters raised in this discussion paper. Any comments received will be subject to the Official Information Act 1982. It is the Commission's usual practice to make submissions available on request. If you would like us to withhold information included in comments on this paper please state this clearly in your response. Any request to withhold information will be considered in accordance with the Official Information Act 1982.
Securities Commission
Level 8, Unisys House
56
The Terrace
PO Box 1179
WELLINGTON
Ph (04) 472 9830
Fax (04) 472 8076
E mail seccom@seccom.govt.nz
Web site www.seccom.govt.nz
Background to the discussion
paper
1.
The Commission has been reviewing the debt security disclosure documents of
some finance companies. Disclosure documents of 30 finance
companies were
reviewed.
2.
Over the past few years finance companies have been taking a higher profile
in New Zealand, and competing more aggressively for investors'
money. There has
been an increase in the marketing and advertising of the various debt securities
on offer. The higher interest rates
offered by finance companies have been
attractive to investors in the low interest rate environment.
3.
The Commission regularly receives and deals with complaints and inquiries
from members of the public who are concerned about the practices
of some finance
companies and the information that is disclosed. Often these people have
invested in debt securities offered by finance
companies. The increase in the
number and profile of finance companies has seen a corresponding increase in the
number of complaints
that the Commission receives and deals with. These trends
have prompted the Commission to undertake this review.
4.
Finance companies' offer documents, like those of other issuers, need to
comply with the Securities Act 1978 (Act) and the Securities Regulations
1983 (Regulations). The documents must not mislead investors. In its
review the Commission has seen some investment statements and prospectuses that
provide a good level of useful information for investors. It has seen some that
do not. The Commission is of the view that some finance
companies are not
meeting the minimum requirements of the legislation. The Commission considers
that these finance companies need
to consider the disclosures that they are
making, and make changes where necessary to their disclosure documents to ensure
future
compliance with the legal requirements of the Act and Regulations.
5.
The Commission has decided to publish this discussion paper, outlining the
Commission's preliminary views on the information that
should be disclosed by
finance companies to assist investors to make informed investment decisions. The
Commission seeks comments
from finance companies and other interested parties on
these preliminary views. Once it has received and considered comments, the
Commission will publish a report to provide guidance on its expectations for
disclosure by finance companies.
6.
Many of the matters raised will be relevant also to other issuers of debt
securities, and to issuers more generally. We welcome comments
from these people
also. The Commission intends to undertake a further review of finance companies'
offer documents at a later date,
and will take enforcement action where
appropriate following that review.
7.
This discussion paper does not include detailed issues concerning disclosure
of financial information by finance companies. The Commission
is undertaking a
separate project on financial disclosure by finance companies.
Issue
areas
8.
The Commission has identified the following broad issue areas relating to disclosure and compliance by finance companies for inclusion in this discussion paper. Many of these issues are interrelated:
9.
The issues that the Commission has identified relate, in most cases, to
concerns that members of the public have raised, or issues
that the Commission's
enforcement activities have highlighted.
SECTION 1 - KEY
PROVISIONS OF THE ACT AND REGULATIONS
10.
Generally, an offer of securities to the public must be made with a
registered prospectus and an investment
statement.
Investment statement
11.
An investment statement is the principal point of sale disclosure document. Its purpose, as stated in the Act, is to:
(a)
Provide certain key information that is likely to assist a prudent but non-expert person to decide whether or not to subscribe for securities; and
(b)
Bring to the attention of such a person the fact that other important
information about the securities is available to that person
in other
documents.
12.
Regulation 7A of the Regulations sets out the requirements for the investment statement:
(a)
The investment statement must contain the information required by Schedule 3D of the Regulations. This requires every investment statement to be set out in a question and answer format, addressing the eleven questions found in Schedule 3D;
(b)
All the information, statements, and other matters required to answer each question must be set out in the investment statement under that question;
(c)
The information required to answer each question must be set out "in a succinct manner"; and
(d)
An investment statement may state that "additional information" about a
matter specified in Schedule 3D is set out in a registered
prospectus.
Registered
Prospectus
13.
This is often a larger document, which must set out all material matters
relating to an offer of securities. In the case of debt securities,
it must
contain all the information, statements, certificates, and other matters set out
in the Second Schedule of the Regulations
that are applicable.
14.
Regulation 5 of the Regulations contains further requirements for registered
prospectuses. Regulation 5(1) provides that if a statement
required in the
registered prospectus would be misleading without the addition of further
information, that further information must
be included also.
15.
The Commission is of the view that:
(a)
Disclosure by many finance companies in their investment statements is insufficient to properly answer the questions set out in Schedule 3D of the Regulations.
(b)
Disclosure and registered prospectuses by many finance companies fall short of the required standard of "all material matters" in clause 34 of the Second Schedule to the Regulations.
(c)
The requirements of Regulation 7A need to be more clearly understood.
(i)
Regulation 7A(1) requires the investment statement to contain all the information required to answer the questions in Schedule 3D. The requirement to set this out "in a succinct manner" does not principally affect what information is presented, but how that information is presented. Effectively it requires issuers to express themselves briefly and clearly, in plain English.
(ii)
The ability under regulation 7A(2) to state that other information is set out in the registered prospectus does not detract from the requirement to fully answer the questions in the investment statement. It permits issuers to say that additional information is available in the registered prospectus. This requires issuers to ensure there is sufficient information in the investment statement to clearly answer each question, and permits them to point out that there is further relevant detail in the registered prospectus.
(iii)
All the information required to answer each question must be set out
under that question. This is intended to allow prospective investors
to quickly
find all the information relevant to each matter, even if this means that some
information must be repeated.
16.
The amount of information needed in any investment statement will be
dependent on the context of the issuer's particular business,
the issuer's
lending activities, the types of debt securities that are being offered, and the
risks of the investment.
17.
Directors of finance companies and their advisers should rigorously check
that all applicable disclosure requirements are met. Directors
are required to
certify that the investment statement complies with the securities legislation
and does not contain any matter that
is likely to deceive, mislead or confuse
with regard to any particular that is material to the offer of securities.
Directors are
also required to certify that the investment statement is not
inconsistent with the registered prospectus relating to the security.
SECTION 2 - RISK DISCLOSURE AND
RETURNS
The
risk/return relationship of the investment must be made clear to
investors
18.
The Act and Regulations aim to ensure that investors are provided with
adequate disclosure about investments, and the persons that
issue, offer, and
promote them to enable investors to make informed investment decisions. In order
to make an informed investment
decision, the risks of the investment must be
sufficiently disclosed.
19.
Many investors are aware that the risks associated with an investment should
be a fundamental determinant of the expected return on
the investment. The
general rule of investment is "the higher the return, the higher the risk".
20.
The Commission is of the view that:
(a)
Few finance companies adequately discuss the risks of the investments that they offer in terms of the returns.
(b)
The prudent but non-expert person is unlikely to be able to gain an adequate understanding or appreciation of the risks of a particular debt security investment from the information contained in the investment statements of most finance companies.
(c)
As a result, investors are likely to find it difficult to make any relative assessment and distinguish among the types of debt securities offered by different finance companies.
(d)
The risk/return relationship is fundamental to investment decision-making.
Inadequate disclosure about the risk/return relationship
of the investment is
likely to have the potential to mislead investors.
21.
The Commission considers that the investment statement must provide
sufficient information to enable an investor to ascertain, assess,
and weigh up
the risks of investing in the finance company's debt securities in relation to
the return offered by the finance
company.
Principal risks for disclosure in the
investment statement
22.
Clause 11(1) of Schedule 3D to the Regulations requires an investment statement to contain a brief description of the principal risks of the following matters:
(a)
The money paid by a subscriber not being recovered in full by the subscriber;
(b)
A subscriber not receiving the described returns;
(c)
A subscriber being required to pay more money than that disclosed elsewhere
in the investment statement.
23.
The investment statements for many finance companies contain disclosure
information on risk that is highly standardised. Some we have
seen simply state
that the principal risk to investors is the company becoming insolvent. While
this is of course true, it does little
to assist investors.
24.
The Commission does not consider that merely stating that insolvency is a
risk meets the requirement of briefly describing the principal risks. The
Commission's view is that where clause 11(1) requires "a brief description of
the principal risks", a finance
company is required to include more specific
statements describing, in the context of the particular finance company's
business,
the principal risks that may lead to insolvency.
25.
The Commission considers that risk disclosure should be addressed by finance companies on two levels. Firstly, a description of the principal risks that may apply to finance companies generally. These may be reasonably generic, and applicable to a wide range of issuers. However, the Commission considers that there are likely to be certain risks that are particularly applicable to finance companies. These types of risks (as disclosed by some finance companies) may include:
(a)
Lending risks - risks associated with lending funds and not being fully repaid the principal, interest and other fees.
(b)
Liquidity risk - whether the finance company has enough cash liquidity to meet its obligations.
(c)
Economic downturn risk - risks concerning the stability of the economy and a downturn in the sectors to which the finance company is exposed.
(d)
Interest margin risk - risks to profitability associated with the margin between the cost of funds invested with the finance company and the interest rate that the finance company charges borrowers for those funds.
(e)
Pricing risk - the risk that the value of a security (financial asset or financial liability) will fluctuate due to changes in interest rates, currency fluctuations, or market prices.
(f)
Solvency risk - risks of not being able to pay debts as they fall due.
(g)
Regulatory risk - changing legal requirements and the effect of legislation
on industry sectors.
26.
Secondly, the Commission is of the view that a description of the principal
risks specific to the particular finance company should
also be disclosed. This
is likely to include disclosure about how more general risks, such as those
outlined above, may impact on
the particular finance company as a result of the
company's principal activities and exposures. Directors will need to assess what
the finance company's main exposures and risks are, and describe them in the
investment statement where they are principal risks
that relate to the matters
set out in clause 11 of Schedule 3D of the Regulations.
27.
The Commission acknowledges that an investment statement must set out the
information required by Schedule 3D "in a succinct manner".
However the
requirement to be succinct must be balanced against the need for informative
disclosure that meets all of the requirements
of the legislation. It must also
be balanced against the requirement not to deceive, mislead or confuse
investors. Non-disclosure
of risks that are specific to the finance company may
deceive, mislead or confuse an investor about the full extent of the risks
associated with subscribing for the debt security.
28.
The Commission's view is that disclosure of principal risks in the investment
statement needs to be tailored more to the activities
and circumstances of each
particular finance company.
Disclosure about
risk and company activities in the investment statement
29.
Clause 4 of Schedule 3D to the Regulations requires an investment statement
to include a brief description of the principal activities
carried on by the
issuer and an indication of how long the issuer has been carrying on those
activities.
30.
The level of risk to the investor is likely to be influenced by the
activities of the company and the industries or sectors that it
invests in. If
company activities are poorly disclosed then it is very difficult for investors
to assess the level of risk involved
in the investment. Clear statements and
appropriately detailed descriptions about the types of lending a finance company
undertakes
allow investors to determine whether they are comfortable with their
subscriptions being used for investment in particular sectors
or
industries.
31.
The Commission has found that some finance companies are not meeting the
requirements of clause 4 of Schedule 3D in their investment
statements.
32.
Some finance companies only provide a generalised statement about the finance
company's activities. Other finance companies do not
describe their principal
activities in this part of the investment statement, but rather discuss aspects
of the company such as its
structure and history.
33.
The Commission's view is that a generalised statement about a finance
company's activities, without the inclusion of specific details,
does not
provide sufficient information to prospective investors to enable them to make
an informed investment decision and does
not comply with the requirements of
clause 4 of Schedule 3D.
34.
Disclosure of the principal activities of the finance company should be such
that it provides prospective investors with useful information
and sufficient
detail about what types of financing activities the company undertakes. In many
cases finance companies may be exposed
to sector-specific risks. For example, a
finance company may be exposed to risks associated with property development
financing if
this is the finance company's principal activity.
35.
Some finance companies lend money in relation to secondary financing
activities. Many finance companies make loans to individuals
or businesses that
may not have been able to obtain finance from other lending institutions. These
persons may have difficulties
raising traditional bank funding due to
insufficient security. This is a factor that the Commission considers material
to the risk/return
relationship of the investment. The Commission considers that
such information should be disclosed to investors where it is a principal
activity of the finance company.
36.
Similarly, where disclosure is made in relation to property financing
activities as a principal activity, the finance company should
make it clear
whether the lending activities involve lending in relation to property under
development or to developed property,
and whether the property lending is to the
commercial or residential sectors.
37.
The Commission's view is that the requirement to briefly describe the
principal activities carried on by the issuer goes beyond the
general statements
that many finance companies currently provide in their investment statements.
Finance companies need to consider
whether sector-specific risks are an issue
and whether such risks need to be disclosed in relation to clause 4 of Schedule
3D.
38.
An understanding of the nature of the financing activities is important to
enable investors to better assess the level of risk exposure
that their
investment may have. If the activities of a finance company are not "principal
activities" for inclusion in the investment
statement, the activities may still
be a material matter for disclosure in the registered prospectus.
39.
Clause 4 of Schedule 3D of the Regulations also requires an indication of how
long the issuer has been carrying on the described principal
activities. Some
finance companies only provide details about when the finance company was
established.
40.
Disclosure about the length of time that a company has undertaken the
described principal activities enables investors to ascertain
the history of the
company and its experience in providing finance to particular sectors. The
Commission considers that the length
of time a company has been involved with a
particular principal activity can be an important factor for an investor making
a decision
whether to invest with the company.
41.
The Commission's view is that merely stating details about when the finance company was established is not what is required by the wording of clause 4 of Schedule 3D. The Commission considers that the wording of the provision requires disclosure about how long the finance company has carried on the described principal activities. For example, the company may have been incorporated 10 years ago, but only operated as a finance company for 3 months. Alternatively, it may have been a finance company since incorporation, but recently has switched its principal activities from lower to higher risk investments. This type of information enables prospective investors to understand what the company is currently doing and how that may differ from what it has done in the past.
Risk and disclosure about related party lending
42.
The Commission is concerned about the adequacy of disclosure by finance companies in relation to related party transactions, including related party lending. Related party lending includes in-substance financing transactions that occur between related parties taking the form of the 'sale' of loans or loan portfolios.
43.
Identification and disclosure of related party transactions, and the risks of the activities of related parties, are important and material matters for investors. They are matters about which investors and commentators often raise concerns.
44.
If related party lending occurs or is likely to occur, then this should be clearly disclosed and explained.
45.
The Commission's view is that investors particularly need to be made aware of:
(a)
Who the related parties are and the nature of their relationship with the issuer.
(b)
The nature of transactions undertaken with related parties (and particularly any related party lending and/or borrowing) and the volume of transactions undertaken.
(c)
Whether related party transactions occurred on any special or unusual terms or conditions not available to unrelated parties.
(d)
Related party balances owing or receivable at the date of the prospectus or the date of the financial statements accompanying the prospectus.
(e)
The nature of the activities related parties are involved in.
(f)
An indication of the financial health of related parties and their ability to repay any loans.
(g)
Whether any related party debts have been written off or forgiven during the reporting period.
46.
Without this information, investors may not be able to assess the risks of the investment and will not know what entities and activities their investment is ultimately funding.
47.
The Commission also notes Statement of Standard Accounting Practice No. 22 Related Party Disclosures. SSAP-22 establishes criteria for the disclosure of related party relationships between reporting entities and related parties. Finance companies must ensure that they properly disclose all of the information necessary to comply with accounting and financial reporting standards in relation to disclosure of related party transactions.
48.
Where a finance company engages in related party lending, the activities of the related parties may require disclosure in the investment statement and may be material information for disclosure in the registered prospectus.
49.
As is the case with the finance company itself, the exposure to risk of the related party is likely to be affected by factors such as the types of business activities that it is involved with and the environment in which it operates. This risk exposure may have an impact on the performance of the finance company, particularly where related party lending is material in the context of the finance company's business. If the related party's exposure to risk is significant, then the activities of the related party and the risks of its business may become principal risks of the finance company and require disclosure in the investment statement under clause 4 of Schedule 3D. The Commission considers that in such circumstances the activities of the related party and the corresponding risks to the finance company are also likely to be material matters that should be disclosed in the registered prospectus.
50.
The activities of the related party and the risks of its business may be a key factor that determines the return on investment and a principal risk of a subscriber not receiving the described returns. The Commission is of the view that such information may need to be described in the investment statement in relation to the question "What are my risks?" It is key information that a prudent but non-expert person is likely to want to know in order to decide whether to subscribe for the securities.
51.
The Commission considers that the investment statement and registered prospectus need to explain what criteria or restrictions govern related party lending and should refer investors to the terms of the trust deed for further information as appropriate so that investors can evaluate it. If a parent company or other related entity is financing the activities of subsidiaries (or a subsidiary is funding the activities of the parent company or other related party) there should be some way for the investor to judge the performance of the other entity. The performance of that other entity may be a risk factor relevant to an investor's decision to invest with the finance company. This would be of particular importance where the finance company has few assets and is dependent on the related entity's ability to honour its loan obligations.
52.
Related party transactions can have a material effect on the activities of a finance company and its financial position. The existence of a related party relationship may expose the finance company to risks that may otherwise not be present.
53.
The Commission considers that there are a range of matters in relation to related party transactions and lending that are likely to require consideration by directors of finance companies. These issues may be of such a type or level to concern the principal activities of the issuer under clause 4 of Schedule 3D. They may be key factors that determine the returns and require disclosure under clause 9 of Schedule 3D. They may be principal risks for disclosure under clause 11 of Schedule 3D. If so, the Commission is of the view that they need to be disclosed in the investment statement. If they are not of a type or level to trigger disclosure in the investment statement but are otherwise material matters, then we think that disclosure is required in the registered prospectus. These issues may include:
(a)
Identification of Relationships
(b)
Activities
(c)
Lending
(d)
Funding
(e)
Requirements under the trust deed
(f)
Financial standing
(g)
Special rates or concessions
(h)
Other
Conduit issuers and funding vehicles
54.
Where special purpose companies are raising money from the public solely to pass it on for use by another company, the Commission is of the view that detailed information is required about that other company and that this is a material matter to be disclosed in the registered prospectus. Information about the other company may also be required to be disclosed in the investment statement in relation to the factors concerning the risks of the investment.
55.
In some cases finance companies may be structured specifically to borrow funds which are then passed to another entity, usually within the same group of companies or in circumstances of common governance involving one or more related entities. The finance company is simply used as a mechanism for gathering subscriptions from the public in order to fund the activities of other parties.
56.
Persons who subscribe for securities in such a situation are essentially making an investment decision on the creditworthiness and standing of the parent company (or other entity that is receiving the money). The risks and rewards of investing with a finance company that is a conduit depend on the ability of other entities to repay the loans.
57.
The Commission considers that in circumstances where finance companies are used as conduits or funding vehicles, providing information in the disclosure documents about the finance company only is insufficient. The nature of the obligations to the parent company (or other entity that is using the subscription monies to fund its activities) needs full explanation and disclosure. The financial health of the parent company (or other entity) and the purposes for which it uses the money are likely to be material to the risks of investing with the finance company.
58.
The Commission is of the view that in such circumstances the principal activities of the parent company, or other entity, and the risks associated with such activities should also be disclosed in the registered prospectus.
59.
The use of conduit companies raises questions about the application of the definition of "issuer" in section 2 of the Act:
"Issuer" means -
(a)
In relation to an equity security or a debt security, or to an advertisement, investment statement, prospectus or registered prospectus that relates to an equity security or a debt security, or to a trust deed that relates to a debt security, the person on whose behalf any money paid in consideration of the allotment of the security is received:"
60.
Where entities are simply being used as conduits, it may be argued that the entity receiving the money is the "issuer" in terms of the definition. This is because the finance company is essentially receiving money on behalf of that other entity. The other entity may therefore be the "person on whose behalf any money paid in consideration of the allotment of the security is received". If so, the Commission is of the view that full disclosure under the Act and Regulations would be required in relation to that entity as an issuer.
61.
The contra argument is that the conduit company is the legal beneficiary of the money and has the debt relationship with the investor. The fact that the conduit company enters into transactions with the other entity does not affect this relationship, and the conduit company legally remains the issuer.
62.
Even if the other entity is not an "issuer" under the Act, it may be the case that the transactions between the conduit finance company and other entity or entities are material in terms of the business of the finance company. If this is a material matter then the Commission is of the view that particulars such as the transactions, the entities that are involved, the amounts that are involved, whether there are any guarantees in place, and the ability of those entities to repay the loans must be disclosed to investors in the registered prospectus so that the disclosed information is not misleading.
63.
Disclosure about these matters would appear to be particularly important where the finance company has few assets, other than the loan receivables, and is dependent on the related entity honouring its loan obligations. The Commission considers this information to be highly material to investors if the conduit issuer is set up as a special purpose subsidiary. In such a case the conduit company's only asset is likely to be the debt of the parent entity. The risks to the investor depend on the ability of the parent company to repay the subsidiary.
64.
The issue of conduits or funding vehicles is relevant to the sufficiency of the risk disclosure about exposure to related parties. The structuring of certain company groups and the extent of related party lending may raise the question of whether certain finance companies are being used as funding vehicles for the activities of other group members.
65.
Where this is the case, the Commission is of the view that the registered prospectus for the finance company should clearly inform prospective investors not only that the finance company is a conduit issuer or funding vehicle but should also include details about the recipient(s) of the funds and the purposes for which the recipient intends to use investors' money, including details of its activities, the risks associated with such activities and its ability to repay the loan. The Commission considers such information to be material information for disclosure.
66.
The Commission notes that often there will be a payment guarantee from the parent entity to the subsidiary company. Where there is a formal guarantor relationship, certain disclosures are required to be made on request to investors under section 54B of the Act or under the Second Schedule to the Regulations, in relation to guaranteeing subsidiaries. If there is no formal guarantor relationship but the ability to repay the investor depends on the creditworthiness of the parent company, the Commission considers this to be material to investors and it would need to be disclosed in the registered prospectus.
67.
Similarly, where the definition of "borrowing group" in the Second Schedule may not capture certain company structures, and therefore disclosure under these provisions is not required, the information about relevant guarantee arrangements may still be material information for disclosure in the registered prospectus.
Possible distortion of the risk/return relationship
68.
The Commission notes in relation to issues of financial reporting that concerns have been expressed by some commentators about the Return on Equity : Return on Assets ratio of some finance companies. There is some concern about whether this may be distorting the risk/return relationship where the interest rates offered by the finance companies are not accurately reflecting the risks that the investor assumes.
69.
The Commission considers that the question of such possible distortions reinforces the need for clear disclosure about the risks of the investment and the activities of the issuer so that investors can assess whether the debenture rate offered is a sufficient return for them, relative to the risks of the investment.
Risk and finance company policies on lending and outstanding debts
70.
Under Financial Reporting Standard 33 - Disclosure of Information by Financial Institutions, a financial institution's statement of accounting policies must disclose the accounting policies for the following matters:
(a)
Impaired assets, including the criteria used to classify those assets and policies for recognising and determining their carrying amounts in the statement of financial position;
(b)
Specific and general provisions for both recognised and unrecognised assets, and the basis on which these provisions are recognised in the financial statements; and
(c)
Policies for recognition of revenue and/or principal payments received, and accounting policies for revenue due but not received, in respect of impaired assets.
71.
The Commission considers that finance companies' policies in relation to lending and debt collection and categorisation are important in assessing the risks associated with the debt security and the impact of such risks on investor returns.
72.
Some commentators have noted that there seems to be varying treatment of bad debts in the financial statements of finance companies, such that it makes a comparison between debts of the various finance companies difficult. The Commission notes that FRS-33 requires certain disclosure in a financial institution's accounting policies about the finance company's categorisation of bad debts. The Commission also notes that if information provided in the financial statements under FRS-33 about bad debts is not sufficient to give an accurate picture of a company's debt situation, the prospectus may be misleading unless additional information is included. In this case, regulation 5 of the Regulations requires the prospectus to contain this additional information. The "true and fair view" requirement of section 11(2) of the Financial Reporting Ac 1993 may also be relevant where compliance with FRS-33 does not fully disclose the situation.
73.
Generally there is little disclosure in the investment statement in relation to a finance company's lending policies and the processes that borrowers must go through to obtain loan approval. Only a few finance companies appear to state whether borrowers are required to have guarantors from which debts can be collected if the borrower defaults. Where the finance company provides finance to higher-risk borrowers or to borrowers with poor financial track records, then this information is likely to be material to assessing the risk/return relationship of investing with the finance company.
74.
Finance companies need to consider the impact of risks associated with credit control procedures, such as effective debt collection. In many cases, finance companies' lending activities involve small scale consumer finance. If finance companies do not have good processes for collecting outstanding debts then this could impact on the viability of the finance company and the risks to investors. This information is important in assessing the risks faced by the finance company in relation to investor returns. It may be relevant to the question of risk in the investment statement, or may otherwise be material information for disclosure in the registered prospectus.
75.
Some finance companies do provide explanations in the investment statement and registered prospectus about the processes that they have in place for debt collection and the percentage and amount of any loans that are overdue.
Risks and the use of rating information by finance companies
76.
There is no formal or mandatory ratings system for finance companies in New Zealand. Some ratings agencies have developed certain rating systems for application to New Zealand finance companies.
77.
It appears that most New Zealand finance companies either do not use this type of rating information, or obtain a rating but choose not to make it public.
78.
Some finance companies do refer to ratings in their advertisements. The Commission is aware that other finance companies have obtained ratings but have chosen not to use them, as the rating may not be viewed favourably by investors.
79.
Finance companies that use ratings generally compare the rating to a well-known standard such as Standard & Poor or Moody's, and advise prospective investors that a copy of the ratings report is available from the finance company. Others simply state that they have obtained a particular rating without providing further information.
80.
The Commission is aware that the use of ratings information by some finance companies is of concern to investors. The Commission has received complaints from members of the public who have expressed concerns or doubts about the use of ratings by finance companies, particularly in relation to the advertising of securities. This raises the issue of whether the use of ratings by finance companies may in some cases be misleading or confusing for investors.
81.
Ratings may be useful for providing a basis on which to assess the relative risks of investing with different finance companies. Ratings may assist investors to grade the level of risk in each debt investment relative to other debt issues and to work out whether each debt investment offers them appropriate returns relative to the risk the investor would have to assume.
82.
However, with only a few finance companies using ratings and the lack of a standard ratings system, the Commission considers that it can be difficult for investors to make any relative assessment about the companies and the various investments that is meaningful. It may be difficult for investors to use the ratings to work out whether appropriate returns are being offered relative to the level of risk involved with investing in a particular company.
83.
Some finance companies have been rated as offering investments appropriate only for sophisticated investors. Others are rated as being sub-investment grade. There does not appear to be corresponding risk analysis in these finance companies' disclosure documents to indicate that an investment may be more appropriate for sophisticated investors or that investors in these debt securities are assuming greater levels of risk. This strongly suggests that the quality of risk disclosure by these finance companies needs to be improved so that distinctions can be drawn by prospective investors between different debt products offered to the public, and assessments made of the financial standing and activities of the finance company.
84.
The Commission considers that any rating obtained by a company is likely to be a material matter for disclosure in the registered prospectus. The Commission's view is that the investment statement should at least briefly explain what the rating means and tell investors where they can obtain further information about the rating. Additional material information about the rating should then be disclosed in the registered prospectus. The Commission understands that ratings companies usually provide the issuer with a report on the rating. Where this is published, the Commission is of the view that the investment statement should also draw investors' attention to the availability of this information.
85.
The Commission is of the view that where a finance company has obtained a rating, and that rating is disclosed to investors, the finance company must also ensure that any subsequent change in the rating is disclosed to investors prior to the reinvestment or renewal of their investment.
86.
The situation may be different where ratings are unsolicited by finance companies. The Commission questions inclusion of ratings information in the disclosure documents where these are not actively sought out, or otherwise used by finance companies. The Commission considers that if an issuer chooses to refer to, or use, an unsolicited rating then again further information about the rating should be made available.
SECTION 3 - RANKING OF SECURITIES
Description of ranking of securities in advertisements
87.
Regulation 14(1) of the Regulations provides that no advertisement shall refer to any debt securities without also stating either that the securities are unsecured, or the nature and ranking in point of the security of the securities. The definition of "advertisement" in section 2A(2) of the Act includes an investment statement.
88.
There are several different types of debt securities offered by finance companies. These include securities described as "secured debenture stock", "unsecured deposits", "subordinated notes", "secured deposits" and "unsecured subordinated notes".
89.
Some investors are not aware of the different risks as between these types of securities. Where there is very little information in the investment statement about the nature and ranking of the securities, investors are likely to find it difficult to ascertain and weigh up the risks of investing in a particular type of debt security, relative to other types of debt securities.
90.
The Commission is of the view that there is room for confusion for investors due to the numerous terms and descriptions that are used by finance companies in relation to the debt securities that they offer.
91.
Regulation 14(1) requires finance companies to either clearly state that the securities are unsecured, or to clearly describe the nature of the securities, how they are secured, and their ranking. This is relevant to the requirement to provide a description of the securities being offered in clause 2 of Schedule 3D and is also likely to be relevant to the question of risk in the investment statement.
92.
The Commission has received complaints from members of the public who have questioned how advertisements can state that debt securities are "first ranking" when the prospectus and investment statement refer to prior charges or claims, for example, prior claims under the Companies Act 1993 or by the Inland Revenue Department. Complainants have been concerned that the description of debt securities as "first ranking" or "first ranking, subject to prior charges" may be misleading to investors when prior claims take priority in the event of insolvency.
93.
The Commission notes that prior claims under other legislation may not relate to the priority of the debt securities relative to other debt securities that are offered. In terms of the ranking of the security, a debt security may well be "first ranking" if there are no other debt securities offered by the finance company that are of equivalent or higher ranking. However, debt securities may not be first ranking relative to claims under other legislation.
94.
The Commission is of the view that the requirements of regulation 14(1) need to be balanced against the requirements of regulation 8 that an advertisement must not deceive, mislead or confuse with regard to any material particular. It needs to be made clearer in advertisements for first ranking debt securities that the reference to "first ranking" relates to the security being first ranking only in respect of the securities offered by the particular finance company and that prior charges or claims under other legislation may take priority.
95.
Some finance companies offer two types of debt securities within the same investment statement. Where this is done the Commission is of the view that the finance company must clearly state for each type of security offered either that the security is unsecured, or the nature and ranking of the security. The difference between the rankings of the securities also needs to be made clear in the investment statement so that the relative risks of the investments can be assessed.
Disclosure about prior claims and equal ranking claims in the investment statement
96.
Clause 12(2) of Schedule 3D requires a brief description in the investment statement of any claims on the assets of the issuer that will or may rank ahead of the claims of subscribers in the event of the issuer being put into liquidation or wound up. The same information is required in respect of any claims that will or may rank equally with those of subscribers under clause 12(3) of Schedule 3D.
97.
Some investment statements provide relatively full explanations that creditors may be required to be paid in priority in law and then go on to provide examples of who these preferential creditors may be and the legislation that may be relevant. Other finance companies include more general statements. The Commission considers that, as clause 12 requires a "brief description" of claims on the assets of the issuer, it is insufficient to simply note that the only claims that rank ahead are prior claims, without describing them.
98.
The Commission is of the view that a description of prior claims on the assets of the finance company must be such that investors are able to appreciate the effect of these claims in relation to the risks that the investor assumes.
99.
If the debt security is first ranking, subject to prior charges or claims, then the nature of the prior charges and claims must be clearly and prominently disclosed in the investment statement. Where there are material prior charges for fixed amounts that will have an effect on the substantive precedence of the debt security these need to be disclosed where possible. If there are precise claims on assets that may rank in priority, then each of these needs to be identified and quantified.
100.
Disclosure in the investment statement of any restrictions on the level of prior charges is also useful. This indicates whether charges may be restricted to a certain portion of the assets of the company.
101.
Where two types of debt security are offered in the investment statement a description of the claims on the assets that rank ahead of the claims of subscribers needs to be described for each type of security offered.
102.
Some finance companies' investment statements include information about claims that will rank ahead of subscribers' claims, but the investment statement does not also explain if there are any claims that will rank equally with those of subscribers. It may be the case that there are no claims that would rank equally and the provision is interpreted as not applicable. Under regulation 7A(3), if a matter specified in Schedule 3D is not applicable then the investment statement does not have to refer to that matter and does not have to state that the matter is not applicable. However, if this is not the case, finance companies need to be aware that they must comply with this requirement of disclosing and describing equal ranking claims as well as prior ranking claims. Again, where more than one type of debt security is offered in an investment statement, information on equal ranking claims must be provided in respect of each type of debt security offered.
SECTION 4 - OTHER DISCLOSURE ISSUES
103.
The Commission's review of finance companies' disclosure documents has also identified a need for improved disclosure by some companies in the following areas.
Consistency between the investment statement and the registered prospectus
104.
Under section 38F of the Act, the Commission has, subject to certain considerations, the power to suspend the investment statement and/or prohibit its distribution if the Commission is of the opinion that the investment statement is inconsistent with the registered prospectus. An investment statement must therefore be consistent with any registered prospectus referred to in it. This is a requirement under regulation 9 of the Regulations.
105.
The Commission has noted a number of discrepancies between information contained in the investment statement and the information contained in the registered prospectus in relation to offers of various types of debt securities by finance companies.
106.
Finance companies must ensure the disclosure documents are carefully checked for content and for consistency to meet the requirements of the legislation. If further information about a particular matter is fully explained in the prospectus but is briefly explained in the investment statement, the finance company should state in the investment statement that other important information is available in the registered prospectus and ensure that the information provided in both documents is consistent. However, the investment statement must still include sufficient information to answer the requirements of Schedule 3D.
107.
Clause 9(2) of Schedule 3D requires information about the dates on which, or frequency with which, the returns from the securities will be due and paid.
108.
Some finance companies' investment statements do not clearly disclose what the finance company will do to advise investors when the investment is about to mature.
Neither is information provided about the options available to investors on maturity of the investment. The Commission's view is that clause 9(2) requires clear information to be provided to investors about whether they will be contacted prior to maturity, allowing sufficient time for investors to decide what they wish to do with the investment.
109.
This type of information also appears relevant to the question in clause 14 of the investment statement about "How do I cash in my investment?" For example, if the investment will be cashed in on maturity, unless an investor contacts the company to reinvest for a further term, this should be clearly explained. Similarly if the investment will be rolled over unless the investor indicates that they want to cash it in, then this needs to be explained.
"How do I cash in my investment?" - disclosure about the effects of early termination
110.
Clause 14 of Schedule 3D of the Regulations requires the investment statement to contain a brief description of any rights of the issuer, subscriber or any other person to terminate the investment early. If any charges are payable by a subscriber, the investment statement must refer to the information given under clause 7(1)(e) - early termination charges or clause 7(1)(f) - switching or sale charges.
111.
As these disclosure provisions are linked by reference, the Commission considers that information about early termination charges should be disclosed in relation to both sections of the investment statement (i.e. both the question "What are the charges?" and the question "How do I cash in my investment?").
112.
The Commission has found that some finance companies are not including such information under both sections of the investment statement. Regulation 7A(4) requires all information specified under an italicised question in the investment statement provisions to be set out in the investment statement under that question. A failure to include the required information on early termination charges under both clause 14 and clause 7 would appear to breach this requirement.
113.
The level of detail about the effects of early termination appears to vary considerably among finance companies' investment statements. The Commission is of the view that some investment statements need to provide clearer and fuller information in the investment statement about the effects of early termination and the situations in which it will be permitted.
114.
Clause 14 requires a brief description of any rights of the subscriber to obtain payment of the returns from the securities. It needs to be made clear to investors that their money is being locked in for a particular term and can only be terminated before that term in what may be very limited circumstances, such as the death of an investor or financial hardship caused by unforeseen circumstances. The Commission considers that some finance companies should give more prominence to the provisions explaining that early withdrawal will be permitted only in exceptional circumstances and that early termination will affect the investor's right to obtain payment of the returns.
115.
The Commission notes that if early termination is approved, then the finance company may charge an early withdrawal fee, determined by reference to the interest rate that would have applied to the full term of the investment, or may adjust the interest rate applicable to the deposit. The Commission considers that finance companies need to explain these fees clearly in the investment statement, as this affects the rights of subscribers to obtain payment of the returns.
116.
Section 38E(1)(b) of the Act requires an investment statement to prominently state the date at which it is prepared. Finance companies must ensure that this requirement is met.
117.
Several investment statements for debt securities offered by various finance companies do not state this date prominently. In some cases the information is in very small print and is contained within the text in the body of the investment statement, rather than displayed upfront. This can be contrasted to the approach taken by other finance companies that prominently state the date of the investment statement on the cover of the document.
118.
Clause 5 of Schedule 3D of the Regulations requires certain details to be included in the investment statement in relation to payment of money by subscribers in respect of the securities. These provisions cover aspects such as the amounts payable, the person to whom and the place where payments are to be made, and the frequency of payments (if applicable).
119.
The Commission has noted a case where the investment statement does not provide details about the person to whom payments should be made. While it may be presumed that payment is to be made to the finance company, there is no express information that tells an investor that the finance company will be the entity that receives the subscriptions. This information is important, not just in a practical sense, but also so that there is transparency about which entity collects the subscription money. Finance companies must ensure that these requirements are met.
Ordering of information within the investment statement
120.
Under regulation 7A(4) all information and statements specified under an italicised question in Schedule 3D to the Regulations that are required to be contained in an investment statement must be set out together in the investment statement under that question.
121.
Finance companies need to check whether information is required to be repeated or referred to in more than one part of the investment statement to meet the requirements of regulation 7A(4). This may raise issues about the practicality of repeating or re-emphasising information.
122.
The Commission's view is that finance companies must take into account the context in which the information is to be provided. The Commission considers that Schedule 3D requires enough information to be provided under each section of the investment statement to adequately answer the head question ( for example "What are my risks?") and the specific disclosures required under each clause.
123.
Clause 18(c) of Schedule 3D requires a statement to the effect that the prospectus, financial statements and other documents of, or relating to the issuer, are filed at the Companies Office and available for public inspection. Clause 18(b) requires a statement describing where a copy of the prospectus and most recent financial statements of the issuer can be obtained free of charge.
124.
The investment statements for some finance companies state in relation to this provision that "further information is available from the Companies Office". The Commission does not consider this to be sufficient in terms of the requirements of the legislation. In particular, finance companies must make it clear that, while documents are available for public inspection at the Companies Office certain information can also be obtained by the investor free of charge from the issuer.
Key provisions of the Act and Regulations relating to advertising
125.
The meaning of "advertisement" is defined in section 2A of the Act. Under section 2A(1) an "advertisement" means a form of communication that -
(a)
contains or refers to an offer of securities to the public for subscription; or
(b)
is reasonably likely to induce persons to subscribe for securities of an issuer, being securities to which the communication relates and that have been, or are to be, offered to the public for subscription.
To be subject to the requirements of the Act, an "advertisement" must be authorised or instigated by, or on behalf of, the issuer or prepared in co-operation or by arrangement with the issuer and is to be, or has been, distributed to a person.
126.
The type of communication that may constitute an "advertisement" for the purposes of the Act is broad. The definition of "distribute" in the Act includes -
(a)
make available, publish and circulate; and
(b)
communicate by letter, newspaper, broadcasting, sound recording, television, cinematographic film, video or any form of electronic or other means of communication.
127.
An advertisement may be distributed by any of these methods of communication.
128.
An investment statement is expressly included in the definition of "advertisement" by section 2A(2)(b) of the Act.
129.
Under section 38 of the Act the meaning of an "authorised advertisement" includes an advertisement -
(a)
that is an investment statement that relates to the securities and that complies with the Act and regulations; or
(b)
refers to an investment statement that relates to the securities referred to in the advertisement and that complies with this Act and regulations.
130.
Regulation 8 requires that no advertisement shall contain any information, sound, image or other matter that is likely to deceive, mislead or confuse with regard to any particular that is material to the offer of securities contained or referred to in the advertisement.
131.
Under regulation 17 a certificate must be signed by a director or other authorised person in respect of an advertisement before it is distributed to the public. The form of this certificate is set out in the Fourth Schedule to the Regulations. The director or authorised signatory must certify that they have:
(a)
Read, seen or listened to the advertisement; and
(b)
That it complies with the Act and Regulations; and
(c)
The advertisement does not contain any matter that is likely to deceive, mislead or confuse with regard to any particular that is material to the offer of securities; or
(d)
The advertisement does not contain any matter that is inconsistent with the registered prospectus referred to in the advertisement.
132.
Under section 38B of the Act, the Commission may make an order prohibiting the distribution of a particular advertisement or any other advertisement relating to an offer of securities if it is of the opinion that the advertisement:
(a)
Is likely to deceive, mislead or confuse with regard to any particular that is material to the offer of securities to which it relates;
(b)
Is inconsistent with any registered prospectus referred to in it; or
(c)
Does not comply with the Act and Regulations.
133.
Under the Act there are also obligations on the media to ensure that there is a certificate as required by regulation 17 for an advertisement before distributing an advertisement to the public.
134.
Finance companies need to carefully check the compliance of all advertising before advertisements are distributed for publication. All applicable requirements of the Act and Regulations in relation to the advertising of debt securities to the public must be complied with.
135.
The Commission's view is that finance companies should consider whether they need to develop compliance plans in relation to the advertising of securities to help ensure that all legislative requirements are met.
136.
Finance companies should check every part of an advertisement carefully so that it does not deceive, mislead or confuse prospective investors and also meets all of the content requirements of the Act and Regulations.
137.
Information may become misleading if it is not kept up-to-date. It is important that advertisements are accurate at the time they are distributed. If circumstances change between the time of distribution and publication, then the advertisement may need to be withdrawn and revised if it would otherwise be misleading.
Areas of common non-compliance concerning advertisements
138.
The Commission notes that there continues to be a significant amount of advertising by finance companies in the print media, as well as via radio and television. The Commission regularly receives complaints about advertisements by finance companies and routinely enquires into the compliance of finance companies' advertisements.
139.
It appears that some finance companies do not appreciate the extent of the advertising requirements for securities and are not meeting the requirements of the legislation.
140.
Issuers should be aware that the definition of "advertisement" in the Act is broad in scope and may cover such communications as media releases, oral presentations, print media, radio and television media, and websites. Each communication to the public about securities therefore needs to be checked carefully against the requirements of the Act and Regulations before distribution and publication. Issuers should also check that advertisements do not advertise in a way that would result in the offer and/or allotment of securities breaching the Act, for example by enabling investors to subscribe for securities without first receiving an investment statement.
141.
In many cases the Commission considers it likely that the adequacy (and existence in the first instance) of internal compliance systems to check the content of advertisements would be useful for improving compliance.
142.
The Commission's enquiries have highlighted the following areas of non-compliance as being more prevalent.
Prominence of required information in advertisements
143.
The Commission has noted certain examples of print advertisements where the required information about the investment statement is in very small print and is not given prominence within the advertisement. The Commission considers that information should be clearly and prominently stated to meet the requirements of regulation 8 of the Regulations and section 38 of the Act. If the required information about the investment statement is buried in the small print then this may be considered to be misleading.
144.
Concealment of information in the small print of an advertisement may also raise issues under the Fair Trading Act 1986. The Commerce Commission has published guidelines in relation to advertising and the Fair Trading Act. The Commission notes the Commerce Commission's comments that "if the overall impression given by an advertisement is misleading, information contained in the fine print may not save you from prosecution for breaching the Act". The Commerce Commission also notes that "you must not use fine print to conceal important information which would be critical to people's decision to buy your goods or services".
145.
Some finance companies advertise investments via television. The Commission has granted a class exemption that applies to offers of debt securities made in audiovisual advertisements. This is the Securities Act (Audiovisual Advertisements) Exemption Notice 2002. It is a requirement of this exemption notice that written information must be displayed "clearly and prominently, and for a sufficient time for the information to be read". Advertising by finance companies in reliance on the exemption must satisfy this condition.
Use of advertising or marketing agencies to prepare advertising
146.
The Commission is aware that some finance companies use external marketing agencies to prepare their advertising. It is not clear that issuers always brief the agencies on the legal requirements of the advertisements. In certain cases the Commission has found that the advertisements had not been prepared in strict accordance with the requirements of the legislation or checked for compliance with the Act and Regulations by either the directors of the finance company or the company's legal advisers.
147.
In 2003 the Commission accepted enforceable undertakings from a finance company in relation to a non-compliant advertisement prepared by an advertising agency. The finance company undertook to prepare a compliance plan to help ensure that all future advertising in relation to securities complied with the Act and Regulations and for the finance company's legal advisers to review all advertising for compliance. The Commission considers that these are common sense measures that could be adopted by finance companies more generally. It may reduce investor confusion if finance company personnel who prepare advertising are adequately trained in the requirements of the legislation. It is an important safeguard that directors actively check advertisements for compliance with the Act and Regulations before signing a regulation 17 certificate, and before distribution of the advertisement for publication. This certification procedure should be taken seriously by directors.
148.
The Commission is also aware of a situation where a newspaper publisher altered an advertisement for debt securities due to lack of available printing space. This resulted in the advertisement not complying with the necessary legal requirements. It is advisable that media do not add, omit or otherwise alter information in advertisements for securities without seeking the consent of the issuer to any change. The issuer should make it clear to the media publisher what is required to be printed or disclosed when advertisements are submitted for publication.
The advertisement does not refer to investment statement
149.
An advertisement is required to refer to an investment statement that relates to the securities in order to be an "authorised advertisement" under the Act. The Commission has dealt with cases where this important information has been omitted from the advertisement. This is a key requirement in relation to the advertising of securities. Finance companies must ensure that it is complied with.
Statements in advertisements about assets
150.
Under regulation 12 of the Regulations -
(a)
no advertisement can state the assets or net assets of any person or persons, other than the total assets, or net assets of the issuing group or borrowing group or mortgagor under a contributory mortgage or of a guarantor of the securities to which the advertisement relates; and
(b)
total assets cannot be stated without also stating with equal prominence the amount of total liabilities; and
(c)
the amount of net assets cannot be stated, or the amounts of the assets and liabilities unless the amounts appear in the most recent audited consolidated statement of financial position (dated within 18 months before the date of distribution) and the advertisement states the date of the statement of financial position as being the date at which the amounts have been calculated.
151.
The Commission has considered certain examples of advertising where total assets have been stated without also stating the amount of total liabilities. Care needs to be taken to ensure compliance with this provision.
Statements in advertisements about how the securities are secured
152.
An advertisement must not refer to any debt securities without also stating either that they are secured, or the nature and ranking in point of security of those securities. The Commission has dealt with certain situations where this requirement has not been complied with. Again, care needs to be taken to ensure that all requirements of the legislation are met.
153.
An advertisement must not state that an investment in the security is safe or free from risk. Care should be taken to ensure that such statements are not included in any advertisement for securities.
Statements in advertisements about the interest rate
154.
Under regulation 21 of the Regulations, advertisements must not state the rate of interest that may be earned by holding securities unless the advertisement states any minimum amount of securities that would have to be held and any minimum period for holding them to earn that rate of interest. Some finance companies are not complying with this requirement.
155.
The Commission has recently dealt with several cases where finance companies have not stated the minimum investment amount in advertisements, in non-compliance with the legislation.
156.
The Commission has dealt with other cases where the advertisement states that the rate of return is x% p.a., for say a five year term, then in small print the advertisement states that "for full details of the return reference should be made to the investment statement". The investment statement then states the minimum investment amount. The Commission is of the view that this approach does not strictly comply with regulation 21.
157.
The Commission's review of finance companies' disclosure documents indicates that some finance companies are already providing a comprehensive level of disclosure to prospective investors. However, others are failing to meet the requirements of the legislation in a number of areas and need to make a better effort to ensure that they comply with the legislation. The Commission's preliminary view is that finance companies generally need to raise standards of disclosure. We think that the minimum legal requirements of the Act and Regulations are more extensive than some finance companies may appreciate, and may require more careful consideration. The purpose of this discussion paper is to invite comment on the views expressed about the standards of disclosure required in offer documents. We also hope the paper will prompt finance companies to critically assess their disclosure, identify shortcomings and make changes where necessary, in order to comply with all applicable requirements of the legislation.
158.
The Commission seeks your feedback and comments on its preliminary views as set out in this discussion paper. If there are other matters that you wish to comment on in relation to compliance and disclosure by finance companies then we welcome these also.
159.
Following the consultation period, the Commission intends to develop a report based substantially on the matters in this discussion paper, and taking into account any comments received. This report will be distributed to finance companies and made publicly available.
160.
The Commission intends to review a further sample of finance companies' disclosure documents, probably around 6 months after the report is publicly released. These documents will be reviewed against the report to assess whether compliance has improved. Where the Commission identifies non-compliance or compliance issues, it intends to follow up on these with individual finance companies. The Commission may take enforcement action as appropriate.
CONSULTATION PERIOD
161.
Please provide us with any comments that you wish to make by 25 October 2004 to:
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Postal:
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Securities Commission
Finance Companies project PO Box 1179 WELLINGTON |
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Or by email to:
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162.
This discussion paper is available from the Commission's website
www.seccom.govt.nz
The Commission acknowledges that some comments made in this discussion paper may be equally applicable to disclosure made by issuers other than finance companies.
The comments made in this discussion paper are not intended to suggest that disclosure in relation to certain parts of the Act and Regulations are of more importance than other required disclosures.
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