In our November 2016 ‘FMCA Baby Blues’ seminars, we likened the transition phase of the new securities law regime to a pregnancy, with successful registration on Disclose akin to the birth of the issuer’s baby. Some pregnancies have been more difficult (and much longer than nine months!) but most issuers got there in the end. Like with any newborn, however, the work has only just begun, and issuer parents need to learn fast about how best to look after their new baby.
In this December 2016 Financial Law Insight we share our insights into some of the key issues that managers and trustees of managed investment schemes will need to cover off each year. Some obligations are relatively mechanical while others require more than just knowing where to find the wet wipes!
The birthing experience
War stories from transition projects abound. Few accurately predicted the sheer volume of work required to achieve manager licensing, restructure scheme governance arrangements, and create offer and registration documents in line with the new regime’s expectations.
For us, there were two main learnings/experiences from the transition phase we will take forward to the ongoing compliance phase:
Disclose: Let’s face it – the shiny new supposedly state-of-the-art registry system did not pass the key test of being fit for purpose. The practicalities of uploading documentation, dealing with closed products, and catering for non-standard scheme designs were far more painful than anyone had envisaged. Those practical limitations will continue to present challenges for some time to come, as there is no quick fix on the horizon. You just need to be aware of the limitations and workarounds in the meantime. The one saving grace has been the fantastic staff behind Disclose, who have bent over backwards to make it work and help resolve difficulties.
FMA: From the start, our regulator said it wanted to operate in an open, transparent fashion, and work with industry to help participants both get across the transition line and comply once they got there. Perhaps surprisingly for some, FMA has been true to its word. Sure we had some robust exchanges over the transition phase (after all, at the end of the day FMA is a regulator – it needs to be comfortable that any regulatory concerns it has identified have been appropriately addressed), but on the whole our engagement with FMA has been very constructive. The key message moving forward - avoid giving FMA unpleasant ‘surprises’.
Baby’s first year teething
There are a number of regular tasks to cover off in a managed investment scheme’s first year. While some appear routine on their face, there are traps and tricks for each of them – beyond just the technical compliance requirements.
For example, some things to think about are:
Related party transaction certificates: Easy, right? Just report within ten working days of quarter end. But have you really identified all related party benefits that need to be supported by certificates? Do your certificates adequately cover off ongoing benefits so you do not need to complete additional certificates for similar transactions? How are you evidencing the assertions made in your certificate? Do you have systems in place to ensure all new transactions giving rise to related party benefits are certified before they take place?
Limit breaks: Like related party transaction certificates, quarterly reporting systems for SIPO limit breaks should be in place. But how have you defined what constitutes a ‘material’ limit break? Have you sensibly and clearly identified the ‘limits’ in your SIPO that must be reported on if breached? How robust are your processes to monitor compliance with limits?
Fund updates: The new key disclosure tool for existing investors, even if you don’t need to send them out to anyone. The detail required means they aren’t straightforward, and they are seen as a fundamental part of telling your scheme’s story. Have you got all your processes in place to ensure you can confidently sign off your updates? What if your PDS or other material information registered on Disclose, is out of sync with your latest update? Does your SIPO need reviewing?
Member statements: Providers will be familiar with the member statement concept (now called ‘confirmation information’). These are now required across the board and content has changed. KiwiSaver scheme providers, in particular, need to watch out for further developments coming their way in the first half of 2017, in response to MBIE’s consultation regarding statements for retirement schemes. Will systems be able to manage quantifying the actual fees paid by each investor during the year? How will you manage messaging around providing savings projections?
Annual PDS/register entry confirmation: The major annual task for a managed investment scheme has moved from the usual practice of registering a prospectus within six months after balance date to filing annual confirmations of the PDS. Unlike the old prospectus timing, annual PDS confirmation timing is tagged to the date the first PDS for the scheme was lodged – even if you have lodged a subsequent replacement PDS, or have multiple PDSs for the same offer. Have you programmed in the most efficient date in your annual schedule for reviewing your PDS and register entry? How will your directors get comfortable that they can sign off on the annual confirmation? Have you been charged the correct fees for registering your first PDS or your annual confirmation? Are you happy with the timing of your annual confirmation?
Other material information: Much of the detail that used to be contained in a prospectus will now appear in something called the ‘Other Material Information’ (or ‘OMI’) document or documents that get lodged on Disclose. Unlike most other aspects of the new regime, this one is completely free form but presents the same liability exposure as a PDS. Does your OMI capture everything it needs to? Have you got processes to ensure it is updated (if required) during the year? How effective is your OMI as a disclosure document? How easy is it for investors to locate material information about your scheme?
Governance – looking after baby
In our November 2016 'FMCA Baby Blues' seminars we shared some thoughts on how managers and trustees of managed investment schemes (and indeed, all issuers) should be approaching their role, the new defences available to them, and what changes are required to due diligence processes and systems.
Again, there are a couple of key pointers here:
Conduct: Good conduct matters. FMA is putting a real emphasis on organisational culture, and in the second half of 2016 consulted on a proposed guidance note outlining its view on good conduct. That guidance note, even in its draft form, contains some useful practical tips for all governing boards involved with financial products to think about.
Compliance assurance: The new black is compliance assurance – not just ‘tick box’ compliance, but from a governing board’s perspective, assurance that a compliance culture is in place, and that everything that needs to be done, is being done. Among other things, this requires governing boards to evidence that they have taken total ‘ownership’ of the task of ensuring that the schemes they are responsible for, and the supporting documentation for each, are fully compliant.
Kensington Swan has extensive local and international experience, and is well placed to assist you to address your obligations. If you would like a specific briefing on the challenges your business may face in the first year of the regime and how to deal with them, or a tailored ‘FMCA Baby Blues’ workshop, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Nick Summerfield on +64 9 915 3357, Karen Mace on +64 4 496 5941, or Tom McLaughlin on +64 4 498 0886, or email the team at email@example.com.