Comment
11. The fundamental objective of a mutual recognition regime is to benefit businesses and individuals by reducing barriers to cross-border securities offerings. Mutual recognition achieves this by enabling entities from a participating jurisdiction to operate in other participating jurisdictions on the basis of compliance with one set of rules.
12. The objective of the proposed regime is to remove unnecessary regulatory barriers to trans-Tasman securities offerings, and to thereby facilitate investment between New Zealand and Australia, enhance competition in capital markets, reduce costs for business, and increase the choice for investors. The regime will significantly reduce compliance costs for issuers wishing to offer securities to investors in Zealand and Australia.
13. Although the detailed requirements of Australian and New Zealand securities law differ in a number of respects, the underlying policy goals are the same, for example disclosure of information to ensure that investors are fully and fairly informed. The relevant goals can be achieved by implementing a mutual recognition regime and allowing issuers to use their home jurisdiction offer documents when offering securities in the other jurisdiction.
The Current Position
14. Currently New Zealand and Australian issuers cannot use the same offer documents in both countries when making a trans-Tasman offer of securities. The issuer must comply with the relevant fundraising requirements in both countries, unless operating under an exemption in the other country.
15. This means that there are additional costs associated with extending an offer from the offeror's home jurisdiction to the other jurisdiction. In some cases, the offer will be made in both countries, but the additional compliance costs will increase the offeror's cost of raising funds. In other cases, the additional costs will mean that the offer is not extended to the other country. This reduces the offeror's access to potential investors, and reduces investment options for investors in the other country.
16. The proposed model would allow an issuer offering securities or managed investment scheme interests to the public, to extend an offer that is being lawfully made in one country (the home jurisdiction), to investors in the other country (the host jurisdiction) using the same offer documents and offer structure. The issuer would not be required to comply with most of the substantive requirements of the host jurisdiction's domestic fundraising laws. Instead, issuers who wish to operate under the proposed regime will have to comply with some entry and ongoing requirements agreed between the two countries, and prescribed in the host jurisdiction's law.
Details of the Proposed Model
The Scope of the Proposed Mutual Recognition Regime
17. The proposed regime will apply to offers of most securities, including shares, debt securities/debentures, options to acquire securities, and interests in collective investment schemes.1 It will not extend to other financial products such as life insurance, superannuation products, or derivatives (other than options to acquire securities). The regime will also not cover financial advice that extends beyond the offer documents.
18. The agreement provides for the regime to be available to issuers who are residents of the home jurisdiction, incorporated or established under the home jurisdiction's laws or registered as an overseas company in the home jurisdiction. However, under the Agreement, either jurisdiction can exclude overseas companies from offering securities under the regime.
19. In preparing regulations to implement the regime, New Zealand officials will consider the appropriateness of allowing issuers registered as overseas companies in Australia to operate under the regime.
Requirements to Be Met by Issuers under the Mutual Recognition Regime
20. As noted at paragraph 12, an issuer wanting to operate under the mutual recognition regime will have to comply with some entry and ongoing requirements.
21. The regime will apply only if the offer complies with certain entry requirements. These comprise:
- The offer must be a "regulated offer" in the home jurisdiction, that is the offer must be subject to the home jurisdiction's regulatory regime;
- The offeror must file a notice with the home and host jurisdiction regulators stating that it proposes to make an offer under the regime. This notice will include specified information, for example the name of the offeror, the securities being offered, an address for service in the host jurisdiction and confirmation that the offeror submits to the jurisdiction of the host country's courts; and
- The offeror must provide the host jurisdiction regulator with a number of other documents, such as the home jurisdiction offer documents.
22. An offer that does not comply with the entry requirements will fall outside the regime. Such an offer will be treated as an ordinary domestic offer in the host jurisdiction and therefore will be unlawful if domestic regulatory requirements are not met. The entry requirements are the means by which an issuer opts in to the regime, and submits to the jurisdiction of the host country's courts. Hence they are necessary for effective enforcement of the regime.
23. The key ongoing requirements of the regime would include:
- The "home country compliance requirement" - the issuer must comply with the requirements of its home jurisdiction securities laws in connection with the offer to investors in the host jurisdiction. The home jurisdiction will apply its securities laws to offers made under the regime to investors in the host jurisdiction.
- The offer must remain a regulated offer in the home jurisdiction.
- The offer must be open to acceptance by persons in the home jurisdiction at all times when the offer is open for acceptance by persons in the host jurisdiction.
- Offers to investors in the host jurisdiction must be accompanied by a prescribed warning statement that (among other things) domestic securities law requirements do not apply to the offer, and that the offer is subject to the securities laws of the other jurisdiction.
24. Failure to comply with the ongoing requirements would result in a breach of the host jurisdiction's laws; the consequences of this would be specified in the law of the host jurisdiction, including criminal sanctions, civil liability and/or stop orders issued by the host regulator.
25. That is, the ongoing requirements are the means which allow investors and the regulator in the host jurisdiction to pursue statutory remedies in their own country. If for example a disclosure document omits information required under the home jurisdiction's securities laws, this will constitute a breach of the home jurisdiction's laws and a breach of the home country compliance requirement under the laws of the host jurisdiction.
26. Under the proposed mutual recognition regime (and also under the current regime) there is a risk arising from the fact that civil pecuniary penalty orders and criminal fines are not enforceable across the Tasman. This problem is one of the issues being addressed by the Trans-Tasman Working Group on Court Proceedings and Regulatory Enforcement in its public discussion paper. The proposed regime will be better than the status quo, because issuers opting in to the regime will provide an address for service of proceedings and submit to the jurisdiction of the host jurisdiction courts, which will facilitate civil court proceedings there and enforcement of any resulting civil money judgment in the home jurisdiction. In addition, most breaches of the ongoing requirements of the host jurisdiction will also be breaches under the law of the home jurisdiction, so action may be taken in the home jurisdiction. Remaining issues on enforcement of penalties across the Tasman will need to be dealt with by the Working Group process.
The Modification of Applicable Offering Requirements
27. The mutual recognition model requires the host jurisdiction to legislate to provide that if an offer is made under the regime, the entry and ongoing requirements apply in place of the standard domestic fundraising requirements.
28. Both jurisdictions will also need to legislate to provide that where an offer made in one jurisdiction is extended to the other jurisdiction under the mutual recognition regime, the securities laws of the home jurisdiction will apply to the offer whether the investor is in the home or host jurisdiction.
29. Some specific provisions of each home jurisdiction's fundraising laws will not apply to offers made under the regime. For example, in New Zealand it is envisaged that offers under the mutual recognition regime would be exempt from the Securities Regulations 1983 and all of Part II of the Securities Act 1978, except for the following sections:
- Section 35 Restrictions on door-to-door sales
- Section 38B Prohibition on advertisements
- Section 58 Criminal liability for misstatements in advertising or registered prospectus.
The Role of the Regulators
30. Under the proposed regime, the home jurisdiction regulator will have primary responsibility for supervising a cross-border offer. It will be able to exercise its powers of its own motion, at the request of the host regulator, or at the request of a person in the host jurisdiction.
31. The host jurisdiction will be able to regulate to provide for its regulator to have certain powers in respect of offers made under the mutual recognition regime if the entry requirements are not satisfied, or the ongoing requirements are not complied with. Legislation in each country will, to the extent necessary, expressly provide for these powers.
Jurisdiction and Enforcement Regarding Civil and Criminal Proceedings
32. Under the regime a breach of the requirements of the regime by an issuer could be the subject of both civil and criminal proceedings, in the home jurisdiction or the host jurisdiction. As noted in paragraph 24, at present penalties imposed against issuers by a court in one country are not enforceable in the other. Apart from the issues included in the regime, remaining issues on cross border enforceability of civil pecuniary penalties and criminal fines will be dealt with as part of the process being undertaken by the Trans-Tasman Working Group on Court Proceedings and Regulatory Enforcement.
The Agreement
33. Officials have agreed on the text of an Agreement between the two governments which sets out the objectives of the regime, the principle of mutual recognition, the entry and ongoing requirements, the agreed provisions on enforcement, how the scheme will be given effect through each party enacting legislation, and consultation and review clauses. A copy of the Agreement is attached as Appendix 1.
34. Article 13 provides that the Agreement shall enter into force on the date on which the Parties have exchanged diplomatic notes confirming the completion of their respective domestic procedures for the entry into force of the Agreement.
35. Major bilateral treaties of particular significance are presented to the House for select committee consideration in accordance with the procedure set out in the Standing Orders (SO 382). What might constitute a "major bilateral treaty of particular significance" is a matter for the Minister of Foreign Affairs and Trade to determine in accordance with the criteria developed to assist the Minister exercise his discretion. The Minister of Foreign Affairs and Trade decided on 2 August 2005 that the Agreement is not a "major bilateral treaty of particular significance" and therefore does not need to be subject to the Parliamentary treaty examination process.
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