Financial Markets Conduct Amendment Regulations 2016

Regulations

1 Title

These regulations are the Financial Markets Conduct Amendment Regulations 2016.

2 Commencement

(1)

Regulation 9(1), (5), and (6) comes into force on 1 December 2016.

(2)

Regulations 6 and 7 come into force on 1 December 2017.

(3)

The rest of these regulations come into force on 30 June 2016.

3 Principal regulations

These regulations amend the Financial Markets Conduct Regulations 2014 (the principal regulations).

4 Regulation 106 amended (Circumstance in which restrictions on acquisitions by restricted schemes of in-house assets do not apply)

Replace the heading to regulation 106 with Restriction on acquisitions of in-house assets does not apply to public securities.

5 New regulation 106A inserted (Restriction on acquisitions of in-house assets does not apply to restricted schemes that invest in certain unregistered schemes)

After regulation 106, insert:

106A Restriction on acquisitions of in-house assets does not apply to restricted schemes that invest in certain unregistered schemes

(1)

Section 176 of the Act does not apply to an investment in an unregistered scheme that is made by a restricted scheme if—

(a)

the requirements of section 173(4) of the Act are met in relation to the transaction or series of transactions by which the investment is made; and

(b)

the unregistered scheme is a trust that is used for the purpose of facilitating investment and reporting for registered schemes; and

(c)

the manager of the unregistered scheme is an investment business (as defined in clause 37 of Schedule 1 of the Act); and

(d)

the manager of the unregistered scheme has in place ongoing arrangements that can reasonably be expected to ensure that, in exercising any powers or performing any duties as a manager, it exercises the care, diligence, and skill that a prudent person engaged in the business of managing a registered scheme would exercise in the same circumstances; and

(e)

the manager of the unregistered scheme has in place ongoing arrangements that can reasonably be expected to ensure that section 174 of the Act applies to the relevant transactions or all related party benefits to be given under those transactions.

(2)

For the purposes of subclause (1)(e),—

related party benefit, in relation to the unregistered scheme,—

(a)

is a benefit—

(i)

that either is given out of scheme property of the unregistered scheme or creates an exposure to loss for scheme property of the unregistered scheme; and

(ii)

that is given to, or received by, a related party of the unregistered scheme; but

(b)

does not include fees or expenses that are paid or reimbursed to the manager in accordance with the governing document of the unregistered scheme

relevant transactions means transactions entered into for or on behalf of the unregistered scheme that provide for 1 or more related party benefits to be given (as defined in this subclause).

(3)

Any term or expression that is defined in section 172 or 176(3) of the Act and used, but not defined, in this regulation has the same meaning as in those provisions.

6 Regulation 106A amended (Restriction on acquisitions of in-house assets does not apply to restricted schemes that invest in certain unregistered schemes)

(1)

Replace regulation 106A(1)(e) (as inserted by regulation 5) with:

(e)

the manager of the unregistered scheme has in place ongoing arrangements that can reasonably be expected to ensure that section 174 of the Act applies to the relevant transactions or all related party benefits to be given under those transactions; and

(f)

in the case of a scheme that is identified on the scheme register as an employer-related scheme, the requirement specified in regulation 106B is satisfied.

(2)

In regulation 106A(3) (as inserted by regulation 5), after “this regulation”, insert “or regulation 106B”.

7 New regulation 106B inserted (Additional requirement for employer-related scheme)

After regulation 106A (as amended by regulation 6), insert:

106B Additional requirement for employer-related scheme

(1)

The requirement for the purposes of regulation 106A(1)(f) is that, immediately after the investment referred to in regulation 106A is made, the restricted scheme must not have an in-house assets ratio of 5% or more (where the ratio is calculated in accordance with section 176(2) and (4) of the Act (applied with all necessary modifications)).

(2)

Subclause (3) applies if the unregistered scheme has or acquires an asset that—

(a)

is a loan to, or an investment in,—

(i)

a contributor to the restricted scheme who is not a scheme participant (other than the Crown); or

(ii)

an associated person of a contributor referred to in subparagraph (i); or

(b)

is subject to a lease or lease arrangement with a person referred to in paragraph (a)(i) or (ii).

(3)

For the purposes of subclause (1), the restricted scheme must be treated as having or acquiring that asset in proportion to the restricted scheme’s interest in the unregistered scheme.

(4)

For the purposes of subclause (1), the restricted scheme’s investment in the unregistered scheme must not be treated as an in-house asset (but this subclause does not limit subclause (3)).

Example

ABC scheme (ABC) makes regular investments into an unregistered scheme called XYZ scheme (XYZ).

ABC currently has in-house assets that are valued at $200,000.

ABC is preparing to make another investment in XYZ and intends to rely on regulation 106A. To rely on that regulation, the requirement in this regulation must be satisfied.

After the investment is made, ABC will own 20% of XYZ’s units.

Employer Limited is a contributor to ABC on behalf of its employees. It is a related party of ABC.

XYZ currently holds shares in Employer Limited that have a value of $10 million. Under subclause (3), 20% of this asset is attributed to ABC as if ABC holds the shares (that is, $2 million worth of shares). This asset is treated as an in-house asset because it is an investment in ABC’s related party.

The sum of the in-house assets directly held by ABC and the assets it is treated as holding is $2,200,000 ($200,000 plus $2 million).

The net asset value of ABC’s scheme property is $20 million.

Applying section 176(2) of the Act, the in-house assets ratio of ABC would be 11% (the ratio of $2.2 million to $20 million).

ABC does not satisfy the requirement in this regulation and cannot make a further investment in XYZ in reliance on regulation 106A. (Investments may resume once XYZ divests itself of enough shares in Employer Limited to reduce ABC’s in-house assets ratio below 5%.)

8 Schedule 1 amended

In Schedule 1, after clause 30, insert:

30A Certain superannuation schemes may elect to be treated as registered

(1)

This clause applies to a scheme and to the interests in the scheme if—

(a)

the scheme is a superannuation scheme of the kind referred to in clause 35 of Schedule 4 of the Act; and

(b)

on or before 1 December 2016, the manager of the scheme elects for this clause to apply to the scheme in accordance with subclause (2); and

(c)

immediately before the specified date, the scheme is neither registered as a registered scheme under the Act nor approved as a Schedule 3 scheme.

(2)

A manager elects for this clause to apply to a scheme by notifying the FMA and the Registrar of the specified date at least 20 working days before that date.

(3)

In this clause, specified date, in relation to a scheme, is the date on and after which this clause will apply to the scheme.

(4)

The specified date must be a date that is on or before 1 December 2016.

(5)

On and after the specified date, clauses 20 and 22 to 32 of Schedule 4 of the Act apply with all necessary modifications to the scheme and interests in the scheme as if—

(a)

Part 2 of that schedule applied to those interests; and

(b)

the specified date were the effective date for those interests.

(6)

Clause 35 of Schedule 4 of the Act ceases to apply on the specified date.

9 Schedule 8 amended

(1)

In Schedule 8, clause 4(3), replace “The law” with “New Zealand law”.

(2)

In Schedule 8, replace clause 27(1) with:

(1)

Clause 28 applies to a person (A) who offers managed investment products to another person (B) in reliance upon clause 21(a) or (c) of Schedule 1 of the Act.

(3)

In Schedule 8, heading of clause 28, replace PIE call fund units, PIE term fund units, and bank notice products that are specified units with certain managed investment products.

(4)

In Schedule 8, clause 28(1) and (2), replace “financial products” with “managed investment products”.

(5)

In Schedule 8, clause 47(2), replace “The law” with “New Zealand law”.

(6)

In Schedule 8, clause 48(2), replace “The law” with “New Zealand law”.

Michael Webster,
Clerk of the Executive Council.

Explanatory note

This note is not part of the regulations, but is intended to indicate their general effect.

These regulations amend the Financial Markets Conduct Regulations 2014 (the principal regulations). Most of the regulations come into force on 30 June 2016. Regulation 9(1), (5), and (6) come into force on 1 December 2016 and regulations 6 and 7 come into force on 1 December 2017.

Regulation 5 inserts new regulation 106A into the principal regulations. This regulation prescribes circumstances in which section 176 of the Financial Markets Conduct Act 2013 (the Act) does not apply (see section 176(5)). Section 176 restricts the ability of restricted schemes to acquire assets involving related parties (in-house assets). The circumstances relate to investments in an unregistered scheme that is used as an investment vehicle for the purpose of facilitating investment and reporting for registered schemes. The regulations allow restricted schemes to organise their affairs in an efficient manner (by using a professionally-managed unregistered scheme) while maintaining appropriate protections for investors in relation to related-party investments. These protections include, for example, ensuring that the manager of the unregistered scheme has in place ongoing arrangements that can reasonably be expected to ensure that it performs or exercises its duties or powers in a professional manner.

Regulations 6 and 7 insert new regulation 106B into the principal regulations and make consequential changes to new regulation 106A. New regulation 106B comes into force on 1 December 2017 (which is consistent with the transitional rule in clause 39 of Schedule 4 of the Act relating to in-house assets). New regulation 106B imposes another requirement before new regulation 106A can be relied on. The new requirement is for the restricted scheme to satisfy a modified in-house assets ratio rule.

Regulation 8 inserts a new transitional provision into Schedule 1 of the principal regulations. The transitional provision relates to schemes referred to in clause 35 of Schedule 4 of the Act (superannuation schemes in relation to which offers to the public have not been made). The provision allows these schemes to opt-in to becoming registered schemes in accordance with Part 2 of Schedule 4 of the Act.

Regulation 9 amends clause 27 of Schedule 8 of the principal regulations. This clause relates to certain requirements for offers of PIE call fund units, PIE term fund units, and bank notice products. The amendment extends the application of the requirements to managed investment products issued by a registered bank.

Regulation 9 also makes some minor changes to the wording of certain statements required by Schedule 8 of the principal regulations (for example, in the eligible investor certificates and the safe harbour certificates under clauses 41 and 44 of Schedule 1 of the Act). The revised wording is consistent with similar wording in other statements required by Schedule 8.

Issued under the authority of the Legislation Act 2012.

Date of notification in Gazette: 2 June 2016.

These regulations are administered by the Ministry of Business, Innovation, and Employment.