The Financial Markets Conduct Act (Act) requires people with a substantial holding (ie 5% or more) in a listed company to disclose their interests and certain changes to their interests in that listed enterprise. The form and method of disclosure is prescribed by the Financial Markets Conduct Regulations (Regulations) and is given in the form of substantial product holder (SPH) notices.
The Financial Markets Authority (FMA) has identified inconsistencies in market practice as to:
- considerations to whether both firms and individuals within firms who are responsible for managing listed financial products are SPHs or only firms themselves, and
- approaches to compliance with and interpretation of prescribed SPH disclosure requirements.
In order to address these inconsistences, FMA has published proposed guidance on SPH disclosures (proposed guidance) and is seeking feedback from the market. In particular, FMA is consulting on its proposed treatment of disclosures by individuals who manage funds.
Disclosures by individuals who manage funds
Whether individuals who manage funds on behalf of a fund management firm (ie their employer) are required to make SPH disclosures, centres on if those individuals have a 'relevant interest' in the financial products their firms hold.
FMA's interpretation is that individuals who manage funds generally do have a 'relevant interest' in the financial products they manage and that such interest needs to be disclosed. This is different from the position in Australia.
FMA is of the view that, even if fund managers have controls or restrictions in place, individuals within the firm will generally have a relevant interest under:
- section 235(1)(c) - the power to exercise, or control the exercise of, a right to vote attached to the product, and / or
- section 235(1)(d) - the power to acquire or dispose of, or control the acquisition or disposal of, the product if they can still exercise some independent decision making over the relevant financial products.
This test applies regardless of the level of seniority of the individual in the firm.
An exception would be where the fund has frameworks or mandates that place controls on how the person who manages the fund must operate, and these rules or controls stop the individual from independently exercising discretion over whether the financial product should be acquired or disposed of, or how the voting rights for those products will be exercised.
Other employees within a firm, who do not manage a particular fund, could also have a relevant interest if they, alone or jointly with others, exercise this decision-making power. This would mean where investment decisions are made by an investment committee, each investment committee member may have a relevant interest to disclose.
What does this mean?
If the guidance is introduced as it is, it will clarify FMA's expectation that individuals who manage funds will need to make SPH disclosures when:
- they have the power to acquire, dispose of, or exercise the votes attaching to 5% or more of financial products in a listed issuer which is held in a fund they manage, regardless of whether or not they have a personal holding in the same listed issuer, or
- they have a personal holding (or control the personal holding of a third party) in a listed issuer, and the power to acquire, dispose of, or exercise the votes attaching to financial products in the same listed issuer that is held in a fund they manage. In addition, they have that power to control the firm's holding together with their personal holding reaches the 5% threshold.
This approach would largely go against current market practice in the area and would diverge from market practice in Australia.
SPH disclosure notices
The proposed guidance also clarifies FMA's expectations as to the content of SPH disclosure notices in relation to:
- details of relevant transactions,
- aggregating on-market trades,
- describing a 'relevant interest',
- joint disclosures,
- timeliness of disclosures,
- details of transactions for 1% movements, and
- registered holders.
In November 2016, FMA asked for targeted feedback on the proposed guidance from a number of fund managers. Despite the five submissions received being largely adverse to the requirement for disclosure from the individuals who manage funds, FMA chose not to implement the initial feedback, but instead to seek further feedback from the wider industry.
Though we agree that FMA's interpretation is the most natural one, given the wording of section 235, it may result in potentially unhelpful or duplicated information being disclosed, particularly if individuals in firms also control personal holdings. Further guidance is still needed to inform the market as to what 'control' actually means and the threshold of 'control' that triggers a 'relevant interest' under section 235. This would be helpful to the market and would prevent further inconsistencies in disclosure.
Submissions on the proposed guidance close on Friday 16 June 2017. If you have any questions in relation to the proposed guidance or would like assistance in making a submission, please get in touch.