Investment schemes structured as unlisted equities would be subject to tougher compliance standards under proposals floated by the Financial Markets Authority (FMA) last month.
The FMA plan – released in a Financial Markets Conduct Act (FMC) regulatory consultation paper dump in December – would see a number of investment schemes, currently classified as equities, corralled under the much tougher managed investment scheme (MIS) regime.
“We have seen examples of companies offering shares with certain features that raise questions regarding where the boundaries should lie between a MIS and an investment company,” the FMA consultation paper says, citing property syndicates and other unlisted collective financial product investment vehicles as examples.
If adopted, all investment companies caught under the proposed class ruling would be defined as managed investment products (MIPs) and subject to MIS rules – including more stringent and regular disclosure – rather than the looser equity compliance standards.
Investment companies operating under licensed markets would be exempt from the class definition.
The FMC defines four classes of financial products – debt securities, equity securities, managed investment products (MIPs) and derivatives – each governed by a “tailored regime”.
Under the FMA’s proposed definition, investment companies would be classified as MIPs if they: deny shareholders certain rights such as appointing directors or approving corporate actions; include a substantial or long-term service agreement that shareholders cannot alter, and; have the word ‘fund’ in their name.
“In our experience, where an offeror uses the word ‘fund’ in its name, that is usually indicative that the economic substance of the offeror is a fund,” the FMA paper says.
“Additionally, if the offeror’s name includes the word ‘fund’ and the economic substance of that offeror is not a fund, we believe that potential investors may be misled that the offeror is a managed fund under the FMC Act and will be regulated in the same way as other managed funds. Therefore, we want to strongly deter investment companies that are not managed funds from using the word ‘fund’ in their name.”
As well as the investment company proposal, the FMA published three other consultation papers late in December covering FMC exemptions for property schemes, forestry investments and overseas regimes.
Submissions close for all the above FMA proposals on February 19 this year, except the overseas regime consultation which is open to comment until February 26.