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JUN 01 2017
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Newly issued shares in investment companies to be treated as managed investment products

Changes for investment companies

The Financial Markets Authority recently introduced legislation which will affect certain unlisted investment companies.  The Financial Markets Conduct (Shares in Investment Companies) Designation Notice 2017 (the Notice) came into force on 19 May 2017, and enables the FMA to treat newly issued shares in investment companies as managed investment products (MIPs).  Companies affected by the Notice will be re-designated as managed investment schemes (MISs), and will need to comply with the provisions of the Financial Markets Conduct Act 2013 (FMCA) which relate to MISs.

The Notice is borne in part out of concerns that certain market participants may be structuring investment businesses through companies, rather than unit trusts or other unincorporated collective investment structures, in order to avoid the governance and compliance requirements which apply to MISs under FMCA.  These include initial disclosure, governance, supervision (through a licensed scheme supervisor), and licensing of scheme managers.  The particular focus of the Notice is on companies whose sole or principal business involves investing in financial products, commodities, currency or real estate, and which have reduced shareholder rights and/or unreasonably entrenched key service provider arrangements. 

The Notice does not apply to investment companies whose shares are quoted on the NZX Main Board or the ASX, as the FMA is satisfied that the governance and disclosure regimes of these exchanges provide adequate investor protections.  Investment companies issuing new shares in circumstances to which the Notice applies will need to comply with FMCA as if they were MISs, and the shares were MIPs.  Unless an exclusion under FMCA otherwise applies, this will mean that:

·               a licensed manager and an independent licensed supervisor will need to be appointed;

·               the company’s assets will need to be held by an independent custodian;

·               the company will need to adopt governing documents which comply with the requirements of the FMCA relating to MISs; and

·               the company will require a Statement of Investment Policy and Objectives.

The Notice does not specify how an investment company must bring itself into compliance with FMCA as an MIS, and there is currently no direct guidance from the FMA on this issue.  Companies which may be affected by the Notice are encouraged to engage with the FMA early in the offer process.