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FMA recommends issuers use ‘plain language’ in offer docs

The Financial Markets Authority has published draft guidelines aimed at improving disclosure in prospectuses and investment statements.

Since taking over from the Securities Commission in May last year the FMA has identified concerns around the general style and presentation of disclosure documents.

Examples ranged from too much jargon and complex information, to directors using “a templated approach” to disclosure documents, with little regard to the circumstances of the particular offer.

“Sometimes it seems directors ‘ticked all boxes’ without ensuring the disclosure documents conveyed an accurate impression of the offer and its associated risks,” the FMA noted.

FMA chief executive Sean Hughes said the agency welcomed comments and suggestions from interested parties before the guidance is finalised.

“In issuing guidance the aim is to ensure that financial markets participants clearly understand their responsibilities, andthatinvestors have what they need to make informeddecisions,” he said.

Among the guidelines is a requirement for “clear, consise, and effective disclosure – a phrase consistent with requirements under Australian law but not written in New Zealand law.

“We propose to recommend using plain language. We want issuers to achieve this approach for every disclosure document, as well as any marketing documentation,” The FMA says.

The guidelines cover KiwiSaver investment performance and cost disclosure including other material information such as:

-  factors other than investment returns which impacted the fund performance;

-  extraordinary non-investment income and/or rebated fees – both the fact of these categories and their impact on investment performance;

-  investment policy and objectives – and how these can be changed;

-  the issuer’s investment intentions for the period of the prospectus in some circumstances;

-  material direct and indirect costs; and

-  any lack of awareness on costs, and why this investment remains appropriate when costs are not certain.

The guidelines can be viewed here

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seccomdocs-_198017-v1-disclosure_guidance.pdf376.12 KB

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Comments and questions
2

This is all very well, but when seeking legal advice, directors are encouraged to have regard to their legal liabilities under securities legislation in what they say, and the lawyers provide the wording accordingly. Given the D&O insurers do their best to avoid any support for directors under their D&O insurance, if things go wrong, directors would be fools to use plain language rather than the language recommended by the lawyers.

On the other hand, surely the purpose of any legal wording to to ensure that all parties understand their legal risks, rights and responsibilities. So if disclosure is written in such a way that no reasonable person can understand it, it would be easy to argue that directors would be fools to use the legalese rather than plain English.

Obviously neither answer is absolute and the answer is in collaboration. But if these guidelines help ensure that spirit collaboration occurs with a goal of clearer understanding, it can only be a good thing.