DISCLOSURE BY FINANCE COMPANIES

Areas of common non-compliance concerning advertisements

138.

The Commission notes that there continues to be a significant amount of advertising by finance companies in the print media, as well as via radio and television. The Commission regularly receives complaints about advertisements by finance companies and routinely enquires into the compliance of finance companies' advertisements.

139.

It appears that some finance companies do not appreciate the extent of the advertising requirements for securities and are not meeting the requirements of the legislation.

140.

Issuers should be aware that the definition of "advertisement" in the Act is broad in scope and may cover such communications as media releases, oral presentations, print media, radio and television media, and websites. Each communication to the public about securities therefore needs to be checked carefully against the requirements of the Act and Regulations before distribution and publication. Issuers should also check that advertisements do not advertise in a way that would result in the offer and/or allotment of securities breaching the Act, for example by enabling investors to subscribe for securities without first receiving an investment statement.

141.

In many cases the Commission considers it likely that the adequacy (and existence in the first instance) of internal compliance systems to check the content of advertisements would be useful for improving compliance.

142.

The Commission's enquiries have highlighted the following areas of non-compliance as being more prevalent.

Prominence of required information in advertisements

143.

The Commission has noted certain examples of print advertisements where the required information about the investment statement is in very small print and is not given prominence within the advertisement. The Commission considers that information should be clearly and prominently stated to meet the requirements of regulation 8 of the Regulations and section 38 of the Act. If the required information about the investment statement is buried in the small print then this may be considered to be misleading.

144.

Concealment of information in the small print of an advertisement may also raise issues under the Fair Trading Act 1986. The Commerce Commission has published guidelines in relation to advertising and the Fair Trading Act. The Commission notes the Commerce Commission's comments that "if the overall impression given by an advertisement is misleading, information contained in the fine print may not save you from prosecution for breaching the Act". The Commerce Commission also notes that "you must not use fine print to conceal important information which would be critical to people's decision to buy your goods or services".

145.

Some finance companies advertise investments via television. The Commission has granted a class exemption that applies to offers of debt securities made in audiovisual advertisements. This is the Securities Act (Audiovisual Advertisements) Exemption Notice 2002. It is a requirement of this exemption notice that written information must be displayed "clearly and prominently, and for a sufficient time for the information to be read". Advertising by finance companies in reliance on the exemption must satisfy this condition.

Use of advertising or marketing agencies to prepare advertising

146.

The Commission is aware that some finance companies use external marketing agencies to prepare their advertising. It is not clear that issuers always brief the agencies on the legal requirements of the advertisements. In certain cases the Commission has found that the advertisements had not been prepared in strict accordance with the requirements of the legislation or checked for compliance with the Act and Regulations by either the directors of the finance company or the company's legal advisers.

147.

In 2003 the Commission accepted enforceable undertakings from a finance company in relation to a non-compliant advertisement prepared by an advertising agency. The finance company undertook to prepare a compliance plan to help ensure that all future advertising in relation to securities complied with the Act and Regulations and for the finance company's legal advisers to review all advertising for compliance. The Commission considers that these are common sense measures that could be adopted by finance companies more generally. It may reduce investor confusion if finance company personnel who prepare advertising are adequately trained in the requirements of the legislation. It is an important safeguard that directors actively check advertisements for compliance with the Act and Regulations before signing a regulation 17 certificate, and before distribution of the advertisement for publication. This certification procedure should be taken seriously by directors.

148.

The Commission is also aware of a situation where a newspaper publisher altered an advertisement for debt securities due to lack of available printing space. This resulted in the advertisement not complying with the necessary legal requirements. It is advisable that media do not add, omit or otherwise alter information in advertisements for securities without seeking the consent of the issuer to any change. The issuer should make it clear to the media publisher what is required to be printed or disclosed when advertisements are submitted for publication.

The advertisement does not refer to investment statement

149.

An advertisement is required to refer to an investment statement that relates to the securities in order to be an "authorised advertisement" under the Act. The Commission has dealt with cases where this important information has been omitted from the advertisement. This is a key requirement in relation to the advertising of securities. Finance companies must ensure that it is complied with.

Statements in advertisements about assets

150.

Under regulation 12 of the Regulations -

(a)

no advertisement can state the assets or net assets of any person or persons, other than the total assets, or net assets of the issuing group or borrowing group or mortgagor under a contributory mortgage or of a guarantor of the securities to which the advertisement relates; and

(b)

total assets cannot be stated without also stating with equal prominence the amount of total liabilities; and

(c)

the amount of net assets cannot be stated, or the amounts of the assets and liabilities unless the amounts appear in the most recent audited consolidated statement of financial position (dated within 18 months before the date of distribution) and the advertisement states the date of the statement of financial position as being the date at which the amounts have been calculated.

151.

The Commission has considered certain examples of advertising where total assets have been stated without also stating the amount of total liabilities. Care needs to be taken to ensure compliance with this provision.

Statements in advertisements about how the securities are secured

152.

An advertisement must not refer to any debt securities without also stating either that they are secured, or the nature and ranking in point of security of those securities. The Commission has dealt with certain situations where this requirement has not been complied with. Again, care needs to be taken to ensure that all requirements of the legislation are met.

Statements as to safety

153.

An advertisement must not state that an investment in the security is safe or free from risk. Care should be taken to ensure that such statements are not included in any advertisement for securities.

Statements in advertisements about the interest rate

154.

Under regulation 21 of the Regulations, advertisements must not state the rate of interest that may be earned by holding securities unless the advertisement states any minimum amount of securities that would have to be held and any minimum period for holding them to earn that rate of interest. Some finance companies are not complying with this requirement.

155.

The Commission has recently dealt with several cases where finance companies have not stated the minimum investment amount in advertisements, in non-compliance with the legislation.

156.

The Commission has dealt with other cases where the advertisement states that the rate of return is x% p.a., for say a five year term, then in small print the advertisement states that "for full details of the return reference should be made to the investment statement". The investment statement then states the minimum investment amount. The Commission is of the view that this approach does not strictly comply with regulation 21.

CONCLUDING COMMENTS

157.

The Commission's review of finance companies' disclosure documents indicates that some finance companies are already providing a comprehensive level of disclosure to prospective investors. However, others are failing to meet the requirements of the legislation in a number of areas and need to make a better effort to ensure that they comply with the legislation. The Commission's preliminary view is that finance companies generally need to raise standards of disclosure. We think that the minimum legal requirements of the Act and Regulations are more extensive than some finance companies may appreciate, and may require more careful consideration. The purpose of this discussion paper is to invite comment on the views expressed about the standards of disclosure required in offer documents. We also hope the paper will prompt finance companies to critically assess their disclosure, identify shortcomings and make changes where necessary, in order to comply with all applicable requirements of the legislation.

CONSULTATION PROCESS

158.

The Commission seeks your feedback and comments on its preliminary views as set out in this discussion paper. If there are other matters that you wish to comment on in relation to compliance and disclosure by finance companies then we welcome these also.

159.

Following the consultation period, the Commission intends to develop a report based substantially on the matters in this discussion paper, and taking into account any comments received. This report will be distributed to finance companies and made publicly available.

160.

The Commission intends to review a further sample of finance companies' disclosure documents, probably around 6 months after the report is publicly released. These documents will be reviewed against the report to assess whether compliance has improved. Where the Commission identifies non-compliance or compliance issues, it intends to follow up on these with individual finance companies. The Commission may take enforcement action as appropriate.

CONSULTATION PERIOD

161.

Please provide us with any comments that you wish to make by 25 October 2004 to:

Postal:		Securities Commission Finance Companies project PO Box 1179 WELLINGTON
Or by email to:		julie.myers@seccom.govt.nz

162.

This discussion paper is available from the Commission's website
www.seccom.govt.nz

The Commission acknowledges that some comments made in this discussion paper may be equally applicable to disclosure made by issuers other than finance companies.

The comments made in this discussion paper are not intended to suggest that disclosure in relation to certain parts of the Act and Regulations are of more importance than other required disclosures.