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REPORT ON DISCLOSURE BY FINANCE COMPANIES

SECTION 4 - OTHER DISCLOSURE ISSUES

72.

This section of the Discussion Paper attracted only limited comment from respondents and the Commission comments on it briefly in this report.

Description of ranking of securities in advertisements

73.

Finance companies must be clear about the terms and descriptions used to describe the debt securities being offered.

74.

Finance companies must state either that the securities are unsecured, or describe the nature of the securities, how they are secured and their ranking.

75.

Where an issuer refers to securities as "first ranking" it must be clear that this description of the ranking relates only to ranking among the securities offered by the finance company, and that prior charges under other legislation may take priority.

76.

Companies that offer more than one type of debt security in the same investment statement need to make clear details about the ranking of the security in respect of each type of security.

Disclosure about prior claims and equal ranking claims

77.

Finance companies must describe the claims on the assets of the issuer in the investment statement. It is not sufficient to note that the only claims that rank ahead of those of subscribers are "prior claims" without describing what these types of claims are.

78.

The description of prior claims on the assets of the finance company must enable investors to understand the effect of these claims (including any restrictions on these charges) in relation to the risks that the investor assumes. If there are claims that rank equally with those of subscribers, the investment statement must also describe these. Investors should be referred to the registered prospectus for further detailed information where relevant.

79.

Where there are material prior charges for fixed amounts that will affect the substantive precedence of the debt security, then these should be disclosed to the extent possible in the registered prospectus. Any precise claims on assets that may rank in priority should each be identified and quantified in the registered prospectus.

80.

Where more than one type of debt security is offered in an investment statement, the information in relation to prior claims, or equal ranking claims, must be described in relation to each type of security offered.

Consistency between the investment statement and the prospectus

81.

An investment statement must be consistent with the registered prospectus referred to in it.

Maturity of investments

82.

Finance companies must disclose the dates on which, or the frequency with which the returns from the securities will be due and paid.

83.

The Commission considers that finance companies should state clearly in the investment statement what, if anything, the finance company will do to advise investors when the investment is about to mature. Investors should have sufficient time to decide what they wish to do with the investment. Finance companies must provide investors with information about the options available to investors on maturity of the investment.

Early termination

84.

The investment statement must contain a brief description of any rights of the issuer, subscriber, or any other person to terminate the investment early.

85.

The investment statement must provide clear information about the effects of early termination and the circumstances in which early termination is permitted. It must be evident to investors that their money is locked in for a particular term and can only be terminated before the end of that term in particular circumstances. These circumstances should be made clear.

86.

Early withdrawal fees or adjustments to the interest rate on early termination need to be clearly explained as this affects the subscriber's right to obtain payment of the returns.

Date of the investment statement

87.

The investment statement must prominently state the date at which it is prepared. It is preferable that this information be clearly displayed on the front page or cover of the investment statement.

Payment of money by subscribers

88.

Details in the investment statement about the payment of money by subscribers for the securities must be very clear. The required disclosures cover the amounts payable, the person to whom and place where payments are to be made, and the frequency of payments. The application form should also be explicit about this.

Ordering of information in the investment statement

89.

Finance companies need to check whether information is required to be repeated or referred to in more than one part of the investment statement and take into account the context in which the information is to be provided. Enough information is required to be provided under each section of the investment statement to adequately answer the head questions and the specific disclosures under each clause of Schedule 3D. Some cross referencing to other documents may be useful and could be used to draw investors' attention to provisions of the trust deed, disclosures in the financial statements contained in the prospectus, or particular sections of the investment statement or prospectus.

Information on request

90.

The investment statement is required to include a statement to the effect that other information about the securities or the issuer, or both, is contained or referred to in a prospectus and the financial statements of the issuer. The investment statement must describe where a copy of these documents can be obtained free of charge.

91.

As well as the above, the investment statement must also include a statement to the effect that the prospectus and financial statements and other documents relating to the issuer are filed on a public register and available at the Companies Office for public inspection. The reference to "other documents" includes the trust deed. Finance companies must ensure that this information is clearly explained in the investment statement.

SECTION 5 - ADVERTISING

92.

The Commission has decided to comment only briefly on advertising in this report and to highlight the areas where issues often arise and improvements are required.

93.

Finance companies must ensure that all advertisements for securities comply with all applicable requirements of the Act and Regulations. An advertisement must not contain any matter that is likely to deceive, mislead or confuse with regard to any particular that is material to the offer of securities. The advertisement must be consistent with the registered prospectus referred to in it. It is the responsibility of the directors to ensure that these requirements are met. Directors must complete a certificate attesting to these matters for every advertisement published for an issuer.

94.

Areas where finance companies need to pay closer attention to the advertising requirements of the Act and Regulations are:

(a)

Ensuring regulation 17 directors' certificates are properly completed;

(b)

The definitions of "advertisement" and "distribute" in the Act and the scope of these definitions;

(c)

Prominence of the required information in advertisements;

(d)

Ensuring that it is made clear to publishers/broadcasters of advertisements what is required to be printed/displayed;

(e)

That reference to the availability of the investment statement is required in order for an advertisement to be an "authorised advertisement";

(f)

Statements about how the securities are secured;

(g)

Statements about safety;

(h)

Statements about the interest rate;

(i)

Statements about assets.

95.

Finance companies should consider whether they need to develop compliance plans or checklists in relation to the advertising of securities to ensure that all requirements of the legislation are met before advertisements are distributed for publication.