Directors and officers disclosure
Directors and officers disclosure
Securities Commission Practice Note and class exemptions
The Securities Commission has released a Practice Note as a guide for market participants affected by the directors’ and officers’ disclosure regime due to take effect on 3 May 2004.
The law relating to the new regime is the Securities Markets Act 1988 and the Securities Markets (Disclosure of Relevant Interests by Directors and Officers) Regulations 2003. Practice Note The Practice Note is available on the Securities Commission website: http://www.sec-com.govt.nz.
Practice Note 2004/1 explains the Securities Commission’s intended approach to: the definition of “officer” in its enforcement of the new law; how the new law applies to former directors and officers; and the scope of the exemption relating to employee share purchase schemes in Regulation 20 of the new Regulations. Further Exemptions The Commission gave notice of several exemptions it intends to grant for directors and officers in its news release of 29 March 2004.
The Commission will also grant the following exemptions from the regime: Interests in bank accounts and term deposits An exemption from the requirement for directors and officers of registered banks to disclose relevant interests in bank accounts and term deposits issued by those banks was announced on 29 March 2004.
The exemption covers all related bodies corporate of registered banks, but it does not currently extend to registered banks related to issuers that are not banks.
The Commission will extend this exemption to include them.
… more … Unlisted Unit Trusts
Some listed issuers have directors and officers who hold units in unlisted unit trusts offered by related bodies corporate. An exemption will be granted from the disclosure requirements for directors and officers who have relevant interests in unlisted unit trusts offered by related bodies corporate.
Given the nature of unit trusts it is unlikely that information held by directors and officers of the public issuer can be used for insider trading in the unlisted trusts. Neither will disclosing that information provide useful information to the market. The disclosure would not further the purposes of the regime which are to deter insider trading and provide market information. Passive Funds An exemption for directors and officers with relevant interests in passive index funds was announced on 29 March. The risk of insider trading in such funds is minimal, and the disclosure is not useful. Neither would this disclosure further the anti-insider trading purpose of the regime.
This exemption will apply to relevant interests in both listed and unlisted passive index funds. Some managers of listed passive index funds have a significant number of related bodies corporate that are not public issuers, and which offer unlisted products in which the directors and officers of the public issuers have relevant interests.
The Commission will exempt directors and officers of any passive index fund manager from disclosing relevant interests in unlisted securities of a related body corporate if they would only have to disclose the interest in the related body corporate because they are directors or officers of the passive index fund manager.
Exemption notices These are summaries of exemptions the Commission intends to grant. The final form of the exemptions will be settled as these are drafted, and in consultation with the applicants.
The Commission expects the exemptions to be gazetted later this month. Changes to the Regulations Yesterday, Commerce Minister Margaret Wilson announced changes to the Securities Markets (Disclosure of Relevant Interests by Directors and Officers) Regulations 2003. These changes: explain the differences between initial and ongoing disclosures; and exempt directors and officers of overseas companies listed on the NZX from the regime.
SECURITIES COMMISSION PRACTICE NOTE No 1/2004
Disclosure of relevant interests in securities by directors and officers of public issuers
Securities Markets Act 1988 - Subpart 2 of Part 2 Securities Markets (Disclosure of Relevant Interests by Directors and Officers) Regulations 2003
Contents Paragraph Introduction 1 Who is an “officer” 4 Former directors and officers 21 Regulation 20 - employee share schemes 24 Note 28
Subpart 2 of Part 2 of the Securities Markets Act 1988 comes into force on 3 May 2004. After that date directors and officers of public issuers must disclose relevant interests in securities of their public issuer and any related body corporate in accordance with the Securities Markets (Disclosure of Relevant Interests by Directors and Officers) Regulations 2003.
In general, disclosure must be made within 5 trading days of any acquisition or disposal of a relevant interest. Disclosure of holdings of relevant interests as at 3 May 2004 must be made within 5 trading days of the commencement of the law – that is, by the end of 7 May 2004.
The Commission will be responsible for enforcing the directors’ and officers’ disclosure obligations. This practice note sets out our understanding of certain aspects of the law, and the approach that we intend to take in our enforcement role under the law.
Who is an “officer”?
Disclosure is required from both directors and officers of public issuers.
The term “officer” is defined in the Securities Markets Act 1988 (the “Act”). Certain exclusions to the term are set out in the Securities Markets (Disclosure of Relevant Interests by Directors and Officers) Regulations 2003 (the “Regulations”).
The Act defines “officer” to mean any person, however designated, who is concerned or takes part in the management of the public issuer’s business; but excludes any class or classes of persons that are declared by regulations not to be officers for the purposes of the Act.
Regulation 4 of the Regulations states that a person is an “excluded person” if he or she does not:
report directly to the board of directors (or to the sole director, where this applies); or report directly to a person who reports directly to the board; or report directly to a person in paragraph (b); or manage a principal business unit, division, or function of a public issuer.
The Regulations provide that no excluded person is an officer for the purposes of the Act.
The Commission is aware that some public issuers are identifying their “officers” by reference solely or largely to the exclusions in the Regulations. The Commission does not think this is the correct approach.
The Regulations do not say who is an officer. The definition of “officer” is set out in the Act. The Regulations only state that anyone who is an “excluded person” is not an officer. The fact that someone is not an “excluded person” in terms of the Regulations does not, in the Commission’s view, imply that the person will be an “officer”.
For its enforcement purposes, the Commission’s view is that consideration of whether or not a person is an “officer” must begin with an examination of the definition in the Act, and of the purpose of the Act.
Parliament intentionally avoided a prescriptive definition of “officer”. The Select Committee report on the Securities Markets and Institutions Bill stated that if the definition was too prescriptive there is a greater chance that people will fall through the gaps in the definition. Consistently with this approach, the Commission will not provide any lists of people that it considers are likely to be “officers”. Issuers who are assessing this question for their officers and directors should consider the definition in the context of their own business, and in the context of the purpose of the legislation.
The disclosure obligation is intended to deter insider trading and to provide information to the market. The obligation to disclose has been defined by reference to individuals’ roles within the issuer. In the Commission’s view, to reconcile the disclosure obligation with the purpose of the law requires consideration of those individuals whose policy or decision making roles are likely to generate or influence material price-sensitive information about the issuer. For public issuers these are people whose individual roles are likely to impact on the continuous disclosure obligations of the issuer.
The definition of “officer” in the Securities Markets Act uses very similar language to sections 382 and 383 of the Companies Act 1993, which set out circumstances in which certain people must not “directly or indirectly, be concerned or take part in the management of, a company”. While the purposes of the Companies Act 1993 and the Securities Markets Act 1988 are different, the Commission finds some assistance in case law considering the management test set out in sections 382 and 383, and similar provisions.
In the context of the Companies Act the High Court in New Zealand has said in Thompson v The District Court at Christchurch (Chisholm J, Christchurch Registry, 30 November 2001, CP56/1) that the “essential nature of the management concept” is captured in a statement made by Ormiston J in the Supreme Court of Victoria, in Commissioner for Corporate Affairs v Bracht (1989) 7 ACLC 40:
... the concept of “management” for present purposes comprehends activities which involve policy and decision-making, relating to the business affairs of the corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs.
The Commission takes the view that the term “officer” in the Act is intended to catch people who are sufficiently senior that their activities would fall within the description in this extract from the Bracht decision. It is intended to include people in significant decision and policy making roles. “Significant”, in this sense, means significant to the financial standing of the issuer, or to the way that the issuer as a whole conducts its affairs.
“Concerned or takes part in”
The definition of “officer” applies to a person who is “concerned or takes part in” the management of the public issuer. A question arises as to how directly a person must participate in the management of the public issuer for that person to be an “officer”.
There have been a number of judicial statements about this and similar phrases, again in the context of cases about prohibited directors. In Tregurtha v Police (Auckland Registry, 15 October 1993, AP123/93) Fisher J, after considering the judgment in Bracht, noted that the protective purpose of the relevant provisions of the Companies Act 1955 was to avoid the risk of repeated harm being caused by a bankrupt who “deals with the rest of the commercial community in circumstances of high responsibility”. The Judge suggested that this mischief occurs if a prohibited person “enjoys large unsupervised discretions at a relatively high level of management”.
The Commission’s view is that the phrase “concerned or takes part in” broadens the definition to the extent that a person’s involvement in the management of the issuer does not need to be at the very highest level. However, the Commission considers that the definition in its context denotes a position of significant responsibility in the decision-making processes of management.
Applying the Definition in Practice
The Commission’s view is that consideration of whether or not a person is an “officer” should include the following steps:
Consider the definition of “officer” in the Act
An officer is any person, however designated, who is concerned or takes part in the management of the public issuer’s business.
It is clear from this definition that a person’s designation or job title does not determine whether or not he or she is an officer. The question will be determined by whether or not the person is concerned or takes part in the management of the issuer’s business. That said, the Commission considers that the holders of some positions will almost certainly be officers, such as the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Chief Legal Officer (or equivalents) of an issuer.
Conversely, the fact that a person’s title includes the term “manager” will not necessarily mean that the person is an “officer” for the purposes of the Act.
The definition of “officer” can include contractors, and employees of subsidiaries or related companies, if they are concerned or take part in the management of the public issuer’s business.
Consider the significance of the person’s role within the public issuer
Typically this will involve asking certain questions: What does the person’s role involve? What duties does the person perform, on a regular basis? To whom does the person report? What level of discretion does the person have in their role? How does the performance of the person’s duties impact on the affairs of the public issuer as a whole?
The reporting obligation is intended to provide market information and to deter insider trading. Only certain people’s disclosure is relevant to achieve these purposes. In the Commission’s view these people are those who have responsibilities integral to the making of decisions that are significant to the issuer as a whole, or to a substantial part of the issuer (e.g. a substantial business unit of the issuer). In enforcing the law the Commission intends to approach the scope of the obligation in this context.
The Commission’s view is that to be an “officer” a person must have responsibilities integral to the making of decisions that are significant to the issuer as a whole, or to a substantial part of the issuer (e.g. a substantial business unit of the issuer). “Significant”, in this sense, means significant to the financial standing of the public issuer or to the way that the public issuer as a whole conducts its affairs. The Commission will expect disclosure from these people.
Consider the exclusions in Regulation 4 of the Regulations
If a person does not come within the definition of “officer”, the exclusions need not be considered at all.
If a person does fall within the definition of “officer” then the exclusions should be considered to see whether that person is declared not to be an officer for the purposes of the disclosure regime.
The regulations exclude, from the definition of “officer”, any person who – is not within the three levels of reporting; or does not manage a principal business unit, division, or function of a public issuer.
The Commission’s view is that the number of people within the three levels of reporting described in the regulations will, for most issuers, be significantly greater that the number of “officers”. In many cases they will have little practical application to an issuer.
Former directors and officers
Section 19W of the Securities Markets Act states that:
A person is treated as a director or officer for the purposes of this subpart for 6 months after that person ceases to be a director or officer, and must continue to comply with this subpart for that period
A question has arisen about whether people who ceased to hold office less than six months prior to the commencement of this law must make disclosure as directors and officers.
In the Commission’s view they do not. The section comes into force on 3 May 2004. Any director or officer who ceases to hold office once the law is in force is caught by this provision, and must continue to make disclosures for six months. Any person who ceased to hold office prior to 3 May is not a person who “ceases to be a director or officer” while the section is in force, and consequently does not have to disclose relevant interests under this law.
Regulation 20 – employee share schemes
Regulation 20 of the Regulations contains an exemption for a director or officer who “acquires or disposes of a relevant interest … if the relevant interest arises from a security that is acquired or disposed of under an employee share scheme”.
Under the exemption these people do not have to make disclosure within 5 trading days of the acquisition or disposal, but must disclose once in every month (but at least 21 days after the date of the last disclosure) while the director or officer has the relevant interest.
This exemption is intended for directors and officers who are trustees of employee share schemes. These people typically acquire and dispose of relevant interests frequently, and on an ongoing basis. The exemption allows them to make disclosure monthly, rather than every 5 days.
Technically, the exemption in regulation 20 can also apply to beneficiaries under an employee share scheme. People who infrequently acquire or dispose of securities under an employee share scheme could find the condition of exemption requires a higher level of disclosure than normal compliance. The Commission notes that the exemption is permissive only. No director or officer is required to take advantage of the exemption. They can instead disclose their relevant interest within 5 trading days, in the usual way.
The Commission cannot give rulings on the interpretation of the law or provide legal advice. Accordingly this practice note is provided for guidance only. It signals the approach the Commission intends to take to enforcement of the law. The Commission may publish further practice notes over time. However, the Commission is not bound by this or any other practice note.