ISSN 1174-4758
ISSN 1177-7184 (online)
The Quarterly Newsletter of the New Zealand Securities Commission
No.48 July 2009
This issue
One form of property investment currently offering higher returns than deposit takers like banks and finance companies is a type of property syndicate. Known as real property proportionate ownership schemes, they are increasingly being publicly offered. Investors, though, need to know what they are getting into. These schemes can be risky.
These schemes see ownership of a property split into equal shares. Individuals buy one or more shares each, becoming part owners. Sometimes shares are held by a nominee whose name appears on the title on behalf of all the investors. Properties are usually commercial – industrial parks, office buildings or shopping complexes. They tend to be tenanted and yielding rental income, but sometimes development work is needed.
This type of property syndicate isn’t required to produce a registered prospectus or investment statement. Instead, it must provide a disclosure document, called an “offeror’s statement”, and an independent registered valuer’s report – before it signs up investors. The statement must include information on those making the offer, how much it will cost investors, and what the likely risks and returns are, as well as anything else relevant to someone considering investing in the scheme.
These schemes work differently to other kinds of investments, and their risks need to be understood.
Someone investing in this type of property syndicate may also be agreeing to share its debts and liabilities, jointly or severally. This means that if the syndicate can’t pay its debts or fund repairs, investors may have to make up the shortfall. In fact, each investor may be liable for the whole amount. You may end up owing money to the syndicate.
Compare this to other types of investment where, although investors might lose principal and interest, they are not expected to contribute more funds. Liability varies from scheme to scheme, so we strongly recommend investors clarify the extent of their liability before investing.
Since you’d be investing in real property, you should pay attention to everything you would normally consider when buying any property – the independent valuer’s report, the land information memorandum, and any covenants, conditions, restrictions or easements on the title.
These schemes usually derive most, if not all, of their income from rent. Potential investors should know who the tenants are, how much they pay, whether their payments are usually up to date, and how long leases have left to run. How difficult would it be to replace a tenant, if, for example, their premises’ fit-out made it unsuitable for other types of business? The statement of offer should include these details.
It should also identify the scheme’s manager and key terms of the management agreement. Read this carefully to satisfy yourself the fees are fair and the manager’s powers reasonable. Think about what happens if investors are unhappy with the manager’s performance. If necessary, can the manager be directed and/or replaced? If managers and others, such as those making or promoting the offer, stand to gain from the scheme, the statement should disclose this too.
It may also include forward-looking financial information. This should clearly explain directors’ assumptions in planning the scheme’s future performance, and you should weigh up whether they seem reasonable. Be aware that circumstances change and all forward-looking information is uncertain.
Finally, investors need to think about how to get out of a scheme. Given the lack of a formal market, it might be difficult to on-sell your interest, particularly if the scheme isn’t performing well. Find out how it will eventually be wound up. Some schemes continue indefinitely until investors vote to wind up. In this case, you need to understand how many votes are needed – if a majority vote is enough, the scheme might be wound up against your wishes.
Look hard at any property proportionate ownership scheme you’re considering, and if there’s anything you’re unsure about, get independent financial advice.
Annabel Cotton
Commissioner for Financial
Advisers
In May, Commission Member Annabel Cotton was appointed Commissioner for Financial Advisers in for a period of up to12 months. Meanwhile, the Ministry of Economic Development is continuing its search for a commissioner to be appointed for the full term of five years.
The appointment of the Commissioner was a crucial step in implementing of the regime for supervision of financial advisers. As the Commissioner, Annabel's initial responsibility was to appoint a Code Committee (see below) responsible for developing the Code of Conduct.
Among other responsibilities, a key role of the Commissioner will be to preside over the yet to be appointed Disciplinary Committee. The Members of the Disciplinary Committee will be appointed by the Minister of Commerce on recommendations from the Commissioner.
Annabel is an adviser to several New Zealand-based listed companies on their investor relations programmes. She is a qualified investment analyst and accountant, and has been a member of the Securities Commission for seven years. She is a director of NZX-listed Kingfish Ltd, Barramundi Ltd, and Marlin Global Ltd, as well as Genesis Power and several private companies.
A 10-member committee was appointed by the Commissioner of Financial Advisers in July to develop a Code of Professional Conduct for authorised financial advisers. The Commissioner, Annabel Cotton, said she was delighted to see such a high calibre group of New Zealanders committed to making the financial adviser industry more professional.
"This multi-skilled committee brings together a wealth of local and overseas knowledge and experience in the financial sector, covering law, governance, banking, insurance, stock broking, funds management, commerce, education and consumer advocacy," she said.
The independent committee will develop the code of conduct that authorised financial advisers will be legally obliged to comply with from late 2010. "The code will commit the adviser industry to do business in a professional and ethical manner. It will also determine the qualifications and level of experience they need to be authorised advisers."
Legislation requires the Code Committee to have between seven and 11 members. Seven of the new appointments are for three-year terms; the other three members will serve one year. "This reflects the fact that initial set-up of the code will be the bulk of the work. It also gives us the flexibility to vary membership to suit future requirements," Annabel Cotton said.
Public feedback recently provided in response to the Securities Commission's staff paper on adviser competence will be considered by the Committee.
The code is expected to be drafted by early 2010.
The Code Committee members are:
Three-year appointments:
Sue Brown, Auckland/Wellington
Partner, DLA Phillips Fox
General Counsel, Corporate at Public Trust
25 years experience in financial services law in New Zealand,
Australia and the UK.
Pip Dunphy, Auckland
Independent director
Current positions include: Chair, Mint Asset Management; Director, NZ Post; Director, Crown Health Financing Agency; Director, Accident Compensation Corporation; Council member, AUT and Monetary Policy Adviser to the Governor of the Reserve Bank.
Shane Edmond, Christchurch
Manager of Retail Broking, Forsyth Barr Ltd
22 years experience in stockbroking/investment
adviser industry.
Liz Koh, Paraparaumu (Wellington)
Director of Moneymax (financial planners)
Experience includes financial planning, general management, management consulting, strategic planning, business research
and financial writing.
Patrick Middleton, Auckland
Head of Wealth Management, Westpac
Nine years financial planning and investment management experience and 10 years in banking.
David Russell, Wellington
Consumer issues consultant and director
Directorships include: Chair, Telecommunications Dispute Resolution Council and member of the Real Estate Agents Licensing Board.
Former Chief Executive of the Consumers' Institute.
Michael Staal, Auckland
Joint Managing Director of:
New Zealand Financial Planning Company Limited, NZFP Asset Management Limited and
Auckland Financial Services Limited.
One-year appointments:
Ross Butler, Nelson
Professional and independent director
Directorships include: Chairman, Mortgagelink (mortgage brokers) and director Triplejump (life insurance advisers Former Executive Chair and Director of GIO Financial Services Australia and chair of the Institute of Financial Advisers of New Zealand (IFA).
David Ireland, Wellington
Partner, Kensington Swan
18 years experience in financial services law Chair, Association of Superannuation Funds of New Zealand.
Gary Young, Auckland
Chief Executive, Insurance Brokers Association of New Zealand Inc (IBANZ)
27 years experience in insurance broking.
In June Commission staff released a consultation paper outlining proposals for the regulation of financial advisers, to take effect in late 2010.
The Staff Paper on Regulating and Supervising Financial Advisers set out the practical implementation of the Financial Advisers Act 2008. It discusses the systems, procedures and capacity businesses will need to have in place to fulfil their obligations under the law. Public submissions closed on 30 July.
The paper divides financial advisers into three broad categories:
The level of systems, procedures and capacity adviser businesses will need to have in place to be able to meet their obligations under the law will depend on the on the category the adviser belongs to. Individual competence, organizational capacity and adviser's conduct are recognised as some of the key matters any adviser, whether solo or working within a business, will need to consider and address when streamlining and updating their existing set up or setting up and documenting their systems and controls.
The paper discusses the idea of a risk-based assessment of advisers or businesses that will be subject to supervision and how the Commission proposes to supervise authorised financial advisers and QFEs. As the Commission will be responsible for authorising and assigning the status of QFE to adviser businesses, the paper discusses the qualifications of a QFE and how the Commission intends to monitor them specifically.
"These proposals are relevant to thousands of people working in the financial sector, affecting all businesses that give recommendations, opinions or advice about investments, insurance or credit products," Director of Supervision Angus Dale-Jones says. "The key objective is to promote high standards of professionalism and integrity for all financial advisers."
The paper is published on the Commission's website www.seccom.govt.nz.
In its Cycle 9 review of financial statements the Securities Commission continued to find inadequacies in matters that were previously alerted to issuers.
In Cycle 9 the Commission reviewed financial statements of 24 issuers with balance dates between March and December 2008.
Matters that issuers need to pay particular attention to when preparing their interim and full year financial statements include:
Other significant matters that require attention are:
"The Commission understands the difficulties issuers face in reporting in the current market environment. It is more likely that issuers will have to review their assets for impairment and may face difficulties determining the underlying assumptions and estimates that are required to assess asset values. Transparent financial statements require disclosure of all significant assumptions, estimates and management judgements," Chairman Jane Diplock says. "Full disclosure is vital for market confidence."
The Commission will publish its conclusions shortly in its Cycle 9 report.
During June and July the Commission ran an online campaign to promote its Look Learn Invest website. It aimed to help investors get a better understanding about investing and the associated importance of risk and return. The website www.looklearninvest.org.nz has been updated in the context of the current environment.
The Commission's Statement of Intent (SOI) for 2009-2012 was tabled in the House on 29 May. It sets out the Commission's immediate as well its medium-term priorities and how it intends achieve these.
The SOI is available on the Commission's website www.seccom.govt.nz
In June the Commission issued a statement encouraging ING investors to carefully consider a purchase offer put to them. ING offered to purchase all units from its investors in its Diversified Yield and Regular Income funds at set prices and subject to conditions. In particular, investors who accepted the offer had to agree to release ING and related entities, and investment advisers, from all legal claims in connection with the funds.
The Commission understood investors faced a difficult decision on whether or not to accept the offer because the outcome was uncertain. The value of any legal claims they may have could not be quantified at the time and, as noted in the independent expert's report sent out with the offer, the potential future value of the units in the funds was extremely difficult to calculate.
The Commission advised investors to seek independent legal and/or financial advice if they did not understand the proposal or were unsure which option to take. In this case "independent" means an adviser who does not stand to benefit from the release from legal claims.
The Commission received a large number of complaints from investors and reviewed the proposal documents sent out by ING. An offer to purchase securities is not subject to the Securities Act. However, it is subject to the general dealing misconduct prohibition in section 13 of the Securities Markets Act, which prohibits conduct that is likely to mislead or deceive. Based on available information, the Commission did not consider that the offer was misleading or deceptive. It therefore had no grounds on which to take any action in respect of the proposal. It is not within the Commission's authority to review the merits or fairness of any offer.
The Financial Crisis Advisory Group (FCAG), of which the Commission Chairman Jane Diplock is a member, has published its recommendations relating to financial reporting and standards setting.
The group was set up in December 2008 by the International Accounting Standards Board and the United States Financial Accounting Standards Board to advise the boards about standards setting implications of the global financial crisis and potential changes to the global regulatory environment.
"The report highlights the importance to financial stability of high quality accounting standards, faithfully applied with rigorous independent audit. This is critical to restoring market confidence and ensuring economic growth," Ms Diplock says.
"While accounting practices were not a main cause of the financial crisis, they have an important part to play in the recovery."
"Because of the global nature of financial markets, the report emphasises the need for a uniform set of internationally recognised accounting standards. It urges all countries to adopt or converge with the International Financial Reporting Standards (IFRS), which New Zealand has already adopted."
The report sets out four principles for standards setting: effective financial reporting, limitations of financial reporting, convergence of accounting standards and standards-setter independence and accountability.
The group will meet in December to review progress made on its recommendations.