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How Do We Regulate Retail Clients Notes

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How are we regulating? Disclosure - Retail Clients Offering Financial Products other than securities Introduction

* Not all instruments acquired/traded on financial markets are securities ftpo Ch 6D - the offer and issue of other instruments are subject to a separate regulatory regime in Pt 7.8 which includes mandatory disclosure requirements which arise when FPs are offered to retail clients. Structure of Pt 7.9

* The regulatory regime in Pt 7.9 aims to protect members of the public who acquire FPs and other securities by requiring the disclosure of certain material information in connection with the issue/sale of FPs, and ensuring as far as possible that the information is provided in written form before the decision to acquire a product is made. It also: o Encourages the presentation of that information in a way enabling those acquiring FPs to compare functionally similar products o Provides ongoing disclosure to holders of products o Restricts advertising and 'hawking' o Allows cooling off in connection with the acquisition of certain FPs

* Though there are parallels in the two securities disclosure regimes, the required disclosure is different - this may reflect the greater emphasis in Pt 7.9 on the use of disclosure to facilitate individual product selection rather than providing corporate information to enable markets to be informed o In many respects acquirers of products within Pt 7.8 are consumers rather than investors. o The EM says that this part "seeks to balance the need for the purchaser to have sufficient information to make an informed decision and compare products against the concern that they may be provided with more information than they can comprehend". It thus takes a middle ground between full due diligence in the fundraising provisions and the 'Key Features Statement' approach in superannuation. It takes a directed disclosure approach supplemented by other information known to the issuer/seller that may materially influence a retail client's decision to acquire the product

* [Scope] The product disclosure regime applies to offers of all types of FPs other than securities and government bonds o FPs are defined through the functional definition in s 763B-E and have a wide-ranging breadth and include products with little or no functional equivalence. o [Limitations] There are two significant limitations:
? It doesn't apply to securities (as defined in s 761A) or government bonds

It only applies to FPs issued in the course of business of issuing financial products
[Complexity] The disclosure requirements in Pt 7.9 are complex and highly specific in their application. They vary depending on the type of financial product on offer and the principal statutory requirements have been extensively modified through regulations and ASICCOs (which sometimes include substantive amendments to the principal law) o Requirements for offers of financial products include requirements as to:
? Additional and Continuous Disclosure
? Periodic reporting
? Dealing with application moneys, Transaction confirmation, Dispute Resolution, Advertising and Cooling off*

Financial products other than securities

* The two abovementioned regimes are quite different - different conduct triggers obligations to disclose, different exemptions from the disclosure requirements exist, the form and content of the required disclosure is different and the process in accordance with which offers are made is different (Woodcroft v Timbercorp) o Due to the issues faced in differentiating between instruments in either regimes in the LEPO Case (SFE v ASX), CASAC recommended a 'core regulatory approach' for all financial markets and instruments traded on them ftpo clarifying the law and reducing uncertainty/compliance costs, reducing gaps, facilitating development of new products etc.
? Though this recommendation was adopted in spirit to the regulation of financial intermediaries and provision of financial advice, it didn't do so in relation to disclosure in connection with offers of financial products. Options and warrants

* Some options and warrants are securities and therefore fall within Ch 6 - others are derivatives and therefore fall within Pt 7.9. o [Scope] Generally speaking, exchange-traded options and other options are derivatives except
? Options to acquire shares/debentures by way of issue which are within the defn of security
? Options over tangible property and other options prescribed by the regs o [Options over issued shares] can be securities or derivatives
? To fall within s 761A(c) the instrument has to confer L&E interest in issued shares or debentures. Thus covered warrants may fall within this categories.

* But some warrants are expressly excluded by Ch 6D and may therefore fall within this?


Offers of options over FPs other than securities is governed by s 1011C which states that ftpo PDS requirements, an offer of an option over an FP isn't taken to be an offer of the underlying FP.

* Further, the grant of an option without an offer of it is taken to be an offer of the option and an offer to grant an option is taken to be an offer to issue an FP constituted by the option.

Issued in the course of business

* This is a limitation on Pt 7.9 in s 1010B(1) in relation to: "a financial product that is not or was not issued, or that will not be issued, in the course of business of issuing financial products" o S 19: A reference to a business of a particular kind includes a reference to a business of that kind that is part of, or carried in conjunction with, any other business. o It is likely that there must be elements of system, repetition and continuity Application to arrangements with different 'components'

* FPs can consist of separate components of parts (even provided by different providers) o Sometimes different components will be aggregated to form a financial product
? S 761B provides that if it is reasonable to assume that the parties to a series of separate arrangements regard them as constituting a single scheme, and together those separate arrangements would constitute an FP, they should be viewed as such o Others may have a financial product as a component of a broader facility
? S 762B: if an FP is a component of a facility with other components, Ch 7 only applies in relation to the facility to the extent it consists of the component that is a financial product (for e.g. a loan to acquire derivatives would be required to comply with Ch 7 only irt the offer of derivatives)
? S 763E: Where the component in the nature of a financial product is only incidental to the broader facility, Ch 7 may be excluded. Consider International Litigation Partners where an LFA was considered to be an FP and considered by the majority not to be incidental to the FP purpose The requirement to provide a PDS

* Pt 7.9 Div 2 requires a PDS be provided to a person who before they acquire a financial product where that person is a retail client. The circumstances in which a retail client must be given a PDS before acquiring a financial product are: o Recommendation situation - where, in the course of providing personal financial advice to the client, a regulated person has

recommended that the client acquire the FP, and the acquisition is either by way of issue to the client, or by way of transfer to the client under a regulated secondary sale to which the PDS requirements apply (s 1012A) o Issue situation - where a regulated person offers to issue, or arrange the issue of, or issues a FP to the client (s 1012B) o Sale situation where a regulated person offers to sell, or sells an FP to a client in circumstances amounting to an off-market sale by a controller of the issuer, a sale amounting to an indirect issue of the FP or a sale amounting to an indirect off-market sale by the controller of the issuer (s 1012C) Regulated persons

* [Scope] The obligation to provide a PDS is triggered where the conduct is engaged in by a regulated person which includes (s 1011B): o The issuer of the FP o The seller of the FP (in a sale amounting to an off-market sale by a controller of the issuer, a sale amounting to an indirect issue of the FP or a sale amounting to an indirect off-market sale by the controller of the issuer) o Certain financial intermediaries who may be involved in the transaction (Any AFSL or AR of AFSL)

* [Who must provide]
o In a recommendation situation the obligation to provide rests on the person providing the advice o In an issue situation the obligation can fall on:
? A regulated person offering to issue a FP
? A regulated person offering to arrange the issue of FP or issuing the FP o In a sale situation the obligation arises
? where a regulated person offers to sell the FP; or
? Where a client makes an offer to a regulated person to acquire the FP that the regulated person proposes to accept Recommendation situation

* S 1012A imposes an obligation to provide a PDS when the person provides personal advice to a retail client that includes a recommendation that the client acquire a particular FP o This is primarily directed at ensuring that, when a financial adviser recommends particular products to clients, those clients receive the PDSs for the products as part of the advice process. o The PDS will be prepared and supplied by the issuer/seller of the products and given to the adviser Issue situation

* S 1012B imposes an obligation on a regulated person to provide a PDS in connection with a primary offer/issue of an FP to a retail client. The obligation arises where the person:

Offers to issue the financial product to the client (s 1012B(3)(a)(i) Offers to arrange of the FP to the client (s 1012B(3)(a)(ii)) Issues the FP to the client (s 1012B(3)(a)(iii)); or Accepts an offer from the client to acquire the FP by way of an issue (s 1012B(4)0
? But not if the regulated person reasonably believes the client has already received an up-to-date P{DS for the product (s 1012D(1)) When is a person treated as having issued a financial product? (s 761E) o A product is issued when it is first issued, granted or otherwise made available to the person (s 761E(2)) The issuer of the product is the person who is responsible to the holder of the product from time to time 'for the obligation owed under the terms of the facility that is the product' (s 761E(4)) o o o o



Sale situation

* Most secondary sales of FPs do not require disclosure through a PDS except: o Where the seller controls the issue of the FP, and the sale isn't made on a licensed market [if it is not quoted or the offer is made offmarket: s 1012C(5)]
o Where FPs issued without a PDS are offered for sale within 12 months of issue and they were either:
? Issued or acquired ftpo of the subscriber 'selling or transferring the product, or granting/issuing/ transferring interests in, or options or warrants, over the product' (s 1012C(5) o Where FPs sold by a controller off-market without a PDS are offered for resale within 12 months, and the FPs were sold or acquired with the purpose of the acquirer 'selling or transferring the product....the product (s 1012C(8)) Retail and wholesale clients

* The obligation to provide a PDS is triggered only if the person to whom the offer is made is a retail client - this depends on the particular FP.

* A person who is not a retail client is a retail client

* In respect of all products except defined classes of GI products (MV, H&C etc.) and Superannuation and RSA products a person is a retail client unless o [The price] of the product exceeds the prescribed amount of
$500,000 [s 761G(7)]
o The product is provided for use in connection with a business that is not a [small business]
? That is a business employing less than 100 people if the business is or includes manufacturing goods or less than 20 otherwise) o The person is a [high net worth investor]

If they have assets of $2.5m [including through a company controlled by them and income or has a gross income for each of the last 2 financial years of at least $250,000 o The person is an [experienced investor] dealing with an [AFS licensee]
? Here the licensee must be satisfied on RG that the client has previous experience in using FS and investing in FPs that allows the client to assess the merits of the product/service, the value of the product/service and the risks associated with it, the client's own information needs and the adequacy of information given by the licensee and product issuer
? The licensee must give the client a written statement of reasons for being satisfied as to these matters before or at the time when the product/advice is provided and the client has to sign it o The person is a [professional investor]
? That is an AFSL holder, a body regulated by APRA, a super/trust entity with >$10m in assets o The person is an [RBC of a wholesale investor]Jurisdictional connection

* The obligation to provide a PDS doesn't apply unless the offers or recommendations under s 1012A-C have the requisite jurisdictional nexus of, ordinarily, the offer or recommendation being received in Australia Exemptions from the PDS requirement

* Aside from the requirement that the FP be issued in the course of business of providing financial products a number of exemptions exist: o S 1012D contains particular exemptions applying in specific situations o S 1012DAA covers rights issued for quoted securities o S 1012DA covers secondary sales of quoted securities o S 1012E contains exemptions for small scale personal offers of interests in RMIS General exemptions

* The key exemptions in s 1012D are: o The client has already received a PDS - e.g. where they get it from their adviser/broker from a recommendation they don't need another one when they buy it (s 1021D(1)) o All relevant information is already known to the offeree - this applies if because of s 1013F no information would be required to be included in the PDS (s 1012D(2B) o The offer is declined (s 1012D(9)) o Existing holders - a PDS needn't be provided if s 1012D(3)
? The client holds an FP of the same kind (as defined in s 1012D(10) and
? The regulated person believes on RG that the client has received, or has and knows they have access to, information





o o

Required to be disclosed through a PDS and Provided in accordance with the continuous disclosure and requirements No consideration - a PDS isn't required for a recommendation, issue or sale situation involving the issue/sale of interests in an RMIS (other than options where the is a further requirement that the exercise of the option must be at not cost (s 1012D(6)) for no consideration (s 1012D(5). Takeovers - where interests in RMIS, or options to acquire shares/debentures by way of transfer, are offered as part of the consideration in a takeover bid, and the offer is accompanied by a bidder's statement prepared in accordance with Ch 6 (s 1012D(7)) Exempt bodies Client associated with an RMIS - a recommendation/issue/sale situation irt interests in an RMIS doesn't require a PDS if the client is a 'senior manager' of the RE or an RBC, or a close relative of such an officer, or is a BC controlled by any such person (s 1012D(9A))

Rights issue of quoted financial products

* S 1012DAA is parallel to s 708AA and provides an exemption from the mandatory disclosure requirements irt certain offers made in connection with a rights issue of FPs quoted on a prescribed financial markets (incl. ASX) o [No reliance if]
? A body has not complied with the periodic and continuous disclosure requirements and the applicable listing rules
? If the securities have been suspended for quotation for more than 5 days in the 12 months before the offer o [Requirements of the notice]
? S 1012DAA(2)(f) provides that the issuer of the product must give a notice complying with s 12DAA(7) within the 24 hours before the offer is made stating that the body has complied with Ch 2M and continuous disclosure requirement. It must also state the potential effect of the rights issue on control of the body and consequences of that effect o [Contents of the notice] The notice provided in accordance with s 1012DAA(7) must include any excluded information which is:
? Information that a person would reasonably require ftpo making a decision, as a retail investor, whether to acquire the relevant product that has not been disclosed by the body under the CD rules

* For e.g. information that a body listed on the ASX hasn't disclosed because the information is within ASXLR r 3.1A.

* But excluded information need only be disclosed to the extent to which it is reasonable for a person considering, as a retail client, whether to acquire the

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