Continuous disclosure required
Thursday, July 12th 2007, 9:24PM
by Philip Macalister
The Bridgecorp collapse continues to dominate the news and so it should too.
If there is one thing to come from this collapse it has to be around disclosure. I believe it is imperative the finance companies move to some form of continuous disclosure regime.
In the Provincial collapse it is clear that material changes to the company weren't disclosed to the market and the same picture is emerging with Bridgecorp.
I am totally aghast that the Securities Commission can suspend a prospectus, but not tell anyone till the company has had a chance to respond.
Yes, the commission maybe acting as the law is written, so the criticism is not with them. Rather it needs to have more power to act and inform the market.
Boy I wouldn't like to be someone sitting at the commission, having suspended a prospectus and not being able to tell anyone. How could you sleep at night?
The rules are crazy, let's see them changed.
One of the themes of the mainstream media has been how much have investors lost and when will they see any of their money.
Comments that the full half a billion dollars are lost are silly and irresponsible. I have no idea how much investors get back, but a guess is that it will be a better outcome than other collapses.
Perhaps the biggest concern is around advisers. Many comments I have received indicate that the same advisers who put clients into Provincial also used Bridgecorp. I suspect there are some advisers sweating profusely at the moment as they are experiencing their second failure in a year.
Were any lessons learnt last time?
I was interested to note a comment that all members of the IFA have to disclose commissions received to their clients. Plenty of the plans I have seen paper over this disclosure and also one would have to raise the question that commission disclosure can be a little irrelevant if there is no benchmark to compare against.
There are plenty more questions about some advisers and how they built portfolios which optimised for their commission incomes as much as for investors' interests.
Stories we have heard go like this. Advisers have created 'portfolios' so that a debenture matures every six months and is reinvested, meaning they get a continuous flow of commissions year after year.
There are many stories telling of firms like Bridgecorp and Provincial incentivising advisers to sell their products.
Meanwhile financial planners have typically ignored the NZDX since a new bond offering only pays one commission (0.75% to 1% typically) which may not mature for five years.
If this has been happening then the whole advisory industry will suffer.
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While I agree with the tenor of your blog about the need for continuous disclosure by finance companies (debt issuers), I think you have missed an important point about the suspension of prospectuses. Suspension on the prospectus means that all new deposits are placed into a trust account; I assume the same must apply to rolled over reinvestments. So no new investor is penalised by not knowing about the suspension. Existing investors are in exactly the same position as they would have been if they had known - locked in. No-one actually suffers from the non-notification of a suspension.
The policy reason for the non-notification of a suspension is presumably to allow the issuer either a "right of appeal" or a chance to fix things up. The suspension is limited in time, and ends either with the suspension being lifted or the prospectus cancelled.
A subsequent issue is if the issuer fixes things up and the suspension is withdrawn, is there then an obligation on the Securities Commission or the issuer to notify investors that the prospectus was temporarily suspended, but the breach has now been rectified?
- Murray Weatherston
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