NZX has released its proposed new Listing Rules, which seek to reduce complexity and promote market activity. One of the changes to the rules is to introduce bespoke rules for managed investment schemes. This will streamline the listing rules for funds and facilitate funds being listed on the NZX.
There are three kinds of funds currently listed on the NZX:
- Listed investment companies, which are close-ended funds listed as companies. There are six investment companies, which have their primary listing on the LSX and their secondary listing on the NZX. There are also three New Zealand investment companies listed on the NZX.
- Exchange traded funds (ETFs), which are managed investment schemes that invest in listed financial products. There are 23 exchange traded funds listed on the NZX, all of which are open-ended and managed by Smartshares, a wholly owned subsidiary of NZX.
- Listed unit trusts: There are also other managed investment schemes which are structured as close-ended unit trusts, such as the Fonterra Shareholders Fund and Goodman Property Trust.
In respect of listed investment companies, these companies issue equity securities. The company is the relevant "issuer" under the listing rules, and it is generally appropriate for them to be governed under the Listing Rules applying to equity securities.
The position is slightly more complex for ETFs and unit trusts, as the current Listing Rules do not contain specific rules for these funds. This means that all the general Main Board Listing Rules apply, which can lead to odd outcomes in some circumstances, as the requirements of the Listing Rules and the Financial Markets Conduct Act 2013 (FMCA) for such funds do not always align. Some of these issuers have had to apply for waivers, and some of them (including all of the exchange traded funds) have non-standard designations to flag that they do not comply with all of the requirements of the listing rules.
Listed funds globally
The global market for funds and in particular ETFs is growing in huge scale and sophistication, with about 7000 products available globally. The ETF industry broke new records in terms of global assets under management, reaching USD4.4 trillion in 2017, up from USD417 billion in 2005.1
ETFs are popular globally as they are accessible to a wide audience, have low fees and enable investors to diversify their investments easily. Fees in New Zealand are generally reducing to be more in line with overseas funds, reflecting the development of the market.
New Listing Rules
The new Listing Rules contain specific eligibility criteria for applications to list "Fund Securities", which is defined as a "managed investment product" in relation to a "Managed Investment Scheme", under the FMCA. These include that the applicant (being the fund) must have a governing document that meets the requirements of the FMCA. The anticipated market value of the Fund Securities must be at least $10m. If the fund is a close-ended fund, then spread and free-float requirements apply, being that at least 20% of the Fund Securities must be held by at least 100 holders.
Once listed, the fund will be primarily governed by the FMCA, as the key governance arrangements for funds relate to the investment managers and external supervisors. At least one member of the board of the manager will be required to be ordinarily resident in New Zealand or Australia.
In terms of reporting, this means that the licensed fund manager will only be required to prepare quarterly fund updates and the annual report required by the FMCA and Financial Markets Conduct Regulations 2014. The Listing Rules will not contain any additional reporting requirements.
In terms of continuous disclosure, the information required to be released to the public under the FMCA and regulations (including any event-based disclosure requirements) will need to be uploaded to MAP. Issuers will also be asked to consider a public release of daily NTA. Continuous issuers of funds may announce issues, acquisition or redemptions of funds on a consistent monthly basis.
The new Listing Rules explicitly state that certain Listing Rules do not apply to issuers of Fund Securities. These include the rules relating to major transactions, related parties and voting rights specifically applying to issuers of equity securities. However, an issuer of funds that is not a continuous issuer, must issue, acquire and redeem further Fund Securities as if they were equity securities carrying votes, and in accordance with those applicable rules.
If a fund is unable to comply with all the applicable listing rules, it may still be listed at the NZX's sole discretion as a "non-standard" listing.
We will be hosting a CPD session for our clients at the very start of December 2018 to consider the key changes and provide practical guidance on the updated Listing Rules and final NZX Guidance Notes. Please contact us if you are interested in attending or have any questions in the meantime.