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Brief Counsel

A Guide to the Securities Trustees and Statutory Supervisors Bill

21 December 2009

The Securities Trustees and Statutory Supervisors Bill (the Bill), introduced into the House last week, will require trustees, statutory supervisors and unit trustees to be licensed by the Securities Commission (automatic statutory approval will be removed).

At a broad level, the Bill marks another milestone in the continuing evolution of the corporate trustee’s role, which originated in contract as the bondholders’ representative.  Increasingly trustees are perceived as frontline regulators of the state (with attendant statutory obligations), and the licensing framework introduced by the Bill builds on that theme.

The elephant in the room, which the Bill studiously ignores and may even aggravate, is the dynamic created by the changing nature of the trustee-issuer relationship.  That is the trustee, as frontline regulator, is in the unusual (and potentially unhealthy) position of having to negotiate its regulatory mandate and its remuneration with the very party it is charged with regulating, namely the issuer.

The question over the medium term will be whether, to resolve this tension, the trustee’s role will need to evolve further away from its contractual genesis, in the form of greater statutory powers vis-à-vis the issuer.  In the meantime the trustee will need to answer to two masters (security holders and the Commission) rather than one, while competing with other licensed operators to negotiate and secure their remuneration and mandate from the issuer.

In this Brief Counsel we set out the key features of the Bill but leave the broader, more philosophical questions, for another day.

Licensing regime

The basics

Licences will be issued for a term of up to five years and their scope may be tailored to ensure they are ‘fit for purpose’.  Temporary licences will be available for existing trustees and supervisors, providing up to nine months respite after commencement of the legislation.

The Commission will monitor compliance on an ongoing basis.  Like its counterpart, the Insurance (Prudential Supervision) Bill, the Bill takes a light handed approach; the onus being largely on licence holders to self-monitor and comply with various reporting requirements.  If things go awry, the Commission has powers to step in. 

Retirement village statutory supervisors come within the Bill’s ambit but will be subject to diluted oversight in recognition of the separate regulatory regime created by the Retirement Villages Act 2003.

Trustees and supervisors will be required to pay for their regulation through a levy to meet the Commission’s costs. 

Ongoing reporting

Those caught by the licensing regime will need to comply with a number of ongoing reporting requirements, including to:

  • provide six-monthly reports to the Commission detailing, among other things, compliance with the terms of their licence and with the deed entered into with the issuer they supervise

  • report actual or potential breaches of their obligations, and any material circumstantial changes that may impact on the terms of their licence

  • report actual or potential breaches by the issuer they supervise of the issuer’s obligations (and set out the remedial steps to be taken)

  • report to the Commission when any issuer they supervise is likely to become insolvent (again, setting out the remedial steps to be taken), and

  • attest, at the Commission’s request, as to the issuer’s compliance with their “issuer obligations”.

A new framework

The licensing framework will replace the existing systems of approval under the Securities Act (for trustees and statutory supervisors), the Unit Trusts Act (for unit trustees) and the Retirement Villages Act (for statutory supervisors of retirement villages).  In one sense, this reflects both regulation and deregulation at the same time – on the one hand, trustees and supervisors will need to be licensed and comply with ongoing requirements (the regulation); but on the other, the preferred position existing trustees enjoy will be removed, opening the way for others to enter the market (the deregulation).

The Bill provides the Commission with broad discretion to tailor licences to the circumstances of each applicant so that they are ‘fit for purpose’.  Before a licence is issued, the Commission must assess (in any manner set by regulation) the applicant’s financial resources, governance structure and various other matters.  Anyone can apply, but clearly not everyone would get over the line.  The Commission can also impose licensing conditions, for example limiting the number of appointments a trustee or supervisor can hold concurrently.

Licence holders must, at least six months before their licence is due to expire, either apply for a new one or notify the issuer they supervise that no application will be made.

Although termination of a licence does not automatically terminate the person’s appointment as a trustee or supervisor, continuing to hold that appointment without obtaining a new licence will render the person in breach of the Act.

In the event that the Commission rejects an application for a new licence, the Commission can appoint a replacement trustee or supervisor to hold office for up to three months.  Before the end of that period the issuer must either appoint a (licensed) replacement or confirm the temporary appointment on a continuing basis.

It is worth noting that – by virtue of an amendment the Bill makes to the Financial Service Providers (Registration and Dispute Resolution) Act – trustees and supervisors will need to be licensed by the Commission before they can be registered as a financial service provider.

Reporting requirements

Once licensed, trustees and supervisors will need to comply with a number of ongoing reporting requirements.  A six-monthly report, containing information about the licence holder’s compliance with the terms of their trust deed (or deed of participation, as the case may be), and with the terms of their licence, will need to be lodged with the Commission.1

Licence holders must also report to the Commission if they believe that:

  • they have breached, may have breached, or are likely to breach a “trustee obligation”2 

  • a “material change of circumstances” (adversely affecting the holder’s ability to perform their functions or resulting in the holder no longer meeting the licensing criteria) has occurred, may have occurred, or is likely to occur, or

  • the information on which the Commission based its decision to issue or vary the holder’s licence was, or may have been, wrong, misleading or incomplete.

Upon receiving such a report the Commission can commence an investigation and, if it agrees with the holder, require the holder to submit an action plan setting out how the mischief will be remedied or avoided.  The Commission can then approve the plan, require the holder to amend and resubmit it or reject it altogether (in which case the holder will be given a direction and/or the terms of their licence will be varied). 

Commission decisions to vary a licence can be reviewed (on paper or at a hearing); and if the holder is still dissatisfied with the outcome, it can be appealed to the High Court.

Penalties

In certain cases a licence holder in breach of its trustee obligations may be required to pay a pecuniary penalty to the Crown and/or compensation to security holders.  In each case, an order of the High Court – on the application of the Commission – is required.

Supervision of issuers

The Commission can require a trustee or supervisor to attest as to whether it is satisfied that an issuer has not breached an “issuer obligation” (i.e. the issuer equivalent of a “trustee obligation”, see footnote 2) in a material respect.  If unable to do so, the trustee or supervisor must report details of the issuer’s breach or possible breach to the Commission.

The Bill also imposes on trustees and supervisors a reporting duty in the event that an issuer has breached, may have breached or is likely to breach an issuer obligation.  This runs parallel to the reporting duty mentioned above (where it is the trustee or supervisor that is in breach, rather than the issuer).  Again, the report must set out any steps the trustee or supervisor intends to take to remedy or avoid the breach in question.

Where a trustee or supervisor reasonably forms the opinion that an issuer is, or is likely to be, insolvent, the information on which that opinion was formed must be disclosed to the Commission, together with the steps proposed to be taken in response.  The Commission can also require information to be provided in respect of the issuer (note this is one of the few provisions that applies in respect of retirement village statutory supervisors too).

Investor protection

If satisfied that there is a significant risk that security holders’ interests will be materially prejudiced – and that the trustee or supervisor has failed to act to eliminate or reduce the risk, or the case is an urgent one – the Commission can give a direction to the trustee or supervisor to take action. 

Existing investor protection order making powers under the Securities Act3 and Unit Trusts Act4 have been carried across into the Bill – albeit on application of the Commission, rather than of a trustee or supervisor.  (The Commission’s power to petition the High Court arises when either investor interests are at significant risk of being materially prejudiced, or the provisions of the trust deed/deed of participation are no longer adequate to protect those interests and the trustee or supervisor has failed to petition the Court of their own volition).

Use of Commission’s existing powers

The Bill makes clear that the Commission can draw on a number of its existing powers under, for example, the Securities Act in performing its functions under the Bill.  The same goes for information gathered in the exercise of its functions under other enactments – although there are confidentiality provisions that apply in this context. 

Licensing levy

Licence holders will be required to pay a levy to meet the cost (in whole or in part) of the Commission’s functions under the Bill.  This will be imposed by regulations.

Transitional provisions

The Bill includes a transitional regime for existing trustees or supervisors, which are deemed to have a temporary licence that covers their current appointment(s).5  Temporary licences expire 9 months after commencement of the Bill, giving trustees and supervisors time to procure a (full) licence (applications by temporary licence holders must be lodged within 1 month following the Bill’s commencement).

Consequential amendments

A number of Securities Act mechanisms – like management banning orders – have been carried across into the Bill.

For further information please contact Frank McLaughlin, Tim Williams, Penny Sheerin or Nick Letham (retirement villages).

Footnote

  1. Licence holders may initially be given extra breathing space– the first report being due between 6 and 12 months after a licence is issued (as set by the Commission).
  2. A trustee obligation is an obligation imposed on a trustee or supervisor under a trust deed or deed of participation relating to a security in respect of which the holder is the trustee or supervisor; under the Bill; under a court order relating to a supervised security; or under Part 5D of the Reserve Bank of New Zealand Act, the Securities Act or the Unit Trusts Act.
  3. See section 49 of the Securities Act 1978
  4. See section 19A of the Unit Trusts Act 1960
  5. If a trustee or supervisor holds a temporary licence and wishes to accept an appointment in respect of a different security, an application must be made under clause 15 of the Bill for a licence that covers the new security – whether or not the new security is within the scope of an approval under the existing regime.

Contacts