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Binding Rulings on Securities Law
A Discussion Paper

CHAPTER 1    INTRODUCTION

1.1

Under its current statutory mandate, the New Zealand Securities Commission ("the Commission") may express authoritative opinions on the application of securities law for the purpose of exercising enforcement and compliance powers under the Securities Act 1978, for example, for the suspension and prohibition of investment statements, the suspension and cancellation of registered prospectuses, for the purpose of granting exemptions from the securities law, determining appeals from decisions of the Registrar of Companies ("the Registrar"), and various other matters. Decisions of the Commission are final and binding on the parties to the decision (see section 26(1) of the Securities Act), subject to appeal or judicial review where available.

1.2

The Commission is seeking comments from interested parties on whether it would be appropriate to extend its statutory functions to include a power to make binding rulings on questions of interpretation of the securities law more generally. Such a function may be thought to fit appropriately within the Commission's current purpose and functions under the Securities Act. The Commission's Statement of Purpose provides as follows:

"Our purpose is to foster capital investment in New Zealand by:

• Promoting the efficiency of New Zealand securities markets,
• Enhancing the integrity of these markets,
• Promoting the cost-effective regulation of these markets,
• Strengthening public and institutional confidence in these markets, both in New Zealand and overseas.

To achieve this purpose we direct our work to promoting:

• Good standards of disclosure,
• Reliable and ethical procedures for effecting transactions,
• Flexibility in development of best regulatory practice,
• Sound principles for market regulation,
• Cost-effective rules of law,
• Compliance with the law,
• Good working relationships with overseas regulators,
• Public understanding of the law and practices of securities."

1.3

There are a number of practitioners who have suggested to the Commission on an informal basis that they would welcome the opportunity of being able to obtain rulings for their clients from the Commission on matters of securities law. They argue that a binding rulings function would be of value to market participants and to investors. They believe it would provide a speedy, authoritative and cost-effective method of increasing certainty in respect of many aspects of securities law.

1.4

This paper invites comment on the utility of such a rulings power and, for this purpose, describes one possible scheme for the making of binding rulings. Under this scheme, the Commission would be empowered to rule on the interpretation of securities law, in a manner which would bind the parties to the decision, including the Commission. The Registrar, who is the principal enforcement agent of securities law, would also be bound by rulings made under this scheme. Investors would find themselves also "bound", firstly as a matter of contract where a ruling affected the nature and terms of the offer documents. Secondly, safe harbours for offerors properly acting in reliance on a ruling would affect the availability of investors' remedies in respect of any matter covered by a ruling. The Illegal Contracts Act 1970 would be available to provide relief to investors if a securities contract became statutorily voided as a result of an overturned ruling.

1.5

It is suggested that, as a result of obtaining a binding ruling under the scheme, persons raising funds or promoting investments would be able to conduct their affairs with greater certainty as to the interpretation of the securities law in respect of their rights and duties under a particular transaction.

1.6

Investors might also benefit from this increased certainty. It is suggested that they would be informed in any securities offer document, and therefore prior to subscribing for an investment product, whether the issuer or any promoter has relied on any ruling by the Commission in making the offer. Consideration would need to be given as to how, or in what circumstances, obligations should be imposed on offerors in relation to disclosing the nature of a ruling that the securities law did not apply to an offer.

1.7

This discussion paper sets out some of the key features of such a binding rulings scheme. These key features may be summarised as follows:

• The Commission could make binding rulings in respect of questions on the application of securities law. Rulings would usually be made at the request of a person with obligations, or potential obligations, under the securities law, but a request might even be made by a prospective investor.

• The Commission could issue rulings on its own initiative. This would be in addition to any practice notes or policy statements, which the Commission from time to time may issue in accordance with its present functions.

• The Commission could amend or revoke rulings.

• Rulings would, when made on request, be fully cost recovered on a similar basis to the fee system currently in place for exemptions.

• The Commission could decline to make a ruling. The Commission would have a broad discretion to determine whether it was appropriate in the circumstances to rule upon a particular question.

• It is anticipated that only important compliance questions would be considered. The Commission would obtain independent legal advice before making a ruling, where it considered it appropriate to do so.

• Rulings would only be available in respect of future transactions. In this way, people would better understand their rights and obligations before deciding whether or not to make the offer or subscribe for the investment. It might be, however, that Commission rulings would be influential in assisting parties to securities contracts, which are not the subject of a ruling, to determine their respective rights.

• Rulings would be based on a set of 'assumed' facts, which would provide the metes and bounds of the point of law ruled upon. Generally, the assumed facts of a ruling would be derived from representations made to the Commission by the applicant at the time of the application for the ruling. There would, nevertheless be an obligation on any person applying for a ruling to disclose all information which was material to any transactions to which the ruling related.

• It would be for the person wishing to rely on a ruling to ensure that the offer fell within the perimeters of the assumed facts of the ruling.

• The question arises as to whether it would be practical for the Commission to make rulings on points of law which are binding on the community generally, or whether rulings should be specific to the applicant only.

• There would be a right of appeal to the High Court by way of case stated on questions of law, as is currently provided for by the Securities Act in respect of decisions of the Commission.

• Safe harbours would be available to those who might otherwise fall foul of the liability provisions of the securities law, if they were to become liable as a result of acting in reliance on a ruling. In this sense, the investors would also be "bound" by the ruling.

• A ruling would cease to have force either by a decision of the Commission or by a decision of the court.

• If a ruling was overturned by the court and it resulted in the statutory voiding of the allotment of securities, the Illegal Contracts Act would be available to provide relief in the form of validating the allotments, if that were in the investors' interests.

• Rulings would become effective by being notified in the Gazette. They could not be considered to be statutory regulations and would not be published in the Statutory Regulations series. However, the Commission would publish the text of each ruling on its web site, along with the reasons for making the ruling.

• It might be appropriate that the Registrar be notified of applications for rulings and given an opportunity to be heard in respect of them, since the Registrar would be bound by the terms of the rulings.

1.8

A rulings regime might operate in conjunction with the Commission's other functions, particularly its exemption function, to provide a more comprehensive service to both fundraisers and investors: exemptions have the effect of adapting the law that would otherwise apply to, for example, an issuer or class of issuers, while rulings would provide a binding interpretation on how or whether the law applied to a situation.

1.9

Rulings might be particularly useful in circumstances where an exemption is not appropriate, for example where a matter of law was not free from doubt but, in the opinion of the Commission, a transaction was not subject to securities law and an exemption would not be necessary.

1.10

The rulings scheme described in this paper is different from the rulings regimes that exist in other jurisdictions. They generally deal with matters in respect of which the regulator has powers of enforcement. They afford market participants the opportunity to obtain an advance statement of the regulator's view on any possible enforcement action it might take on proposed transactions. In Australia and the United States of America, for example, such 'rulings' (generally in the form of no-action letters) are given by Commission staff and are not formally binding. Moreover, the Securities Commission in each of those jurisdictions is the primary enforcer of the securities law. By convention these Commissions will adhere to a decision to take no enforcement action expressed in a no-action letter.

1.11

By comparison, the New Zealand Securities Commission has a relatively limited mandate. It is not the primary enforcer of the securities law. Rather, that role is reserved to the Registrar of Companies. In addition, New Zealand law provides for extensive powers of self-enforcement by investors. Therefore, it is accepted that any non-binding statements made by the Commission are of only limited value to market participants. Nevertheless the Commission staff from time to time give non-binding opinions on questions related to the exercise of the Commission's powers. This practice is likely to continue on the present discretionary basis even if a binding rulings scheme were introduced.

1.12

The Commission expresses no view on the regime as described in this paper or on the question whether there should be a regime at all. The purpose of this paper is to promote public discussion about these matters. The Commission intends to review all submissions and comments from interested parties, before making any recommendation for consideration by the Government.

Invitation to Comment

1.13

A number of discussion questions are set out at the end of each Chapter, and for convenience are repeated in an Appendix at the end of the paper. As the questions show, any rulings power gives rise to a number of important and at times complex issues that need to be fully assessed. We would be pleased to have views in respect of all the questions, but particularly those in bold type.

1.14

This paper may be downloaded from the Commission's web site (www.seccom.govt.nz). Comments on this discussion paper should be sent to the Commission by Friday 4 August 2000. They can be e-mailed to margaret.bearsley@seccom.govt.nz or sent in hard copy to:

Margaret Bearsley
Discussion on Rulings
Securities Commission
P O Box 1179
WELLINGTON