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Binding Rulings on Securities Law
A Discussion Paper

CHAPTER 3    BINDING RULINGS FUNCTION FOR THE COMMISSION

3.1

Under the regime described in this paper, the Commission would be empowered to make rulings that provide binding interpretations as to the application of the law, based upon a set of assumed facts. The assumed facts would relate to a specific issuer or, if it is thought useful and appropriate that rulings should also be of a more general nature, could be generalised or defined to accommodate a class of issuers or a type of investment product. Issuers who obtained and wished to rely on a ruling would need to ensure that the factual matrix of their offer fitted within the boundaries of the ruling.

3.2

If an issuer was uncertain as to the application of the law to its particular transaction, it could apply to the Commission for a ruling. The Commission could consider an application for a ruling from any person who may have obligations under the securities law in respect of a proposed transaction. It might also be appropriate that the Commission could consider a ruling sought by an investor.

3.3

Rulings would set out the Commission's interpretation of the law in respect of questions of compliance raised by the fact situations as represented by applicants. The facts would be generalised into "assumed" facts so that no particular ruling could be challengeable on the basis solely of misrepresented facts set out in the ruling.

3.4

Rulings would bind not only the Commission, but also the applicant, the Registrar, and every person who becomes a party to a transaction properly made in reliance on the ruling. These parties would be bound by a ruling for so long as it remained in force.

Duration

3.5

The various types of taxation rulings issued by the Inland Revenue Department generally are granted for a period of three years, although they may cover shorter periods at the applicant's request or at the discretion of the Binding Rulings Unit. The question of duration will need to be considered in respect of any Securities Commission rulings.

3.6

The Commission would have the power to amend or revoke any ruling at any time, with prospective effect, in its absolute discretion. Rulings might also become redundant as a result of amendments to the securities law.

3.7

Amendment or revocation would operate only with prospective effect, so that transactions undertaken prior to the amendment or revocation would fall under the original ruling. Only transactions contemplated or undertaken after the amendment or revocation would be affected by the change. This would ensure that the integrity of the rulings system was retained so that anyone who entered into a transaction in reliance on a ruling would know that all parties involved would remain bound by the ruling as it operated at the time the transaction was entered into.

3.8

The power to amend or revoke rulings would be exercised either on the Commission's initiative, because it considered that the interpretation of the law expressed in the ruling had become incorrect, ambiguous or unhelpful, or, in the Commission's discretion, on the application of a person affected by, or the subject of, a ruling. All revocations and amendments to rulings would be notified in the Gazette.

5. Is it a proper administrative function for a body such as the Commission, which is not a tribunal of lawyers, to give greater certainty to the law (i.e., through giving rulings) in areas where the law is doubtful?

6. Should rulings be made for a specified period of time, for example, say, five years, or should they remain in force indefinitely (until revoked or amended)?

7. Should rulings be made specifically for the applicant alone, or should general or "class" rulings also be available?

CHAPTER 4    AMBIT OF BINDING RULINGS REGIME

4.1

It has been observed that the Commission is a powerful committee which is plainly intended to have very wide powers of review (City Realties Ltd v Securities Commission (1982) 1 NZCLC 98,266, Quilliam J). Market participants and their advisers have informally suggested to the Commission that its statutory functions and powers would be further enhanced through the provision of a rulings function that would enable the Commission to rule authoritatively on ambiguous aspects of the securities law or on the proper application of the law to specific securities transactions.

4.2

The ambit of the rulings function considered in this paper would be broader than the Commission's current exemption function. The Commission can approve exemptions only in respect of the compliance provisions of Part II of the Securities Act and Securities Amendment Act and in respect of the Securities Regulations. However, the Commission could be empowered to make rulings in respect of any questions of compliance in relation to those statutes and regulations (except regulation 8), and also in respect of any provision of a current exemption notice. For example, although an issuer cannot obtain an exemption from section 6 of the Securities Act in respect of previously allotted securities, parts of section 6 are notoriously difficult to interpret. A ruling could be made on a provision of section 6, if it involved a question about compliance.

4.3

The Commission would make rulings on specific provisions of the securities law as they relate to a set of facts provided by the applicant regarding questions of compliance raised by a proposed transaction. There may also be occasions where interpretations of "pure law" were sought in respect of an unclear provision of the securities law. The credit unions situation discussed above might perhaps fit into the category of "pure law", as shares in a credit union are defined by the Friendly Societies and Credit Unions Act 1982.

4.4

However, there could be dangers in accepting a mandate to give rulings which would be binding on the community generally, given the great variety of terms which are available within any class of securities.

Matters that may be Appropriate for a Ruling

4.5

Binding rulings could be available for questions of compliance in respect of many of the provisions of the Securities Act, the Securities Amendment Act and the regulations. Binding rulings could also be sought on any provision of a current exemption where there is a question of compliance involved.

When a Ruling would be Refused

4.6

Inevitably, there would be applications in respect of which the Commission would decline to make a ruling. This would be likely to arise where:

• The application was in relation to the exercise by the Commission of any investigative or enforcement powers;

• The application related to a determination on questions of fact;

• The application sought a ruling on matters involving regulation 8 of the Securities Regulations;

• The application had insufficient information;

• The application was in respect of a transaction which was not seriously contemplated, raised frivolous or vexatious issues, or was otherwise not important;

• Questions raised in the application would be more suitable for consideration by the court, or were already before the court;

• The matter was more suitable for an exemption;

• The Commission believed a ruling on the matter or for the particular applicant was, in the circumstances, unwarranted or undesirable;

• The law is confused and the matter would be better addressed through law reform.

1. Applications in relation to the exercise of the Commission's investigative or enforcement powers. There might be areas, in respect of the Commission's discretion, on which it could make rulings. However, it would be unlikely that the Commission would be prepared to make a binding ruling on the exercise of its investigative or enforcement powers that would exclude it generally from exercising those powers in respect of an offer of securities to the public.

   Nevertheless, at a Commission staff level, opinions are at times given on the Commission's likely response to a matter of compliance. The question of whether such non-binding no-action type of relief should be included in a binding rulings function for the Commission should be considered;

2. Applications that relate to determinations of fact. Determining whether applications give rise to questions of fact will depend on the circumstances of each case. Generally, a ruling would apply to a set of assumed facts, generalised from a particular set of facts as represented by the applicant. However, the Commission would not give rulings as to whether or not facts provided by an applicant were correct;

3. Applications that seek a ruling on matters involving regulation 8 (matters likely to deceive, mislead or confuse in an advertisement). The Commission believes that, if a power to give rulings were to be added to its statutory functions, it would be inappropriate to make rulings on whether a matter that is material to an offer of securities is likely to deceive, mislead or confuse. Exemptions are not granted from regulation 8. If, for example, the Registrar refuses to register a prospectus because it contains a matter that the Registrar believes is likely to deceive, mislead or confuse, then the appropriate forum for dealing with that is through an appeal under section 69 of the Securities Act.

4. Applications with insufficient information. An application may include insufficient information simply because the applicant is not aware of the information that would be required by the Commission to make a considered and responsible decision, or because a proposed transaction is too far away for key aspects to have been settled. In the former scenario, it may be that further correspondence would bring the additional information to light and the application was then revived. In the latter case, the applicant may have to wait until material facts are finalised before proceeding further with the application;

5. Applications where the transaction is not seriously contemplated, or that raise frivolous, vexatious or unimportant issues. It would be within the Commission's discretion to determine whether a question for a ruling was sufficiently important or complex to warrant a ruling. The Commission would not allow its resources to be diverted by applicants who were not seriously contemplating the transaction upon which a ruling was requested, nor by those with merely an axe to grind;

6. Questions raised should be placed, or already are, before the court. It is the constitutional role of the judiciary to finally interpret the law. Where a matter was before the court, the Commission would not make a ruling. After the court's decision on a question of interpretation, a Commission ruling would be required to follow the interpretation given by the court;

7. The law is clear and the matter is more suitable for an exemption. If a person applied for a ruling that the law does not apply to a situation, when, in the Commission's view, the law did apply, the Commission might decline to rule. The applicant then would have the option of applying for an exemption or appealing the decision by way of case stated to the High Court;

8. The Commission believes a ruling on the matter or for the particular applicant is, in the circumstances, unwarranted or undesirable. It would be a matter for the Commission's discretion, as the "committee of the market", to decide whether the making of a particular ruling was appropriate or whether it might be detrimental to the integrity or efficiency of the market. It would be appropriate for the Commission to exercise a broad discretion to ensure maximum flexibility and efficient and timely resolution of questions regarding the application of the law;

9. The matter is better addressed by law reform. There might be situations in which rulings were applied for which could not be considered an interpretation of the law, but would result in something tantamount to a general reform of the law. The Commission cannot usurp the role of Parliament to reform the law. The Commission would, therefore have to decline to make a ruling where, in its opinion, the matter would be more properly dealt with through its statutory law reform function. Nor would the Commission be able to make rulings which contradicted or enlarged the law as currently in force. Likewise, a ruling on the interpretation of a provision of an exemption would not be able to contradict or alter the words or intent of such a provision.

Administrative Matters

4.7

The Commission would not want to allow its other statutory functions to be swamped by an inundation of trivial questions. For that reason, it is suggested that a full fee would be charged. In addition, it would need to be accepted that expert advice might be sought by the Commission for dealing with many of the questions that arose. Indeed, it is anticipated that only difficult or complex matters would be considered for a ruling.

4.8

Under the regime outlined in this paper, either all rulings applications would be notified to the Registrar, or at least those in respect of which the Commission believed that the Registrar should be involved. In any event, the Registrar should be able to be heard by the Commission in respect of rulings applications that may affect or involve the functions or powers of the Registrar.

4.9

On a slightly different note, consideration needs to be given to possible cross-jurisdictional implications of the making of binding rulings by the Commission. The Inland Revenue Department's Binding Rulings Unit at times makes rulings in relation to transactions involving securities. There may be a danger that conflicting binding rulings were issued as between the different jurisdictions, so that tax law in respect of an offer of securities was interpreted one way and the securities law in respect of that offer interpreted another way. Such a situation would be likely to create confusion and to erode public confidence.

8. Should the Commission give rulings on the exercise of its discretionary powers?

9. Should the Commission provide "no-action" rulings as part of a binding rulings function?

10. Should the Commission have a discretion to refuse to make rulings? If so, in what circumstances?

11. How might Securities Commission rulings affect or be affected by past, current and future Inland Revenue rulings? What if they conflict?