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Securities Commission Policy in Respect of Approval of Trustees and Statutory Supervisors

PART II
NEED FOR TRUSTEES AND STATUTORY SUPERVISORS

6. The primary reason for having trustees and statutory supervisors is to represent the interests of security holders. The cost of undertaking individual actions against an issuer is prohibitive to most security holders. It is considered to be more effective, both in terms of cost and outcome, to centralise some of the rights and powers of the security holders in an independent person who is in a position to monitor, liaise with, and detect breaches and enforce rights against, the issuer. It also appears that the quality of management of an investment scheme may be improved if the manager is required to report on the scheme's affairs to the trustee / statutory supervisor and the trustee / statutory supervisor is empowered to provide advice to the manager and investors.

7. Section 33(2) of the Act provides that no debt security shall be offered to the public for subscription unless the issuer has appointed a person as a trustee and has registered a trust deed which both the issuer and the trustee have signed in respect of the security. Section 33(3) contains a similar provision for the offering of participatory securities to the public under which the issuer must appoint a statutory supervisor and register a deed of participation.

Rights and Duties of Trustees and Statutory Supervisors

8. The rights and duties of the trustee or statutory supervisor are, in general, set out in the trust deed or deed of participation relating to the security. Certain provisions are deemed to be contained in the deed. These are prescribed in the Fifth and Seventh Schedules to the Securities Regulations 1983 respectively.

9. For the purposes of this paper, we have not, except as set out below, distinguished between the roles of trustees and statutory supervisors. The rights and duties of trustees and statutory supervisors include:
   1. Exercising reasonable diligence to ascertain whether any breach of the terms of the trust deed or the terms of the offer of securities has occurred, and, except where they are satisfied that the breach will not materially prejudice the interests of the holders, to do all the things they are empowered to do to remedy any breach of those terms. Trustees and statutory supervisors may also apply to the Court for certain orders under section 49 of the Act.

   2. Obtaining by request accounting records, reports and other information from the issuer and auditors.

   3. Attending general meetings of the issuer and being heard on any matter which concerns the trustee or statutory supervisor or security holders for whom that trustee or statutory supervisor acts.

   4. Disclosing to the Registrar, pursuant to section 11 of the Corporations (Investigation and Management) Act 1989, information relating to the affairs of a corporation if:
      1. the corporation is insolvent or is likely to become insolvent or is in serious financial difficulties; or

      2. the corporation has breached or is likely to breach in a significant respect, the terms of either the trust deed or deed of participation or the terms of the offer of securities; or

      3. the disclosure of the information is likely to assist or be relevant to the exercise of powers under the Corporations (Investigation and Management) Act 1989.

   5. In respect of trustees, providing a statement in the prospectus for debt securities that the offer of securities complies with the provisions of the trust deed.

   6. In respect of trustees, exercising reasonable diligence to ascertain whether or not the assets of the borrowing group that are or may be available, whether by way of security or otherwise, are sufficient or likely to be sufficient to discharge the amounts of the debt securities as they become due.

10. In the Christchurch Pavilion Partnerships case ((1998) 8 NZCLC 261,675) Cartwright J (as she was then known) described the nature of the statutory supervisor's responsibilities. She rejected (at 261,691):

    "any notion which so limits the responsibilities of the statutory supervisor that it must remain passive and review rather than monitor and supervise actively the actions of the issuer in relation to any of those duties. The primary responsibility is that of the issuer. Nonetheless, the central role of the statutory supervisor is to supervise and if in the exercise of reasonable diligence a breach of the terms of the prospectus or deed of participation is detected then it cannot stand idly by and disclaim any responsibility. The statutory supervisor has an obligation to ensure within its powers that any breach is to be remedied. The manner of remedying the breach will differ according to the responsibility to be discharged. If, for example, the prospectus upon which the issuer is eliciting public subscription is clearly deficient then the statutory supervisor would presumably decline to accept appointment unless any defects were remedied."

11. On appeal before the Court of Appeal, the judgment of Cartwright J was set aside ((2000) 8 NZCLC 262,361). However, Tipping J, in delivering the judgment of the Court of Appeal, did not dissent from the comments made by Cartwright J about the extent of the role of a statutory supervisor.

12. We consider that trustees and statutory supervisors are an established and accepted part of the securities law regime in New Zealand. There is a place for trustees and statutory supervisors in New Zealand's securities regulatory regime. As Cartwright J noted in the Christchurch Pavilion Partnerships case (at 261,688) the "overriding purpose of the Act is, therefore, the protection of investors and the statutory supervisor has an important role to play in this regard."

13. Trustees and statutory supervisors help to promote self-regulation and the proper management of schemes, thereby reducing the need to involve the Courts and regulatory bodies to recover investors' funds. Such persons are expected to be proactive and to detect and minimise the risk of mismanagement of funds.

14. The role and existence of independent trustees and statutory supervisors is compatible with the Commission's purpose of strengthening confidence in New Zealand's capital markets by promoting the efficiency and integrity of these markets and their cost-effective regulation.

Discussion Questions

1. Is there a useful role for trustees and statutory supervisors to play in representing the interests of security holders?

2. If yes, in respect of question I, do the prescribed rights and duties of trustees and statutory supervisors empower them to adequately represent the interests of security holders?