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

PART I  INTRODUCTION

• Invitation to Comment

PART II  NEED FOR TRUSTEES AND STATUTORY SUPERVISORS

• Rights and Duties of Trustees and Statutory Supervisors
• Discussion Questions

PART III  REASONS FOR THE COMMISSION APPROVING TRUSTEES AND STATUTORY SUPERVISORS

• Trustee Corporations
• Alternatives to the Current Regime
• Discussion Questions

PART IV  COMMISSION'S CRITERIA AND PROCEDURES FOR APPROVING TRUSTEES AND STATUTORY SUPERVISORS

• Competence and Financial Capacity
• Character
• Independence
• Accountability
• Duration of Approvals
• Discussion Questions

PART V  NEED FOR AN ONGOING ROLE

• Discussion Questions

APPENDIX  DISCUSSION QUESTIONS

The Securities Commission is an independent statutory body. One of the Commission's functions, as provided by section 48 of the Securities Act 1978 ("the Act"), is to approve any person or any class of persons to act as a trustee or statutory supervisor for the purposes of the Act. The Commission has decided to review aspects of its policy in performing this function. This discussion paper is prepared to assist in this review.

We invite comment on the matters raised in this paper. Any comments or submissions received are subject to the Official Information Act 1982. It is the practice of the Commission to make submissions available on request and where appropriate to draw attention to them in any further paper.

If you would like us to withhold information included in comments on this paper would you please let us know. Any request to withhold information will be considered in accordance with the Official Information Act 1982.

Securities Commission
12th Floor, Reserve Bank Building
2 The Terrace
PO Box 1179
WELLINGTON

Ph (04) 472 9830
Fax (04) 472 8076
E mail seccom@seccom.govt.nz
Web site www.seccom.govt.nz

PART III
REASONS FOR THE COMMISSION APPROVING
TRUSTEES AND STATUTORY SUPERVISORS

15. The question we turn to now is whether a regulatory body, such as the Commission, is needed to oversee and vet applications for approval of persons to act as trustees and statutory supervisors. What does this regulatory oversight add?

16. Trustees and statutory supervisors occupy a position of responsibility and trust. They require expertise and competence to carry out their duties. They need to have the reputation and the confidence to deal with issuers, and to uphold the interests of investors. Trustees may also be responsible for holding investors' funds and property on trust. Whilst these persons may not be responsible for initiating or formulating investment strategies, they must understand the types of risks which the issuer of debt securities is assuming or the types of investments being managed within a contributory scheme and the investment policies of the manager so that they can represent investors' interests.

17. It is an offence under section 60(2) of the Act for a person to contravene or fail to comply in any respect with section 48 of the Act, in particular, to accept appointment as a trustee or statutory supervisor without Commission approval. Such persons would be liable on summary conviction to a fine not exceeding $10,000.

18. In the majority of cases, the self-interests of issuers to preserve their reputation and to attract investors will lead to the selection of responsible and reputable persons to act as trustees and statutory supervisors. Similarly, the self-interest of trustees and statutory supervisors will lead to the selection of responsible and reputable issuers to act for. There is often a risk however that if the Commission's approval is not required, both "rogue" issuers and issuers concerned with saving costs will appoint trustees and statutory supervisors who do not have the ability or honesty to protect the interests of investors. This is particularly so as, aside from registered banks which are regulated, issuers of debt securities and managers of investment schemes are not licensed. Investors should not be exposed to this risk unnecessarily.

19. Investors may bring civil actions in negligence or breach of trust if the trustee or statutory supervisor fails to exercise reasonable diligence in monitoring the manner in which investors' funds are managed. The duties of the trustee / statutory supervisor are limited to those which are expressly stated in the trust deed / deed of participation and those which are deemed to be incorporated into those deeds by the Act. In the Christchurch Pavilion Partnerships case Cartwright J stated that "there can be no doubt that the duties imposed by the Securities Act do not have a life beyond those deemed to be included in the deed" (at 261,689). Section 62 of the Act confers some protection on the trustee / statutory supervisor by deeming to be void, any provision of the trust deed / deed of participation that has the effect of exempting or indemnifying a trustee / statutory supervisor against liability for breach of trust, where the trustee / statutory supervisor fails to show the required degree of care and diligence.

20. It is interesting to note that the Securities Advertising Bill (which was later enacted as the Securities Act 1978) in the form in which it was introduced into Parliament, provided that the Registrar of Companies would be responsible for approving trustees and statutory supervisors. At that stage, the concept of an independent Securities Commission had not been introduced as part of that Bill. When Part One, which established the Securities Commission, was incorporated in the Bill through a Supplementary Order Paper, the general consensus of persons making submissions was that the Commission was the appropriate body to undertake the role of approving trustees and statutory supervisors.

Trustee Corporations

21. At present, trustee corporations are eligible to act as trustees or statutory supervisors without prior approval from the Commission. To qualify for the status of a trustee corporation, the organisation must be approved as such by Parliament. Only five companies have been authorised by Parliament to act as a trustee corporation, the last in 1929.

22. In 1998, the Commerce Select Committee considered and declined the application of the East Coast Trustee Company Limited to be granted the status of a trustee corporation under the Trustee Companies Act 1967. In its report dated 22 May 1998, the Committee commented that the fact that "so few have been accorded this status indicates the serious public interest involved" (page two). The Committee considered that:

    "existing legislation should be changed to specify the criteria for authorisation for new entrants and that the criteria should be administered by a body such as the Securities Commission. Parliament is not a suitable body to approve companies having this general type of trustee company status" (page three).

Alternatives to the Current Regime

23. It seems appropriate to have some level of regulatory review of those persons who wish to act as trustees and statutory supervisors. Do we have a sound system now? Two possible alternatives to the present system of approval by the Commission are:

Alternative A

24. Requiring an appointee to file statutory declarations with the Registrar of Companies, at the time the trust deed / deed of participation is lodged for registration, attesting such matters as:
    1. that they, their affiliated firms, and other affiliated persons are and will remain, independent of the issuer and of the securities being offered by the issuer;

    2. that they hold sufficient professional indemnity insurance to protect investors from any loss that might be suffered as a result of their negligence or breach of trust; and

    3. that the appointee, or the directors of the appointee, if a company, have not been convicted of a serious offence, disqualified from acting as a director under the Companies Act 1993, been made a bankrupt within the previous five years, or disqualified or suspended from holding a licence or authorisation to act as a member of a professional association within the previous ten years.

25. The obvious weakness with adopting this process is that no one, other than the issuer, will be responsible for making an assessment as to whether the appointee has the competence to fulfil the duties and functions of a trustee or statutory supervisor. Sanctions for filing a false statutory declaration would need to be incorporated into the Act.

Alternative B

26. Expanding the classes of persons who automatically qualify to act as a trustee or statutory supervisor. It may be possible to formulate some minimum statutory criteria which a person needs to satisfy to be eligible to act as a trustee or statutory supervisor.

27. The challenge would be to ensure that the stated criteria are sufficiently flexible to adapt to changing market practices and to be objectively applied. Further, who would be responsible for assessing trustees and statutory supervisors and considering whether they have met the minimum statutory criteria?

Comment

28. There are practical problems associated with moving to an alternative regime. Any proposal to provide such a regime would require careful research and planning. We consider that the Commission in the meantime remains an appropriate body to administer the present system. We also think the Commission is in a good position to consult with applicants and other market participants on the criteria for approval, given that one of its statutory functions as provided in section 10(c) of the Act, is to keep under review practices relating to securities.

Discussion Questions

3. Is there a need for a regulatory body to consider applications for approval of persons to act as trustees and statutory supervisors?

4. If yes, in respect of question III, is the Commission the appropriate regulatory body to manage this process?

5. Are there more desirable alternatives to the present system of approval?

APPENDIX
DISCUSSION QUESTIONS

We would be pleased to receive any views, observations or comments that you may wish to make to us about this paper and would be grateful to have our attention drawn to any important considerations that we may have overlooked. We would also appreciate it if submissions were to include views in respect of the questions set out in the paper (repeated below). Submissions must reach the Commission by Friday 6 July 2001.

Part II

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?

Part III

3. Is there a need for a regulatory body to consider applications for approval of persons to act as trustees and statutory supervisors?

4. If yes, in respect of question III, is the Commission the appropriate regulatory body to manage this process?

5. Are there more desirable alternatives to the present system of approval?

Part IV

6. Are the Commission's current criteria for the approval of trustees and statutory supervisors satisfactory?

7. Are the Commission's current procedures for the approval of trustees and statutory supervisors necessary?

8. Should the Commission require an applicant to have a minimum amount of paid up capital?

9. Should the Commission approve individuals to act as trustees?

10. Is the dishonesty criterion (paragraph 38) satisfactory?

11. Should the professional membership criterion (paragraph 39) be amended to allow applicants a greater level of flexibility in terms of their board membership?

12. Does the independence criterion (paragraphs 44 and 45) impose an unnecessary entry barrier to potential applicants or a business barrier to established trustees and statutory supervisors?

13. Should personal guarantees be required from applicants?

14. Is the duration period of approvals (five years) too short, about right or too long?

15. Should approvals, of either trustees or statutory supervisors, be for an unlimited duration?

Part V

16. Is there a need for ongoing oversight of trustees and statutory supervisors?

17. If yes, in respect of question XVI, is the Commission the appropriate body to conduct this role?

18. If yes, in respect of question XVII, should the trustee / statutory supervisor be required to report to the Commission on the occurrence any change in matters material to the Commission's approval of that person and in any event, on an annual basis to the Commission?

19. If yes, in respect of question XVIII, should such an annual report be made available to investors on request?