Requirement to be licensed and to comply with the licence

The Bill provides that a trustee, statutory supervisor, or unit trustee must hold a licence that covers the debt security, participatory security, or unit trust to which the appointment relates and a licence holder must comply with every condition imposed on the licence. It is an offence for a person to act as a trustee, statutory supervisor, or unit trustee without an appropriate licence and for a person to represent that the person holds a licence that covers a security without holding such a licence. A person who commits such an offence is liable on summary conviction to a fine not exceeding $300,000 (Part 2, Subpart 1, Clauses 6-8).

Definition of "trustee", "statutory supervisor" and "unit trustee"

The term "trustee" means a person appointed as a trustee in respect of debt securities under the Securities Act 1978. The term "statutory supervisor" means a person appointed as a statutory supervisor in respect of participatory securities under that Act. The term "unit trustee" is defined under the Unit Trusts Act 1960 as, in relation to any unit trust:

• the trustee in which is vested any money, investments, and other property that are for the time being subject to the trusts governing the unit trust; or
• if any money, investments, and other property that are for the time being subject to the trusts governing the unit trust are vested in a nominated person, the trustee that appointed the nominated person; or
• if any money, investments, and other property that are for the time being subject to the trusts governing the unit trust are vested in a nominee of a nominated person, the trustee that appointed the nominated person (Part 1, Clause 4(1) definitions of "Trustee" (cf, definition of "trustee" in Section 2(1) of the Securities Act 1978)), "statutory supervisor" (cf. definition of "statutory supervisor" in Section 2(1) of the Securities Act 1978), and "unit trustee" (cf. definition of "trustee" in Section 2(1) of the Unit Titles Act 1960).

What is a security?

• Section 2D of the Securities Act 1978 provides that "security" means any interest or right to participate in any capital, assets, earnings, royalties, or other property of any person; and includes an equity security, a debt security, a unit in a unit trust, an interest in a superannuation scheme, a life insurance policy, any interest or right that is declared by regulations to be a security for the purposes of that Act, and any renewal or variation of the terms or conditions of any such right or interest (Section 2D of the Securities Act 1978).
• Comment
• "The pattern of the Securities Act and the sanctions it imposes make it plain that the broad statutory goal is to facilitate the raising of capital by securing the timely disclosure of relevant information to prospective subscribers for securities. In that way the Act is aimed at the protection of investors. That aim is achieved by regulating the conduct of issuers of securities and by providing sanctions for infringement by those issuers and their officers" (per Richardson J, Re AIC Merchant Finance [1990] 2NZLR 385, 391).

What are "debt securities", " participatory securities" and "unit trusts"?

Decision on application for, or to vary, licences

The Bill provides that the Securities Commission (the Commission) may license persons to be trustees in respect of debt securities, statutory supervisors in respect of participatory securities, and trustees of unit trusts. The Commission may issue licences that cover particular securities or classes of security. The Commission may also license persons to be statutory supervisors of retirement villages. Licences must be issued for a period no longer than five years and may contain conditions. Licences may be varied. The Commission may issue or vary a licence only if it is satisfied that:

• the applicant is either a body corporate incorporated in New Zealand or an overseas company registered under the Companies Act 1993; and
• every director and senior manager of the applicant is of good character (defined in Clause 15); and
• the applicant is either registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 or complies with Section 13(a) and (b) of that Act [4]   (Clause 15(1) and (2)).

Clause 15(3) of the Bill sets out in detail the factors the Commission must take into account in deciding to issue or vary a licence. Before making a decision under Clause 15(1), the Commission must assess the following matters:

• the experience, skills, and qualifications of the applicant (including, in particular, of the applicant's directors and senior managers);
• the financial resources available to the applicant;
• the other resources available to the applicant;
• the applicant's procedures for ensuring that the applicant complies with the trustee obligations and issuers of securities covered by the licence comply with the issuer obligations;
• the applicant's independence from issuers of securities covered by the licence;
• the applicant's governance structure;
• the applicant's professional indemnity insurance;
• other prescribed matters relating to the applicant, securities covered by the licence, and issuers of securities covered by the licence;
• any other matter that the Commission considers is material.

Before making a decision on a licence that covers a debt security issued by a deposit taker (as defined in Section 157C of the Reserve Bank of New Zealand Act 1989), the Commission must consult the Reserve Bank of New Zealand and take the Bank's views into account (Clause 15(5).

The Commission may issue or vary a licence only if the Commission is satisfied that, having regard to any conditions that the Commission imposes on the licence, the applicant will be capable of effectively performing the functions of a trustee, statutory supervisor, or unit trustee in respect of securities covered by the licence. The Commission may issue a licence that is narrower in scope than the licence that was applied for. The Bill provides that an applicant who is dissatisfied with the outcome of the application for a licence or to vary a licence may seek a review of the decision, on paper or at a hearing. There is a further right of appeal to the High Court for a person who is dissatisfied with the outcome of such a review by the Commission (Part 2, Subpart 1, Clauses 9-18).

Monitoring and enforcement

The Bill makes detailed provision for licence holders to report at regular intervals (between six and twelve months from the issue of the licence and once every six months after that) to the Commission, particularly concerning the licence holder's compliance with the terms of trust deeds and deeds of participation, continued compliance with the requirements of eligibility to hold a licence referred to in Clause 15(2), and the matters referred to in clause 15(3). A duty is placed on licence holders to report to the Commission if the licence holder believes that:

• the licence holder has breached, may have breached, or is likely to breach a "trustee obligation"; or
• a "material change of circumstances" 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 licence was, or may have been, wrong, misleading, or incomplete.

The Bill gives the Commission the power to investigate the breach of a trustee obligation, whether a material change of circumstances has occurred, and whether the information on which the Commission based its decision to vary a licence was wrong, misleading, or incomplete (Part 2, Subpart 2, Clauses 24-26).

What are "trustee obligation" and "material change of circumstances"?

Action plans

The Bill provides that the Commission may require a licence holder to submit an action plan if the Commission is satisfied that:

• the licence holder has breached, or is likely to breach, a trustee obligation; or
• a material change of circumstances has occurred in relation to the licence holder; or
• the information on which the Commission based its decision to issue or vary the licence was wrong, misleading, or incomplete in a material respect.

The action plan must specify the steps that the licence holder will take to remedy or avoid the breach or in light of the material change of circumstances or wrong, misleading, or incomplete information. If the Commission approves the action plan, the licence holder must comply with it. If the Commission rejects the action plan, the Commission may give a direction to the licence holder or vary the licence holder's licence, or both (Part 2, Subpart 2, Clauses 27-29).

Variation and cancellation of licences, removal of trustee etc

The Bill enables the Commission to vary a licence before the expiry of a licence without the consent of the licence holder. The reasons why the Commission may do this are set out in the Bill. One of the most important factors is because of material change of circumstance as defined. Licence holders may request a review of the Commission decision and there is a right of appeal to the High Court against the Commission's decision to vary a licence. Apart from extensive powers to vary licences, the Bill also gives the Commission powers to remove trustees and cancel licences. The Commission may apply, in certain circumstances, to the High Court for orders that a trustee, statutory supervisor, or unit trustee pay a pecuniary penalty to the Crown and/or compensation to a security holder. (Part 2, Subpart 2, Clauses 30-43).

Commissions functions in relation to issuers

The Bill gives the Commission the power to require a trustee, statutory supervisor, or unit trustee to attest to the Commission as to whether the trustee or supervisor is satisfied that an issuer has not breached an "issuer obligation" [5]   in a material respect. If the trustee, statutory supervisor, or unit trustee is unable to do so, the trustee or supervisor must report details of the issuer's breach or possible breach to the Commission. A duty is imposed on a trustee, statutory supervisor, or unit trustee who believes that an issuer has breached, may have breached, or is likely to breach an issuer obligation to report the breach to the Commission and advise the Commission of any steps that the trustee or supervisor intends to take. A duty is also imposed on trustees, statutory supervisors, or unit trustees who become aware of information on the basis of which the trustee or supervisor could reasonably form the opinion that an issuer is unable, or likely to be unable, to pay its debts or the value of the issuer's assets is less than, or is likely to be less than, the value of its liabilities. The trustee, statutory supervisor, or unit trustee must disclose the information to the Commission and advise the Commission of any steps that the trustee or supervisor intends to take.

The Commission may give a direction to a trustee, statutory supervisor, or unit trustee to take action in relation to an issuer if the Commission is satisfied that there is a significant risk that security holders' interests will be materially prejudiced and the trustee or supervisor has failed to take the opportunity to take action to eliminate or reduce the risk or the case is an urgent one. The High Court is given significant powers in this area. In particular, the High Court may make, on the application of the Commission, the same orders that the court may make under Section 49 of the Securities Act 1978 on the application of a trustee or statutory supervisor (or under new Section 19A of the Unit Trusts Act 1960 on the application of a unit trustee). The Commission's power to apply to the court arises if the Commission is satisfied that there is either a significant risk that the interests of security holders will be materially prejudiced or the provisions of the trust deed or deed of participation are no longer adequate to give proper protection to security holders and the trustee, statutory supervisor, or unit trustee has failed to take the opportunity to make an application (Part 3, Clauses 44-50).

Other amendments

The Bill makes numerous, amendments to the Securities Act 1978, the Corporations (Investigation and Management) Act 1989, the Financial Service Providers (Registration and Dispute Resolution) Act 2008, the Retirement Villages Act 2003, the Securities Markets Act 1988, the Takeovers Act 1993, the Trustee Companies Act 1967, and the Unit Trusts Act 1960 (Part 4, Subparts 1 and 2, Clauses 51-90).

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