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New Zealand Securities Commission |
Last Updated: 4 November 2014
Binding Rulings on Securities Law
A Discussion
Paper
SECURITIES COMMISSION
WELLINGTON, NEW ZEALAND
7 June 2000
TABLE OF CONTENTS
CHAPTER 3 BINDING RULINGS FUNCTION FOR THE COMMISSION
CHAPTER 4 AMBIT OF BINDING RULINGS REGIME
CHAPTER 6 BINDING RULINGS AND THE COURT
CHAPTER 8 A POSSIBLE ALTERNATIVE: EXEMPTIONS WHERE THE LAW IS IN DOUBT
APPENDIX: DISCUSSION QUESTIONS
The Securities Commission is an independent statutory body. Its functions
include to keep under review the law relating to securities
and to recommend
changes it considers necessary. This discussion paper has been prepared in
accordance with this function.
We invite public 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.
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:
To achieve this purpose we direct our work to promoting:
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:
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
Background
2.1
The Commission was established in New Zealand in the wake of a series of
financial collapses, notably of the Securitibank group of
companies in 1976,
that left many investors with substantial losses. People had invested in
Securitibank without the benefit of a
registered prospectus or equivalent
disclosure document.
2.2
It was decided in the aftermath of these losses to introduce wide-ranging
disclosure legislation that would apply to all persons seeking
to raise funds
from the public, replacing the narrow disclosure requirements set down at that
time in the Companies Act.
2.3
When originally drafted, the securities legislation contained detailed
schedules setting out the disclosure requirements attaching
to the security or
scheme being offered and there was no provision for a Securities Commission. The
Registrar of Companies was to
administer the securities law, including that in
relation to exemptions and enforcement.
2.4
Submissions on the securities bill highlighted that, in its draft form, the
detailed statutory provisions would be unworkable and
they focused on the need
for a flexible regulatory environment so that growth and change in the financial
markets would not be unduly
constrained. They also expressed deep concern at the
concentration of so much power in the hands of a public servant. In response
to
the submissions, the Commission was established as an independent "committee of
the market", with Members chosen for their experience
in the field of business
and of securities law and practice.
2.5
The Securities Act and Securities Regulations have now been in force for more
than 21 years and 16 years, respectively. During that
time, it has become
apparent that there are a number of ambiguities in the legislation. As well,
there have been sophisticated developments
in financial products that leave
commercial and other fundraisers uncertain as to the requirements of the law.
The structuring of
the products and the methods by which they are offered
continue to develop, often very quickly.
2.6
Exemptions are applied for at times because they can provide certainty, and
can do so relatively speedily and at quite modest cost.
However, exemptions are
not always the most appropriate method for resolving ambiguity or other
difficulties of interpretation, especially
where the sensible view of the law is
that it does not apply to the offer.
Examples Suitable for a Ruling
2.7
Some recent examples of questions that have been put to the Commission, usually in the form of an application for an exemption, that could be suited to being dealt with under a rulings power, include:
New Zealand Association of Credit Unions ("the Association")
The Association applied for various exemptions relating to offers to the public of securities in respect of credit union shares/deposits. The basis for the application was the Association's view that the shares may be participatory securities, and it wished to have the exemptions for the avoidance of doubt. (Since 1983 the Commission has had a class exemption for credit unions in which credit union shares have been treated as debt securities). In consultation with the Association, the Commission instructed a senior barrister to prepare an opinion on the issue. We concluded that the shares fall within the statutory definition of "debt security" and are properly classified as such.
The Commission declined to approve the exemptions.
Leveraging Securities ("ABC Ltd")
ABC Ltd applied for various exemptions in respect of a facility to provide loans to clients to allow clients to leverage their investments. Collateral for the loan would be provided by clients transferring securities to ABC Ltd, and gaining a contractual right of re-transfer of equivalent securities upon repayment of the loan. Under the terms of the loan and security agreement ABC Ltd would be entitled to deal in the securities in transactions with New Zealand Stock Exchange brokers.
It appeared to the Commission that this facility, in particular, the client's continuing claim in respect of the securities transferred, did not involve questions of compliance with Part II of the Securities Act. In consultation with the applicants, the Commission instructed a senior barrister to provide an opinion on the matter. The barrister was of the opinion that the facility did not involve an offer of securities to the public.
The Commission decided to decline ABC's exemption application, giving the following reasons:
Purpose of Binding Rulings
Function
2.8
The Commission, when exercising its exemption power, must take a view on the
manner in which the law applies. This can create difficulties
of interpretation
of the law when the Commission is under pressure to resolve legal uncertainties.
Exemptions developed on this basis
may leave the impression that, in the view of
the Commission, the law did apply to the situation and the issuer would have
been in
breach to make the offer in the way it did, without the exemption. The
Commission must weigh up whether an exemption might cast doubt
on the legality
of other issuers' similar transactions, or whether a more robust interpretation
of the law should be adopted.
2.9
The examples given above demonstrate the types of situations where the
Commission might have a power to make a ruling on the application
of the law to
the offerors' particular set of facts or, possibly, a more general ruling on how
the law is to be interpreted. General
rulings could be of a "pure law" nature. A
general ruling might have been given in the credit unions example where the
shares are
defined by statute. Other "pure law" or general rulings might be made
in respect of provisions of the securities legislation, or
of exemption notices,
that are difficult to interpret, for example the section 5(1) exemptions in
respect of land.
2.10
In Australia and the United States of America there is no binding rulings
regime for securities law. Rather, those jurisdictions rely
on a non-binding
"no-action letter" process whereby the views of the regulator's staff on
enforcement in relation to particular transactions
are made known to requestors
seeking an advance statement of the regulator's likely approach to the proposed
transaction.
2.11
In contrast to the situation in Australia and the United States, however, in
New Zealand the Securities Commission is not the primary
enforcer of the
securities law, so the degree of certainty provided by a no-action letter
process here would be only limited. At
any time, despite having obtained a
no-action letter from the Commission, a person might still have action taken
against them by,
for example, the Registrar or by an investor, on the very
matter dealt with by the no-action application. Therefore it is considered
that
a binding rulings function for New Zealand's Commission may provide some
additional certainty.
2.12
Of course, offerors could apply to the courts for a declaration where there
is doubt regarding the status under the Securities Act
of a proposed offer.
However, that course appears to be rarely adopted, probably because of the need
in the financial markets for
speed in decision-making about how to structure, or
whether to make, an offer. Moreover, much of the information that would require
consideration in open court in respect of a declaration would be commercially
sensitive. Thus, the two greatest barriers to using
the courts for certainty
will be delay and the possible availability to the public, and perhaps to
competitors, of commercially sensitive
information.
Benefits
2.13
Two likely benefits to fundraisers from introducing a rulings power for the
Commission would be a reduction of uncertainty about the
status of a
transaction, and assistance to fundraisers to comply with the securities law:
respectively, transaction certainty and
compliance certainty. In addition, it
would be likely to lead to greater consistency in the interpretation of
securities law and
may lead to a more authoritative basis for promoting law
reform.
2.14
This increased certainty about the disclosure implications of proposed
transactions would lead to increased efficiency, since fundraisers
know the
regulatory costs before deciding whether or not, or in what manner, to undertake
a transaction. Compliance certainty, meanwhile,
would be generated by a ruling
that reassured the applicant that the Commission and Registrar will react in a
particular way to the
proposal or transaction, provided its terms are the same
as those represented by the applicant. The risk of incurring enforcement
action
for non-compliance could be thus effectively eliminated.
2.15
Benefits to investors might arise from greater certainty that their
investment decision will not be put unnecessarily at risk by conflicting
views
on the technicalities of the law, thereby increasing investors' transaction
certainty. Meanwhile, lower transaction costs to
the fundraiser could result in
better returns to investors.
2.16
Subsidiary benefits of a rulings power could include reduced enforcement actions being taken against offerors, resulting in lower administrative costs to shareholders and various public bodies and lower compliance costs to fundraisers. Better and quicker flows of information to the Commission concerning trends in fundraiser-behaviour and grey areas in the law would be an additional subsidiary benefit of introducing a rulings function.
DISCUSSION QUESTIONS
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.
DISCUSSION QUESTIONS
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:
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;
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.
DISCUSSION QUESTIONS
CHAPTER 5 PROCEDURAL
MATTERS
5.1
The rulings regime envisaged in this discussion paper is one where rulings
would be available generally in respect of complex or important
compliance
questions. Prospective applicants would need to weigh up whether the expense
involved in obtaining a ruling (especially
as the Commission would be likely to
seek expert advice from senior members of the legal profession in many cases)
was warranted.
Disclosure Requirements in Application
5.2
Applicants for a binding ruling would be required to provide full disclosure,
on the basis of which the Commission would make its
ruling. Any safe harbour
provisions that might be available to directors and others who might otherwise
be liable for breach of the
securities law would ultimately only be available if
there had been no misstatement or material omission in respect of the facts
represented to the Commission at the time of the application.
5.3
The types of information that the Commission would require to enable it to make a considered and responsible ruling would be similar to the kind of information that should be provided when requesting an exemption. On that basis, an application for a ruling would include information regarding:
Consultation
5.4
The Commission could be free to publish its rulings whether they favour the
applicant or not, as the law may be clarified just as
effectively through
affirming as well as declining to affirm the applicant's view.
5.5
The Commission would consult with applicants of a binding ruling,
particularly in relation to the wording of the ruling and any terms
or special
definitions attaching to it. If the Commission declined to make the ruling
sought, the applicant would be informed of
the reasons for the decision to
decline.
5.6
Consideration needs to be given to the extent to which consultation with
third parties should be undertaken. As binding interpretations
of the law,
rulings may affect many people. The question arises as to whether some if not
all applications for a ruling should be
published for public consultation.
Offer Documents
5.7
The offer documents in relation to a securities transaction that is made in
reliance on a ruling would be required to explain the
nature and consequences of
the ruling to the extent these were material to the offer. Investors, therefore,
would be informed prior
to subscribing for securities of the existence of the
ruling and its materiality to the terms of the contract they will enter upon
subscription.
5.8
If a ruling declared that the securities law or some part of securities law
did not apply to the offer, the Commission would have
no further jurisdiction in
respect of the offer or relevant part of the offer while the ruling remained in
force. It seems important,
however, that the promoter of the scheme to which the
ruling related should disclose the ruling, if it wished to rely on it.
Consideration
needs to be given to how, and the circumstances in which, an
offeror who obtained a ruling that the securities law did not apply
should
provide disclosure of the nature and effect of the ruling.
Fees
5.9
Binding rulings would be subject to full cost recovery by the Commission.
There would, we suggest, be arrangements for this which
were modelled on the
Securities (Fees) Regulations 1998.
5.10
The Commission would most likely seek expert advice from senior members of
the legal profession in respect of many, if not all, of
the questions involved
in rulings applications. The cost of this would be recoverable.
5.11
The Commission would make or decline to make a ruling at a formal meeting of
Members. The time of Commission Members and professional
staff would be charged
at a rate set from time to time in the Securities (Fees) Regulations.
5.12
Should the Commission, after consideration, decide not to make a ruling, the
costs already incurred would be nevertheless recoverable.
So too if, after
initiating a request, the applicant subsequently withdrew the request.
5.13
Consideration might be given to the establishment of a panel of suitable expert advisers.
DISCUSSION QUESTIONS
CHAPTER 6 BINDING RULINGS AND THE COURT
Appeals
6.1
An applicant dissatisfied with a ruling may be able to appeal it. A case may be stated for the High Court, on questions of law, under section 26 of the Securities Act. Section 26(1) and (2) provide:
26. Appeals to High Court on questions of law only - (1) Subject to subsections (2) to (10) of this section, every decision of the Commission shall be final and binding on the parties to the proceedings.
(2) Where any party to any proceedings before the
Commission is dissatisfied with any determination of the Commission as being
erroneous in point of law, he may appeal to the High Court by way of case stated
for the opinion of the Court on a question of law
only.
6.2
The succeeding subsections of section 26 set out a strict timetable for the
lodging of an appeal and deal with procedural matters
in respect of the conduct
of the hearing and various other procedural matters.
6.3
A ruling on a particular matter would be a "proceeding before the Commission"
in terms of section 26. Of course, judicial review would
also be mechanism that
may be available for providing relief to persons aggrieved with a refusal by the
Commission to make a ruling
or to persons who believed they had been adversely
affected by a ruling.
Commission and Registrar Still Bound
6.4
If the court did not support the Commission's interpretation in a binding
ruling, we think the Commission and Registrar would still
need to be bound by
the ruling in respect of any persons who had entered into transactions in
reliance on the ruling, at least in
respect of any exercise of their enforcement
powers. This would preserve the certainty of the application of the Commission's
interpretation,
which is at the heart of the binding rulings regime.
6.5
The greatest risk to persons who obtained a ruling which was subsequently
overturned in court is that they may then be open to action
from investors for
breach of the securities law. This may be particularly acute in respect of a
ruling that an offer did not constitute
an offer that was subject to the
securities law and therefore the offer was not made in a registered prospectus
or investment statement.
Under section 37(4) of the Securities Act, any
allotments made in respect of such an offer would be invalid, while under
section
37A, subscribers could notify the issuer that they wished to void their
allotments. The directors of the issuer then become personally
liable to pay
back any subscription moneys, possibly with interest.
6.6
The Commission considers that, under a binding rulings regime, the most
appropriate way to ensure that directors and others with potential
liability,
who act in good faith in reliance on a Commission ruling, could not subsequently
be penalised if a ruling were overturned
on appeal, is through the enactment of
safe harbours in respect of the civil and criminal liability provisions of the
securities
legislation (including the repayment liability on issuers and
directors under sections 37 and 37A of the Securities Act).
Safe Harbour
Provisions, Third Parties, and the Illegal Contracts Act
6.7
A statutory safe harbour provides protection to persons who have made efforts to comply with the law. There are a number of safe harbours already available in the Securities Act, which may be relied upon in certain circumstances by individual issuers, or directors of the issuer, and by promoters and experts. For example, under section 56(2) and (3), a director or promoter who would otherwise be liable to investors for damages in respect of misstatements in an advertisement (for example, in an investment statement) or in a registered prospectus may avoid personal liability if he or she is able to prove, amongst other things, any of the following:
6.8
Section 57(2) and (3) provide similar safe harbours in respect of
misstatements in advertisements or prospectuses made by experts.
There are also
limited safe harbours or defences available in respect of the criminal liability
provisions of the Securities Act.
6.9
Further safe harbour provisions could be enacted in respect of binding
rulings, so that, provided proper disclosure of all material
facts had been made
by the persons relying on the safe harbour, immunity from liability would be
available in respect of any contravention
of the securities law that arose out
of reliance on a ruling.
6.10
It would normally only be where the court had overruled a Commission ruling
that an issuer, directors, promoters or experts would
wish to rely on a safe
harbour from liability.
6.11
Such safe harbours would, in certain circumstances, affect the ability of
investors to obtain relief if they were looking to get their
subscription monies
back. The statutory safe harbours would operate to make a director (or other
potentially liable person) immune
from liability where the court ruled that the
Commission had wrongly interpreted the law and that in following the ruling the
director
had thereby failed to comply with the law. Where this resulted in the
invalidation of the allotments of the securities issued, investors
could not in
those circumstances look to securities law for a remedy, if the only fault of
the issuer under securities law was action
taken in reliance on a ruling.
6.12
In view of the harshness of the result on investors, it may be important to
have a requirement in these circumstances that the court
consider the provisions
of the Illegal Contracts Act, so that the allotments could be validated and the
investment continue. In weighing
up whether or not to grant relief under the
Illegal Contracts Act, the court would bear in mind that the Securities Act is
for the
benefit of investors and is not to be operated to their disadvantage,
provided they have acted in good faith and there are no other
reasons why relief
should not be granted (Westpac Financial Services Ltd v Securities
Commission (1996) 7 NZCLC 261,106).
6.13
If, on the other hand, a director (or other potentially liable person) failed to properly comply with some aspect of securities law not covered by the ruling, he or she could not rely on the safe harbours in respect of rulings merely because the offer was subject to a ruling at the time of the breach.
DISCUSSION QUESTIONS
The Commission is of the view that, if it were to take on a rulings function,
all rulings should be published in an accessible medium
to ensure that they are
publicly available. This not only ties with the efficiency and compliance
purposes behind a rulings regime,
but also ties with the constitutional
principle that people should have ready access to the laws and rules that govern
their activities.
Publication would probably be made in respect of rulings which
endorsed the interpretation promoted by the applicant as well as those
which did
not.
7.2
A further important argument in favour of publication is that it enables the
public to scrutinise a public body's application of the
law to particular
persons or transactions. Public scrutiny is one of the most powerful tools for
ensuring that the use of discretionary
powers is transparent and therefore less
amenable to abuse.
7.3
If a ruling had been made in the case discussed earlier in relation to the
leveraging of securities by ABC Ltd, the factual basis
of the complex series of
transactions involved would need to have been described sufficiently clearly so
that others who came after
were able to rely on the clarification to the law
provided by ABC Ltd's ruling. The ruling itself would indicate that, on the
assumed
facts set out in the ruling, the offer did not constitute an offer of
securities to the public. The reasons given by the Commission
for the ruling
would, in that case, have drawn on the opinion provided by the barrister.
7.4
Meanwhile, ABC Ltd would probably have disclosed the nature and effect of the
ruling in its offer documents. Indeed, it should be
necessary for it to do so if
it wished to rely on the safe harbour provisions that would be available in
respect of rulings. This
returns us to one of the questions referred to at the
beginning of this paper, namely, how and in what circumstances the offeror
would
be expected to give notice of a ruling that securities law did not apply to the
transaction.
7.5
It seems clear, on the other hand, that rulings on the meaning or application of the securities law to an offer of securities to the public should be disclosed in the offer documents by the issuer. This raises the question as to whether it should be an offence to fail to disclose accurate, or indeed any, information regarding a ruling.
DISCUSSION QUESTIONS
CHAPTER 8 A POSSIBLE
ALTERNATIVE: EXEMPTIONS WHERE THE LAW IS IN DOUBT
8.1
Most of the enquiries received by the Commission in respect of which a
ruling, of the type described in this paper, could be made
turn on the question
as to whether or to what extent the law applies to a proposed transaction. A
possible alternative, therefore,
to a new statutory rulings power for the
Commission would be to expand on its current exemption function by empowering it
explicitly
to approve exemptions where it was of the opinion that there was
reasonable doubt about the application of the securities law to
the offeror or
transaction or to a particular aspect of a transaction.
Advantages
8.2
If a new section 5(6) of the Securities Act were to provide something along the following lines, the Commission would have the power to approve exemptions from the law where there was genuine doubt as to its application:
5(6) Where the Commission is of the opinion that there
is reasonable doubt as to the meaning or application of the securities law,
the
Commission may, in its discretion and upon such terms and conditions (if any) as
it thinks fit, by notice in the Gazette, exempt any person or class of
persons from compliance with any of the provisions referred to in subsection
5(5) of this section.
8.3
Such an extension to its exemption power would enable the Commission to
provide the comfort of an exemption for the avoidance of doubt.
This type of
exemption could have been granted in the credit unions case discussed earlier in
this paper.
8.4
If a court later determined that the law did not in fact apply to the
situation, the offeror would be in the position of finding that
it had not
needed an exemption from the law after all. If a court were to find, however,
that the law did apply, the offeror would
have the exemption to rely on for not
having complied with the provisions of the securities legislation, to the extent
of the exemption.
8.5
Procedurally, there would be the advantage that the Commission's practice in
respect of exemptions is well-established and well-understood
by Government
agencies, practitioners and financial market participants. Exemptions can be
processed at moderate cost and relatively
speedily. There would be no
'down-time' while Commission staff and Members ironed out any rough patches in
establishing a new procedure,
as would be likely to arise with a new rulings
function. There would be no implicit challenge to the authority of the court.
There
would be no requirement for the Commission with its mixed membership of
accountants, brokers, company directors and lawyers to become
a tribunal to
determine purely legal questions. It would be less likely that there would be
the legal challenges often associated
with completely new statutory powers.
8.6
Furthermore, the level of legislative change necessary to achieve a small
extension to the Commission's existing exemption function
appears to be
relatively minor. It may even be achievable through a Business Law Reform Bill.
Disadvantages
8.7
The most obvious disadvantage to a power to exempt where the law was in doubt
would be that situations similar to that discussed above
in respect of ABC Ltd's
leveraging of securities might fall outside of this category of exemptions. ABC
Ltd would have benefited
from the exemption if the Commission had accepted that
the application of the law to the transactions was in doubt. ABC would have
obtained the certainty it was seeking that even if the law applied to the
transactions concerned, ABC was exempted from the law in
respect of them.
However, the Commission might not always accept the view of the applicant that
there was a reasonable doubt about
the meaning or application of the law.
Moreover, the Commission might consider that the decision to grant an exemption
might create
doubts about compliance with securities law for other market
participants who had offered similar transactions.
8.8
Whenever it granted such exemptions, the Commission would appear to be making
an authoritative statement that the law was, in its
opinion, in doubt.
8.9
A ruling, meanwhile would have given some added certainty to ABC Ltd that, in the Commission's view, the law did not apply to the situation. Other market participants might also have found such a ruling useful for clarifying how the Commission might view their own rights and obligations, or they might seek the assurance of an individual ruling on their specific transactions. In any event, a ruling for ABC Ltd would not have had negative downstream effects for other market participants. (However, a ruling could be declined on the grounds of being trivial or unimportant if it might produce negative downstream effects outweighing the certainty to be gained by the applicant).
DISCUSSION QUESTIONS
Other Matters
Binding Rulings on Securities Law
A Discussion
Paper
APPENDIX: DISCUSSION QUESTIONS
We invite comment on the issues raised in this paper and would be grateful to have our attention drawn to any important considerations that we may have overlooked. We should also appreciate it if submissions were to include views in respect of the range of questions set out in the paper (repeated below), but particularly those in bold type. Submissions should be sent to the Commission by Friday 4 August 2000.
Chapter 2.
Chapter 3.
Chapter 4.
Chapter 5.
Chapter 6.
Chapter 7.
Chapter 8.
Other Matters
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