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Request for comment on a proposed extension to the Stock Exchange's Faster Electronic Securities Transfer System [2000] NZSecCom 9 (20 October 2000)

Last Updated: 5 November 2014

REQUEST FOR COMMENT ON A
PROPOSED EXTENSION TO THE STOCK EXCHANGE´S FASTER
ELECTRONIC SECURITIES TRANSFER SYSTEM
20 October 2000

1. The Securities Commission is seeking comments on a proposed extension to the FASTER (Fully Automatic Screen Trading and Electronic Registration) securities transfer system. FASTER is an approved electronic transfer system under the Securities Transfer Act 1991 in accord with the Securities Transfer (Approval of FASTER System) Order 1998 ("the FASTER Order").
2. The FASTER system is a system administered by the New Zealand Stock Exchange ("NZSE") and is used to effect the electronic transfer of securities from seller to buyer. FASTER is a system for the transfer and registration of securities.

The FASTER Order

3. The FASTER Order currently has the effect of exempting listed companies from the need to issue certificates and shareholders from the need to complete signed transfers for securities quoted on the NZSE, by allowing for electronic transfer. By way of explanation we attach:
   1. An analysis of the law (Attachment "A").
   2. An extract from the NZSE Fact Book for the year ended 31 December 1999 containing a description of the FASTER system (Attachment "B"); and
   100. A copy of a paper entitled "General Description of the FASTER system for Paperless Clearing, Settlement and Registration of Securities Listed on the New Zealand Stock Exchange" published by the NZSE and dated August 1997 (Attachment "C").
4. Aside from its services to listed securities, the NZSE also provides facilities for its members to trade the securities of approximately 50 unlisted but quoted companies. As those securities are not listed securities the FASTER Order does not apply to them.
5. Rudd Watts and Stone, solicitors for the NZSE, state that:
   "for all practicable purposes (other than enforcing the listing rules against listed companies) the service provided by the NZSE in respect of unlisted securities is the same as for listed securities but with the exception that at present FASTER... cannot be utilised for the electronic settling of trades in unlisted securities."
6. According to Rudd Watts and Stone the settlement of the trades and the transfer of the unlisted quoted securities must at present be done by means of a signed memorandum of transfer. This memorandum must comply with sections 3 or 4 of the Securities Transfer Act 1991 or section 84(2) of the Companies Act 1993.

The Extension

7. The members of the NZSE inform us that this process is cumbersome and inefficient. They would like the scope of the FASTER Order expanded so it also covers securities quoted and traded by NZSE members although not subject to a listing agreement with the NZSE. The application by the NZSE is to extend the FASTER Order so that it applies to all quoted securities whether listed or not.

Safeguards

The Exchange´s Rules, Regulations and Code of Practice

8. All members of the NZSE are bound by its Rules, Regulations and Code of Practice which apply to their dealings in quoted securities.
9. The NZSE Rules are made by the NZSE and approved by the Governor General in Council. They deal generally with the membership of the NZSE, its board, disciplinary committee and relations between members including the rule that all trades are between members and each member is liable on the contract with the other member as a principal unless they have otherwise specifically agreed in writing.
10. The NZSE Regulations are also made by the NZSE board but are not subject to approval by the Governor General. They are more detailed than the Rules.
11. The NZSE consider that the Rules, Regulations and Code (with some minor exceptions that will be referred to in the Unlisted Quoted Securities Agreement), and also the Securities Amendment Act 1981 all apply equally in respect of quoted securities whether listed or not. To put this beyond question the NZSE intends to record in its regulations that they apply to listed and unlisted securities traded by members and settled by means of FASTER. Rudd Watts and Stone state that the essential point in this application is that the safeguards are the same for unlisted securities as they are for those that are listed.
12. Rudd Watts and Stone have provided us with a formal legal opinion stating that where the Rules, Regulations, Code and the Sharebrokers Amendment Act 1981 apply to the transfer of securities, they apply fully to the transfer of unlisted quoted securities except for a few limited cases where they are intended to apply only to listed securities.

The Unlisted Quoted Securities Agreement

13. The listing rules govern the relationship between the issuer and the exchange for listed securities. The listing rules do not apply to unlisted companies. The NZSE proposes entering into an Unlisted Quoted Securities Agreement with each issuer of unlisted quoted securities that wishes to participate in the electronic transfer facility. The extended FASTER Order will contain a condition that issuers must be party to a listing agreement or a securities transfer services agreement (the Unlisted Quoted Securities Agreement). This agreement will relate to the transfer of securities. It will also require compliance with Listing Rule 7.10 (rights issues), Listing Rule 7.11 (allotment of securities) and Listing Rule 7.12 (announcements and information to be supplied to NZSE) but will not include other aspects of the Listing Rules. Rudd Watts and Stone summarise the obligations in the Unlisted Quoted Securities Agreement as the following:
    1. of the issuer to connect its electronic registry to the FASTER system and to keep it connected during the normal business hours of the NZSE;
    2. of the issuer to comply with all the requirements of the NZSE relating to the operation of FASTER;
    100. of the issuer to reinstate any holder whose securities have been transferred by means of an electronic entry which has not been authorised by the holder;
    4. of each member of the NZSE to give a warranty to the issuer that only valid transfers will be entered through FASTER;
    5. of the issuer to issue statements to holders of the issuer´s securities in the same manner as contained in listing rule 11.2 (that rule providing a number of details which the statement must include) whenever there is a transfer of securities to or from the holder and at any time upon request by a holder if the holder has not been issued a statement within the last six months.
14. The agreement contains provision for the Exchange to remove issuers who do not comply from the system.

Warranty Given By Each Member Of The NZSE To Issuers

15. A warranty is given under NZSE Regulations 14(7) and 14(8) which read as follows:

"14(7) Warranty by Member Firms
Every Member firm who completes a Client Inward Transfer will be deemed to warrant to the Issuer that the transfer is valid and has been authorised by the registered holder of the Securities being transferred and to indemnify the Issuer for any loss suffered by the Issuer due to a breach by the member firm of that warranty, without prejudice to any right of the member firm under the Exchange´s List Rule 11.3.2.

14(8) Cause of Action
The warranty and indemnity contained in Regulation 14(7) constitute promises which confer and are intended to confer a benefit on Issuers within the meaning of section 4 of the Contracts (Privity) Act 1982 and, therefore give rise to a cause of action by an Issuer against the member firm in question; provided that this obligation on the part of the member firm shall not affect or prejudice any other right the member firm may have."

16. The warranty will be confirmed in the Unlisted Quoted Securities Agreement.
17. The NZSE has arranged insurance cover of $50m for the benefit of issuers where an invalid transfer has been entered by a broker into the FASTER system. The reason that the cover is provided to issuers is that in the event of an invalid transfer being entered the issuer is required by law to cancel the transfer and reinstate the original holder or if that is not possible acquire replacement securities and transfer them into the name of the applicable holder so that the holder is not disadvantaged. This obligation will be reinforced by the Unlisted Quoted Securities Agreement.

Fidelity Fund

18. The NZSE fidelity guarantee fund is established under Rule 25 and applies to persons who have suffered pecuniary loss from a stockbroking transaction as a result of a member being unable to meet its obligations. The NZSE inform us that it applies equally to non listed quoted securities as to listed securities.

Legal Issues

19. Under section 7 of the Securities Transfer Act 1991, the Governor General may, on the advice of the Minister of Commerce given in accordance with a recommendation of the Securities Commission, approve a system that is wholly or partly electronic for the transfer of securities.
20. To streamline this system an exemption from the provisions of s54 of the Securities Act 1978 (Certificates Evidencing Securities) may be necessary. We attach as attachment "A" our interpretation of the relevant legislation.

Conclusion

21. We are now considering this application. As part of that consideration the Commission would be pleased to hear from those persons and organisations that will be substantially affected by any Order in Council made in regard to the application.
22. Accordingly we request you send us any comments you may have regarding the requested extension.
23. Comments are requested by 19 November 2000.

ATTACHMENT "A"
Legal Issues

24. The principal requirements for transfer of securities can be found under section 54 of the Securities Act 1978, sections 84 and 95 of the Companies Act 1993 and the Securities Transfer Act 1991.

Transfers

Section 84 of the Companies Act

25. Section 84 provides primary rules of law about the transfer of shares. Alternative or concurrent provisions appear in the Securities Transfer Act.
26. Section 84 will not apply to shares transferred on a system approved under the Securities Transfer Act: section 9 of the Securities Transfer Act.

Certificates

Section 54 of the Securities Act

27. Section 54 of the Securities Act imposes obligations relating to share certificates. These do not apply where FASTER now applies. There is a question as to the section´s applicability should the FASTER extension to the securities of unlisted issuers be authorised.
28. Section 54 of the Securities Act does not apply "to a company to which ... section 95(2) of the Companies Act 1993 ... applies.": section 54(4).
29. Section 95(2) provides:
    "Nothing in subsection (1) of this section applies in relation to a company the shares in which can be transferred under a system authorised or approved under the Securities Transfer Act 1991 that does not require a share certificate for the transfer of shares."

Our Interpretation

30. We consider that section 95(2) of the Companies Act can only apply where subsection (1) of section 95 is relevant. Subsection (1) relates to shares "subject to a listing agreement". Therefore without an exemption non-listed companies trading under the extension of the FASTER order will be subject to the obligations imposed in section 54.

Alternative Interpretation

31. The alternative interpretation would see section 95 applying to any: "company the shares in which can be transferred under a system authorised or approved under the Securities Act 1991 that does not require a share certificate for the transfer of shares."

In that case section 95(2) would apply whether or not the company would otherwise fit into section 95(1).

32. Accordingly it would not matter that companies are not subject to a listing agreement for the purposes of section 54(4) of the Securities Act 1978; that if the FASTER system is extended section 95(2) would apply to the non listed companies trading under it and section 54 would not apply.

Sub-Conclusion

33. We consider the most convincing interpretation to be that section 95(2) does not apply because subsection (1) does not apply. At best there is ambiguity as to whether section 95(2) applies. Accordingly an exemption may be necessary to remove the obligations imposed by section 54 of the Securities Act. Alternatively the Business Law Reform Bill referred to below may deal with this by an amendment to section 95(2).

Section 95 of the Companies Act 34

34. Compliance with section 95(5) of the Companies Act, necessitating share certificates to accompany share transfer forms, is unnecessary: section 9 of the Securities Transfer Act. This supremacy of the Securities Transfer Act is likely to be made even clearer by a proposed amendment to section 95(2) in the upcoming Business Reform Bill. The Business Law Reform Bill presently before Parliament contains an amendment to section 95(2) to omit the words "of this section" and substitute the expression "or subsection (5)".
35. Prior to enactment of the Business Law Reform Bill, sections 95(3) and 95(4) of the Companies Act will still apply. These sections oblige the company to send the shareholder, on request, a certificate stating:
    1. the name of the company;
    2. the class of shares held by the shareholder; and
    100. the number of shares held by the shareholder to which the certificate relates.
36. Rudd Watts and Stone suggest that this certificate will become meaningless where the FASTER system is implemented as it will not evidence ownership; that accordingly the obligations imposed in these sections should be removed.
37. This problem will be dealt with by enactment of the Business Law Reform Bill. If section 95(2) is amended as proposed, then a company issuing unlisted quoted securities settled through the FASTER system extension would be a company to which subsection (2) applies. Accordingly a shareholder will not be able to apply to the company for a certificate under section 95(3) as the proviso in that section will apply.