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Securities Commission policy in respect of approval of trustees and statutory supervisors. A discussion paper [2001] NZSecCom 1 (25 May 2001)

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

A DISCUSSION PAPER
SECURITIES COMMISSION

25 May 2001

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
    100. 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?

PART I
INTRODUCTION

1. The Commission is reviewing aspects of its policy in relation to the approval of trustees and statutory supervisors under section 48 of the Securities Act 1978 ("the Act").
2. This paper describes the role and the procedures for the appointment of trustees and statutory supervisors under the Act. It also describes the Commission's existing criteria and procedures for approving such persons.
3. In broad terms, we have examined the following policy questions:
   1. Is there a useful role for trustees and statutory supervisors in New Zealand's securities regulatory system? What is that role?
   2. Why should the Commission approve persons to act as trustees and statutory supervisors? Are there alternative means, without the need for the Commission's involvement, to ensure that appropriate people are appointed to act as trustees and statutory supervisors?
   100. Assuming the Commission is to continue its role of approving trustees and statutory supervisors, what criteria and procedures should be applied by the Commission in determining whether to approve people to act as trustees and statutory supervisors?
   4. Is there a need for the Commission to have an ongoing regulatory role in respect of approved people?

Invitation to Comment

4. We invite general comment on the role that the Commission has played to date in administering its discretion under section 48 of the Act and on any suggestions for change. A number of discussion questions are set out at the end of each Part and for convenience these are repeated in the Appendix at the end of the paper. We would be pleased to receive any views, observations or comments that you may wish to make to us about this paper generally, including submissions in respect of the discussion questions.
5. 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 6 July 2001. They can be e-mailed to tim.dolan@seccom.govt.nz or sent in hard copy to:

Tim Dolan
Lawyer
Securities Commission
Facsimile: (04) 472 8076
PO Box 1179
WELLINGTON

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
    100. 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?

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

29. The Act does not provide explicit direction as to the criteria and procedures to be adopted by the Commission in approving trustees and statutory supervisors. The Commission is empowered under section 48(3) to approve any person, or class of persons, to act as a trustee or statutory supervisor either in respect of specified securities, or a specified class or classes of securities only, or in respect of all securities. Any such approval may be granted on such terms and conditions as the Commission thinks fit.
30. The Commission has from time to time reviewed and refined its criteria and procedures for approvals. The current criteria have four main elements namely, competence and financial capacity, character, independence and accountability. Set out below is a restatement of the criteria that the Commission takes into account when approving trustees and statutory supervisors, and the procedures and information to be sought from applicants to satisfy that criteria.

Competence and Financial Capacity

Criteria

31. The applicant must be able to demonstrate competence to fulfil the duties and functions required of a trustee or statutory supervisor under the law in respect of the particular securities being offered ("the duties").
32. The applicant, and where the applicant is a company, the applicant's directors, should have:
    1. appropriate skills, qualifications, and experience to carry out the duties;
    2. adequate financial resources to carry out the duties and to meet the potential liabilities of office; and
    100. adequate personnel and other resources.

Procedures / Information Required

33. The applicant should prepare and present a report to the Commission. The presentation should focus on:
    1. the curriculum vitae of the applicant, or, where the applicant is a company, the curriculum vitae of each director of the applicant and any key management staff, setting out the relevant skills, qualifications and experience of those people;
    2. where the applicant is a company, core information about the applicant including details of incorporation, directors, shareholders and financial statements if available;
    100. the proposed role of the trustee or statutory supervisor;
    4. the procedures it will observe in carrying out its functions, for example, reporting and communication channels with the issuer and security holders;
    5. the standards it will adhere to in conducting its business;
    6. a brief description about its level of resources and its staff, including a profile of key management staff responsible for carrying out the duties of the trustee or statutory supervisor on a day to day basis; and
    7. whether the applicant needs to delegate any of its duties to an external body, and if so, the reasons for that delegation and the procedures to ensure the proper performance of those duties.
34. In assessing the competence of the applicant, the Commission has regard to the nature of the securities being offered and the particular functions of the applicant. For example, the experience and procedural systems expected of a trustee charged with acting in respect of a substantial finance company will differ from those expected of a statutory supervisor whether with or without a custodial role. Similarly, the level of resources required of a statutory supervisor applying for approval in respect of schemes generally, may be higher than that of a statutory supervisor applying for approval in respect of a particular scheme.

Comment

35. At present, the Commission does not require applicants to have a minimum amount of paid up capital. It is considered that the introduction of a minimum capital requirement would be a marked departure from the settled policy of New Zealand company law. There is no requirement for companies to have a minimum amount of capital under the Companies Act 1993.
36. We do not think it is necessary for the Commission to prescribe a minimum level of capital in the future. The Commission is entitled to consider the resources of the applicant, including working capital and indemnity insurance, in order to make an assessment as to whether the applicant is able to carry out its duties and to meet its obligations as they arise.
37. To date, the Commission has not approved an individual to act as a trustee under the Act. The Commission has considered that the duties and obligations imposed on a trustee differ from those placed on a statutory supervisor, and that recognised companies are better suited to the task than individuals. Individuals have, however, been approved to act as statutory supervisors but only in respect of specified schemes, rather than on an unlimited basis.

Character

Criteria

38. The applicant (and if the applicant is a company, its directors) and key management staff must not:
    1. have been convicted of a serious offence, in particular a crime involving dishonesty (as defined in section 2(1) of the Crimes Act 1961) including theft and fraud;
    2. be prevented from acting as a director under section 199K of the Companies Act 1955 or under sections 382, 383 or 385 of the Companies Act 1993;
    100. have been a bankrupt at any time during the last five years; or
    4. have been disqualified, banned or suspended for more than six months from holding a licence or authorisation to practice under the law or membership rules of any professional association at any time during the last ten years.
39. The applicant, or the applicant's directors and shareholders, if the applicant is a company, must be chartered accountants or lawyers, or otherwise members of a professional body which the Commission designates from time to time. The Commission may make inquiries of these professional bodies before approving an application. These bodies maintain and enforce rules relating to competence and discipline within their profession.

Procedures / Information required

40. The applicant, if the applicant is a company, must provide a written assurance that it has undertaken reasonable investigations and is satisfied that the above criteria are satisfied in respect of directors and key management staff.

Comment

41. It is arguable that the Commission's dishonesty criterion (paragraph 38) may be superfluous if the applicant, or if the applicant is a company, the applicant's directors and shareholders are required to be members of a professional body. A chartered accountant or lawyer who has been convicted of a serious offence will be subject to the disciplinary process within a designated professional body. A blanket prohibition on persons whose offence took place ten or twenty years ago may be rather extreme if a designated professional body has determined that the person is fit to practise the profession without qualification or restriction.
42. The Commission has only approved applications where the applicant or its directors and shareholders are chartered accountants or lawyers. The Commission has said it is willing to consider approving an application where the applicant, or its directors and shareholders, are members of a professional body other than the Institute of Chartered Accountants of New Zealand or the New Zealand Law Society. This matter has not been tested in practice.
43. The effect of the professional membership criterion (paragraph 39) may be that people who have practical experience, but who are not members of a professional body, may not be eligible to act as directors or shareholders of a trustee or statutory supervisor. It is also argued that the need for directors and shareholders of an applicant to be members of a professional body may also increase the potential for conflicts of interest, where the trustee / statutory supervisor deals with chartered accounting firms and lawyers. It is suggested that applicants should be allowed a greater level of choice, for example, if only a portion of their directors or shareholders needed to satisfy the professional membership criterion.

PART IV
COMMISSION'S CRITERIA AND PROCEDURES FOR APPROVING TRUSTEES AND STATUTORY SUPERVISORS (Cont...)

Independence

Criteria

44. The applicant and where the applicant is sponsored by a firm (for example a firm of chartered accountants) any person or firm affiliated to either the applicant or the sponsor's firm, and any of their employees, shareholders, or officers, must be independent from and have no involvement, relationship or interest, including involvement as an auditor, in respect of, any issuer of securities or any securities offered by the issuer for which the applicant acts as trustee or statutory supervisor.
45. The applicant must not engage in any business other than as a trustee or statutory supervisor under the Act, or as approved by the Commission.

Procedures / Information required

46. The applicant and the applicant's sponsoring firm, as well as any person or firm affiliated to either the applicant or the sponsor's firm, must provide a written undertaking that neither they nor any of their employees, shareholders, or officers will at any time hold any office or appointment or have any involvement, relationship or interest, including involvement as an auditor, in respect of any issuer of securities or any securities offered by the issuer for which the applicant acts as trustee or statutory supervisor.

Comment

47. A number of persons approved by the Commission to act as trustees or statutory supervisors appear also to have relationships with chartered accountancy firms which provide audit, taxation and other services. Our present criteria prevent such chartered accountancy firms from having any involvement with the issuer or the securities offered by the issuer. Does this criterion impose an unnecessary barrier to business?

Accountability

Criteria

48. The applicant must demonstrate that it has adequate professional indemnity insurance.

Procedures / Information required

49. Applicants should provide the following:
    1. a statement from the applicant's insurer in relation to the amount and currency of the applicant's professional indemnity insurance and confirmation that it is currently in force;
    2. a statement from the applicant that, on the basis of independent expert advice, the professional indemnity insurance is adequate; and
    100. an undertaking that adequate professional indemnity insurance cover will be maintained.

Comment

50. The Commission has in the past required personal guarantees in respect of the obligations of the applicant. It no longer does so. It is likely that professionals such as chartered accountants and lawyers will have structured their affairs to limit their personal exposure to liability. In those cases it may not be worthwhile pursuing a personal guarantee. The requirement to have adequate professional indemnity insurance in force provides an alternative safeguard.

Duration of Approval

51. The Commission may limit the duration of any approval. Recently the Commission has tended to limit the duration of an approval to a period of five years, although some approvals have been for an unlimited period. Given that many appointments of trustees and statutory supervisors are often required for a relatively long term, it may be preferable for the Commission to remain flexible about this. Given that trustee corporations are empowered to act for an unlimited period, should trustees approved by the Commission also be approved for an unlimited period? If so, in what circumstances? It should be noted that pursuant to section 48(4) of the Act, the Commission has the power to revoke any approval provided that no such revocation shall affect any appointment made prior to the date of revocation.
52. If the duration of appointment is limited, a further question arises as to whether approved persons should be required, when reapplying to the Commission, to supply all the information required of unapproved applicants including meeting with the Commission in order to satisfy the Commission's competence criterion (paragraph 33).

Discussion Questions

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
NEED FOR AN ONGOING REGULATORY ROLE

53. To date the Commission has not exercised an ongoing role in assessing the continuing suitability of trustees and statutory supervisors once approved. It does not have an explicit mandate for this. Nevertheless we consider that some level of ongoing oversight is appropriate.
54. If a new oversight role were established, it would we suggest be on the basis that the trustee / statutory supervisor is required, as a condition of approval, to notify the Commission in writing of any change in matters material to the Commission's approval of that person as a trustee / statutory supervisor or matters which may have a adverse material effect on that person's ability to carry out its duties. The trustee / statutory supervisor would also be required to report to the Commission on an annual basis as to whether there has been any change in such material matters.
55. The question then arises as to whether copies of the proposed report should be made available to investors on request. It is possible that public disclosure of the information may lead to greater public confidence in the role of trustees and statutory supervisors and a greater appreciation of the importance of this role.
56. If the Commission were to undertake this ongoing regulatory role it would need to be given any necessary resources.

Discussion Questions

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?

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?