Trustees of debt securities, KiwiSaver schemes and unit trusts will have greater powers, and greater obligations, from 1 October 2011 under regulations passed last month.
Issuers and providers will need to amend their trust deeds to reflect the new provisions.
Also in prospect, through the draft Financial Markets Conduct Bill (FMCB), are moves to impose an express standard of care on trustees and to limit trustee indemnities.
The Securities Amendment Regulations (No. 2) 2011 (the Regulations) will require each trust deed relating to debt securities to include the following provisions:
- the issuer must provide to the trustee any reports the trustee requires
- the issuer must report to the trustee any breach or possible breach of the terms of the trust deed or the offer of the debt securities
- the trustee may engage an expert, at the cost of the issuer, to assist the trustee to determine the financial position of the issuer or to review the business, operation, management systems or governance of the issuer
- the trustee may agree with the issuer any amendments to the trust deed that do not adversely affect the interests of the holders of debt securities, and
- the trustee holds on trust for the benefit of the holders of the debt securities certain rights, including the right to enforce the issuer’s duty to repay.
Matters to be specified in trust deeds for debt securities
Each trust deed relating to debt securities must include the following matters:
- the form of the issuer (whether it is a body corporate, friendly society or credit union)
- the governance requirements with which the issuer must comply
- the frequency and contents of the reports the issuer must provide to the trustee
- the frequency, procedure, business to be conducted and voting rights for meetings of holders of debt securities, and
- the terms relating to the appointment and removal of the trustee and the trustee’s powers and duties.
KiwiSaver schemes and unit trusts
Each trust deed relating to a KiwiSaver scheme or unit trust will be deemed to include clauses that:
- the trustee must exercise reasonable diligence to ascertain whether or not there has been any breach of the terms of the trust deed or the offer of the interests/units, and
- the trustee must do all the things it is empowered to do to cause any breach of the duty above to be remedied (unless such breach will not materially prejudice the holders of the interests/units).
These provisions already apply to trustees of debt securities under Schedule 15 to the Securities Regulations 2009.
Immediate impact of the Regulations
Issuers will need to amend their existing trust deeds by 1 October 2012 to reflect the new Regulations.
Trustees will have very wide powers to obtain information from issuers that may help if a trustee has concerns about an issuer or its business. Trustees in relation to debt securities already have considerable powers under the Securities Regulations 2009 to require issuers to provide information so this should not be a significant change for those trustees and issuers.
The Regulations should not have a material impact on the day to day operation of trustees or issuers. A number of trust deeds already include clauses similar to these new provisions so in practice there may be little change for those trustees and the issuers they supervise. In other cases, we do not expect there will be a significant increase in reporting requirements unless there are challenges within the issuer’s business. Trustees will however have greater obligations if a breach of the trust deed occurs.
The Regulations are intended to improve the supervision of issuers but any improvement will naturally depend not just on the existence of these powers, but also on the extent to which a trustee exercises them and acts on the information received.
Impact of the Financial Markets Conduct Bill
Many of these new provisions will eventually be superseded by enhanced provisions governing trustee conduct in the FMCB (when it is enacted) and supporting regulations.
In that context, trustees should also be aware of proposed provisions in the FMCB to expressly impose a standard of care on trustees and to introduce new limits on their ability to be indemnified for their role as trustee.
Trustees must exercise the care, diligence and skill that a prudent person engaged in the business of acting as a licensed supervisor would exercise in the same circumstances. Any indemnity from the issuer’s or scheme’s assets or limitation of liability is only available in relation to the “proper performance” of the trustee’s duties as set out in the FMCB and must be set out in the trust deed – in contrast to the current position which essentially allows trustees to be indemnified for all actions except negligence.
The Regulations come into force on 1 October 2011. The draft FMCB is expected to be introduced to Parliament in early October and enacted in mid-late 2012 with commencement in early 2013.