Duties of a Corporate Trustee
The law requires that a Trustee or a statutory supervisor be appointed to monitor the performance of business entities offering debt securities, unit trusts, KiwiSaver default schemes or participatory securities to members of the public. Only a company authorised by its own Act of Parliament or a Trustee or statutory supervisor approved by the Securities Commission can undertake this role.
Trustee Corporations are appointed to:
- most of New Zealand's debt security issues and unit trusts
- a significant number of New Zealand's participatory security issues offered to the public, and
- an increasing number of superannuation and KiwiSaver schemes.
Role in Debt Securities
Debt securities include a range of financial instruments which enable the issuer of the security to borrow money. They include bonds, debentures, convertible notes or capital notes which are either secured or unsecured, subordinated or unsubordinated.
By law, offerors of debt securities to the public must appoint an independent Trustee and register a trust deed.
The role of a Trustee includes:
- negotiating the content of the trust deed which sets out the 'rules' of the appointment;
- confirming that the offer of debt securities set out in the prospectus complies with any relevant provision of the trust deed;
- monitoring compliance with the terms of the trust deed;
- monitoring reports supplied by the issuer's directors and auditors;
- acting as a liaison between issuers and investors, particularly in times of crisis, and
- approving variations to the terms of the trust deed which are not regarded as prejudicial to the interests of the investors.
Trustees are required to exercise reasonable diligence to ascertain whether there has been any breach of the terms of the deed or of the actual offer and to take such action as necessary to ensure such breaches are remedied. Trustees must also satisfy themselves that the company or group issuing the securities has sufficient assets to repay the amount of the debt securities as they fall due for payment.
Trustees have the right to inspect accounting and other records of the issuer of an offer of securities. Trustees may ask an issuer to call a meeting of security holders at any time. Trustees also have the power to apply to the Court for directions and generally have the power to appoint receivers or liquidators.
Role in Unit Trusts
The law relating to unit trusts requires the appointment of a Trustee and registration of a trust deed. An investor in a unit trust relies on the expertise of a manager for the performance of the fund and on a Trustee to independently hold the assets of the fund.
The Unit Trust Act 1960 is the predominant legislation governing the regulation of unit trusts in New Zealand. The legislation provides that:
- there must be both a manager and a Trustee;
- the manager has power to manage the investment;
- the Trustee has vested in it or its nominee company all investments;
- the Trustee must be independent from the manager, and
- the Trustee may veto any investment or sale proposal which the Trustee believes is manifestly not in the interests of the unit holders.
The Trustee is required to confirm that the manager has managed each of the funds in accordance with the provisions of the trust deed, the prospectus and investment statement. The prospectus/investment statement will include information on the authorised investments and investment policies.
The Trustee generally has the following powers:
- to authorise any borrowing requested by the manager;
- on the removal or resignation of the manager to appoint a temporary manager;
- to approve the appointment of a new auditor or to remove the existing auditor;
- to agree to modifications to the terms of the trust deed where those changes are not considered to be prejudicial to the interests of the unit holders;
- to wind up the trust and dispose of assets, and
- to appoint representatives to attend or chair meetings of unit holders.
Role in Participatory Securities
Some examples of participatory securities are interests in retirement villages, forestry partnerships, marinas, agricultural partnerships and horticultural partnerships such as kiwifruit or berry farming.
The securities in the form of licences to occupy issued by retirement villages are the most common kind of participatory security that Trustee Companies deal with. An investment in a retirement village is a major commitment for most residents because often they have sold their family home to purchase occupancy rights. The Retirement Villages Act 2003 came into force on 1 May 2007.
The need for adequate disclosure to these investors is important if their interests are to be protected.
Participatory securities are supervised by a statutory supervisor and the offering company or organisation is required to register a deed of participation.
The role of the statutory supervisor is to exercise reasonable diligence to ascertain whether or not any breach of the terms of the deed or of the offer of the securities has occurred and, except where the statutory supervisor is satisfied that the breach will not materially prejudice the interests of the holder of the securities, must do all it can do to cause any such breach to be remedied.
The statutory supervisor has the power to:
- Require the manager to make available all financial records;
- Remove the manager in the event of bankruptcy, receivership or a material breach of the deed of participation;
- Require the manager to summon a meeting of the holders of the securities and persons holding not less than one-tenth in nominal value of the issued securities, and
- Have the right to appoint the chairman of every security holders meeting.
Role in Superannuation Schemes
There is growing recognition among New Zealanders that we must save for retirement. This has focused attention on the extent to which investments can and should be protected.
The Trustee of a superannuation scheme is deemed to be the issuer of the securities under the Securities Act. The Trustee remains responsible for the following, although this work can be delegated to a third party:
- the preparation of financial statements;
- the issue of the prospectus, and
- the investment policy.
There is no legislative requirement for a Trustee Corporation to be appointed to superannuation schemes. Commonly, senior executives of companies have been appointed. However, this opens the way for conflicts of interest.
The appointment of an independent Trustee Corporation ensures independence from the company.
The Superannuation Schemes Act 1989 requires that the trust deed of every superannuation scheme specify conditions of membership and termination, contributions, conditions for benefits to be paid, the number of Trustees and the provision for their appointment and retirement, and the circumstances in which the scheme can be wound up.
The Act also requires Trustees to keep accounts. The Trustee will generally maintain a separate account in the name of each member and is required to provide members with a copy of the annual financial statements and a copy of their own account on an annual basis.
Where a Trustee Corporation is appointed as sole Trustee, it is common for a liaison committee to be established which is made up of representatives of the employer and employees. The liaison committee is most helpful when it comes to assisting the Trustee in making decisions regarding scheme members. For instance a member who may wish to retire early and gain access to their contributions or a member who through hardship requests early termination.
Under various Acts of Parliament, Corporate Trustees have statutory responsibilities to represent the interests of investors and lenders, but many investors have generally been unaware of these activities and the obligations on Trustees that go with them. This has been a situation further compounded in the instance of the recent finance company failures.
In response to this lack of understanding, TCA has continued to work closely with government leading to new legislation to license Trustees. The Trustee Licensing regulations will give government, through the Financial Markets Authority, the ability to monitor the activities of Trustees. This oversight will lead to an improved understanding of what their responsibilities and obligations are, and that Trustees are meeting their responsibilities, which will inevitably lead to increased investor confidence in the financial system.
It is most significant that TCA members, who have long had statutory rights to conduct Corporate Trustee services, are voluntarily giving these rights up in favor of the new licensing regime in the interests of being seen to be performing their Corporate Trustee responsibilities fully, professionally and transparently.
The new legislation to introduce Trustee licensing will allow new market participants to offer Corporate Trustee services provided they meet government criteria based around the concept of “fit for purpose.”