Securities Act non-compliance – the legislators step in

Earlier this year, it came to light that certain Australian Registered Managed Investment Schemes had breached the Securities Act when offering their units to New Zealand investors. It seems that quite a few Schemes may be affected and that the amount of money involved could be several hundreds of millions.

In an unusual move, legislation is proposed to provide a mechanism to retrospectively correct such past non-compliance by Australian based fund managers1. It is likely that, in taking this step, legislators have been influenced by the disproportionate consequences that would otherwise flow from a largely technical breach.

What happened?

These Australian Schemes were operating under a Securities Act Exemption Notice that enabled them to offer in New Zealand using an Australian prospectus rather than a New Zealand prospectus. The Exemption Notice contains conditions requiring the Schemes to lodge certain documents with the Companies Office e.g. copies of the Australian prospectus and the Scheme's constitution.

It appears that some Schemes failed to keep these filings up to date. Arguably, it is necessary to lodge updated documents as soon as the original documents are amended and this did not always occur.

What did this mean?

Because the application of the Exemption Notice was expressed to be conditional on these documents being lodged, the failure to meet this requirement meant the Exemption Notice did not apply. Therefore, the Schemes were required to comply in full with New Zealand securities laws, including producing a New Zealand prospectus.

A failure to produce a New Zealand prospectus when one is required has very significant implications. Any securities allotted are treated as invalid and the issuer is required to refund any moneys received.

This is an automatic consequence regardless of the fact that few (if any) investors would conduct a Companies Office search for the documents in question. Investors wishing to see these documents would be much more likely to request them from the Scheme and so would not normally have been prejudiced by the non-compliance.

The position is exacerbated by recent performance in the capital markets. Many investors have suffered losses and so the prospect of a return of their original investment is attractive.

The proposed legislation

Legislation has been proposed to provide a mechanism for validating these invalid securities. If the legislation is passed, Schemes will be able to apply to the High Court to have the securities validated. The Court is likely to validate unless the investor can demonstrate that he/she has been prejudiced by the non-compliance.

Please feel free to contact Mark Todd if you have any queries.

1. A Supplementary Order Paper to the Business Law Reform Bill, which will amend the Securities Act, was announced by Commerce Minister Lianne Dalziel on 16 October 2003.

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.