What does a Supervisor do?
In its corporate supervisory capacity, Trustees Executors (via its Corporate Trustee Services division) performs various legislated roles as set out across a number of Acts of Parliament. In essence, a supervisor is necessitated by law to act as the legally independent guardian of investors’ best interests in relation to certain types of investments and their issuers, managers and operators.
In this function, the supervisor is required to actively monitor the issuer/manager/operator of the supervised investment in order to ensure that the issuer/manager/operator does its job properly in full compliance with its duties and obligations under applicable legislation, regulations, governing documents and supervisory agreements. This monitoring activity can change into an enforcement role for the supervisor if the issuer/manager/operator is non-compliant with its obligations.
The supervisor also often, but not always, takes custody of the assets of an investment it supervises on behalf of investors - for whom the assets are held in trust - and therefore becomes the investment’s custodian. The supervisor can appoint another party to act as the custodian in its place, but cannot contract out of its own responsibilities concerning custodianship by doing so. Thus the activities central to the supervisor’s role can be summed up as serving the interests of investors through monitoring, enforcement and (if required) custodianship of their investment. These core functions of a supervisor are intended to provide enhanced investor protection as their common objective, and in order to perform these functions, the supervisor must be officially licensed by the Financial Markets Authority (FMA).
In this article, aspects of monitoring and enforcement by supervisors will be considered, with the topic of custodianship reserved for another piece.
Acts of Parliament Applying
Four Acts of Parliament primarily apply to the corporate supervisor’s role. These are summed up in the table below.
Table 1. Applicable Legislation
In what follows, the role of the supervisor in conducting monitoring and enforcement activities on behalf of investors will be described and analysed in respect of the four Acts of Parliament listed in Table 1.
1. Financial Markets Supervisors Act 2011
The Financial Markets Supervisors Act is the legislative foundation of the role of the corporate supervisor. The Act establishes that the Financial Markets Authority (FMA) is the primary regulator of supervisors. In its regulatory capacity, the FMA (i) grants licenses to corporate supervisors permitting them to operate with respect to supervising nominated investment entities, and (ii) enforces strict compliance discipline on licensed supervisors with respect to the terms and conditions of their licenses, backed up by a penalties regime. The FMA styles licensed supervisors as its “front line regulators”, but this description is not quite accurate because supervisors are not regulators. What supervisors do instead is to act as the direct interface and interpreter between the individual investment entities and their issuers/managers/operators that they are licensed by the FMA to supervise, and the FMA itself as the true regulator of all these various parties, supervisors included.
The particulars of the duties, powers and obligations of supervisors licensed by the FMA are detailed below in respect of the other three Acts of Parliament mentioned in Table 1, namely the Financial Markets Conduct Act (Section 4), the Non-bank Deposit Takers Act (Section 5), and the Retirement Villages Act (Section 6). These parts may be referred to as required for understanding core legislative obligations imposed on licensed supervisors under each Act. Relevant sections from each Act receive brief summaries provided in what follows.
2. Financial Markets Conduct Act 2013 (FMCA)
The FMA is the regulator of supervisors under the FMCA. The Act is a huge piece of legislation, of which Part 4 Governance of financial products contains the key provisions applicable to supervisors with respect to supervising, as treated separately in their own specific sections, debt issuers (eg., bond issuers and non-bank deposit takers) and registered schemes (eg., registered managed investment schemes/MISs such as retail managed funds, KiwiSaver schemes, superannuation schemes, forestry trusts, mortgage trusts, etc.). Core sections of Part 4 setting out respectively what supervisors must do in relation to debt issuers (sections 111-3) and registered schemes (sections 152-4), along with sections 203-4 on supervisors’ duties to report to the FMA non-compliance matters concerning both debt issuers and registered schemes, are key to understanding supervisor functions under the FMCA. The strong parallels between the law on debt issuers and the law on registered schemes are apparent in the near identicality of language used throughout the relevant sections.
In summary, sections 111 and 152 set out the functions of supervisors of debt issuers and registered schemes respectively. These sections provide that a supervisor must act on behalf of investors in relation to the investment issuer or manager, the applicable trust deeds and documents, and contraventions of issuer obligations. Additionally, the supervisor must supervise the issuer’s or manager’s performance of obligations and maintenance of financial soundness, and itself comply with applicable legislation and the governing documents (typically trust deeds and statements of investment policy and objectives/SIPOs). The sections also require that the supervisor must not delegate its functions outside of what is permitted under the FMCA and the Financial Markets Supervisors Act.
Sections 112 and 153 are concerned with the general duties applying in exercise of the supervisor’s functions in relation to debt issuers and registered schemes respectively. These duties vary somewhat depending on whether a debt issuer or a registered scheme is involved, but overall include the supervisor acting honestly and in the best interests of investors in the supervised entity, and exercising reasonable diligence in carrying out its functions. The supervisor must do all it can within its power to cause contraventions of issuer or manager obligations to be remedied, and to act in accordance with lawful directions made by special resolution of investors in the supervised entity to remedy contraventions and otherwise perform functions of the supervisor. If acting in good faith when carrying out such directions, the supervisor is not liable for anything it does or omits to do, and is also subject to orders of the court.
Sections 113 and 154 are virtually identical, in that whether for a debt issuer or a registered scheme, the supervisor “must, in exercising its powers and performing its duties as a supervisor, 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”. Sections 203 and 204 apply equally to debt issuers and registered schemes with respect to the duties of the supervisor to report to the FMA on the supervised issuer’s or manager’s material contravention of obligations or serious financial problems.
3. Non-bank Deposit Takers Act 2013 (NBDTA)
In addition to being regulated by the FMA under the FMCA, debt issuers who are also non-bank deposit takers/NBDTs (eg., finance companies, credit unions and building societies) are licensed and regulated by the Reserve Bank of New Zealand (RBNZ) under the NBDTA. Licensed supervisors come into the picture where they act as trustee of a trust deed for a regulated debt security offer made by or on behalf of a licensed NBDT. This trustee status can be effected by direct designation or appointment to the trust or under relevant sections of the NBDTA, the FMCA, the Financial Markets Supervisors Act, or the Securities Act 1978 (see NBDTA, section 4 Interpretation, “trustee”). The term “trustee” is used in the NBDTA as meaning the same as “licensed supervisor” under the FMCA, but in the NBDTA’s legislative context the RBNZ regulates trustees notwithstanding the FMA’s role in regulating licensed supervisors under the FMCA. Thus a licensed supervisor serving as a trustee for an NBDT debt security offer can find itself simultaneously reporting and accountable to two regulators, each with their own distinctive legislated authority, range of powers, and penalty regimes: the FMA under the FMCA and the RBNZ under the NBDTA.
The NBDTA abounds in references to trustees and their duties and obligations in respect to trusts they supervise for NBDTs. Some sections of the NBDTA expressly refer to the role of trustees in their headings. For example, section 28, which requires that every licensed NBDT must submit a risk management programme for trustee approval and, if need be, trustee-directed amendment. Sections 44-6 relate to mandatory reporting by the trustee to the RBNZ of instances where a licensed NBDT the trustee supervises is non-compliant with the NBDTA and its regulations, or with solvency requirements, trust deeds, and terms of debt securities offers. Failure to report such non-compliance exposes the trustee/licensed supervisor to heavy financial penalties.
4. Retirement Villages Act 2003 (RVA)
Under the RVA, a licensed supervisor is referred to as a statutory supervisor. Unless exempted by the Act, all retirement villages registered under the RVA are required to have a statutory supervisor, who has wide powers over retirement village operators and works in conjunction with the regulator, the Registrar of Retirement Villages (Registrar). Many sections of the RVA are devoted to the role and powers of the statutory supervisor, and so only a few are examined herein as samples. An example is section 24, requiring receivers, liquidators and statutory managers of retirement villages to ask statutory supervisors thereof to act as representatives of the residents. Part 3 Retirement Commissioner and statutory supervisors is almost entirely given over to the position and functioning of the statutory supervisor, including sections 38-46.
Section 38 requires that, unless an exemption applies under section 41, a retirement village operator must appoint a statutory supervisor via a deed of supervision written in accordance with regulations made under the RVA. Section 42 sets out the duties of the statutory supervisor, including maintaining a facility to hold certain funds on trust for actual and intending retirement village residents, monitoring the village’s financial position, reporting annually to the Registrar and residents on its own performance, and otherwise carrying out its legal obligations. In Section 43 the remedial powers of the statutory supervisor are laid out, encompassing abilities to give the retirement village operator directions on disclosure of information to residents and operating the village in a specified manner, seeking court orders, and suppressing non-compliant publications by the operator. Section 44 provides for the Registrar and the statutory supervisor to agree on public statements to be made by the supervisor about the operator.
Supervisors perform diverse roles with shared features under the various Acts of Parliament by which they are governed. In this article we have considered how supervisors function as monitors and enforcers of investment-related legislation, regulations, governing documents and supervisory agreements, with analysis based on a range of key legislative sections. The supervisory roles examined derive originally from the Financial Markets Supervisors Act, and are defined in detail under the FMCA, NBTDA and RVA. The common thread running through all these roles, regardless of the particular legislation applicable, is dedicated investor protection by a party – the supervisor – who is legally required to be independent of the investment and its issuer/manager/operator.
“As a corporate trustee licensed under the Financial Markets Supervisors Act, Trustees Executors provides valuable supervisory services and protections to investors, and contributes to public confidence in New Zealand’s financial markets,” said Matthew Band, General Manager of Corporate Trustee Services. “Our services also add value to the entities we supervise, whether under the FMCA, the NBDTA, or the RVA, as we help debt issuers, registered scheme managers, and retirement village operators comply with their legislated duties and obligations to act in the best interests of their investors. Trustees Executors aims to be proactive in bringing the competitive advantages that strict compliance with applicable legislation can bring to corporate clients we oversee. The role of the licensed supervisor will only increase in economic importance as New Zealand’s investment markets grow and become more complex, with ever-increasing public participation,” said Matthew.
General Manager, Corporate Trustee Services
+64 21 645 014