To err is human, to forgive is divine

The story goes like this: To distribute, say, units in an Australian unit trust or shares in a UK Open Investment Company in New Zealand to New Zealand investors, without a New Zealand registered prospectus, one is required to comply with one or other certain exemption notices to the Securities Act.

One specific stricture common in these notices is the need to ensure simultaneous filing with the New Zealand Companies Office of all relevant offshore product documentation and changes thereto.

Failure to do so renders any subscriptions made, and units/shares allotted, in a non-compliant period void, to be returned in full with a penalty of 10% per annum. Ouch! Let’s call this “the problem”.

Well imagine you are such a New Zealand distributor and times are good. Healthy asset prices and bullish forecasts see good demand for your distributed product. Positive sales reports receive most management attention and promotion. Reports on filing compliance (if they exist at all) tend to gather dust and induce serious eye glaze. It is much more fun, satisfying and remunerative to sell, sell, sell rather than check, confirm, comply.

Alas all good things come to an end, including bubbles, bull runs and bonuses. Three years into a serious bear market, sales down and margin pressures mounting you discover “the problem”.

You’ve banked subscriptions in the past when product documents have not been filed with the Companies Office. What’s worse is that after three years of massive price deflation you would have to write some very large cheques to return subscriptions to investors at the original subscription price, even before a wee 10% penalty is added. Oh dear, what to do?

Of course as a rational businessperson you dislike paying anything out if you don’t have to. This includes payments to investors with strong claims at law. This is common sense and goes without saying. It certainly goes without saying if any investors are within earshot.

There are several possible courses of action.

You can work hard and quietly for many months and quantify the horrifyingly large amounts you might have to pay.

You quietly gather similarly afflicted fund managers around. You then notify the regulator of these “technical” breaches and simultaneously pull every string in sight to have the law either somehow waived or retrospectively changed.

It helps if you are Australian here as you can ask your Australian Treasurer to heavy his smaller New Zealand cousin. This is the pork belly approach and best done on a group basis for maximum firepower. If you have friends in high places, use them. If you are individual investor, you can only use string to tie up parcels or pull teeth.

Alternatively you can play the mission impossible card and disavow any knowledge of any breach. You simply say it is the responsibility of the fund manufacturer on the other side of the planet to attend to New Zealand Companies Office filing of the funds you promote and distribute. This is a refreshingly muscular approach to compliance and is to be congratulated for its breathtaking boldness and sheer nerve.

A further approach is to do and say nothing. Breathe quietly through the nostrils, do not alert your investors or anyone else that there is a problem and pray that the pork belly and mission impossible actions of others help you out.

You are aided in this strategy by no one in New Zealand standing up and vigorously arguing the investors’ position.

Certainly no one who relies on fund manager patronage is going to rock the boat on that one, no sirreee!

A final approach of course is to have no problem at all. You have read the exemption notices and seen that no definition of “technical breach” actually exists, much less states that you don’t have to worry about it.

You scrupulously comply with the exemption notices and ensure simultaneous filings. If there is any period where documents are not filed then you do not accept any subscriptions, rather you return the cheques with a request to resubmit after filings have been accomplished. This startling behaviour is founded on a simple reading of the exemption notice.

This final approach relies on a perhaps naive belief that a compliance regime should be both transparent and enforced. It should not be subject to influence, patronage or personality. Then again that would not be good business, and certainly not good business in the New Zealand funds management industry at present.

All views expressed are personal to Richard Baker and not necessarily those of Tower Ltd. Nothing in this article should be taken to refer to Tower Ltd in any context.

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