BT Funds Management’s problems of non-compliance with securities exemption rules should come as no surprise to some people in the managed funds industry.
Good Returns can reveal that Westpac, BT’s current owner, ended up in court over this very issue in 1996.
Australian managed funds can be promoted in New Zealand using their Australian prospectuses as long as they comply with the exemption notice provisions of the Securities Act. One of the provisions relates to filing of documents with the Registrar of Companies.
In the case of non-compliance, which makes the unitholder allotments invalid, the penalty is that investors get back all their capital plus 10% interest per annum.
Westpac Financial Services was the plaintiff in a case it brought to court, asking the Securities Commission to validate the securities. It decided to take this action as there was no provision within the Act enabling an application to the Court to rectify the non-fulfilment of the exemption notice.
Rather it wanted to get the Securities Commission to validate the unlawful allotments.
It appears that the earlier case is very similar to the current problems being experienced by BT.
In the earlier case it was accepted that, regardless of precisely how the failures arose, they were a result of innocent error on the part of officers of Westpac.
Likewise, once Westpac became aware of the omissions, it took immediate steps to endeavour to rectify the position and immediately drew it to the attention of the commission.
“This is not a case where anyone has been misled by the failure to lodge the particular roll-over prospectuses with the Registrar of Companies. There are no interests of other parties other than those of the investors and Westpac,” Justice Doogue said at the time.
The main differences are that back in 1996 most of the investments affected by the non-compliance had returned more than 10% a year, therefore imposing the penalty would have disadvantaged these unitholders.
“It would be unconscionable if the prospectuses and the allotments were not validated,” the judge said.
This is a major point of difference with the current case as it is likely, considering the state of the financial markets over the past few years, that the investments will have returned less than 10% a year.
The other point of difference is that in 1996 most of the 2,500 unitholders affected were unaware of the court case.
This time BT has said it will make a major effort to inform investors of the problem. While the judge validated the allotments, under the Illegal Contracts Act, he made an order that Westpac tell unitholders about it’s breach of the law when they redeemed their units.
It also had to offer them the option of taking either the actual returns achieved by the units or to have their capital returned, plus 10% annual interest.
It is unknown how many investors took up this offer.
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