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Fund managers get relief

Funds management firms caught by the Australian Registered Managed Investment Schemes exemption notice row may be able to see relief in the courts - if Commerce Minister Lianne Dalziel is able to get a proposed law change through Parliament.

Thursday, October 16th 2003, 4:07PM

by Rob Hosking

Funds management firms caught by the Australian Registered Managed Investment Schemes exemption notice row may be able to see relief in the courts - if Commerce Minister Lianne Dalziel is able to get a proposed law change through Parliament.

The government is seeking support from all the political parties for a change in the law, so as to avoid some firms losing millions of dollars.

The change does not retrospectively validate the funds caught up in the row: rather it allows the courts to take a more lenient approach than that currently allowed for in the legislation.

The current law allows some offshore based funds to be exempt from the Securities Act requirement to issue a prospectus in New Zealand, so long as they file the necessary documentation with the Companies Office.

If that is not done, the transaction becomes an illegal contract and the money has to be refunded, along with a 10% per year penalty.

Until now though it has been assumed that the Illegal Contracts Act, which allows the courts to provide relief in such cases, would apply in this case. However the government’s legal advice is that the Illegal Contracts Act does not apply to contracts outside of New Zealand.

The issue arose when Westpac bought BT Funds Management and it was discovered that the necessary paperwork was lodged late.

Although the company effectively dobbed itself in to the Securities Commission, it was still liable for the penalty.

Subsequently a further dozen firms have been discovered to have been affected.

Both the New Zealand Investment Savings and Insurance Association and the Australian Investment and Financial Services Association have lobbied the government, pointing out that the punishment is out of all proportion to the crime.

The government does not want to retrospectively validate the funds, Dalziel says, but it is concerned that if it does not tone down the penalty New Zealand could see access to offshore based schemes dry up, so it is proposing a change to the Illegal Contracts Act to cover these contracts.

If it does not do so, the firms affected “may be reluctant to extend offers to the New Zealand market because of the perception that technical breaches lead to severe penalties, with no avenue for relief,” she says.

“The potential impacts on our financial markets is another reason why it is important that we resolve the issue.”

The government wants to tack the law change onto the annual Business Law Reform Bill currently before a select committee. The possible difficulty with this is that those reform bills are basically tidy up legislation and have to have the support of all political parties.

At this stage National, Act and United Future have all indicated preliminary support, but there could be a hitch with New Zealand First, which has already raised objections to the whole business law reform bill process.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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