Obligations of Issuers - Coursework Example

OBLIGATION OF ISSUER INTRODUCTION Under the Securities Act 1978(the act) the Issuers have the following obligations; firstly under section 51 they ought to keep a register of the securities. These securities are deemed to consist of equity securities, debenture stock, participatory securities, unit trusts, all interests in superannuation schemes and life insurance policies. The register kept should disclose the name and the holder of the security, the date on which the security was transferred or allotted, the holder of the security, its nature, amount and due date of the security. The issuers are under an obligation to make sure that the register of the securities is audited at least once a year by a very qualified auditor.1 Moreover according to the provision of the act the issuer should give a notice to the Registrar where they keep their register and any change made to its location. Secondly issuers are under an obligation to allow the inspection of the registers of the securities under section 52 of the act. There is a proviso however that the duration of inspection should not last for more than two hours. Any holder of the securities should inspect the register without being charged any amount of fee, however any other person should be charged a prescribed fee.2 Furthermore the holders of the securities are allowed to make a copy of the register after payment of a prescribed fee (Chris, 2010). Under section 53 the issuers are under an obligation to keep proper books of accounting. Currently the books of account should be in line with the financial reporting standards of 19933. The accounting records kept by the issuers should be properly recorded detailing the analysis of each transaction of the equity securities, unit trust, participatory securities, life insurance policies and superannuation scheme. The records too should be able to accurately present the financial position of the business entity. They should also comply with any other regulation set by the Financial Management Authority (FMA). The financial records kept by the issuers should also be kept in a way that properly and readily allows the auditing of the books of accounts. Section 53(3) further requires a detailed analysis of these components; the entries of income and expenditures, an inventory of all the assets and liabilities, an analysis of stock if the business deals with stock and when the entity deals with services, a record of all the relevant services accompanied by their invoices. According to the Securities Amendment Act of 1996 the following too should be taken into account by the issuers. That the accounting records be kept in the English language, the accounting record be kept in a registered office of the issuer, the records should also be kept for a period of a minimum of seven years from the date they were completed, they should be available for inspection and they be audited at least once an year by a qualified auditor.4 The other obligation of the issuers is they should issue certificate evidence the securities. This is provided under the provision of section 54 of the Act. The certificate should be issued within one month of transfer or allotment of an equity debt, a debt security, a participatory security or a unit. The certificate issued by the issuers must at all times be executed. However there are particular classes of securities that the issuers are under no obligation to issue a certificate. The security holders are entitled to any information that the issuers have and which should be sent to them periodically. These will include all the prescribed regulations, documents and information that relates to the public securities. If the security holders wishes to get more information, he is entitled upon payment of the prescribed fee to get such information he or she may need.5 The act is very clear that the following documents ought to be availed to the security holders at no prescribed fee; a. A copy of the registered prospectus. b. Financial statements copy. c. Any documents that details an extension of the securities allotment extension. The act provides under section 54B (4) that the above documents ought to be availed to the investors or security holders within a practicable period which is ascertained to be a period of 5 working days following the request. Under the Securities Amendment Act of 20116 the issuers of shares are under an obligation to disclose to the public any kind of documents and information, which should be disclosed public, which relates to the public subscription or event related to the public securities. The FMA is mandated under section 54D to specify the methodologies and the frameworks under which the issuers are to present the documents and the information about the securities to the general public. LIABILITY OF ISSUERS Most of the liabilities by the issuers arise from the misstatements in the advertisements and prospectus. According to section 55 of the act a misstatement will include both a statement included in the advertisement and prospectus that is misleading in its context and form or a statement that is omitted thereby misleading in its form and context. The statement may appear on the face of the advertisement channel or prospectus or be contained in a report, documents of incorporation or financial statements of the business entity that deals with the securities. Under civil liability the remedies that the court offers are a compensation order7 and a pecuniary penalty order.8 According to section 55C of the act the civil liability arises if there is a breach of the FMA regulations that are often given periodically or publishing of untrue statements in the prospectus and the advertisements thereby misleading the public (Bennett, 2006). A pecuniary penalty order will only be declared by the court upon petitioning of the same by the FMA. The court in giving the order must be correctly guided and convinced that there is an event that has led to the civil liability, further that the event has led to some form of prejudice to the subscribers interest, the event is one of a serious nature and is more likely to tarnish the integrity and reputation of the country security market. The penalty is usually paid to the state. Accordingly the main purpose for declaration of civil liability is to assist any applicant under section 55G to petition for compensation. Further such a declaration is of evidential value. Any civil liability declaration ought to state clearly the following; a. The particular court where the declaration was made. b. Essentially the person held liable of the liability event. c. The particular form of conduct that has lead to the civil liability.9 The Act provide under section 55F that the maximum amount of penalty that the court can issue for civil liability to a body corporate is $5,000,000 and $1,000,000 for an individual. The court before giving any measure of liability should take into account the civil liability event nature and extent, the circumstances under which the event occurred, previous record of misstatements, the effect of the event to the reputation and integrity of the securities market and finally the level of damages suffered and incurred by the subscribers of the issuers due to the event resulting to the civil liability (Bennett, 2006). Under section 55G the court is mandated that it can issue a compensation order to the petitioner, who may be FMA or a subscriber. This order is directed to a liable person who is defined as a person who caused liability of the event resulting to the civil liability.10 CONTROL OF THE ACTIVITIES AND NOT THE PERSONS. Every leader in an organisation that sits in the management is required to exercise due care and skill a while managing the affairs of the organisation. The following shows that the control is usually targeted on the transaction and not on the persons; a. FMA Mandate. The Financial Management Authority is established under the provision of the act. The authority is a very important player in the management of the state market securities. Its core functions include reforming the law relating to securities, giving exemptions, ensuring monitoring and enforcement of the law as well as giving the necessary authorizations. These functions are targeted towards the conducts of the issuers’ transactions and not on the persons directly. As earlier noted the FMA plays a major role in application of penalty orders and compensation orders in case of a civil liability event. The functions of the FMA have been successfully achieved with the legislation of Financial Advertisers Act of 2008, the Investment Advisers Disclosure Act of 1996 and the Securities Act (Fees) Regulations of 1998. The authority has in the recent past played a key role in protection of the subscribers from breach of the issuers’ obligation. An example is the South Canterbury Finance (Yoke Trustees Ltd v S. Canterbury Ltd HC 2012) that was put into statutory management due to fraud thereby rescuing the subscribers in 2010. Without such an authority transactions would not be controlled and most investors would be caught up in the corruption traps of the managements (Chris, 2010). b. Auditing This is an important tool that illustrate that the act seeks to control the transactions and activities of the issuers rather than the person. The issuers are under an obligation of section 51(6) of the act to ensure that the securities that are offered to the general public are audited at least once every year. Auditing is a very important tool through which the securities of the subscribers are protected. The auditors are under an obligation to disclose any information to the trustee, security holders and statutory supervisor of interest to their security investments. Financial statements too should be audited.11 A qualified auditor is obligated to audit the equity securities, insurance policies and life policies to ensure that the accounting records reflect free and fair position of the security company according to the International Financial Standards. The auditor should not however audit the redeemed securities.12 c. Publicity of the Transactions This is another way through which the transactions are controlled in the security market. This is clearly drawn from the provisions of section 54C of the act which provide that any information and documents that reveals the subscription and events of public securities to be made in public. This is made in the form and methodology that is given by the FMA. Publicity is important and controlled by the act by the virtue of liability created for any misstatements and omission made on an advertisement and prospectus. The liability result in pecuniary penalty orders and compensations orders.13 Conclusion There are currently no penal sanctions under the act for the issuers who are involved in breach of their obligations. This ought not to be a new introduction since the same is provided under the Companies Act 1983. This represents an inadequate deterrence measure for the officials who are involved in securities mismanagement. An example is Richwhite and Michael Fay who were involved in 2007 with insider trading at Midavia Rail Investments. Criminal sanctions would have been important to deter such dishonest behavior (Chris, 2010). Most of the management staff that involves themselves with insider trading easily escapes from the glare by paying the monetary fines and the orders required for compensation purposes. Often these people have enough resources to pay for these penalties (Financial Regulations, 2009). Criminal sanctions would provide a greater control of the transactions (R v Graham (HC 2012). REFERENCES Bennett, Adam, 2006. "One financial regulator to rule them all". NZ Herald. Hutching, Chris ,2010,. "Some big winners from South Canterbury collapse" UAP. Securities Regulations 2009 Securities Act 1978. Read More