FMA consultation:  Proposed guidance on winding-up requirements for registered schemes

Sometime in August the FMA undertook a limited process of consultation, by sending a draft guidance paper, to clarify [its] intention and compliance expectations under sections 212 and 213 of the FMC Act – being the initial steps in winding-up of a registered managed investment scheme and the requirements of the subsequent winding-up report.

It is not clear how widely the FMA has consulted.  For example, a copy was not sent to the New Zealand Law Society for comment.  A copy of the draft guidance is available via the FMA website – but only if you know to look for it.  Its existence did not come to my attention until mid-October. 

Because of the subject matter and my experiences, advising the directors of the manager of a number of small, registered schemes, as they each seek to navigate the winding up process, I took it upon myself to provide comments to the FMA.

Subject matter – the winding-up regime

The FMA has sought to clarify its expectations about the application of the winding-up regime for managed schemes – having observed varying approaches to that regime, some of which it considers inconsistent with the intention of the regime.

Winding-up resolutions

On the subject of winding-up resolutions, the draft guidance says:

• winding up resolutions should clearly state the ‘wind-up effective date’ to create a reference point for other winding-up events – such as preparation of final financial statements (winding-up accounts);
• a ‘wind-up effective date’ can be the date of the resolution, a specific future date or set by reference to a future event (e.g. settlement of the sale of scheme assets); and
• if a resolution does not clearly specify the ‘wind-up effective date’ – then that date will be the date the resolution is approved/signed.

Sadly, the guidance does not seem to contemplate single-purpose schemes – in which the need for a winding up resolution seems unnecessary.  This is a concept that is accommodated by other legislation such as the Companies Act and the Limited Partnerships Act.  The latter refers to a ‘terminating event’ which includes an event or the expiry of a period of time when, under the [governing document] the limited partnership terminates. 

A simple example is a scheme established to undertake a single rotation forest.  It seems unnecessary to go through yet another process hurdle to define the ‘wind-up effective date’ – when its existence is typically a matter of fact (such as harvesting of the forest and distribution of the harvest proceeds). 

Winding up accounts and distributions

The FMC Act requires that the (audited) winding-up accounts must be prepared and audited within 4 months of the ‘wind-up effective date’, and sent to the FMA and investors within 20 working days of audit completion, together with an explanation about how any remaining scheme assets will be distributed (winding-up report).

The FMA must be advised of the date on which the final distribution of scheme assets is completed.

The draft guidance notes that:

• If the governing document allows, partial distributions of assets can be made before the winding-up report is sent to the FMA and investors.  A partial distribution must be in the best interests of investors.
• The FMA can extend the statutory timeframes for compliance with these provisions – but does not provide guidance on the grounds for such an application.

Alarmingly, the draft guidance says that an ‘appropriate proportion’ of scheme assets should remain undistributed until the winding-up accounts have been provided to all investors.  The rationale for this point is on the basis that the FMA considers one purpose of the winding-up accounts is to give investors the opportunity to challenge how the assets are being distributed.

The draft guidance continues by asserting that this also means that the ‘wind-up effective date’ cannot be immediately before or on the date of the final distribution of scheme assets.

There is no authority cited for this ‘view’.  And any policy underpinnings are difficult to understand.  There is nothing in the legislative history of this part of the FMC Act which appears to support this view.  Put simply, why should investors have to wait for some undated grace period after the finalisation of the winding-up accounts before receiving their final distribution out of the scheme?  The most relevant guidance I could find from a comparable jurisdiction is that from ASIC (Australia) which, whilst not a neat fit (because it is largely focused on external administration of insolvent/near insolvent managed investment schemes) notes, by reference to decided Australian case law, that the winding-up of a registered scheme should follow the same path as the winding-up of a company.

To suggest this new (and seemingly unsupported) legislative purpose – of providing an opportunity for challenge without factoring the opportunity costs for investors is quite odd.  And, from a practical perspective, it seems quite unnecessary – given the involvement of the supervisor (coupled with the assurance provided by the requirement that the winding up accounts must be audited).

This also suggest that the FMA’s view that the ‘wind-up effective date’ cannot be immediately before or on the date of the final distribution of scheme assets is a matter of some debate.

In practice scheme managers, and supervisors, seek to distribute the remaining scheme assets to investors as soon as reasonably practicable.

Annual financial statements during the wind-up

The FMC Act requires that, even during the winding-up process, annual financial statements must be prepared for each subsequent balance date.

The draft guidance suggests the timing of winding-ups should be managed to avoid the preparation of unnecessary additional financial statements, but the FMA will consider tailored relief from this requirement on a case-by-case basis.  Again, there is no guidance on the possible grounds for granting such relief.

The existence of potentially overlapping financial reporting obligations calls for relief.  Whilst the FMA suggests the wind-up should be managed with an eye on the annual balance date, this is not always possible.  A starting point (for relief) may be to consider the information needs of investors in a scheme that is in wind-down mode, and will continue in that mode beyond the end of the current financial year.  One possible benchmark may be a modified form of the 6-monthly reporting that is required under section 255(2)(d) of the Companies Act – in respect of a company in liquidation. 

The GNA problem

The draft guidance also says that final distribution has not been completed until all investors have received their respective distribution (entitlements) – and any undistributed amounts (e.g. for investors who are ‘Gone No Address’) have been transferred to Treasury or Inland Revenue under the unclaimed moneys regime.  Sadly, the FMA does not consider the pragmatic approach already being adopted by some schemes and their supervisors – for the entitlements of ‘Gone No Address’ investors to be held by the supervisor on bare trust for the relevant investors to allow completion of the winding-up.  This approach will give a little more time to locate ‘Gone No Address’ investors and have them navigate AML/CFT formalities before transferring those funds into the unclaimed moneys regime. 

Experience suggests that a number of factors have collided to make it harder for GNAs to be traced. Such as changes as the patterns of postal delivery and the reduced number of people with landlines point to the need to consult more widely on this issue.  For example, by dialogue with the two main share registries and the insurance industry – who will all have practical experience to add (at scale).

Concluding comments

The draft guidance addresses important issues that have significant implications for managers, supervisors and particularly investors. 

There is also the makings of a ‘rule of law’ issue in the proposed guidance.  From where I sit, the FMA is seeking to develop something more than merely ‘guidance’ and is imposing what appear to be substantive new obligations on managed investment schemes – in a manner that risks being seen as law-making without the necessary underpinnings.