When an investor hands money to a stockbroker or fund manager, the money remains the investor’s. Subdivisions 2 to 5 of Division 4 of Part III of the Capital Market Act 2015 turn that principle into rules. They sit alongside a unit trust trustee’s separate duty under section 191 to hold scheme property on trust. See how a trustee holds scheme assets.
Dealers in securities: sections 86 to 92
A holder of a capital market licence “shall establish and keep in an institution licensed under the Banks and Financial Institutions Act 2000, one or more trust accounts designated or evidenced as such” into which it must pay all amounts, less brokerage and other proper charges, received from or for any person for the purchase of securities, or from the sale of securities, that have not been paid out “not later than the next bank business day” after receipt or such other day as the Commission specifies.
Section 87 defines “client’s assets” as money or other property received by the firm in the course of its business “for which the holder is liable to account to its client”, and anything accruing from it. Breach of section 88 carries a fine of up to K5,000,000, rising to K10,000,000 or ten years’ imprisonment, or both, where the breach is with intent to defraud (section 88(3)).
Section 90(1) permits withdrawals from the trust account only to pay a person entitled to the money or on their written instructions, to defray brokerage and proper charges, or as otherwise authorised by law. Section 90(2) is the key protection: trust account money “shall not be available for payment of the debts of a holder of a capital market licence or be liable to be paid or taken in execution under an order or process of any Court”. Contravention is punishable by up to K10,000,000 or ten years, or both. Client assets other than money must be dealt with as the regulations prescribe (section 89), with the same penalty. Section 91 entitles a client to copies of book entries about their transactions; section 92 preserves lawful liens such as unpaid brokerage.
Derivatives traders: sections 93 to 96
A firm licensed to trade in derivatives must deposit client money in a “client’s segregated account” and client property in segregated safe custody by the next bank business day (section 95(1)–(2)). Withdrawals are limited to paying the client, margining or settling the client’s trades, proper charges, deposit with a licensed bank or clearing house, or payments otherwise authorised (section 95(3)). Section 96 provides, notwithstanding the Companies Act 1997, that segregated money and property are not available to pay the firm’s debts. Both sections carry up to K10,000,000 or ten years, or both; the figure in section 96(7) is misprinted as “K10,000,00.00”.
Fund managers: sections 97 to 101
A fund manager “shall open a trust account for its client’s assets and shall make arrangements for a custodian to maintain such trust account”; must deposit client assets with the custodian “not later than the next bank business day” after receipt; may not withdraw or deal with them except to pay the person entitled or as authorised by law; and client assets in the trust account “shall not be available for the payment of the debts of a holder of a capital market licence”.
A “custodian” under section 98 is a licensed bank appointed with the client’s prior written consent, its nominee subsidiary, a licensed overseas custodian, or another person the Commission specifies. The Commission may exempt a manager from using a custodian (section 99(3)); section 99(4) cross-refers to “Subsection (2)” for that permission, where subsection (3) is clearly meant.
Two further rules matter for unit trusts. Section 99(8) forbids a representative licensed for fund management from accepting or holding client assets except on behalf of the licensed firm as its employee: an individual adviser may never take the money personally. Section 100 forbids a manager dealing in securities for a client unless client assets are received for agreed purposes only, deposited with the custodian by the next bank business day, and recorded in a separate book entry for each client. Breach of section 99 carries a fine of up to K1,000,000, or K10,000,000 or ten years with intent to defraud (section 99(10)); section 100 carries the general penalty under section 461.
The Commission’s protective powers: section 102
Section 102 applies to licensed persons, trustees approved under sections 156 or 189, custodians and anyone maintaining a trust account for clients’ assets. Where such a person has contravened the Act, where clients’ or unit holders’ interests “are likely to be jeopardised, or are jeopardised”, or where a ground for revocation under section 48 exists, the Commission may direct the person not to deal with clients’ money, to transfer the money, property and records to another person it names, prohibit specified transactions, or direct it to maintain property sufficient to meet its liabilities. Nothing in any contract or other law invalidates such action (section 102(4)). A hearing is required unless delay “would be prejudicial to the public interest or the interest of the clients” (section 102(5)–(6)).
If a licensed trustee or fund manager fails, the trust account and the scheme property held under section 191 are not part of the firm’s estate. The 2019 dispute over the Pacific Balance Fund’s frozen accounts shows the other side: when the Commission restricts a trustee’s accounts, unit holders may be unable to redeem until a new trustee is appointed. See the ANZ case and interim trustees.
Sources
- Capital Market Act 2015 — ss 86–102, 156, 158, 189, 191, 201, 203, 461
- Banks and Financial Institutions Act 2000
- Companies Act 1997
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.