Almost every rule in the Capital Market Act 2015 is switched on by one of two terms: “securities” or “capital market product”. A licence is needed to deal in securities (section 34); a prospectus is needed to offer securities to the public (section 128); insider trading is trading in securities (section 307). Whether a unit trust is caught depends on whether a unit falls within these definitions.
“Securities”
“Securities” means “(a) debentures, stocks, bonds issued or proposed to be issued by any government; and (b) shares in or debentures of, a body corporate or an unincorporated body; and (c) units in a unit trust scheme or prescribed investments, and includes any right, option or interest in respect of units in a unit trust scheme or prescribed investments, but does not include derivatives; and (d) other rights, interests or instruments that the Minister may, by notice in the National Gazette prescribed under Section 5”.
Paragraph (c) is the one that matters for this series. A unit, defined in the same section as “any right or interest in a unit trust or managed investment scheme by whatever name called”, is a security in its own right, and so is an option or other right over a unit. The trustee is the “issuer” of a unit (section 2, definition of “issuer”, paragraph (b)).
Paragraph (c) refers to “prescribed investments”, a term the Act does not define. It appears to be a remnant of earlier legislation and is best read as investments prescribed under section 5. Readers relying on it should seek advice.
“Capital market product”
The newer term is deliberately wider. Section 2 defines “capital market product” as (a) a debt security, (b) an equity security, (c) “a managed investment scheme or unit trusts”, (d) a derivative, (e) “any product or arrangement which is based on securities or derivatives, or any combination of securities and derivatives”, and (f) any other product the Commission prescribes. Where “securities” excludes derivatives, “capital market product” includes them. The Act uses the wider term in its definitions of “dealing”, “client money” and “investor”, so the conduct rules in Part III reach every kind of product.
Debt securities and equity securities
| Term | Core meaning (section 2) | Notable inclusions and exclusions |
|---|---|---|
| Debt security | A right to be repaid money, or paid interest on money, deposited with, lent to or owing by any person | Includes debentures, bonds, notes, convertible notes and shares redeemable only at the issuer’s option. Excludes derivatives, units in a unit trust or managed investment scheme, life policies, and debt securities issued by the State, a superannuation fund or a bank or licensed financial institution. The Commission may declare further classes by Gazette notice. |
| Equity security | Any interest in or right to a share in the share capital of a company | Includes ordinary and preference shares; excludes debt securities. The Minister, on the Commission’s recommendation, may declare further classes. |
Units sit in neither box. The definition of “debt security” expressly carves out “a unit, proportionate interest, or membership interest in a unit trust or a managed investment scheme”, and a unit is not a share in a company. Units are a third category of security in their own right, which is why Part V exists as a separate code.
“Derivative”
A derivative is an agreement under which a party must, or may be required to, provide consideration at a future time, and the amount or value “is ultimately determined, is derived from, or varies by reference to” something else: an asset, a rate, an index or a commodity. The definition lists futures, forwards, options, swaps, contracts for difference, caps, collars and floors, and excludes ordinary securities, managed investment schemes, physical delivery contracts that cannot be cash-settled, and certain currency and interest rate contracts authorised by the Bank of Papua New Guinea. A unit trust that trades derivatives is a “derivatives fund” under section 210(2)(e).
Prescribing new products: section 5
Financial products change faster than Parliament. Section 5(1) therefore lets the Minister, on the Commission’s recommendation and by order in the National Gazette, prescribe any instrument or product to be securities or derivatives “for the purposes of securities laws”. Section 5(2) lets the Commission itself prescribe interests exempted under section 77 of the Companies Act 1997 to be securities or derivatives, and section 5(3) allows the prescription to specify which provisions of the Act apply to the new product. A crowd-funding interest or a cryptocurrency token could be brought within the Act by this route.
The Act is not consistent about who prescribes what. New equity securities are declared by the Minister on the Commission’s recommendation; new debt securities by the Commission alone; new securities generally by the Minister under section 5; new capital market products by the Commission. The text of “debt security” also ends with a dangling “or”, suggesting a paragraph was lost in drafting. Check the Gazette for any prescription before concluding that a novel product is outside the Act.
Why it matters for unit trusts
Because a unit is a security and a scheme is a capital market product, a trustee that issues units is dealing in securities and needs a capital market licence (section 34); offering units to the public needs a Commission-approved prospectus (section 128); the Commission must approve the listing of units on PNGX (section 116(1)(b)); a person who manipulates the price of listed units or trades on inside information commits an offence under Part VII; and a trustee holding units for clients must keep them in trust (sections 193, 194). See what a unit trust is, who needs a licence and when a prospectus is required.
Sources
- Capital Market Act 2015 — ss 2(1) (“capital market product”, “debt security”, “derivative”, “equity securities”, “issuer”, “securities”, “unit”), 5, 34, 116, 128, 193, 194, 210(2), 307; Schedule 2
- Companies Act 1997 — s 77
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.