4. Legal Treatment of Emissions Units
Legal Effect of Registration
4.1 Under current law relating to title to shares in a company, entry onto a register is prima facie evidence of title. The terms of other types of securities commonly provide for the relevant register to be prima facie evidence of title too. This provides certainty for persons buying or selling securities or shares in a company by ensuring that the person registered as the holder of the securities or shares has legal title.
4.2 The Draft Bill provides that the statutory provisions relating to title and registration of emissions units be amended to provide that registration of an emissions unit on a register is prima facie evidence of title (see clause 33 of the Draft Bill). This will give owners of emissions units certainty of title, further supporting certainty and integrity of the system. Note that owners of New Zealand units will receive certainty of title through the legislation establishing the ETS.
Registrability of Electronic Transfers of Securities and Emissions Units
4.3 The Draft Bill provides that the Securities Transfer Act 1991 be amended to confirm the registrability of the transfer of securities settled through a designated settlement system, (see clause 11 of the Draft Bill). The Draft Bill also confirms the registrability of emissions units transferred in accordance with the rules of a designated settlement system (see clause 34 of the Draft Bill).
4.4 There is no requirement for registries to be part of a designated settlement system to enable electronic transfer in this way. Such a requirement is potentially undesirable to the extent it might be used to force all settlements in that product through that particular settlement system, rather than giving buyers and sellers of that product choices on how they settle any trades in that product.
Exclusion of Emissions Units from Definition of "Security"
4.5 The Draft Bill expressly excludes an emissions unit from the definition of "security" (see clauses 40 and 41 of the Draft Bill). This provides certainty as to the legal treatment of an emissions unit. Trading in emissions units will not attract the provisions of the Securities Act 1978 and Securities Markets Act 1988 applicable to a security (e.g. prospectus, insider trading, market manipulation, and so on).
Emissions Units to be Investment Securities Under the PPSA
4.6 The Draft Bill amends the PPSA by extending the definition of "investment security" to include an emissions unit. This will provide purchasers of emissions units, through the operation of section 97 of the PPSA, with a priority over third party perfected security interests in those emissions units in specific circumstances (see clause 37 of the Draft Bill).
4.7 This change has been introduced under the ETS Bill in relation to NZ ETS emissions units. During the legislative process a decision will be made as to whether the change should be effected by the ETS Bill or the Draft Bill.
Specific Questions
In addition to the questions set out in paragraph 1.13, please consider the following questions:
- The definition of "emissions unit" (see clause 22 of Draft Bill) is intended to include voluntary units as well as regulatory units. Is the definition appropriate? Should voluntary and compulsory emissions units be treated the same under the Securities Act 1978, Securities Market Act 1988, Securities Transfer Act 1991, and the PPSA?
- Is prima facie evidence of title through registration appropriate for all forms of emission units, both of a compulsory and voluntary nature?
- Are there any risks associated with excluding emissions units from the definition of "security" for the purposes of the Securities Act 1978 and the Securities Markets Act 1988 that should be further considered? Do these risks differ with respect to voluntary and compulsory units, or on some other basis?
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