Investments by TEIs – Guidance and Investment Protocols
TEIs’ legal powers and their limits
Tertiary Education Institutions (TEIs) are established and regulated through the Education Act
1989. They have as much independence and freedom to make academic, operational and
management decisions as is consistent with the nature of the services they provide, the
efficient use of national resources, the national interest and the demands of accountability
(section 160). TEIs generally have all the rights, powers and privileges of a natural person
(i.e. practically unlimited) (section 192(1)).
TEI’s otherwise practically unlimited powers are however subject to the limitation that they
may only be exercised for the purposes of performing the functions characteristic of the class
of TEIs to which the TEI belongs (section 192(2)(a)), or for performing functions that in the
opinion of the Council may be performed conveniently and without disadvantage to the
characteristic functions of the TEI, that may be performed in association with those functions,
and which are appropriate for the class of TEIs to which the TEI belongs (section 192(2)(b)).
The powers of TEIs are also subject to the constraint that they may not sell assets, grant
mortgages, charges or leases, or borrow without the consent of the Secretary of Education
(section 192(4)), or within limits determined by the Minister (section 192(5)).
TEIs’ powers to invest (which are the subject of this guidance document) are also subject to
section 203(4) of the Education Act, which says section 65I of the Public Finance Act 1989
applies to TEIs. Under section 65I, TEIs may invest money held by them,
1.
2.
3.
in deposits with a bank (whether in New Zealand or elsewhere) approved by the
Minister of Finance for the purpose;
in public securities (which are securities issued by the Minister of Finance on behalf
of the Crown, and essentially means government stock); and
in any other securities approved by the Minister of Finance for the purpose.
These are the same rules that apply to the investment of public money by the Treasury, and
they are broadly similar to the investment rules which also apply to other Crown entities under
the Crown Entities Act 2004. The intention is that the investment powers of TEIs are
conservative and TEIs are expected to be risk averse when they make investment decisions.
Defining the activity of investing
Section 65I of the Public Finance Act and the protocols below deal with investing money by
TEIs. Before discussing what investments may be made by TEIs as of right, or which may or
may not be approved by the Minister of Finance under section 65I, it is important to
distinguish between what does and what does not constitute investing money.
Section 65I specifically applies to investment of money held in a bank account, so it does not
apply to investments in kind, such as the application of intellectual property or permitting the
use of facilities or services for a non-cash return. In kind investments which are not covered
by section 65I must still be within the general powers of TEIs under section 192(1) and (2) of
the Education Act. 1
The TEC is continuing the Ministry of Education approach previously agreed with the sector,
of considering "investing" to be the application of money primarily for the purpose of making a
monetary gain. The intended monetary gain from an investment may be in the form of
income or a capital gain.2
The primary reason for a transaction is paramount to determining whether the transaction is
an investment. The purchase of physical assets, shares, or securities, or the making of loans,
for "educational purposes" would not be considered to be an investment because their
primary purpose is not the making of a monetary gain. 3 Transactions which are not
investments for the purpose of section 65I of the Public Finance Act therefore include (by way
of example, and without limitation) the purchase or subscription for shares in an educational
co-operative, the establishment of a subsidiary to undertake educational functions, or the
purchase of land to build an educational facility.
The main question that should be asked when considering whether entering into a particular
transaction would constitute investing is why has the TEI chosen to apply money to this
activity? The purpose test depends on the principal reason for undertaking the transaction
and not on the nature of the activity connected with the transaction. Money put into entities
carrying out education or research activities may be an “investment” if the primary purpose is
to make a monetary gain from those activities.
Given this definition of "investing", investing would not include the "holding" of existing
investments or the receipt of investments by way of gift. In those instances no money held by
the TEI would have been applied by the TEI. Vesting money in a trust for an educational
purpose rather than for the primary purpose of making a monetary gain would also not be an
investment. 4
TEIs are responsible for ensuring proper governance arrangements are in place for any
subsidiaries they incorporate, whether or not the incorporation of the subsidiary constitutes an
“investment” by the TEI. TEIs need to be satisfied that the activities of their subsidiaries are
properly authorised and monitored, including the activities which involve incurring liabilities or
making further investments. TEIs are required to provide group financial statements, which
include their subsidiaries [and other related entities?]
Approval of investments
Some investments are allowed as of right for TEIs under section 65I of the Public Finance
Act. These include deposits with a bank approved by the Minister of Finance for the purpose,
and investments in public securities.
Bank deposits
The Minister of Finance approved TEIs investing money on deposit with any bank operating in
New Zealand by virtue of a paper dated 19 April 2006. The Public Finance Act says a “bank
operating in New Zealand” means a registered bank under the Reserve Bank of New Zealand
Act 1989.5 There are currently 19 banks registered by the Reserve Bank.
Public securities
"Public securities" is defined in the Public Finance Act to mean, "any security issued [by the
Minister of Finance] under section 63 of the Public Finance Act or any provision of any other
Act; and includes any loan or credit agreement, guarantee, indemnity, bond, note, debenture,
bill of exchange, Treasury bill, Government stock, and any other security representing part of
the public debt of New Zealand". This definition excludes investment in local authority debt
instruments, or any shares or other securities issued by State owned enterprises or private
companies.
Investments in other securities
The TEC acknowledges that there may be instances where there are valid reasons for TEIs to
consider making investments not allowed as of right under the Public Finance Act. TEIs may
wish to diversify the investment of their reserves or other financial assets for risk management
purposes. They may have investment opportunities which are particularly attractive to them.
The Minister of Finance has discretion to approve investments in securities other than bank
deposits or public securities.
"Security" is defined under section 2D of the Securities Act 1978 and it is proposed that this
definition should apply for present purposes. A security therefore includes "any interest or
right to participate in any capital, assets, earnings, royalties, or other property of any person;
and includes: an equity security; a debt security; a unit in a unit trust; an interest in a
superannuation scheme; a life insurance policy; and any interest or right that is declared by
regulations to be a security for the purpose of the Securities Act 1978..."
TEIs should discuss any investments they propose to make in securities apart from bank
deposits or public securities with their Investment Manager and, where appropriate, seek
approval from the Minister of Finance for those investments. Requests for these approvals
are considered on a case by case basis.
The Minister of Finance does not have the power to authorise TEIs to make investments for
the primary purpose of making a monetary gain in other assets apart from securities (e.g.
commercial property).
Protocols
TEIs should adopt the following protocols for investing,
1.
TEIs may freely invest in:
a. deposits with a bank in New Zealand or elsewhere that is approved by the Minister
of Finance for the purpose; and
b. public securities.
2.
TEIs will only invest in other forms of security or assets if they:
a. discuss with their Investment Manager and, where necessary, seek prior approval
from the Minister of Finance before making the investment; and
b. disclose the investment in the TEI's annual report, if material. 6
3.
All investment decisions should be made in line with documented Council approved
policy (or equivalent).
4.
Trust funds held by a TEI should be clearly identified as such through the
maintenance of appropriate documentation.7 This documentation should clearly
indicate the trustee, the settlor, and the beneficiary of the funds.
The terms used in the protocols should be interpreted in accordance with the Public Finance
Act and the discussion in this guidance document.
Requests for approval of investments should be forwarded to:
The Director
Tertiary Investments and Monitoring
Tertiary Education Commission
PO Box 27048
Wellington 6141
Telephone: (04) 462 5200
Email: teifm.info@tec.govt.nz
Individual investment approval
1. A brief description of the entity being invested in (including a description of the credit
rating of the entity, if available and the assets and activities of the entity).
2. A copy of the latest financial statements (and latest public financial disclosure
statement, if available) for the entity being invested in.
3. Details of the relationship (if any) between the TEI and the entity being invested in.
4. Details of the investment i.e. form (shareholding/loan/other), purchase price, current
market value, term, repayment arrangements, options for renewal/redemption,
security arrangements, interest rate/return, and maturity date of investment (if
specified).
5. A description of the reason for investing in a security which is not allowed as of right
under section 65I and benefit to the TEI.
6. Comment on whether the TEI has considered other investment alternatives i.e.
whether consideration has been given to the opportunity cost involved in the
investment.
7. Comment on how the investment fits with the TEI's current investment plan,
characteristic functions, investment policies and strategies, and capital asset
management plans.
Supporting documents
To support their application, TEIs will need to ensure their Investment Manager holds:
1. A copy of the latest financial statements for the TEI.
2. Forecast financial statements for the TEI covering the proposed period of the
investment.
3. A copy of the TEI's latest strategic plan and current business plan.
4. A copy of the TEI's investment policies and investment strategy.
5. A description of the risks involved in the investment(s), and steps that will be taken by
the TEI to manage, monitor, and report on those risks.
6. Details of the people (and experience) who will be managing the investment(s).
7. Any other information considered to be relevant to the proposal.
The type and detail of information that would be required would depend on the size of the
investment compared to the TEI's own assets (i.e. materiality), the general financial status of
the TEI, and the types of financial risks involved in the investment.
Information on how to make an approval application may be obtained from the Director
Tertiary Investments and Monitoring at the TEC.
Notes:
1.
2.
3.
TEIs have all the rights, powers and privileges of a natural person, subject to the
limitation that their powers may only be exercised for the purpose of exercising
functions characteristic of the class of TEIs to which they belong (section 192(2)(a)),
or which may, in the opinion of the TEI’s council, be conveniently and without
disadvantage to the characteristic functions of the TEI, be performed in association
with those functions, and which are appropriate for the TEI (section 192(2)(b)).
The leading New Zealand case on what constitutes and investment is Culverden
Retirement Village Ltd v Registrar of Companies [1997] NZLR 257 (Privy Council).
This case takes a particularly broad approach to the nature of the potential monetary
gains or financial returns from investments, which may include returns in kind, such
as the provision of services.
Educational purposes are those educational functions which are characteristic of and
appropriate to TEIs under section 162(4) of the Education Act 1989. The
characteristics of universities include,
(i)
(ii)
(iii)
(iv)
(v)
being primarily concerned with more advanced learning, with the principal aim
of developing intellectual independence,
having closely interdependent research and teaching, and having most of the
teaching done by people who are active in advancing knowledge,
meeting international standards of research and teaching,
being a repository of knowledge and expertise, and
accepting the role as a critic and conscience of society.
Polytechnics may share one of more of the characteristics of universities, as well as
being characterised by providing a wide diversity of continuing education, including
vocational training, that contributes to the maintenance, advancement, and
dissemination of knowledge and expertise and promotes community learning, and by
research, particularly applied and technological research, that aids development.
4.
5.
6.
7.
The Trustee Act 1956 would apply to these trust funds. Generally the TEC would
expect that trust funds contributed by a TEI would be supported by a trust deed or
some other form of documentation. This would be good practice and provide a TEI
with an audit trail for the purpose of the TEI's external audit.
A bank operating in New Zealand is defined under section 2 of the Public Finance Act
as being the Reserve Bank or a registered bank under the Reserve Bank of New
Zealand Act 1989. A current list of the registered banks in New Zealand can be
found at www.rbnz.govt.nz/nzbanks.
TEIs should disclose investments entered into during the year and not just those
existing at balance date.
Trust funds held by a TEI are property vested in the TEI for the benefit of a third
party, for a purpose recognised by law. The Trustee Act 1956 would apply to these
trust funds.