Actually your correct, the rank of LTZ3 was in use in 1940. It was however a rank for a midshipman who had graduated. It wasnt usually used for officers coming in from other branches. The source for this is in the book "Enys House".
The same rank equavalency was defined for marine pilots and merchant marine officers. They would be miltarized in a navy rank lower then their company or department rank while they were working for the government.
The ARO Sergeants were often merchant marine officers of lower ranks. They had officer status, ate in their mess, but wore officer uniforms with banana peel stripes. When were promoted they would become LTZ2JG's not LTZ3.