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Brief Counsel

Further decisions in Securities Law Review

03 June 2011

​The latest Cabinet decisions in the review of securities law are now out, including the proposed penalties regime.

This Brief Counsel provides a user-friendly guide to the new proposals.

Penalties

A key theme of the review is to lift public confidence in New Zealand’s financial markets through stronger enforcement, and tougher sanctions against those who break the rules. 

An escalating six-tier system of remedies and penalties is proposed with the Financial Markets Authority (FMA) able to deal with the least serious breaches through infringement notices without the need to go to court.

The allocation of categories of misconduct to tiers will be refined through the consultation process.  The examples used in the table below are illustrative only.

 

​CIVIL REMEDIES ​ ​

Sanctions​ ​Example of misconduct

​Tier 1

 

FMA infringement notice of up to $20,000, infringement offence of up to $50,000.​

Failure to keep a register of security holders.

Failure to comply with directors’ and officers’ disclosure obligations.​

Tier 2​

 

Civil penalty of up to $200,000 for individuals, $600,000 for companies, plus compensation orders. 

 

Failure to comply with an order from the FMA.

Breach of fund manager duties.​

Tier 3​

 

Civil penalty of up to $1 million for individuals, $5 million for companies (or three times the gain made or loss avoided), plus compensation orders.

Breach of insider trading obligations.

Breach of market manipulation rules.

 CRIMINAL OFFENCES​ ​ ​

Tier 4

Prison for up to 3 years and/or a fine of up to $200,000 for individuals and $600,000 for companies, plus compensation orders.  ​

Operating a securities market without being licensed.​

​Tier 5

 

Prison for up to 5 years and/or a fine of up to $1 million for individuals and $5 million for companies.

Contravening a management banning order, or ongoing disclosure requirements for debt and managed investment schemes.

Offering a regulated financial product without a product disclosure statement (PDS).​

Tier  6

Prison for up to 10 years and/or a fine of up to $1 million for individuals or $5 million for companies.

 

Knowing or reckless inclusion of a false statement in a PDS with intent to deceive.

Celebrity endorsements

The Cabinet decided against any additional regulation for celebrity endorsements but celebrities who make false or misleading statements in the promotion of financial products will be liable under the new penalties system for a Tier 3 penalty, which could be as high as $1 million.

Securities markets regulation

The current regime is all or nothing and turns on whether a securities market calls itself an exchange or is held out as one.  If you’re in, you’re fully regulated.  If you’re out, you escape regulatory scrutiny. 

What is proposed is a continuum in which all markets will be registered (unless explicitly exempted) and then subject to rules that are proportionate to the scale and risk they pose to participants.  This approach was recommended by the Capital Market Development Taskforce and is intended to provide a conduit for small growth companies to full listing on the NZX. 

Specific proposals are:

  • a single licensing system to apply to both securities and derivatives markets
  • the definition of “financial market” to be substance based rather than relying on the name the business uses to describe itself (as now)
  • all operators of markets which are accessible to retail investors and meet certain volume and other criteria to require a licence, unless they receive an exemption.  Proposed criteria are:
      • more than 100 transactions a year with a combined value of at least $2 million
      • operated by a person who operates another regulated market, or
      • where regulation is sought by the operator
  • overseas based exchanges to be licensed in New Zealand as a separate category, and
  • markets to be able to adopt alternative rules, depending on their characteristics. 

There would be minimum standards covering matters such as misleading and deceptive conduct, market manipulation and potentially market abuse.  But instead of continuous disclosure, exchanges catering to smaller businesses could require half yearly reports of material changes or event-based disclosure.  And instead of an outright prohibition on insider trading, they might adopt a “notice and pause” regime under which insiders would announce their intention to trade and investors would be able to opt out of trades or withdraw their orders.

Current securities law and the Fair Trading Act

The overlap between the Fair Trading Act and securities law in relation to false, misleading or untrue statements will be resolved by awarding primary jurisdiction in the financial sector to the new securities legislation. 

Next steps

A working draft of the new legislation will be released for public consultation in August and a Bill introduced into the House before the election. 

The Cabinet Paper is available here.

Chapman Tripp’s commentary on the Government’s earlier decisions in relation to the Securities Law Review is available here.

For further information, please contact the lawyers featured.

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