Financial Markets Conduct Bill liability provisions out of step
The New Zealand Law Society says it endorses the policy decision that crimes under the Financial Markets Bill which carry a sentence of imprisonment will be reserved for knowing or reckless conduct.
However, the Law Society says a provision in the Exposure Draft of the bill seems to be out of step with what it understands to be the policy underpinning the new approach to liability issues – that of moving the focus to the issuer rather than primarily being on the directors of the issuer.
It says that the current draft defines “relevant person” in clause 462 to pin liability for defective disclosure in Product Disclosure Statement (PDS) or register entry on offerors and every other person who contravenes, directors of the offeror, the issuer and an underwriter (but not a sub-underwriter) to the issue or sale who is named in the PDS or register entry with the underwriter’s consent.
“The Law Society does not understand the policy justification for including underwriters in clause 462,” it says in a submission to the Ministry of Economic Development on the Exposure Draft of the Financial Markets Conduct Bill (Exposure Draft).
“In turn, the term ‘contravene’ is defined very widely and has an aiding and abetting element – which could bring into the liability net an even wider range of persons.”
The submission says that the accessory liability regime under the Exposure Draft will be wider than the current Securities Act, and similar to the Securities Markets Act and the Australian regime. It is understood that the Australian experience has generated US-style class action litigation.
“The Law Society is concerned that this risk will add to the costs of all those involved and may cause some parties to have second thoughts about capital-raising in the New Zealand market. In the Law Society’s submission, the potential costs of extending liability should be weighed against the objectives of the new regime, which relevantly include promoting and facilitating New Zealand’s capital markets.”
The Law Society says that while there may be a case for having such a wide range of “relevant persons” capable of being brought into the liability net in the case of primary offers of equity and debt securities, it is not convinced that this is the case for managed funds. The submission suggests that the focus of attention for managed funds should continue to be the manager and its directors.
The submission also states concerns about clause 463, which introduces a rebuttable presumption that materially adverse misstatements have caused a product’s loss in value. The rationale for this is questioned, as it is not a normal economic inference and is contrary to normal civil law principles.