New Zealand: A Regulator With Teeth: The Enforcement Capabilities of the FMA: Part 3

This article is part of a series: Click A Regulator With Teeth: The Enforcement Capabilities of the FMA: Part 2 for the previous article.

THE MECHANICS

The flowchart at Appendix II sets out in summary form the mechanics of the FMA's power to exercise a person's right of action.

That power may only be exercised "as a result of an inquiry or investigation carried out by the FMA". While the Act is silent as to whether this investigation or inquiry must be complete before the FMA exercises the power, equivalent statutory language in Australia has been interpreted as not requiring completion and, in any event, any such requirement is likely to be easily achieved.

The FMA then has three options: to take no action, to take direct enforcement action (such as a prosecution or pecuniary penalty) or to exercise a person's right of action. At that point, the "public interest" test, as discussed above, is triggered. Assuming the threshold is met, the real mechanics begin.

Consent

To initiate proceedings, the FMA must notify the person in writing of its intention and may proceed unless within 30 days, the person either gives written notice that it objects11 or exercises its own right of action.

The process for taking over proceedings that a person has already commenced is, for obvious reasons, more stringent. In these circumstances, the FMA may proceed only with the person's written consent.

Leave

However, should a person object to the FMA commencing proceedings, or decline to give consent to the FMA taking over proceedings, the FMA has the ability to apply to the High Court for leave to overcome the person's objection or nonconsent, provided the person is not an individual.

The Act expressly states that if the person is an individual the High Court may not give leave. This exception was included reasonably late in the legislative process in response to submissions that allowing the Court to "overrule" an individual's objection was constituted an unwarranted interference in the rights of individual investors.

High Court leave is by no means a given. The Court must be satisfied that it is in the public interest for the FMA to initiate or take over the proceedings and for the FMA, rather than the person, to control the conduct of the proceedings. In considering these factors, the High Court must have regard to whether the person intends to commence or diligently continue the proceedings, the interests of the person, its shareholders, members, and creditors, and, if the person is an issuer, the holder of any securities issued by the person.

Presumably to ensure the Court receives a balanced view, the FMA is required to serve notice of an application for leave. The person may appear and be heard on that application and must, if it does appear, inform the High Court whether it intends to commence or continue the proceedings (one assumes the Court then makes its own assessment as to diligence or otherwise).

High Court orders as to proceedings

Whether the FMA is exercising a person's right of action by consent or by leave, the High Court may, on the FMA's application, make any order it thinks fit in relation to those proceedings. Such orders may include:

  1. authorising the FMA to control the conduct of the proceedings
  2. giving directions for conduct of the proceedings, and
  3. requiring the person, or its directors, to provide information or assistance in relation to the proceedings.

It is worth noting that only the FMA may make such an application. The reason for this, according to the Commerce Select Committee, is to prevent applications being made for the purpose of slowing down proceedings or skewing the outcome.

In addition, while the FMA is required to consult with the person as to the conduct of the proceedings (subject to any order of the High Court), the FMA need do so only to the extent "it considers appropriate" and need not do so (and the High Court must not so order) if it considers that consultation would materially prejudice its ability to efficiently or effectively conduct the proceedings.

Money ordered to be paid

The High Court may order that any amount to be paid by a defendant in the proceedings must first go to pay, in whole or in part, the FMA's actual costs in commencing, taking over or conducting the proceedings. This was a reasonably late inclusion in the legislation which, as originally drafted, sheeted the costs of proceedings in whole or in part to the issuer (and, indirectly, to investors).

Similarly, the Court may order that such money be paid to a shareholder, member, or creditor of the person.

Time limits

A "gaming risk" raised during the legislative process was that court proceedings could be used to delay litigation by the FMA beyond the limits of the Limitation Act. To remedy this, the Act now provides that the date on which an FMA application for leave is filed must be treated, for the purposes of the Limitation Act, as the date on which the claim is filed.

The teeth bared?

Recent examples of action taken by the FMA against financial markets participants show the new powers that are available to it and its ability to co-operate with other enforcement and regulatory bodies.

GFNZ Group

On 15 June 2011, the FMA made an interim order to stop an allotment of securities by GFNZ Group Limited (formerly known as Geneva Finance Limited). This represented the first exercise of a new power, under section 43G of the Securities Act 1978, for use when the FMA is of the opinion that, for example, a registered prospectus may be false or misleading.

In this case, the FMA learned that GFNZ had breached a lending covenant with its primary funder. The FMA is now seeking further information from GFNZ to determine whether to order the offer documents to be corrected to the FMA's satisfaction or cancelled on the grounds that they are likely to deceive, mislead or confuse investors.

This intervention by the FMA demonstrates that it can take successful ex ante enforcement action against financial market participants.

Whimp partnerships

On 6 May 2011, the FMA ordered Mr Bernard Whimp under section 49 of the FMA Act to include a warning from the FMA, in the form set by the FMA, at the beginning of any unsolicited offer documents he makes. Mr Whimp had made several unsolicited "low ball" offers to investors to purchase their shares in NZX-listed companies for prices significantly below market values.

Separately, after legal action by the FMA, the High Court on 13 May 2011 ordered the cancellation of offers to purchase securities at above market price but with the payments spread over ten years. The Court agreed that this feature was not properly described and so the offer was misleading.

SuperLife

On 21 June 2011, the FMA issued a warning to SuperLife to overhaul its KiwiSaver sales practices after it became concerned about potential noncompliance with the law and apparent poor monitoring of the activities of SuperLife's sales force. The FMA had previously (9 May 2011) warned investors to be wary of SuperLife's unacceptable practices.

The FMA warned SuperLife that the door-to-door sale of securities was illegal under the Securities Act and would also be in breach of the Financial Advisers Act and that, if SuperLife persisted, the FMA would not hesitate to take action under that Act when the Act came into force on 1 July 2011.

Allan Hubbard

On 20 June 2011, the FMA closed its investigation into a series of companies of which Allan Hubbard was director, after the Serious Fraud Office (SFO) laid 50 charges against Mr Hubbard under sections 220, 242 and 260 of the Crimes Act.

The SFO and FMA had worked closely together on the Hubbard investigation and, although the FMA had authority to commence proceedings against Mr Hubbard for breaching section 59 of the Securities Act, it decided that this would be duplicative and has instead simply offered to assist the SFO with its prosecution if necessary.

Although it has decided not to prosecute Mr Hubbard, the FMA nevertheless retains the ability to take action on behalf of investors in any civil action against Mr Hubbard in his capacity as a director for compensation arising from any breach of his director's duties.

Hanover Finance and Mark Hotchin12

On 10 December 2010, the Court granted interim freezing orders over New Zealand assets held by former Hanover Finance director Mark Hotchin after an application by the Securities Commission. The FMA (taking over from the Securities Commission) successfully opposed an application by Mr Hotchin to vary or revoke those orders on 5 May 2011.

The action was taken under sections 60G and 60H of the Securities Act with a view to ultimately freezing sufficient property and assets of Mark Hotchin to meet any civil claims that may be brought by investors. Any such claims would relate to those who invested in the Hanover group of companies on the basis of disclosure documents that are proved to contain untrue statements.

The Securities Commission could apply for such orders only in relation to breaches under the Securities Act and the Securities Markets Act and for non-compliance with the Takeovers Act or Code. Sections 60G and 60H apply this remedy to breaches of all financial markets legislation.

Although the orders can be made before a liability is established and, indeed, before the evidence necessary to establish liability has been collected; the Court has held that it is "an extraordinary remedy to be exercised with caution".

APPENDIX 1

Summary of regulatory or investor protection bodies

Enforcement and prosecution responsibilities are spread around the Securities Commission, the Serious Fraud Office, the Commerce Commission, the Ministry of Justice (and the judicial system more generally), the New Zealand Police, Crown Law and the Registrar of Companies.

HEADING HEADING
Reserve Bank
  • Prudential supervision of banks and, now, non-bank deposit takers

Ministry of Economic Development
  • Policy advice and overall monitoring of the regulatory system
Registration of Companies
  • Registration and review of prospectuses (compliance review, not substantive)
  • Powers to ban directors of issuers

Exchanges (NZX)
  • Administration of its listing rules
  • Supervision of member broker firms
  • Review of trading and other data and sharing information on potential breaches of insider trading, market manipulation or continuous disclosure rules with Securities Commission

Trustee corporations
  • Monitoring the financial position and investment practices of issuers on behalf of holders of debt and collective investment scheme securities, in accordance with a published trust deed

NZ Institute of Chartered Accountants
  • Self-regulatory body for auditors and accountants preparing financial statements for issuers

Commerce Commission
  • Enforcement powers in relation to misleading advertising in offers of Securities

Serious Fraud Office
  • Enforcement powers in relation to fraudulent offers of major Securities

Takeovers Panel
  • Administration of the Takeovers Code and sharing of information with Securities Commission

Ministry of Consumer Affairs
  • Provision of consumer information, education and policy advice
  • Warning the public about scams

Commerce Commission
  • Investigation of anti competitive behaviour and misleading or deceptive conduct, including in the offer of securities

Banking ombudsman
  • Dealing with complaints about banks



Responsibility for raising New Zealanders' level of financial literacy (i.e. investor education) is shared among the Securities Commission, the Retirement Commission, the Ministry of Education and the New Zealand Qualifications Authority. A number of non-governmental bodies such as Young Enterprise Trust, Grey Power and the Shareholders Association also do valuable work in this field.

Appendix 2

Click here to see flow chart attached to appendix 2

Footnotes

1. Refer Appendix 1 for a summary of the regulatory or investor protection bodies involved. Source: Prada and Walter, "Report on the Effectiveness of New Zealand's Securities Commission", September 2009.

2. Page 162, per Gallen J

3. Unlike the Commerce Commission, the Securities Commission did not have the ability to obtain a search warrant.

4. Which means "a body in another country that performs functions that correspond with, or are similar to, any of those conferred on the FMA". This definition appears to preclude provision of information or documents to overseas law enforcement agencies.

5. And the requisite written notice must specify that the power is being exercised at the request of an overseas regulator.

6. The Act gives the FMA power to exercise the right of "a person". "Person" is not defined in the FMA Act, but as per the Interpretation Act 1999 it includes "a corporation sole, a body corporate, and an unincorporated body"

7. The use of the term "inquiry" here is interesting. It suggests something less than an "investigation", which would presumably be subject to the threshold questions discussed above.

8. See the Explanatory Note to the Financial Markets (Regulators and KiwiSaver) Bill 2010

9. See Australian Securities Commission v Deloitte Touche Tohmatsu (1996) 70 FCR 93

10. Although note that ASIC has used the power more frequently in more recent times, notably in pursuit of the directors of the Westpoint Group to receover some of the A$288 million lost by investors after the collapse of the property investor in 2006.

11. Note the requirement is for written notice of objection, it can therefore be assumed that silence constitutes consent.

12. Chapman Tripp's Auckland office is acting in relation to this matter.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

This article is part of a series: Click A Regulator With Teeth: The Enforcement Capabilities of the FMA: Part 2 for the previous article.
Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions