I OVERVIEW

i Sources of law

The primary source of securities law in New Zealand is the Financial Markets Conduct Act 2013 (FMCA). The FMCA is the culmination of a comprehensive reform of securities law in New Zealand, and entirely replaces the preexisting regime.

The FMCA, together with the common law and other consumer protection legislation, provides the key source of law for securities litigation.2 Regulations promulgated under the FMCA also contain important detail relevant to the securities regime.3

New Zealand’s main securities exchange is the New Zealand Stock Exchange (NZX). The NZX Listing Rules and NZX-issued guidance are an important source of market regulation.4

ii Regulatory authorities

The Financial Markets Authority Act 2011 (FMAA) establishes the Financial Markets Authority (FMA), which is New Zealand’s financial conduct regulator and provides licensing, compliance, supervision and systems oversight under a number of statutes, including the FMCA.

The FMCA and FMAA provide the FMA with a number of administrative, civil and criminal tools – escalating in severity and formality – to engage with market participants, with a focus on proportionality. The FMA has increased staff numbers and significantly increased budget over its predecessor, the Securities Commission, such that it has the resources to focus on market integrity and conduct.5

The New Zealand Markets Disciplinary Tribunal (the Tribunal) is a regulatory body, separate to the NZX, which undertakes an essentially judicial role to determine whether breaches of the NZX Listing Rules have occurred and, if so, what consequences should follow (e.g., to revoke or suspend a market participant’s designation or issue a penalty).6

iii Common securities claims

There have been few proceedings brought under the FMCA since its enactment. However, there is an existing body of case law applying the preexisting statutory regime (the Securities Act 1978 (SA) and the Securities Markets Act 1988 (SMA)),7 which, together with Australian decisions, provide guidance on the likely interpretation and application of the FMCA.

The most significant example of private securities litigation in New Zealand is that of Houghton v. Saunders, involving representative claims (primarily under the SA) by shareholders of Feltex Carpets Limited against parties associated with that failed company.8

False or misleading statements and omissions in disclosure

A focus of the liability regime under the FMCA (as was the case under the SA) is on defective disclosure in offer documents.9 One of the key prohibitions in the FMCA is on the offeror10 making or continuing to make an offer where the product disclosure statement11 or register entry for a financial product contains false or misleading information or omits required information, or a new circumstance has arisen since the launch of the offer that has not been disclosed (in each case if the relevant matter is materially adverse from the point of view of the investor).12 Where this prohibition is contravened:

  1. the offeror will have strict civil liability for the contravention;
  2. each director of the offeror at the time of the contravention will be deemed to have contravened the provision and will have strict civil liability;13
  3. the offeror and its directors can be criminally liable for a knowing or reckless contravention;14 and
  4. others (e.g., joint lead managers, underwriters and professional advisers) can have civil liability for ‘involvement’ in the contravention15 (or criminal liability as a party to offending).16

There is also a presumption of loss, meaning that if a person acquires financial products that have declined in value following a contravention of the above prohibition, the person must be treated as having suffered loss or damage because of the contravention.17 A defendant can rebut this presumption through proof that the decline in value was caused by something other than the relevant statement or omission.18 There is no separate requirement under the FMCA that a plaintiff demonstrate reliance.

The FMCA contains a number of statutory ‘due diligence’-style defences for contraventions of civil liability provisions, including in relation to defective disclosure. Relevant defences include:

  1. that the contravention was because of reasonable reliance on information supplied by another person;19
  2. that all reasonable enquiries were made and that, after making such enquiries, the defendant believed on reasonable grounds that the statement was not false or misleading or that there had been no omission, or the defendant was unaware of the new circumstance;20 and
  3. in respect of directors who are deemed to have contravened, or persons ‘involved’ in a contravention, that they took all reasonable and proper steps to ensure that the offeror complied with its obligations.21
Fair dealing provisions

The fair dealing provisions in the FMCA prohibit, generally, misleading or deceptive conduct in relation to financial products and services.22 The making of unsubstantiated representations in relation to financial products or services is also prohibited.23

The fair dealing prohibitions apply broadly to all financial products and services, not just regulated offers. The fair dealing provisions do not apply to conduct that contravenes more specific prohibitions in the FMCA (e.g., in relation to defective offer documents)24 but can apply to other materials, for example, advertisements or road show presentations, and to advertising material for non-regulated offers.

Market manipulation and insider trading

Civil or criminal liability can be imposed for market manipulation or insider trading. The market manipulation prohibitions in the FMCA apply to any quoted financial product, and focus on disclosure-and trade-based manipulation.25 Disclosure-based manipulation consists of disseminating false or misleading information calculated to materially affect the price or to induce a person to trade in the financial product.26 The claimant must show that a material aspect of the information disseminated was false or misleading and that the defendant knew, or ought to have known, this was the case.27

Trade-based manipulation involves an act or omission that will have, or is likely to have, the effect of creating a false or misleading appearance of the extent of active trading or the market for a financial product.28 The defendant must know or ought to have known their act or omission will, or is likely to, have such an effect.29 A defence exists if the defendant can prove that the trading or offer to trade in financial products was in line with market practice and for a proper purpose.30 The FMCA deems ‘wash sales’ and ‘matched orders’ to constitute manipulation.31

An ‘information insider’ under the FMCA is someone with information not generally available to the market who knows or ought to know that the information is material and not available to the market.32 An information insider is prohibited from direct trading, disclosing information to others who are likely to trade, or advising or encouraging others to trade in the relevant financial product.33 The FMCA and regulations provide exemptions to the insider trading prohibitions.34

Tort

It is not settled in New Zealand whether a duty of care in tort is owed to investors for the content of financial product disclosure and advertisements. In Feltex, the High Court held there was no special relationship for the purposes of a negligence claim because issuers’ and promoters’ obligations to the plaintiffs were already defined by the existing statutory scheme (the SA).35

Secondary liability and gatekeepers

Other than in respect of the offeror and its directors, civil liability under the FMCA for defective disclosure will turn on whether a person was ‘involved in the contravention’.36 In criminal securities proceedings, secondary liability will turn on the party liability provision in the Crimes Act 1961 (Crimes Act).37

A person is involved in a contravention if they aid, abet, counsel, procure, induce (by threats or otherwise), are knowingly concerned in (directly or indirectly), or have conspired with others to effect the contravention.38 The secondary liability provisions are similar to those in at least two existing New Zealand statutes, Section 43(1) of the Fair Trading Act 1986 (FTA) and Section 83 of the Commerce Act 1986, and Australian legislation, all of which will be helpful to practitioners applying them in practice.39 The category most open to debate is the threshold of being ‘knowingly concerned’ in a contravention. Issues will arise as to what form of knowledge is required and what a person must have knowledge of (i.e., the essential facts that constitute the contravention). The provision could, potentially, capture anyone engaged in the offer process, whether they are a joint lead manager, underwriter or any other third party in the preparation of the disclosure. Liability will depend on the particular facts as to whether the relevant person was involved in the contravening conduct40 and had knowledge of contravention.41 This will be, ultimately, a question of fact and degree in each case, and could be particularly difficult to determine where the underlying contravention involves evaluative judgments as opposed to simple untruths.

II PRIVATE ENFORCEMENT

i Forms of action

In addition to private individual actions, securities litigation can take the form of representative actions and shareholder derivative actions.

Representative actions

Until recently, representative actions had not been a significant feature of New Zealand’s legal landscape. One reason for this slow development is the current absence of clear rules for such litigation.42 Despite the lack of a developed statutory framework, a group can bring litigation by way of representative proceedings action under the High Court Rules (HCR).43 Significant litigation has been brought in this way.44 The HCR provide that a person may sue ‘on behalf of, or for the benefit of, all persons with the same interest in the subject matter of a proceeding’, with the consent of the represented parties or as directed by the court on application.45

Securities representative actions in New Zealand will likely see continued growth in the future as a result of the presumption of loss in the FMCA, which will make it easier to establish causation in actions by the FMA and other plaintiffs on behalf of a large number of investors.

Derivative actions

Shareholders can also bring derivative actions under the Companies Act 1993 (CA).46 Shareholders can seek leave from the court to bring a claim in the name, and on behalf of, the company. Typically, proceedings of this nature are brought against company directors in respect of breaches of directors’ duties.

ii Procedure

The procedural features of a private securities claim are largely governed by the HCR, which, alongside the Senior Courts Act 2016, form a procedural code.47 Private proceedings under the FMCA are ordinary civil proceedings and the usual rules of procedure and evidence apply.48

Claims are commenced when a claimant files a statement of claim and a notice of proceeding in the High Court.49 Assuming that the defendant intends to defend the claim and does not dispute the court’s jurisdiction, it will file and serve a statement of defence. Typically, the parties are then required to disclose documents to each other in a discovery process.

A key feature of litigation in New Zealand is that courts typically require unsuccessful parties to pay the successful party’s costs.50 These sums can be significant and act as a deterrent to bringing speculative claims.

Litigation funding, although not regulated by statute, is becoming increasingly common in New Zealand. Outside the representative context, the Supreme Court has stated that it is not prepared to take on the role of general regulator of funding arrangements.51 The Supreme Court concluded that a funded party should, however, disclose the following information to the court and other parties when funded proceedings commence:

  1. the fact that there is a litigation funder;
  2. the funder’s identity and location;
  3. the funding agreement itself where relevant;52 and
  4. whether the funder is subject to the jurisdiction of the New Zealand courts.

More recently, the Supreme Court, and in particular the chief justice, has made remarks that could be interpreted as marking a shift towards a more supervisory role.53 These comments may lead to future challenges to litigation funding arrangements.

Representative actions

The Supreme Court has imposed a relatively low threshold on the ‘same interest in the subject matter’ requirement in representative proceedings.54 The relevant HCR (4.24) is interpreted purposively to allow representative proceedings to be a ‘flexible tool of convenience in the administration of justice’.55 To satisfy this ‘same interest’ requirement, it will be sufficient for the claimant party and represented parties to have ‘a community of interest in the determination of some substantial issue of law or fact’.56

Representative actions generally proceed on an opt-in basis, with prospective members of the group needing to opt in within a set time period.57 Even in instances in which all represented persons consent, the High Court has noted that it is prudent for those bringing the representative proceeding to apply for directions confirming that they may act as representative plaintiffs.58 Where not all persons to be represented consent to the proceeding, an application to the court for a representation order is necessary.59 Members of a represented group will be bound by any judgment to the extent of common issues, and may face obligations with respect to discovery of documents, answering interrogatories or payment of adverse costs awards.60

The procedure for representative actions, subject to the above, follows typical civil procedural rules.

Derivative actions

The court has discretion to grant an applicant shareholder leave to bring derivative proceedings. The court will have regard to the likelihood of success in the proceeding, the costs of the proceedings as against the likely relief, and any actions already taken with respect to the breaches.61 Notice of an application for leave must be served on the company, and the company must inform the court as to whether it intends to progress the proceedings. The procedure for derivative actions under the CA is governed by Part 18 of the HCR and largely follows civil procedural rules.

iii Settlements

There is no general requirement for judicial oversight of an agreement to settle civil securities actions in New Zealand. A settlement agreement is a contract, which provides for the terms of the settlement, typically being a release of all claims by the plaintiff along with a payment from the defendant or defendants to the plaintiff. The parties generally agree regarding the apportionment of legal costs.

There are no specific rules governing the settlement of representative actions in New Zealand. It, therefore, remains open to parties to reach out-of-court settlements. Notably, court approval of settlements is not expressly required in New Zealand, and if a proceeding is settled, it can simply be discontinued.

Shareholder derivative proceedings brought with leave of the court cannot be settled, compromised or discontinued without approval of the court.62

iv Damages and remedies

The primary remedy for private actions under the FMCA is compensation.63 A court may make any order that it considers just in order to compensate any person who has suffered, or is likely to suffer, loss or damage.64 It seems likely that a New Zealand court would calculate loss in the case of defective disclosure as the difference between the purchase price and a measure of ‘market’ or other value.65 The exact methodology is yet to be tested.

In addition to compensatory orders, the FMCA grants the New Zealand courts the power to make a wide range of civil liability orders under Section 498, including the power to require refunds of money, vary or cancel agreements and restrain the issue or transfer of financial products.

III PUBLIC ENFORCEMENT

i Forms of action

The FMA has a broad range of criminal, civil and administrative enforcement tools.66

The FMA can collect and disseminate information or research about financial markets, has the power to issue warnings, reports and guidelines and make comment about any matter relating to financial markets, and it can set frameworks and methodologies for market participants.67

The FMA can also issue (on an urgent basis, if necessary) orders or notices as follows:

  1. stop orders: Stop orders may prohibit offers, issues, sales or other acquisitions or disposals of financial products; prohibit an offeror from accepting applications for financial products; or prevent the distribution of disclosure documentation.68 The FMA can also issue, without notice, an interim stop order pending an exercise of its powers;69
  2. direction orders: Direction orders may direct a person to comply with the law; take steps to comply with the law or to avoid any potential or actual adverse effects of a contravention; or require a person to report to the FMA regarding implementation.70 A direction order can also specify that a person may not rely on an exemption in the FMCA, prohibit the use of simplified disclosure and prohibit an offer under a recognition regime;71 and
  3. infringement notices: Infringement notices may be issued in a limited range of circumstances and provide the FMA with a flexible means for dealing with minor offences (such as a failure to send certain notices to security holders).72

The next level of intervention is the FMCA’s civil liability regime, under which the FMA can apply to the High Court for a declaration of contravention, a pecuniary penalty order, a compensatory order or other civil liability order (as described above).73

The FMA can prosecute any proceeding under the FMCA and can:

  1. exercise and control a right of action on behalf of private litigants;74 and
  2. with leave of the High Court, represent a class of persons if the persons have the same or substantially the same interest in relation to the proceedings.75

The FMA can accept enforceable undertakings (a form of negotiated settlement, which can include the payment of compensation), state a case for the opinion of the High Court and settle a case or investigation.76 The FMA (or any other entitled person) may also seek banning orders77 in the High Court.78 On application of the FMA (or any other person), the court may grant injunctive relief.79 In certain cases, the FMA may refer conduct to the Serious Fraud Office, the Commerce Commission, the Police or the Reserve Bank.80

At the highest level of intervention, a contravention of the FMCA coupled with knowledge or recklessness can lead to criminal prosecution by the FMA.81

The FMA has a policy of publicising enforcement action unless there are policy, legal or other compelling reasons not to do so.82 This is to maximise the ‘visible deterrence’ and to educate market participants.83

ii Procedure
Search powers

One of the key differences between public enforcement and private enforcement is the information gathering powers of the FMA. If the FMA considers it necessary or desirable it may (by written notice) require a person to supply the FMA with information, produce documents, reproduce information, appear before the FMA and give evidence.84

The FMA may authorise a specified person to enter and search a place, vehicle, or other thing.85 The search may only occur if the occupier or person in charge consents or a warrant is obtained.86

Civil proceedings

The standard of proof for civil proceedings is the balance of probabilities, and the usual rules of evidence and procedure apply.87 In FMA v. Warminger, a market manipulation case brought under the old regime (the SA), the High Court required ‘strong evidence’ to be satisfied that the elements of the statutory provisions were made out on the balance of probabilities.88 It seems likely this approach will be carried over to civil proceedings under the FMCA.

The FMA has committed to act as a model litigant in civil proceedings. This leads to a number of (self-imposed) obligations, including acting honestly and fairly, but does not prevent the FMA from acting promptly, decisively and properly to protect its interests.89

Criminal proceedings

The FMA will only take criminal action where there is evidence of intentional, reckless or other serious unlawful conduct.90 Rules governing the FMA’s conduct of criminal litigation are also set out in the Solicitor-General’s Prosecution Guidelines.91

The standard of proof for criminal proceedings is beyond reasonable doubt and procedure is governed by the Criminal Procedure Act 2011.

Declarations of contravention

Any person, including the FMA, can apply to the court for a declaration of contravention.92 The purpose of a declaration of contravention is to lay the groundwork for a later applicant seeking a civil remedy, who can rely on the declaration of contravention as establishing the defendant’s contravention of the FMCA.93

Collaboration with other regulators

The FMA has entered into memoranda of understanding with other regulators and agencies.94 One relevant example is the MOU between the FMA and the Commerce Commission. For matters relating to misleading and deceptive conduct, the FMA has primary regulatory responsibility in relation to financial products and financial services, with the Commerce Commission taking primary regulatory responsibility for other misleading and deceptive conduct.95

iii Settlements

The FMA can settle matters either prior to, or following the commencement of, proceedings. The FMA will, pursuant to its model litigant policy, consider proposals to avoid or resolve litigation, including by co-operation or other agreed resolution.96

When the FMA exercises a person’s right of action and brings proceedings, those proceedings cannot be settled, compromised or discontinued without the court’s approval.97 The High Court recently issued the first such approval.98 The Court assessed the settlement in light of the FMA’s objective and functions,99 and approved the settlement on the basis of the following reasons:

  • a the defendant’s admissions;
  • b the settlement sum was accepted as being in a ‘range commensurate’ to the losses caused; and
  • c the settlement agreement was to be made public, including by way of public announcement.100

In criminal prosecutions, the parties can find a mutually beneficial compromise, which results in the defendant facing fewer charges or pleading guilty to certain charges, or both.

iv Sentencing and liability
Criminal proceedings

The maximum sanctions for criminal offending under the FMCA are: for individuals, up to 10 years’ imprisonment or a fine not exceeding NZ$1 million, or both; and for corporations a fine not exceeding NZ$5 million.101

Pecuniary penalties in civil proceedings

Significant pecuniary penalties can be imposed under the FMCA. The maximum penalty applicable (e.g., for defective disclosure in regulated offers) is the greatest of:

  • a the consideration for the relevant transaction;
  • b three times the amount of the gain made or loss avoided by the contravention; and
  • c NZ$1 million for an individual or NZ$5 million in any other case.102

A person cannot be liable for more than one pecuniary penalty for the same conduct and cannot be ordered to pay a pecuniary penalty and a fine for the same conduct.103

In determining the appropriate pecuniary penalty, the court must have reference to a variety of relevant matters, including those listed in section 492 of the FMCA. In Warminger,104 the High Court adopted an approach to determining the appropriate pecuniary penalty that required the Court to fix a starting point having regard to the relevant statutory criteria and then make deductions for personal circumstances. A similar approach is likely to be adopted under the FMCA.

Infringement notices

The maximum amount payable under an infringement notice105 ranges from NZ$5,000 to NZ$20,000.106 However, if an infringement offence is proceeded with summarily, the maximum fine is NZ$50,000.

IV CROSS-BORDER ISSUES

i Jurisdictional issues

Whether a New Zealand court will have jurisdiction over a foreign person or entity will turn on the regime for service out of jurisdiction in the HCR.107 An originating document may be served out of New Zealand without leave of the High Court in a number of situations, including, relevantly, when the claim arises under an enactment and the enactment applies expressly or by implication to an act or omission that was done or occurred outside New Zealand in the circumstances alleged.108

If jurisdiction is challenged by the defendant, then the party effecting service is required to establish that there is a good arguable case the claim falls within one of the specified grounds109 and that the court should assume jurisdiction by reference to the following factors:

  • a there is a serious issue to be tried on the merits;
  • b New Zealand is the appropriate forum for the trial; and
  • c any other relevant circumstances support an assumption of jurisdiction.110

The New Zealand courts will continue to be guided by earlier authorities relating to forum non conveniens.111

ii Extraterritorial application of the FMCA

Certain provisions of the FMCA have extraterritorial effect:

  1. the fair dealing provisions apply to conduct in New Zealand and to conduct outside New Zealand by any person resident, incorporated, registered, or carrying on business in New Zealand to the extent that that conduct relates to dealing in financial products, or the supply of a financial service, that occurs (in part or otherwise) within New Zealand;112
  2. the disclosure obligations in Part 3 apply to offers of financial products in New Zealand, regardless of where the resulting issue or transfer occurs or where the issuer is resident, incorporated or carries on business;113 and
  3. the provisions regarding dealing in financial products on markets in Part 5, including insider trading and market manipulation, apply to conduct in relation to quoted financial products or listed issuers regardless of whether the conduct is in New Zealand or outside New Zealand.114
iii Mutual recognition scheme

The trans-Tasman mutual recognition scheme allows issuers of securities to offer specified financial products in New Zealand and Australia, using one disclosure document prepared under the fundraising laws in the issuer’s home country.115

V YEAR IN REVIEW

In February 2018, the FMA released its Conduct Outcomes Report for 2017.116 The FMA had a busy year, notching victories in market manipulation and insider trading cases, entering into a number of settlements, releasing guidance and reports of relevance to the market, taking administrative action and having one mistrial declared in a High Court proceeding.

i Market manipulation and insider trading

In March 2017, the High Court found Mark Warminger, a former trader, guilty of market manipulation of listed stocks in breach of the SMA.117 The Court found against Mr Warminger with respect to two of the 10 instances of alleged market manipulation.118 This was the first market manipulation case to come before the New Zealand courts. The Court imposed a pecuniary penalty of NZ$400,000 on Mr Warminger.119 He also received an automatic five-year management ban.120

In March 2017, the FMA filed criminal proceedings in the District Court against two individuals in relation to insider trading.121 This was New Zealand’s first prosecuted criminal case of insider trading. One of the individuals pleaded guilty to being an information insider and advising and encouraging another person to trade.122 He was sentenced to six months’ home detention.123 The case against the other individual is still in progress. The FMA filed criminal charges regarding alleged obstruction of its investigation, which were not pursued following the guilty plea.124

ii Settlements

In 2014, the FMA instituted civil proceedings pursuant to its power to act in the place of investors under Section 34 of the FMAA.125 The case concerned a trustee’s conduct, and was settled three days before the five-week hearing was to begin on 21 August 2017.126 As the case was brought pursuant to Section 34, the High Court had to approve the settlement. The settlement required the trustee to make admissions, pay the FMA NZ$4.5 million and agree not to act as a supervisor of any regulated offer of securities for five years.127

iii Guidance and reports

As part of its investigation in Warminger, the FMA noticed trading activity by Goldman Sachs that gave it cause for concern.128 The FMA, after an investigation, chose not to pursue enforcement action, but instead issued a report in November 2017.129

In October 2017, the FMA issued guidance on the Bank Bill Benchmark Rate and closing rates.130 The FMA was conscious of litigation and regulatory action overseas regarding the London Interbank Offered Rate (and other benchmarks), and this guidance set out the FMA’s expectations regarding trading conduct and controls to firms trading in the wholesale market.131

iv Other matters

In November 2017, an offeror halted a pending initial coin offering (ICO) after engagement by the FMA. The FMA believed the offering should be classed as a financial product and, therefore, fell within its regulatory remit.132 The directors of the company agreed to stop the ICO voluntarily and refunded all money to investors. The FMA has also released commentary on ICOs and cryptocurrencies.133

VI OUTLOOK AND CONCLUSIONS

Securities litigation and regulatory enforcement continues to be a significant risk facing market participants.

Market integrity remains a key driver of the FMA’s behaviour.134 Where the FMA identifies threats and risks to ‘fair, efficient and transparent financial markets’, it will take appropriate action, which could be ‘classic enforcement action such as court proceedings, or supervisory or administrative action’.135 The FMA will continue to invest in regulatory action to ensure the integrity of New Zealand’s capital markets.136

The FMA has communicated its ongoing focus on conduct, releasing a guide to its view of conduct in 2017.137 This provides the FMA’s view that conduct goes beyond formal governance systems and processes, and extends to culture, which is the responsibility of leadership.138 In terms of culture, the FMA has emphasised that the board and leadership must set expectations, and remuneration policies and rewarding good conduct will be an important part of this.139

i Pending cases

In October 2017, the FMA filed criminal insider trading charges under the SMA against an individual. The case is still in progress.140

In October 2017, the FMA filed criminal charges against an individual under the Crimes Act, alleging that he had misappropriated funds deposited by clients.141 The FMA had previously obtained asset protection orders on a without notice basis under Sections 522 and 523 of the FMCA, after suspecting that the individual was operating a Ponzi scheme.142

ii Legislation and regulation

An early stage omnibus Bill currently proposes amendments to a number of New Zealand acts, including the FMCA.143 While the current Bill largely focuses on changes in regulating the provision of financial advice, the Bill also includes minor changes and improvements to the FMCA that have emerged since the implementation of the new regime. The FMCA and regulations will continue to be refined and updated.

1 Chris Curran and Marika Eastwick-Field are partners and Nathaniel Walker is a senior associate at Russell McVeagh. The authors wish to thank Camille Butters, Tim Morrison, Aidan Lomas, Sophie Hayman, Samantha Knott and Josh Suyker for their assistance.

2 Other relevant legislation includes the Financial Markets Authority Act 2011; the Companies Act 1993; the Fair Trading Act 1986; and the Credit Contracts and Consumer Finance Act 2003.

3 See, for example, the Financial Market Conduct Regulations 2014.

5 In 2017, the FMA had 178 staff and a budget of NZ$40 million, as against the Securities Commission’s staff of 94 (plus 72 full-time equivalent employees) and budget of NZ$18.1 million in its last year of operation, 2011. (See https://issuu.com/financialmarketsauthority/docs/170926_fma_annual_report_2017 (FMA Annual Report); and http://www.treasury.govt.nz/budget/2017/estimates/v1/est17-v1-buscin.pdf (Vote Business, Science and Innovation 2017); and https://fma.govt.nz/assets/Annual-reports/
111025-securities-commission-2011-annual-report.pdf (Securities Commission Annual Report 2011).)

6 See https://www.nzx.com/regulation/nzmd-tribunal-regulation; the Tribunal is not responsible for identifying (potential) breaches, as that responsibility lies with the NZX itself. The NZX has dedicated teams for this purpose.

7 See, for example, R v. Moses HC Auckland CRI-2009-004-1388, 8 July 2011; R v. Graham [2012] NZHC 265; Jeffries v. R [2013] NZCA 188; Graham v. R [2014] NZSC 55; Houghton v. Saunders [2014] NZHC 2229; [2015] NZLR 74 [Houghton (HC – substantive)]; and Houghton v. Saunders [2016] NZCA 493, [2017] 2 NZLR 189 [Houghton (CA)] (leave to appeal granted in Houghton v. Saunders [2017] NZSC 55). There is still the potential for securities claims under the SA for securities issued under that regime (issuers of securities could choose to make an offer pursuant to the SA (notwithstanding its repeal) within two years (in the case of continuous issue securities) or 12 months (in any other case) from the commencement of the FMCA. See FMCA, Schedule 4, Clauses 5–6). The limitation period for actions under the SA is generally six years, so, proceedings with respect to certain offerings could still be brought pursuant to the liability regime in the SA until at least 2022.

8 Houghton (HC – substantive), note 7. The High Court of New Zealand in 2014 found in favour of the defendants. The Court of Appeal in turn upheld the High Court judgment: Houghton (CA), note 7. The Supreme Court has reserved judgment on a subsequent appeal from the Court of Appeal.

9 Sections 82, 99 and 427 of, and Clause 27 of Schedule 1 to, the FMCA.

10 The ‘offeror’ for securities on issue is the issuer.

11 The product disclosure statement (PDS) is the New Zealand equivalent of an investment statement. The PDS is a consumer-focused disclosure subject to page limits, and is supplemented by disclosures on an electronic register.

12 FMCA, Sections 82 and 101.

13 FMCA, Section 534.

14 FMCA, Section 510.

15 FMCA, Section 533.

16 Crimes Act 1961, Section 66. There is also a separate criminal offence under Section 512 of the FMCA, under which any person will be criminally liable if, with respect to a document required by or for the purposes of the FMCA, they make or authorise the making of a statement in that document that is false or misleading in a material particular, knowing it to be false or misleading.

17 FMCA, Section 496. This presumption applies in relation to defective disclosure under Sections 82 and 99 of, or Clause 27 of Schedule 1 to, the FMCA.

18 FMCA, Section 496.

19 FMCA, Section 499. Note that ‘another person’ does not include a director, employee, or agent of the party in contravention.

20 FMCA, Section 500.

21 FMCA, Sections 501 and 503.

22 FMCA, Sections 17–38.

23 FMCA, Section 23. Note this prohibition does not apply to the content of offer documents – Section 26 of the FMCA.

24 FMCA, Section 28.

25 FMCA, Sections 240–269.

26 FMCA, Section 262.

27 FMCA, Section 262.

28 FMCA, Section 265.

29 FMCA, Section 265.

30 FMCA, Section 268.

31 FMCA, Section 267.

32 FMCA, Section 234.

33 FMCA, Sections 241–243.

34 FMCA, Sections 245–256. These circumstances include where trading is required under an enactment; where the disclosure of information is required in the preparation of a PDS or other offer document; trading with knowledge of the trader’s own intentions (for example, dealing in products of a target company prior to a takeover); and executing trades on specific trading instructions.

35 Houghton (HC – substantive), note 7; and see also Tait v. Austin (2000) 8 NZCLC 262,167 (HC).

36 FMCA, Section 533. Directors, officers and other participants could also face direct liability for other common law (e.g., tort) and statutory claims (e.g., breach of directors’ duties), as well as direct criminal liability under the Crimes Act, which is preserved by Section 542 FMCA.

37 Crimes Act 1961, Section 66.

38 FMCA, Section 533 defines the term involved in a contravention.

39 See, for example, Yorke v. Lucas (1985) 158 CLR 661 and Ng v. Harkness Law Ltd [2015] NZCA 411.

40 For example, assisted in preparing the PDS.

41 For example, knowledge that a statement in a PDS was misleading.

42 In 2008, the Rules Committee released a draft Class Actions Bill and Rules for consultation. Although the Commerce Committee recommended in 2012 that the Government give priority to the introduction of a class actions regime, no real progress was made until a recent reference to the Law Commission in 2017. The Commission has at the time of writing not settled its terms of reference for its class action project.

43 HCR, Rule 4.24.

44 See, for example, Houghton (HC – substantive), note 7, as well as the discontinued proceedings against various retail banks in respect of bank fees.

45 HCR, Rule 4.24.

46 CA, Section 165.

47 The relevant part of the HCR is Part 5.

48 FMCA, Section 509.

49 In some cases, such as derivative actions under the CA, shareholders may first need to obtain leave from the court.

50 HCR, Rule 14.2. Such payment of costs is on a scale rather than an indemnity basis.

51 Waterhouse v. Contractors Bonding Limited [2013] NZSC 89, [2014] 2 NZLR 91 at [28] and [76].

52 If disclosure is required of the agreement it must be relevant to the particular application before the Court. If disclosure is required, redaction is allowed for sensitive information (for instance the ‘war chest’ among other matters).

53 PricewaterhouseCoopers v. Walker [2017] NZSC 151 at [100]­­­­­­–[101].

54 Credit Suisse Private Equity LLC v. Houghton [2014] NZSC 37, [2014] 1 NZLR 541 at [2]. See also HCR, Rule 1.2, which provides that the objective of the HCR is to ensure the ‘just, speedy and inexpensive determination of any proceeding or interlocutory application’.

55 Credit Suisse, note 54, at [2] citing John v. Rees [1970] Ch 345 (Ch) at 370.

56 Credit Suisse, note 54, at [2] citing Carnie v. Esanda Finance Corp Ltd (1995) 182 CLR 398 at 408 per Brennan J.

57 Saunders v. Houghton (No. 2) [2012] NZCA 545, [2013] 2 NZLR 652 at [75].

58 R J Flowers Ltd v. Burns [1987] 1 NZLR 260 (HC) at 264.

59 HCR, Rule 4.24.

60 Devcich v. Cowley Stanich & Co (1997) 11 PRNZ 47 (HC); Hedley v. Kiwi Co-Operative Dairies Ltd (2000) 15 PRNZ 210 (HC); compare Houghton v. Saunders (2011) 20 PRNZ 509 (HC) (‘the individual members of the representative class are not liable for any adverse costs’).

61 CA, Section 165(2).

62 CA, Section 168.

63 FMCA, Section 494.

64 FMCA, Sections 494–495.

65 Houghton (HC – substantive), note 7, at [699]–[712].

66 See FMA Enforcement Policy (August 2016) (available at: https://fma.govt.nz/assets/Policies/160824-enforcement-policy.pdf) and FMA Regulatory Response Guidelines (August 2016) (available at: https://fma.govt.nz/assets/Policies/160824-Regulatory-response-guidelines-policy.pdf). Note that the FMCA also imposes governance obligations on certain entities. For example, Part 4 of the FMCA requires trust deeds for regulated offers of debt securities to comply with specific requirements and imposes legal duties on supervisors to supervise the issuer and to act in the best interest of investors. Part 4 also creates a register of managed investment schemes, including unit trusts and superannuation schemes under which a regulated offer has been made. Security trustees’ compliance with oversight and monitoring obligations has been in the spotlight in New Zealand, particularly following the Supreme Court’s decision in Hotchin v. New Zealand Guardian Trust Company [2016] NZSC 24, [2016] 1 NZLR 906, in which a majority of the court refused to strike out contribution claims by a director of a failed finance company against trustees for allegedly failing to take enforcement action to prevent loss to investors. See also discussion regarding FMA v. Prince & Partners Trustee Company Ltd [2017] NZHC 2059 later in this chapter.

67 FMAA, Sections 8–9; FMCA, Sections 567–569; FMA Regulatory Response Guidelines (August 2016) (available at https://fma.govt.nz/assets/Policies/160824-Regulatory-response-guidelines-policy.pdf). The FMA also has powers of designation (including the call-in of financial products) and exemption.

68 FMCA, Sections 462–467.

69 FMCA, Section 465.

70 FMCA, Sections 468–469.

71 FMCA, Sections 470–471.

72 FMCA, Sections 513–516.

73 FMCA, Section 484.

74 FMAA, Section 34. This would include, for example, the right to step in and bring claims for breaches of directors’ duties. See, for example, Prince & Partners, note 66, which was the first case where the High Court was required to examine a case instituted under Section 34.

75 FMAA, Section 39.

76 FMAA, Sections 44–48.

77 Such orders prohibit a person from either providing financial advice or broking services or being a director or a promoter of an entity. Breaching a banning order is an offence. See Sections 517–521 of the FMCA.

78 FMCA, Section 517. The FMA may also impose conditions on, or revoke, licences.

79 FMCA, Section 480.

80 FMA Conduct Outcomes Report 2017 (available at https://fma.govt.nz/assets/Reports/_versions/10491/Conduct-outcomes-report-2017.1.pdf).

81 See FMA Prosecution Policy (available at https://fma.govt.nz/assets/Policies/prosecution-policy.pdf).

82 FMA Enforcement Policy (available at: https://fma.govt.nz/assets/Policies/160824-enforcement-policy.pdf) at [16].

83 FMA Enforcement Policy (available at: https://fma.govt.nz/assets/Policies/160824-enforcement-policy.pdf) at [16].

84 FMAA, Section 25.

85 FMAA, Section 29.

86 FMAA, Section 29(3). When the FMA issues an infringement notice, Section 515 of the FMCA sets out the procedural requirements for doing so.

87 FMCA, Section 509.

88 FMA v. Warminger [2017] NZHC 327 [Warminger (No 1)] at [33].

89 See FMA Model Litigant Policy (available at https://fma.govt.nz/assets/Policies/model-litigant-policy.pdf). The FMA must act honestly and with complete propriety, fairly and in accordance with the highest professional standards. More specifically, this includes responsibly spending public funds in relation to litigation, considering proposals of alternative dispute resolution and not pursuing appeals unless the FMA considers it has a reasonable prospect of success and/or the appeal is otherwise justified in the public interest.

90 See FMA Prosecution Policy (available at https://fma.govt.nz/assets/Policies/prosecution-policy.pdf).

91 Solicitor-General Prosecution Guidelines, Crown Law, 1 January 2010; FMA Model Litigant Policy (available at https://fma.govt.nz/assets/Policies/model-litigant-policy.pdf).

92 FMCA, Section 486.

93 FMCA, Section 487(1).

94 See https://fma.govt.nz/about-us/what-we-do/how-we-regulate/regulatory-co-operation/mous-with-
other-financial-regulators-and-agencies/.

95 In particular in relation to consumer credit contracts.

96 See FMA Model Litigant Policy (available at https://fma.govt.nz/assets/Policies/model-litigant-policy.pdf).

97 FMAA, Section 41.

98 Prince & Partners, note 66.

99 Prince & Partners, note 66, at [8]–[12].

100 Prince & Partners, note 66, at [13]–[19].

101 FMCA, Section 510(3). Lesser sanctions apply for certain criminal offences under the FMCA.

102 FMCA, Section 490.

103 FMCA, Sections 506–507. This extends to fines under the FTA and the Financial Advisers Act 2008.

104 FMA v. Warminger [2017] NZHC 1471 [Warminger (No. 2)] at [13].

105 Infringement notices can be issued for infringement of approximately 30 FMCA provisions.

106 Financial Markets Conduct Regulations 2014, Schedule 22.

107 HCR, Rules 6.27–6.36.

108 HCR, Rule 6.27(2)(j).

109 For example, the claim arises under an enactment and the relevant acts or omissions occurred in New Zealand.

110 HCR, Rule 6.29.

111 Wing Hung Printing Company Ltd v. Saito Offshore Pty Ltd [2010] NZCA 502, [2011] 1 NZLR 754 at [43].

112 FMCA, Section 33(1). The fair dealing provisions also apply to a restricted communication that is distributed or to be distributed to a person outside New Zealand by any person resident, incorporated, registered, or having a principal place of business in New Zealand (Section 33(2)).

113 FMCA, Section 47.

114 FMCA, Section 239.

115 FMA, Regulatory Guide 190: Offering financial products in New Zealand and Australia under mutual recognition December 2016 at 4; Subpart 6 of Part 9 of the FMCA sets out the legislative scheme relevant to Australian issuers in New Zealand, while Chapter 8 of the Corporations Act 2001 (Aust) (and associated Regulations), sets out the same for New Zealand issuers.

116 FMA Conduct Outcomes Report 2017 (available at https://fma.govt.nz/assets/Reports/_versions/10491/Conduct-outcomes-report-2017.1.pdf).

117 Warminger (No. 1), note 88.

118 Warminger (No. 1), note 88, at [326].

119 Warminger (No. 2), note 104, at [63].

120 SMA, Section 431; Warminger (No. 2), note 104, at [49].

121 FMA v. Honey [2017] NZDC 12793.

122 FMA v. Honey, note 121, at [1].

123 FMA v. Honey, note 121, at [84].

124 FMA Conduct Outcomes Report 2017 at 15 (available at https://fma.govt.nz/assets/Reports/_versions/
10491/Conduct-outcomes-report-2017.1.pdf).

125 Prince & Partners, note 66.

126 Prince & Partners, note 66, at [2].

127 Prince & Partners, note 66, at [14]–[17].

128 FMA Conduct Outcomes Report 2017 (available at https://fma.govt.nz/assets/Reports/_versions/10491/Conduct-outcomes-report-2017.1.pdf).

129 Investigation into certain trading conduct of Goldman Sachs New Zealand Limited, 15 November 2017 (available at: https://fma.govt.nz/assets/Investigations/Report-on-investigation-into-trading-conduct-of-
GSJA-13-Nov-2017.pdf).

130 The Bank Bill Benchmark Rate and closing rates – Guidance note for market participants (available at: https://fma.govt.nz/assets/Guidance/_versions/9942/171010-BKBM-guidance-note.1.pdf).

131 FMA Conduct Outcomes Report 2017 at 26 (available at https://fma.govt.nz/assets/Reports/_versions/
10491/Conduct-outcomes-report-2017.1.pdf).

132 FMA Conduct Outcomes Report 2017 at 27 (available at https://fma.govt.nz/assets/Reports/_versions/
10491/Conduct-outcomes-report-2017.1.pdf).

133 See https://fma.govt.nz/news-and-resources/media-releases/fma-commentary-on-icos-
and-cryptocurrencies/.

134 FMA Conduct Outcomes Report 2017 at 1 (available at https://fma.govt.nz/assets/Reports/_versions/
10491/Conduct-outcomes-report-2017.1.pdf).

135 FMA Conduct Outcomes Report 2017 at 1 (available at https://fma.govt.nz/assets/Reports/_versions/
10491/Conduct-outcomes-report-2017.1.pdf).

136 FMA Annual Report at 16 (available at https://fma.govt.nz/assets/Annual-reports/FMA-Annual-Report-
2017-with-financials.pdf).

137 A guide to the FMA’s view of conduct (available at https://fma.govt.nz/assets/Guidance/_versions/
9210/170202-A-guide-to-the-FMAs-view-of-conduct.1.pdf).

138 FMA Annual Report at 9 (available at https://fma.govt.nz/assets/Annual-reports/FMA-Annual-Report-
2017-with-financials.pdf).

139 A guide to the FMA’s view of conduct at 12 (available at https://fma.govt.nz/assets/Guidance/_versions/
9210/170202-A-guide-to-the-FMAs-view-of-conduct.1.pdf).

140 See https://fma.govt.nz/news-and-resources/media-releases/fma-files-insider-trading-charges/: The charges were filed under the SMA because the offending related to conduct that took place in July 2014.

141 See https://fma.govt.nz/news-and-resources/media-releases/fma-files-crimes-act-charges-against-
steven-robertson/.

142 FMA v. PTT Ltd [2015] NZHC 2204; and FMA v. PTT Ltd (in receivership) [2016] NZHC 692 (later costs application).

143 See Financial Services Legislation Amendment Bill 2017 (291-1).