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Securities Legislation Bill (Consistent) (Sections 14, 25(c), 26(2)) [2004] NZBORARp 39 (2 November 2004)
Last Updated: 23 March 2021
Securities Legislation Bill
12 November 2004
Attorney-General
LEGAL ADVICE
CONSISTENCY WITH THE NEW ZEALAND BILL OF RIGHTS ACT
1990:
Securities Legislation Bill:
- We
have considered whether the Securities Legislation Bill (the "Bill") (PCO5451/9)
is consistent with the New Zealand Bill of Rights
Act 1990 (the "Bill of Rights
Act"). We understand that the Bill will be considered by the Cabinet Legislation
Committee at its meeting
on Thursday, 18 November 2004.
- We
have concluded that the Bill appears to be consistent with the Bill of Rights
Act. In reaching this conclusion, we considered potential
issues of
inconsistency with sections 14, 25(c), and 26(2) of the Bill of Rights Act. Our
analysis of these potential issues is set
out below.
- We
understand that a subsequent version of the Bill with minor amendments will go
to the Cabinet Legislation Committee on Thursday
18 November 2004. Further, we
understand from officials from the Ministry of Economic Development (MED) that
any changes to the Bill
are unlikely to give rise to Bill of Rights Act issues.
If any of the amendments do give rise to a Bill of Rights Act issue, we will
advise you immediately.
- The
Bill would make several changes to current securities laws including those
contained in the Securities Act 1978, Securities Markets
Act 1988, and Takeovers
Act 1993. Examples of significant changes contained in the Bill include
amendments to:
- ensure that
securities and takeovers laws apply to entities and securities market
participants that the public would expect to be
regulated;
- simplify the
current substantial security holder disclosure regime by requiring disclosure of
relevant interest by class and in respect
of listed, voting securities
only;
- introduce
comprehensive prohibitions against practices involving the creation of a false
impression of securities trading activity,
price movement, or market
information;
- strengthen
insider trading laws by focusing on the threat that insider trading poses to
market integrity and confidence in the market,
rather than a breach of duty owed
to a company;
- improve the
quality of investment adviser and broker disclosure, as well as business
practices across the advisory industry, by making
all disclosures mandatory and
requiring that additional disclosures be made prior to the giving of investment
advice or the receipt
of investment money or property; and
- implement a
comprehensive overhaul of the penalties and remedies available under securities
and takeovers law in order to deter illegal
behaviours and encourage
compliance.
ISSUES OF INCONSISTENCY WITH THE BILL OF
RIGHTS ACT
Section 14: freedom of expression
- Section
14 of the Bill of Rights Act provides:
"Everyone has the right to
freedom of expression, including the freedom to seek, receive, and impart
information and opinions of any
kind and in any form".
- The
right to freedom of expression in section 14 extends to all forms of
communication that attempt to express an idea or
meaning.[1] The right
has been interpreted as including the right not to be compelled to say certain
things or to provide certain
information.[2]
Power
to summon witness to give evidence
- Clause
14 (Power to summon witnesses) amends section 69D of the Securities Act 1978
which empowers the Securities Commission (the
Commission) to summon a person to
appear before the Commission to:
- give evidence
(including under oath); and
- provide any
documents or information that are now in his or her possession or control that
are relevant to the matter.
- Clause
45 (Power to summon witnesses) of the Bill amends section 31N of the Takeovers
Act 1993 to provide the Takeovers Panel with
the same power as clause 14.
- These
powers were considered justified in the context of our advice on the Securities
Markets and Institutions Bill (passed in December
2002).[3] In our view
these amendments do not give rise to any additional issues.
Disclosure Regimes
- The
Bill clarifies the current substantial security holder disclosure
regime[4] and the
disclosure of relevant interests by directors and officers of public
issuers,[5] and makes
all investment advisers’ and brokers’ disclosures mandatory by
requiring, for instance, investment advisers
and brokers to make additional
disclosures prior to the giving of investment advice or the receipt of
investment money or
property.[6] These
provisions compel the provision of information or publication of certain
statements, and therefore appear to be prima facie inconsistent with
section 14 of Bill of Rights Act.
- Where
an issue arises a provision may nevertheless be consistent with the Bill of
Rights Act if it can be considered a "reasonable
limit" that is "justifiable" in
terms of section 5 of that Act. The section 5 inquiry is essentially two-fold:
whether the provision
serves an important and significant objective; and whether
there is a rational and proportionate connection between the provision
and that
objective.[7]
- The
purpose behind the disclosure regimes is to promote an informed market and open
dealings by ensuring that participants in New
Zealand’s securities markets
have access to information concerning the interests of those advising them about
their investments,
and the identity and trading activities of persons who are
entitled to control or influence the exercise of significant voting rights
in a
public issuer. We consider this a significant and important objective.
- In
our view the provisions setting out the disclosure obligations are also
rationally and proportionately connected to this objective.
The information
sought in relation to substantial securities holders in public issuers is
limited to factual information, which is
not generally available to the market
and the non-availability of which may result in unfairness or market distortion.
Again, the
disclosure requirements of investment advisers and brokers are
largely factual. For example, they will be required to disclose details
of their
experience, qualifications, whether or not they have a criminal conviction,
relevant details about the securities, and any
pertinent relationships or
interests they (or an associated person such as a business partner or relative)
have in relation to an
investment.
- We
therefore consider that, while clauses 23 to 26, 30 and 35 are prima
facie inconsistent with section 14 of the Bill of Rights Act, they are
justified in terms of section 5 of the Bill of Rights
Act.
Section 25(c): right to be presumed innocent until proved
guilty
- Section
25(c) affirms the right to be presumed innocent until proved guilty. This means
that an individual must not be convicted where
reasonable doubt as to his or her
guilt exists; therefore, the prosecution in criminal proceedings must prove,
beyond reasonable
doubt, that the accused is guilty. Strict liability and
reverse onus offences give rise to an issue of inconsistency with section
25(c)
because the accused is required to prove (on the balance of
probabilities) the defence to escape liability; whereas, in other criminal
proceedings an accused must merely
raise a defence in an effort to create
reasonable doubt. Where an accused is unable to prove the defence, then he or
she could be convicted
even though reasonable doubt exists as to his or her
guilt.
- The
Bill contains several strict liability offences and reverse onus offences that
require an accused to prove a defence, on the balance
of probabilities. In
addition, the Bill contains some presumptions – which gives rise to the
same issue – that an accused
must rebut to escape liability. These
offences give rise to issues of inconsistency with section 25(c) of the Bill of
Rights Act.
- Our
analysis of these offences is set out below, with the exception of clause 29
(new section 19ZF substituted: Offences relating
to interest register) which we
advised you was justified in our advice on the Securities Markets and
Institutions Bill (passed in
December 2002).
Insider Conduct and
Market Manipulation
- Clause
21 (New Part 1 substituted), new section 11D (criminal liability for false or
misleading appearance of trading) makes it an
offence for a person to contravene
new section 11B (false or misleading appearance of trading) if the person has
actual knowledge
that the act or omission will have the effect of creating a
false or misleading appearance. The offence itself is not a strict liability
or
reverse onus offence; however, new section 11C (presumption as to false or
misleading appearance of trading) creates a presumption
that an accused has
contravened new section 11B in specific circumstances. An accused must rebut
this presumption by proving on the
balance of probabilities that the trading in
securities occurred, or the offer to trade was made, for a legitimate reason.
This presumption
gives rise to an issue with section 25(c) of the Bill of Rights
Act because an accused who fails to prove (on the balance of probabilities)
the
legitimate reason could be convicted even though reasonable doubt exists as to
his or her guilt.
- The
objective behind the offence is to prevent and reduce the harm caused by
manipulative trading practices to both individuals and
the market itself. Where
securities are traded with no change to the beneficial ownership it can create
an appearance of increased
turnover in a security that is likely to induce
others to buy the security. In situations where enough new investors are
attracted,
the price of the securities will rise and the manipulator is able to
sell at a higher price. The resulting harm is that, in the case
of individual
investors, they are misled into paying a higher price for the security than is
warranted. This may have negative consequences
for the New Zealand
market’s reputation from an overseas investment perspective.
- We
have been advised by MED that there are extremely limited situations where the
trading of securities with no change to beneficial
ownership may be legitimate
and will not result in harm. Therefore, it appears to be appropriate that the
onus for establishing this
legitimate reason is the responsibility of the
accused. It is also relevant, in terms of justification of a strict liability
offence,
that these are public welfare regulatory (rather than truly criminal)
offences.
Disclosure Regimes for Investment Advisers and Brokers,
and Interests of Substantial Security Holders in Public Issuers
- The
disclosure obligations for investment advisers and brokers, and for public
issuers in relation to interests of substantial security
holders created in the
Bill are reinforced by offence provisions including some strict liability
offences and reverse onus offences:
(a) Investment advisers and
brokers disclosure offences - two reverse onus offences (clause 35 – new
section 41R: offence of
deceptive, misleading, or confusing disclosure, and new
section 41S – offence of deceptive, misleading, or confusing
advertisement).
(b) Disclosure of substantial holdings in public issuers offences: one
reverse onus offence (clause 30 – new section 32: conditions
of exemption
for trustee corporations and nominee companies), and two strict liability
offences (clause 30 - new section 35E: offences
relating to substantial holdings
registers; and clause 30 – new section 35H: offence for failing to publish
information on
substantial holdings or disclosures).
- In
considering whether these reverse onus and strict liability offences were
justifiable we have taken into account the clear objective
behind the disclosure
regimes: to promote an informed market and open dealings by ensuring that
participants in New Zealand’s
securities markets have access to pertinent
information (as discussed in paragraph 11 above).
- In
addition, we have noted MED’s explanation that these offences are vital to
achieving this objective. The offences have been
framed as strict liability
offences or reverse onus offences to ensure that the onus is on an individual or
body corporate operating
in the securities market industry to take
responsibility for their transactions, and meet their obligations under the Bill
(e.g:
public issuers have an obligation under the Bill to maintain a register,
and make it publicly available). We agree that, given the
detailed and precise
nature of the disclosure regimes set out in the Bill, the reason why an
investment adviser or broker, or public
issuer has not met a disclosure
requirement in a specific situation is particularly within his or her realm of
knowledge. It is also
relevant, in terms of justification of such offences, that
these are public welfare regulatory offences.
Compliance with
Commission's Orders
- Clause
35, new section 42L (offence for failing to comply with Commission's orders)
makes it an offence for a person to contravene
an order made by the Commission;
however a person may not be convicted where he or she is able to prove that the
contravention occurred
without the person’s knowledge or without the
person’s knowledge of the order (new section 42L (2)(a)).
- The
Commission's enforcement powers (prohibition orders, disclosure orders, and
temporary investment adviser or broker banning orders)
are intended as a
front-line response to securing compliance or preventing contraventions of the
Securities Markets Act. MED considers
this offence integral to encouraging
compliance with these orders. The Commission must follow a detailed process
before issuing an
order,[8] and this
process actively involves the party against whom it is intended the order be
made against, and includes notification requirements.
Again, this is a situation
where the party involved is particularly in possession of the knowledge why they
did not comply with the
order. It is also relevant, in terms of justification of
a reverse onus offence, that it is a public welfare regulatory
offence.
Conclusion
- In
our view the limit these presumptions, strict liability offences, and reverse
onus offences place on section 25(c) of the Bill
of Rights Act is justified in
terms of section 5 of the Bill of Rights Act.
Section 26(2):
protection against double jeopardy
- Section
26(2) of the Bill of Rights Act affirms the double jeopardy protection: the
right not to be tried or punished for an offence
twice.
- The
Bill proposes some amendments to the Securities Act
1978,[9] Securities
Markets Act 1988,[10]
and Takeovers Act
1993[11] to enhance or
introduce pecuniary penalty and civil liability regimes to complement the
Commission's ability to issue orders, and
the criminal enforcement measures. We
have considered whether the potential for a person to be subject to two separate
penalties
in relation to the same conduct gives rise to an issue with section
26(2) of the Bill of Rights Act.
- The
Bill specifically provides that a person cannot be ordered to pay a pecuniary
penalty order and be liable for a fine under the
relevant Act for the same
conduct.[12] In
respect of the civil liability provisions enabling compensation to be ordered in
some instances, we draw your attention to the
majority decision of the Court of
Appeal in the leading case on 26(2), Daniels v
Thompson[13]
that made it clear that this section must be read as
referring:
Only to criminal proceedings relating to an offence
against the law, for which the person has been tried. What is prohibited is
further
trial for the same offence, that is a trial which may also result in
acquittal or conviction. The provision is not concerned with
a trial which may
result in a form of civil liability.
- Therefore,
we consider that these enforcement regimes appear to be consistent with section
26(2) of the Bill of Rights Act.
CONCLUSION
- In
accordance with your instructions, we attach a copy of this opinion for referral
to the Minister of Justice.
Roger Palairet Acting Chief Legal Counsel Office of Legal
Counsel
|
Stuart Beresford Senior Legal Adviser Bill of Rights/Human Rights
Team
|
cc
Minister of Justice
[1] R v
Keegstra [1990] INSC 224; [1990] 3 SCR
697,729,826
[2]
RJR MacDonald v Attorney-General of Canada (1995) 127 DLR
(4th)
[3]
Advice dated 31 October
2001.
[4] Clause 30
– New Subpart 3 of Part 2
substituted
[5]
Clauses 23 – 26 (Amendments to disclosure of relevant interests by
directors and officers of public
issuers)
[6] Clause
35 – New Parts 4 and 5
inserted
[7] See
Moonen v Film Literature Board of Review [1999] NZCA 329; [2000] 2 NZLR 9, and R v
Oakes (1986) 26 DLR
(4th)
[8]
Clause 35: new section 42H – Commission must follow steps before making
orders, new section 42I – Commission may shorten
steps for specified
orders, and new section 42J – Commission must give notice after making
orders.
[9] Clause 4
– New sections 55A – 55G; Clause 5 – Civil liability for
misstatements in advertisement or registered
prospectus; clause 6 – Civil
liability for misstatements by expert; Clause 7 – Civil liability for
breach of contributory
mortgage regulations; Clause 8 – New Sections 57B
to 57E
inserted
[10]
Clause 35 – New Parts 4 and 5 inserted (Part 5, subpart 4) – new
sections 42T to
42ZK
[11] Clause 50
– New Subpart 2 inserted – new sections 33E to
43E
[12] Clause 11
– New sections 60A to 60F (new section 60F – No pecuniary penalty
order and fine for same conduct); clause
35 new section 43Z (No pecuniary
penalty order and fine for same conduct); and clause 59 - New heading and
subparts 3 and 4 inserted
(new section 44K - No pecuniary penalty order and fine
for same
conduct)
[13]
Daniels v Thompson [1998] 2 NZLR 22, 33
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