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'Reckless' directors not criminal in securities law revamp

Monday 11th June 2012

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The government is casting too wide a net in deeming ‘reckless’ directors to be criminally culpable, according to a number of submissions on the revamp of New Zealand's decades-old Securities Act.

A common concern among the 65 written submissions on the Financial Markets Conduct Bill is how far-reaching the term 'reckless' can be when determining the criminal liability of a director of a company that issues securities.

The bill, which passed its first reading in March, was designed to limit criminal liability for "egregious contraventions of securities law" that were either intentional or reckless, rather than capture negligence or major misjudgements. That shift was behind the Green Party's opposition to the bill, the only dissenting voice at the legislation's first reading.

Bank of New Zealand corporate lawyer Paul Hay said recklessness has a "torturous history in criminal jurisprudence" and easily blurs into the lesser category of gross negligence.

"The unclear boundaries of recklessness should not be allowed to leave any scope for the criminal sanctions to be employed for situations involving negligence," Hay said in his submission to Parliament's commerce select committee.

"It is wrong in policy, because it leaves an undesirable degree of uncertainty that will result in increased costs of advice and will act as a deterrent to businesses engaging in the retail market," he said.

The Institute of Directors was another voice saying the legislation needs a clear line in the sand between what constitutes reckless criminality and what was merely negligence. It also pushed for an opportunity to rehabilitate directors saddled with a lifetime ban, saying such a punishment "is a very harsh sanction, which should only be applied in the most extreme cases."

Similarly, the Institute of Finance Professionals said the bill's current wording meant it might impose criminal sanctions on a director who was found not to have done enough due diligence, a duty the courts have concluded in recent finance company cases not to be delegable.

If "the courts continue to take the view that the duty to ensure the contents of offer documents are correct is non-delegable, then it is likely that directors will continue to view issuance of securities to the public as very onerous and only do so if the whole board can make it their first priority to undertake personally the review and monitoring process," INFINZ said.

The New Zealand Shareholders' Association supported the increased emphasis on civil liability, saying good governance is crucial to keeping a lid on the risk of investing.

"Obtaining and retaining a good calibre of directors is not only beneficial to the issuer and investors, it is ultimately beneficial to our economy," it said. "We doubt whether directors, pre the global financial crisis, knew or even focused on their liability, let alone the strict liability criminal offences."

The mammoth piece of legislation aims to consolidate New Zealand securities law into one act with a goal of improving financial market conduct and restoring investor confidence.

The commerce committee is due to report back on Sept. 7.

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