New Securities Law for
Investment Advisers and Market Participants
2008
Investment Advisers and Investment Brokers
Introduction
This chapter describes the law that applies to investment advisers and investment brokers in the Securities Markets Act 1988 as amended in 2006 and in the Securities Markets (Investment Advisers and Brokers) Regulations 2007. This law comes into force on 29 February 2008.
The previous law which set out the requirements for investment advisers, the Investment Advisers (Disclosure) Act 1996, is repealed.
Other securities law also applies to investment advisers and investment brokers, for example, insider trading law and market manipulation law which are also covered in this guide. Investment brokers are also bound by the Financial Transactions Reporting Act 1996 which is not covered in this guide.
Important principles
This section describes the important principles on which this law is based. Words that have particular meaning in the Securities Markets Act 1988 are in bold the first time they are used in this Guide. All words in bold when they first appear are defined in the glossary.
Who is an investment adviser?
An investment adviser is a person who gives investment advice about securities to members of the public as part of their job or business.
Share brokers, financial planners, lawyers, accountants and other people will be investment advisers under this law if they give investment advice to the public.
An employee who gives investment advice to the public as part of their job is an investment adviser. In most cases their employer is also an investment adviser.
There are some exceptions to who is an investment adviser.
An issuer of securities is not an investment adviser in relation to advice given about those securities. But an issuer's employees are investment advisers if they give investment advice as part of their jobs.
Example: A finance company that recommends people buy its debentures is not an investment adviser because it is the issuer of the debentures. However, the company's employees are investment advisers if they give investment advice as part of their jobs, even if this is only about the finance company's securities.
A person who only passes on investment advice given by an issuer will not be an investment adviser provided they do not change the advice or add anything to it.
Example: A company's call centre employee reading from a prepared text is not an investment adviser.
Firms need to consider the roles of their staff, especially who can give investment advice and who can only pass on information received from issuers. Staff need to understand that they have obligations as investment advisers if they do more than pass on issuers' information unchanged.
A person who advises clients only about bank term deposits or call debt securities (e.g. bank or building society current and savings accounts) is not an investment adviser because these are not considered to be securities under this law.
A person making a takeover offer under the Takeovers Code is not an investment adviser, nor is the target company. An independent adviser appointed under the Takeovers Code is not an investment adviser.
A lawyer or chartered accountant who gives investment advice to a member of the public does not have to comply with the disclosure rules described in this guide if:
- the investment advice is given in the lawyer or chartered accountant's professional capacity; and
- the investment advice is a necessary incident of the professional legal or accounting advice being given.1
What is investment advice?
Investment advice is a recommendation, an opinion or guidance about investing in securities given to a member of the public.
Investment advice includes suggesting:
- that a particular securities investment would be a good investment to make;
- that a particular investment would not be a good idea;
- how an investment might suit a particular investor or a particular type of investor.
Investment advice can be about:
- making an investment or not making an investment; or
- selling, holding on to, or terminating an investment.
Investment advice can be given in various ways including:
- a face-to-face conversation;
- over the telephone;
- in a letter or email;
- in a written report;
- in a newspaper or magazine article or advertisement;
- on a website;
- in a radio or television interview or advertisement;
- at a seminar.
Opinion, guidance or recommendations about securities published in the media are not investment advice if the writer's or broadcaster's main job is journalism. Opinion, guidance or recommendations about securities published in the media are investment advice if written or broadcast by a person whose main job is not journalism e.g. a financial planner writing a guest column in a newspaper.
Guidance that is limited to the procedure for making an investment or selling an investment is not investment advice.
Example: A person who tells a customer the bank account number to use or the address to which an application must be sent to make an investment, is not giving investment advice.
Advice given in some offer documents is not investment advice. These are registered prospectuses, investment statements, advertisements authorised by the issuer of the securities, bank disclosure statements and documents used in place of a prospectus or investment statement under a Securities Act 1978 exemption.
Who is a member of the public?
A member of the public under this law is defined by the Securities Act. It has a particular legal meaning which is broader than is commonly understood by the term a "member of the public". Under this law most investors are members of the public. An adviser should assume a client is a member of the public, and provide disclosure, unless satisfied that the client is not a member of the public.
Whether or not a particular person is a member of the public can only be judged by the person's circumstances. This means that it is not possible to give a complete list of who is, and who is not, a member of the public under the law. If in doubt an adviser should discuss specific cases with a lawyer.
An adviser's existing clients are probably members of the public even if they are long term clients who do regular business with the adviser.
Whether or not a person is a member of the public will usually depend on either:
- the person's profession - someone who habitually invests as part of their job is not a member of the public; or
- the existing relationship between the investor and the issuer of specific securities or a director of the issuer.
In the second of these cases, it is not the relationship between the adviser and the investor which determines whether an investor is a member of the public. An adviser's best friend, close relative or spouse can be a member of the public. What matters is the connection between the investor and the issuer, or the investor and a director of the issuer. This means an investor might be a member of the public for one investment, but not for other investments.
Example: A person who buys shares in a company of which their brother is a director will not be a member of the public when they buy those shares, but can be a member of the public for all other investments.
When is an investor not a member of the public?
A relative or a close business associate of an issuer is not a member of the public when investing in securities offered by that issuer. A relative or close business associate of a director of the issuer is also not a member of the public.
Most existing relationships with an issuer will not qualify for this exception.
Example: A shareholder of a company would still be a member of the public when buying additional shares in that company. A customer or employee of an issuer will still be a member of the public when investing money with that issuer.
The term "close business associate" is not defined in the law. The Courts have interpreted it to apply where the business relationship is sufficiently close to overcome the usual inequality between an issuer and an investor. The main inequality between issuers and investors is access to information.
A person whose principal business is the investment of money is not a member of the public. A person who, in the course of and for the purposes of their business, habitually invests money, is not a member of the public.
Only people whose business it is to invest money can fit into these categories, including investment advisers, sharebrokers, and institutional investors. It will not include a person simply because he or she already has a large investment portfolio or invests frequently. Someone who habitually invests for their personal ends but not as part of their principal business is still a member of the public.
These exceptions are similar to those under the Securities Act. However, a person who buys at least $500,000 worth of securities in a single transaction is not a member of the public under the Securities Act, but can be a member of the public for the purposes of investment adviser law. If in doubt an adviser should provide a disclosure statement as if the client were a member of the public.
In rare cases the specific circumstances of an offer of securities can mean an investor is not a member of the public for securities law. However, if there is any doubt, it is better to provide a disclosure statement.
What investments are covered?
Investment advice is advice given about securities.
A security is a share in an issuer's capital, assets, earnings, royalties or other property, given to an investor in return for money paid to the issuer.
An arrangement under which an investor gives another person money and the other person has to repay that money in the future, is also a security.
Examples of a security are:
- a share in a company;
- a finance company debenture;
- a unit in a unit trust or group investment fund;
- a share in a partnership;
- some investments in time shares;
- membership of a superannuation scheme;
- a life insurance policy including a term life policy.
Some investments are not securities. For example, most investments in land, mortgages or chattels are not securities. However, some investments in land, mortgages or chattels will be securities, for example, where there is a contributory scheme under which investors' money is pooled and paid into the scheme.
Some investments that are securities under some laws are not securities under the investment adviser or investment broker disclosure law. These are bank term deposits that are issued by registered banks and call debt securities issued by any institution.
Adviser disclosure is not required if the person advises clients only on call debt securities or bank term deposits. However, if a person advises about call debt securities or bank term deposits as well as other types of securities, they are an investment adviser and are required to make disclosure to clients when giving advice about securities.
Adviser disclosure is not required if a person gives advice only about a term life insurance policy, although in this case the adviser must still comply with the advertising requirements of the Securities Market Act.
Who is an investment broker?
An investment broker is a person, including a company, who receives investment money or investment property from members of the public as part of their job or business. Investment money is any money received from, or on account of, a member of the public in relation to buying or selling securities. Investment property is any property received for the same purpose.
An employee who receives investment money or investment property as part of their job is an investment broker. Their employer is also an investment broker.
An investment broker can also be an investment adviser.
Some people who are involved with an investment are not investment brokers even if they receive investment money or investment property for that particular investment. These people are any issuer, trustee, statutory supervisor or security registrar for an offer of securities.
Example: A company that receives money for its shares offered to the public is not an investment broker.
A person who merely passes on investment money or investment property to the issuer of the securities will not be an investment broker, provided the person cannot apply the money for any other purpose.
Example: An adviser who takes a cheque made out to an issuer from a client, and sends the cheque on to the issuer, is not an investment broker. However, a broker who operates a client funds account and receives funds into that account to buy securities for clients is an investment broker.
Footnote
- Regulation 6
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