New Securities Law for
Investment Advisers and Market Participants
2008
Investment Advisers and Investment Brokers
Disclosure Obligations of Investment Advisers and Investment Brokers 2
This section describes the main obligations of investment advisers and brokers under the Securities Markets Act 1988. It does not cover obligations of advisers and brokers under other laws, for example insider trading law, market manipulation law and the Financial Transactions Reporting Act 1996.
When do disclosure obligations apply?
Obligations under the Securities Markets Act apply:
- where advice is offered to a member of the public in New Zealand:
- when broker services are performed for a member of the public in New Zealand.
The obligations apply when advice or broking services are provided to the public in New Zealand even if the person giving the advice or performing the broking services is not in New Zealand. The law also applies if the investment is with an issuer outside New Zealand or the money is sent for investment outside New Zealand.
The obligations cannot be avoided by a term in an agreement between the client and the adviser or broker, i.e. the client cannot waive their right to receive the information.
When and how must an adviser or broker disclose? 3
An adviser must disclose before giving investment advice to a member of the public. The adviser's disclosure must be made by giving the investor a disclosure statement.
A broker must disclose before receiving investment money or investment property from a member of the public. The broker's disclosure must be made by giving the investor a disclosure statement.
The law sets out two ways in which a disclosure statement can be given. Either:
- the investor must receive the disclosure statement before the advice is given, or the property or money is received or delivered;
or
- the adviser or broker must have delivered or sent the disclosure statement to the investorfs address before the advice is given, or the property or money is received or delivered. The address must be the last known address of the investor, or any address given by the investor for delivering the disclosure statement. It can be an electronic address.
An adviser or broker could meet the disclosure requirement by having a standard procedure for new clients, such as providing a disclosure statement before any advice is given or investment money or property is received.
Organisations should have sound internal procedures for accepting new clients and for transferring clients between different advisers within the organisation (because the new adviser will need to give their own disclosure statement to the client). These procedures should also ensure that the requirements of other laws are met, for example, the Financial Transactions Reporting Act 1996.
The disclosure statement can be given to the investor in person when he or she first goes to see an adviser or broker.
The disclosure statement can be sent electronically if the investor gives the adviser or broker an electronic address (email or fax) for this purpose. It is not good enough for the disclosure statement to appear on a website to which the investor has access.
If investment advice is given over the telephone, the disclosure can be given verbally. All the disclosure must be made. Any information needed to update a disclosure statement that has already been given to the client can also be given verbally. In either case the adviser must also send the written disclosure statement to the client within 5 working days.4
What are the requirements for a disclosure statement?5
A disclosure statement must not be deceptive, misleading or confusing.
A disclosure statement must:
- be in writing;
- have a clear heading that includes the term "disclosure statement";
- show the date it was prepared;
- give the name, address and business telephone number of the adviser or broker or their employer if the adviser is an employee of another adviser or broker;
- contain a specific heading for each item of information required under the law; and
- be at the front if it is contained within another document (for example, a marketing brochure for a firm).
A disclosure statement must set out the information clearly, concisely, and in a manner likely to bring the information to the attention of a reasonable person. Advisers should take care to make sure their disclosure statements will be easily readable and are written in a manner that will be easy for non-expert investors to understand.
What must an investment adviser disclose in a disclosure statement?6
An adviser must disclose five types of information in a disclosure statement:
- experience and qualifications;
- criminal convictions;
- fees;
- other relevant interests and relationships; and
- types of investments that the adviser advises on.
What must an adviser disclose about experience and qualifications?7
If an adviser has qualifications that are relevant to giving investment advice, the disclosure statement must state:
- the nature of those qualifications;
- when those qualifications were obtained; and
- briefly how the adviser has kept up-to-date since getting the qualifications.
The disclosure statement must describe briefly the adviser's experience as an investment adviser.
Example: An adviser might state how long they have been giving investment advice, and who they have been associated with or employed by during that time.
If an adviser is a member of a professional body relevant to giving investment advice, the disclosure statement must state the name of the professional body.
If an adviser has professional indemnity insurance, the disclosure statement must state the nature and scope of that insurance.
If dispute resolution facilities are available to the adviser's clients, then the disclosure statement must state that dispute resolution facilities are available. These facilities may be provided internally, for example, by the adviser having an internal complaints system. Or they may be external, for example, through complaints and disputes procedures offered by the Insurance and Savings Ombudsman or the Banking Ombudsman.
What must an investment adviser disclose about criminal convictions?8
The disclosure statement must include any of the following which have happened to the adviser within the five years before the date the investment advice is given or the investment money or investment property is received. The adviser must disclose if they have been:
- convicted of an offence under the Securities Markets Act 1988, the Securities Act 1978 or of a crime involving dishonesty;
- a principal officer of a body corporate at a time when that body corporate committed one of these offences;
- adjudicated bankrupt;
- prohibited by a law or a court from taking part in the management of a company or a business;
- the subject of an adverse finding by a court in any civil or criminal court action that has been taken against the adviser in their professional capacity;
- expelled from, or has been prohibited from being a member of, a professional body.
If an adviser is a body corporate or unincorporated body, the adviser must also disclose whether any of these things have happened to a principal officer of the adviser. If the adviser has been placed in statutory management or receivership within the last five years, this must be disclosed.
What must an adviser disclose about fees?9
An adviser must disclose the nature and level of the fee that the adviser will charge the client for investment advice. An adviser does not always have to disclose a fixed amount if this is not known, but must then disclose how any fee will be calculated, so that the nature and level of the fee is clear.
Examples:
- if an adviser charges on an hourly basis, the hourly rate must be disclosed;
- if the adviser charges a fee based on the amount invested, the formula for calculating the fee must be disclosed; and
- if the client has to pay a brokerage fee, this must be disclosed.
The adviser should tell the investor when fees must be paid.
If the adviser deducts fees from a client's money held by the adviser, this deduction must be disclosed.
If the client has to pay any particular costs in relation to an investment or a transaction, such as custodian fees passed on by the adviser, these should be disclosed as well so that the client can see the total amount that an investment will cost them, and so that the fee disclosure is not misleading.
What must an adviser disclose about other interests and relationships?10
The disclosure statement must give details of the adviser's interests and relationships that a reasonable person would find reasonably likely to influence the adviser in giving the advice.
Details of any remuneration the adviser has received or will receive from a person other than the investor in connection with the advice given, or any transaction resulting from that advice, must be disclosed.
Remuneration is defined widely in the Securities Markets Act. It includes a commission, fee, brokerage or other benefit or advantage, whether pecuniary or not and whether direct or indirect. It does not include salary or wages of a fixed amount but includes incentive payments and bonuses that are connected with giving advice.
The adviser must disclose, as accurately as possible, the amount or rate of remuneration and the name of the person who has paid or will pay the remuneration.
Remuneration received directly by the adviser must be disclosed, as well as remuneration received indirectly. This includes remuneration paid to a company or trust in which the adviser has an interest, and also any remuneration paid to a family member of the adviser.
An adviser's usual fixed salary and wages do not have to be disclosed under this heading, but a bonus tied to investment product sales must be disclosed.
This information about remuneration must be disclosed before the advice is given. An adviser may not be able to disclose the exact amount at this time, because the level of remuneration might depend on the amount of money the investor chooses to invest, or the investor might negotiate with the adviser to share some of the benefit of remuneration that may be received by the adviser. In this case, an adviser might disclose remuneration in a range, or in a series of ranges relating to different products or types of product.
An investment adviser must disclose the actual dollar amount or a percentage formula of any fee or remuneration when giving advice about a specific investment.11
Types of remuneration that need to be disclosed include:
- commissions received from the investment product provider, such as initial commission, trail commission or retention commission;
- bonuses, incentives and profit-sharing arrangements;
- "soft commissions" such as overseas trips, goods, sponsorships;
- loyalty-based support services, for example, software and technology services; and
- any agreement with the issuer that the issuer will buy a stake in the adviser's business if the adviser sells a certain amount of the issuer's securities.
Particular relationships that an adviser must disclose are:
- an association with another person connected with the investment;
- any financial or other relationship with any person connected with the investment;
- a relationship with any other person who may reasonably be expected to influence the content of the investment advice or how it is given; and
- any other direct or indirect pecuniary or other interest in giving the investment advice.
Other relationships or interests that must be disclosed include:
- the adviser owns the security that is being sold to the investor, for example, share brokers must disclose that sometimes they may act as principal when buying or selling securities for the investor;
- the adviser has a business interest in an issuer, for example, if the adviser is a director of the company in which the adviser recommends the client invest;
- the adviser or the adviser's firm has been appointed as the lead manager and/or underwriter in the public offer of securities that the adviser is recommending to the investor;
- the advisory firm is a member of the same group of companies as the firm that is offering the securities.
Advisers do not need to disclose interests or relationships of their employers
if the advisers are prevented from knowing about interests or relationships by
internal information barriers (Chinese walls). This also applies to people who
give investment advice under contract as part of the business of the person
they are contracted to.12
Any remuneration or relationship described above will need to be disclosed if it would be reasonably likely to influence the adviser in giving investment advice. If in doubt, disclose.
If there are no relationships or no remuneration that need to be disclosed, the disclosure statement must state that the adviser has no interests or relationships that a reasonable person would find reasonably likely to influence the adviser in giving the investment advice.
Footnote
- Sections 41 to 41M
- Sections 41A, 41G & 41J
- Regulations 4 & 5
- Sections 41J & 41K and regulation 10
- Sections 41B to 41F
- Section 41B
- Section 41C
- Section 41D
- Section 41E
- Regulation 8
- Regulation 9
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