New Securities Law

for

Investment Advisers

and

Market Participants

New Securities Law for
Investment Advisers and Market Participants
2008

Investment Advisers and Investment Brokers

Disclosure Obligations of Investment Advisers and Investment Brokers

When must an adviser disclose fees and remuneration?

Most of the information required to be given to clients must be provided before any investment advice is given. However, information about all fees and remuneration does not have to be given:

• if the initial investment advice is only of a general nature, (i.e. not about a particular investment) and;
• the information usually required about fees and remuneration is not relevant in light of the general nature of the advice being given at that stage.¹³

Information about fees and remuneration must be provided before advice is given about any specific investment, and this must comply with the requirements for a disclosure statement.

Disclosure about fees can be given in stages so that an adviser can find out what sort of investments a client is interested in before giving the client detailed information about fees and remuneration. It means that advisers who give advice on a wide range of securities do not necessarily have to give a full list of possible benefits for all products before finding out what services or products the client wants.

Advisers should remember that if fees or remuneration about other products are material to the client, then this information must be provided.

Example: An adviser who gives advice about many types of securities will not have to provide a list of the remuneration applying to all products when seeing a client for the first time. The adviser can find out what products might suit the client's needs. For example, if the client is only interested in superannuation, the adviser can give the client a written disclosure form setting out the fees and remuneration that will apply to any superannuation products advised on, before going on to discuss the benefits and risks of specific investments.

What must an adviser disclose about the investments they give advice on?¹⁴

The disclosure statement must state the types of securities that the adviser gives advice on.

Examples:

• If the adviser only advises about life insurance policies, then the disclosure statement must state this.
• If the adviser gives advice only on investments offered by a particular issuer or issuers, the disclosure statement must state this and give the name of each of the issuers.

What must a broker disclose in a disclosure statement?¹⁵

A broker must disclose two types of information in a disclosure statement:

• criminal convictions, insolvency and disciplinary proceedings; and
• procedures for dealing with investment money and investment property.

What must an broker disclose about criminal convictions?¹⁶

The disclosure statement must include any of the following which have happened to the broker within the 5 years before the date the investment money or investment property is received. The broker must disclose if the broker has 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 proceeding that has been taken against the adviser or the broker in a professional capacity;
• expelled from, or has been prohibited from being a member of, a professional body.

If a broker is a body corporate or unincorporated body, the broker must also disclose whether any of these things have happened to a principal officer of the broker. If the broker has been placed in statutory management or receivership this must be disclosed.

What must an broker disclose about procedures for dealing with investment money and investment property?¹⁷

The broker's procedures for dealing with investment money and investment property must be described in the disclosure statement. If the broker is an employee, then the broker's employer's procedures must be described. Some brokers are required to have a trust account, for example, NZX Participants, lawyers and accountants.

The description of the procedures must cover the following things as a minimum:

• how the investor is to pay money to the broker, e.g. by cheque, electronic transfer or cash;
• how the investment property is to be given to the broker e.g. by delivering a certificate of title;
• whether or not money or property is to be held on trust for the investor, until the investor tells the broker what to do with the money or property;
• if the broker does not hold the money or property on trust, this must be disclosed;
• the records that will be kept by the broker about the investment money or investment property;
• access that the investor will have to records kept by the broker about the investor's investment money or investment property, and the terms of that access;
• whether or not the broker's handling of the investment money or investment property will be audited by an auditor;
• if the broker's handling of the investment money or investment property is audited by an auditor, the name of the auditor;
• how (if at all) the broker can use the investor's money or property for someone else's benefit. For example, if the money is not to be held on trust, the broker would have to disclose if the money could be used by the broker to pay the broker's expenses.

Disclosure must not be misleading¹⁸

A disclosure statement must not be deceptive, misleading or confusing to an investor who is a member of the public. As this applies whenever a disclosure statement is given to a client, the disclosure statement must be kept up-to-date.

Before giving a disclosure statement to a member of the public the broker or adviser must consider whether changes (e.g. to commissions or membership of a professional body) since the disclosure statement was prepared make it deceptive, misleading or confusing. If so, the statement should be revised.

Other information¹⁹

A disclosure statement can be accompanied by other information. If an adviser or broker gives other information in or with a disclosure statement, that other information must not be deceptive, misleading or confusing. If the disclosure statement is contained within another document, the disclosure statement must be at the front.

Disclosure statement must be kept up-to-date²⁰

If an adviser has given a disclosure statement to a member of the public, and the information in that statement has become out of date, the adviser must give the person the up-to-date information before giving any more investment advice to that person.

If a broker has given a disclosure statement to a member of the public, and the information in that statement has become out of date, the broker must give the person the up-to-date information before receiving any more investment money or investment property from that person.

A disclosure statement will be out of date if:

• there has been a material change in any thing that must be disclosed in a disclosure statement; and
• a reasonable client would think that the change would materially affect their decision to take advice from the adviser, to follow the adviser's advice, or to assess what weight they should give the advice; or
• a reasonable person engaging a broker would think that the change would materially affect any decision to proceed with giving investment money or property to the broker.

Examples: Material changes that would require a disclosure statement to be amended and given to the client again include:

• an adviser or broker is convicted of an offence that needs to be disclosed;
• an adviser or broker changes employment and needs to disclose information about the new employer;
• an adviser or broker enters a relationship with a new investment product provider under which a new incentive will be provided;
• an adviser's firm or broker's firm is purchased by a investment product provider;
• a material change in the remuneration received for any product.

Advisers and brokers should have procedures to ensure that the accuracy of disclosure statements is checked regularly, and to ensure that if there are changes that require a disclosure statement to be amended, these amendments are made.

If a disclosure statement is outdated the adviser can address this by providing up-to-date information separately. If this is done without amending and reprinting the disclosure statement, the adviser must ensure that the correction is clear, and that clients are not misled or confused about the information and its relevance to previous disclosure.

Footnote

13. Regulation 7
14. Section 41F
15. Sections 41H & 41I
16. Section 41H
17. Section 41I
18. Section 41K
19. Section 41L
20. Section 41M

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