New Securities Law for
Investment Advisers and Market Participants
2008
Advertisements by Investment Advisers and Investment Brokers 21
Any advertisement by an investment adviser or broker must state that a disclosure statement is available on request and free of charge. An advertisement must not be deceptive, misleading or confusing.
These requirements for advertisements are new requirements under the 2006 amendments to the Securities Markets Act 1988. They cover a large range of communications that advisers or brokers make or are involved in.
There are three types of advertisement covered by this law. They are adviser advertisements, product advertisements, and broker advertisements.
An advice advertisement is any communication prepared by an adviser that contains or refers to investment advice, or that is likely to induce a reader to seek investment advice.
A product advertisement is any communication prepared by an adviser that contains or refers to an offer of securities to the public, or that is reasonably likely to induce people to subscribe for those securities, and that is not an advertisement or prospectus under the Securities Act.
A broker advertisement is any communication prepared by a broker that refers to the broker, or is reasonably likely to induce a reader to seek the services of a broker.
These requirements apply to communications including:
- advice given over the telephone or in a written report;
- a research report on an issuer or security prepared by an adviser to be given to clients;
- a flyer sent to clients informing them of a new investment product;
- an account operating form sent by an adviser or a broker to a client;
- an investment seminar run by an adviser or broker.
Examples: Advertisements that might be deceptive, misleading or confusing are:
- an advertisement that states an adviser has been approved as an NZX Adviser, when this is not the case;
- a product advertisement that states that an issuer has assets of a particular value, but omits the fact that the issuer also has significant liabilities;
- an advertisement that claims without foundation that a particular investment will generate high returns;
- an advertisement that says an adviser can obtain special rates on investments where this is not true;
- a claim that a particular investment is of a lower risk than it really is;
- overly broad claims that an investment is suitable for a particular class or type of investor.
Offers of Securities Must Comply with the Law22
An adviser must not recommend that a client invest in any offer of securities that is illegal.
When recommending an investment in securities to a member of the public, an investment adviser should check that the offer of securities complies with the law.
Before receiving investment money from a member of the public to acquire securities, a broker should check that the offer of securities complies with the law.
Advisers and brokers should obtain from the issuer or investment product provider the registered prospectus and investment statement for an offer of securities to the public, and should read these documents.
Some offers of securities can be made without an investment statement or prospectus. Usually this is because the Securities Commission has granted an exemption from the law. Most exemptions have conditions which require the issuer to provide alternative information about the investment. Advisers and brokers should obtain the alternative information and read it.
Advisers and brokers should check that the offer documents are up-to-date and current.
If an issuer tells an adviser or broker that there is no prospectus or investment statement for the offer of securities, the adviser or broker should ask whether the offer complies with the law and with the conditions of any exemption. If the adviser or broker cannot confirm this, or doubts that the offer complies, the adviser or broker must not recommend that a member of the public invest in the securities. A broker should refuse to accept investment money in similar circumstances.
If an adviser recommends that a member of the public acquire securities, and the offer of securities is illegal, the adviser will commit a criminal offence if the adviser knew or ought to have known that the offer was illegal.
If a broker receives money from a client to invest in an illegal offer of securities, the broker has committed a criminal offence if the broker knew or ought to have known that the offer was illegal.
Summary of steps to check that an offer of securities complies with the law
Investment advisers and brokers should
- obtain the registered prospectus and investment statement
- if there is no investment statement or prospectus check whether the issuer is making the offer under an exemption from the Securities Commission and obtain the alternative documents
- check that the offer documents are up-to-date and have not expired
- NOT recommend that a member of the public invest in an offer of securities that does not comply with the law or accept investment money for such an offer
Enforcement and Remedies 23
The Securities Commission has powers under the Securities Markets Act 1988 to enforce the obligations of investment advisers and brokers.
An investment adviser or broker who does not comply with the obligations could also be charged with a criminal offence or be sued in a court by a person who suffered loss as a result of the breach. The Commission can also go to court for a pecuniary penalty or a banning order.
When an investment adviser or broker breaches the disclosure requirements the Commission can make prohibition and corrective orders, or disclosure orders. The Commission can also make a temporary banning order.
Prohibition Orders 24
If the Commission is satisfied that a person has contravened or would contravene an investment advisers' obligation or brokers' obligation it can make a prohibition order. This may prohibit or restrict the making of any statement or distributing any document in order to prevent contravention or further contravention of the obligation.
Corrective Orders 25
If the Commission is satisfied that someone has contravened or would contravene an investment advisers' or brokers' obligation it can make a corrective order. This may direct a person who has breached the law to publish a corrective statement. The order can set out what statement must be published, and how and when it must be published. The Commission can require a person to publish a corrective statement at their own cost.
Disclosure Orders 26
If the Securities Commission is satisfied that a person has contravened an investment advisers' or investment brokers' disclosure obligation it can make a disclosure order. A disclosure order can require a person to disclose information to comply with a disclosure obligation, or make a corrective statement at their own cost.
Temporary Banning Orders 27
If the Securities Commission is satisfied that a person:
- has persistently contravened the law that applies to investment advisers and brokers; or
- has persistently engaged in misleading conduct; or
- has been banned from being an investment adviser or broker overseas, it can make a temporary banning order. This can prohibit or restrict a person from doing things set out in the order for a maximum of 14 days.
A temporary banning order can:
- ban a person from giving investment advice or receiving investment money or investment property from the public;
- stop a person from acting as a director or a promoter of, or taking part in the management of, any incorporated or unincorporated body that is an investment adviser, or acting as employee or agent of an investment adviser or broker.
Procedure for making orders 28
The Commission must give a person notice before making an order. The Commission has to give only 24 hours notice of a prohibition or corrective order that would apply for less than 14 days, or a temporary banning order. It must give at least 48 hours notice of any other disclosure order, and seven days notice for any other prohibition order or corrective order.
The notice must state:
- the nature of the alleged breach;
- the terms of the order the Commission wants to make; and
- the reasons why the Commission wants to make the order.
The person can make written submissions within the time frame set out in the notice. In some cases this can be less than 24 hours if the Commission thinks it should act quickly in the public interest.
When the Commission makes an order it must tell the person that the order has been made. The Commission can also tell others about the order, i.e. it can make a release to the news media. If the Commission makes a temporary banning order it must publish details of this on its website.
Criminal offences 29
It is a criminal offence to contravene an order made by the Securities Commission. The maximum fine for this offence is $30,000.
It is a criminal offence if a person is aware of (or ought reasonably to be aware of) information that must be disclosed under an investment adviser's or broker's disclosure obligation, doesn't disclose that information. The maximum fine is $100,000 for an individual and $300,000 for a body corporate.
It is a criminal offence if an investment adviser or broker makes a deceptive, misleading or confusing disclosure statement. The maximum fine is $100,000 for an individual and $300,000 for a body corporate.
It is a criminal offence to make a deceptive, misleading or confusing broker or adviser advertisement, or product advertisement. The maximum fine is $300,000, and if the offence continues, a further fine can be imposed not exceeding $10,000 for every day or part of a day during which the offence continues.
It is a criminal offence if an investment adviser recommends that a member of the public invest in securities which have been offered illegally, if the adviser knows or ought to know, that the offer was illegal.
It is a criminal offence if an investment broker receives investment money from a member of the public for securities that have been offered illegally if the broker knows, or ought to know, that the offer was illegal.
The maximum fine for these offences is $300,000. If the offence continues, a further fine can be imposed not exceeding $10,000 for every day or part of a day during which the offence continues.
Court orders and injunctions 30
Any person (including the Securities Commission) can go to court for;
- an injunction to restrain a person from doing something that would contravene the obligations of investment advisers and brokers; or
- a corrective order or a disclosure order.
Civil remedies 31
The Securities Commission can go to court to get a pecuniary penalty order for a breach of an investment adviser's or broker's obligation, other than a breach of the disclosure obligations. The maximum amount of a pecuniary penalty is $1,000,000 which is paid to the Crown.
Anyone can go to court to get a compensatory order if they suffer loss because of a contravention of an investment adviser's or investment broker's obligation other than a breach of the disclosure obligations.
Example: A person who has received advice from an investment adviser can apply to the court for a civil remedy order if the adviser has contravened an investment adviser's disclosure obligation. The court must be satisfied that if the adviser had complied with the obligation, a reasonable person:
- would not have used the adviser or followed their advice; or
- would have acted in a materially different way from the way the person acted on the advice.
The maximum amount a court can order is $100,000 for an individual and $300,000 for a body corporate.
Banning Orders 32
A court can make a banning order against a person if:
- the person has been convicted of certain criminal offences or has been found liable to pay pecuniary penalties; or
- the person has persistently contravened the Securities Markets Act; or
- the person has been banned overseas.
A banning order can prohibit a person from being an investment adviser or broker, or being a director or promoter, or being concerned or taking part in the management of an incorporated or unincorporated body, for any period up to 10 years. It is a criminal offence to contravene a banning order.
A court can make a banning order against a person who has committed an offence of a deceptive, misleading or confusing advertisement, or recommending or receiving money for an illegal offer, or persistently contravening the law about investment advisers or brokers.
People who are convicted of certain criminal offences under the Securities Markets Act or the Crimes Act, or who are found liable to pay a pecuniary penalty under the Securities Markets Act are automatically banned for five years.
Footnote
- Sections 41N & 41O
- Section 41S
- Sections 42 to 43N
- Sections 42 & 42A
- Sections 42 & 42A
- Sections 42B &42C
- Sections 42D &42E
- Sections 42F, G & H
- Sections 42J, 41P to 41T
- Sections 42K, 42N & 42P
- Sections 42T to 42ZD
- Sections 43F to 43O
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