New Securities Law

for: Investment Advisers

and: Market Participants

Overview

Investment adviser disclosure

Investment advisers have to make more disclosure to their clients from 29 February 2008. Under the new law share brokers, financial planners, lawyers, accountants and other people will be investment advisers if they give investment advice to the public.

The Investment Advisers (Disclosure) Act 1996 is repealed. Client disclosure requirements for investment advisers and brokers will instead be set out in Part 4 of the Securities Markets Act 1988.

The new disclosure laws require more information to be given to clients, especially about fees and remuneration. Full disclosure must be made up-front by investment advisers before investment advice is given to members of the public and by investment brokers before receiving investment money or investment property from members of the public.

Disclosure statement

The disclosure is mandatory. It must be made in a disclosure statement, and provided without the client having to ask for it.

The Securities Markets (Investment Advisers and Brokers) Regulations 2007 set out some principles for the disclosure statement including:

it must be clearly identified;
it must be clear, concise and easily understood by a member of the public;
each item of disclosure must be under a heading;
the statutory information must be at the front of the document if it is combined with other information; and
the statutory information must be in the same format and style as the rest of the document.

The new rules are intended to make sure clients receive information they need about their investment adviser. In particular clients must be given more information about fees, commissions and other remuneration. This will extend to any benefits to be received by the adviser, whether from the client or another source, and include "soft" commissions and indirect benefits relevant to the advice being given to the client.

Investment advisers' disclosure must include:

their experience and qualifications;
criminal convictions;
the nature and level of fees charged;
other interests and relationships (including all remuneration); and
types of securities the adviser advises on.

Investment brokers' disclosure must include:

criminal convictions; and
procedures for dealing with investment money and investment property.

Disclosure statements must be kept up-to-date and must not be deceptive, misleading or confusing.

Exemptions

The Securities Markets (Investment Advisers and Brokers) Regulations 2007 provides some exemptions for investment adviser disclosure. These mostly aim to allow disclosure to be given in stages, or to be given verbally where it could be impracticable to give full disclosure before giving any advice.

The exemptions are:

telephone advice - this exemption allows disclosure to be given verbally, but it must be given in full, and a written disclosure document must be given to the client within 5 working days of verbal disclosure;
fees and commissions - an exemption allows disclosure about fees and commissions of a specific investment to be given before advice is provided about that investment. It removes the requirement to give detailed advice about fees for all types of investment up front, e.g. it enables a representative of a multi-service firm to get an idea of the type of advice a client is seeking, before disclosing these;
lawyers and accountants - a limited exemption is made for an investment advice given by lawyers and accountants where this advice is necessary for and incidental to legal or accounting advice being given to the client;
term life insurance - advice that is only about term life insurance is exempted from the disclosure requirements; and
fixed term deposits with a registered bank - these investments are exempt from the disclosure requirements.

The new law also regulates advertisements made by investment advisers and brokers. The term "advertisement" is broadly defined. Any form of communication can be an advertisement (as is the case under the Securities Act). There are three types of advertisement:

advice advertisement - prepared by or for an investment adviser, and either:
- contains or refers to investment advice; or
- could induce people to seek investment advice:
product advertisement - prepared by or for an investment adviser, and either:
- contains or refers to an offer of securities to the public; or
- could induce people to subscribe for an offer of securities, but does not include anything that is an advertisement under the Securities Act:
broker advertisement - prepared by or for an investment broker, and either refers to the broker or could induce people to seek the services of an investment broker.

Advertisements are likely to include newsletters, seminar presentations, paid advertising in newspapers, tv, or radio, and radio and tv broadcasts containing investment advice or promoting securities.

Advertising must not be deceptive, misleading, or confusing. Any advertisement for an adviser's or broker's services must say that a disclosure statement is available, on request and free of charge.

Penalties for non-compliance

Misleading disclosure statements or misleading advertising will attract criminal penalties of up to $300,000. Further penalties of up to $10,000 per day can be imposed where offending continues. Civil penalties of up to $1 million can be imposed for misleading advertising.

Advisers and brokers must not recommend illegal offers of securities or receive investment money in respect of illegal offers of securities. A breach of this requirement is a criminal offence if the adviser or broker knows or ought to know that the offer is illegal.

The Commission will have the power to enforce the new requirements and make prohibition orders, corrective orders, disclosure orders and temporary banning orders. The Courts will be able to make orders banning people from acting as investment advisers for up to 10 years.

Failure to comply with the disclosure obligations is an offence with fines of up to $300,000. Civil remedy orders requiring payment of up to $300,000 (or $100,000 for an individual) can be imposed by the court.

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