New Securities Law

for: Investment Advisers

and: Market Participants

New dislclosure law for investment advisers in 2007

Financial Alert Magazine, Vol 17, 25 January 2007

The Securities Legislation Bill passed in 2006 amends various Acts under the Securities Act and the Securities Markets Act, and the changes will aff ect all investment advisers...

Many investment advisers will need to revise their client disclosures from next year, under new law passed in October 2006. All investment advisers will need to be familiar with the new law, which will be enforced by the Securities Commission.

The changes arise from the Securities Legislation Bill passed in October. The Bill amends various Acts including the Securities Act and the Securities Markets Act.

The changes to the Securities Act (extending the Commission’s enforcement powers) have already come into force. Regulations will be passed to bring the rest of the changes into effect.

A handbook to help people understand the law changes is being prepared by the Securities Commission. It will be published when the detail of the regulations is known, and will be available free of charge.

This article briefl y highlights some of the significant changes including:

new investment adviser and broker disclosure regime;
new insider trading laws;
new market manipulation laws;
revisions to the substantial security holder disclosure laws; and,
greater enforcement powers of the Securities Commission.

New investment adviser & broker disclosure regime

When the new law comes into force it will repeal the Investment Advisers (Disclosure) Act 1996. Client disclosure requirements for investment advisers and brokers will be set out in Part 4 of the Securities Markets Act.

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.

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

The new rules are intended to make sure clients receive information they need about their investment advisers.

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-todate and must not be deceptive, misleading or confusing. Any advertisement for an investment adviser’s services must tell investors that the disclosure statement is available, free of charge.

Misleading disclosure statements or misleading advertising will attract criminal penalties of up to $300,000. Further penalties can be imposed where off ending continues – up to $10,000 per day.

Advisers and brokers must not recommend illegal off ers of securities or receive investment money in respect of illegal off ers of securities. A breach of this requirement is a criminal off ence if the adviser or broker knows or ought to know that the off er 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 off ence with fines of up to $300,000. Civil penalties of up to $1,000,000 can be imposed by the Court.

Insider trading laws

The new regime focuses on the threat that insider trading poses to the integrity and confidence of the market, rather than the duty owed by officers or agents of a company to that company.

Liability for insider trading is not limited to those who are connected or related to the issuer. A person becomes an insider by possessing inside information, rather than by connection to the company to which the inside information relates.

An information insider is someone who has material information about a public issuer that is not generally available to the market, where the person knows or should know that the information is material and is not generally available.

Material information is information that would be expected to materially aff ect the issuer’s share price if it were generally known.

Information insiders must not trade in securities, disclose the information to others to trade on, or advise or encourage anyone else to trade or hold securities.

Anyone who breaches the new insider trading law will be liable for substantial civil penalties. The maximum penalty in any case will be the greater of:

the consideration paid for the shares;
three times any profit made or loss avoided; or,
$1 million.

Knowingly breaching this law will be a criminal off ence. Anyone convicted could face up to five years imprisonment or a fine of up to $300,000 for an individual and $1 million for a body corporate.

There will be a number of exceptions and defences to liability, designed to encourage legitimate trading activity.

These include:

independent research or analysis;
where both parties to a transaction have equal information;
trading in accordance with a fixed trading plan;
where trading or disclosure is required by law;
underwriting agreements;
knowledge of a person’s own intentions or activities;
agents and advisers acting on instructions;
certain takeovers-related activity; and,
trading where information is protected by Chinese Walls.

New market manipulation & general dealing misconduct laws

Market manipulation is behaviour or practices that are likely to give a false or misleading impression about the supply, demand, price or value of securities traded on a registered exchange.

It includes practices known as ramping share prices, marking the close, pumping and dumping, $1 million can be imposed by the Court, which can also make a range of orders relating to any holding of securities, including orders to forfeit or dispose of securities.

Enforcement powers of the Securities Commission

The new securities markets law includes extensive public enforcement provisions. The Commission will be able to apply to the Court for various orders, and also has increased administrative powers to intervene to protect investors.

The Commission can:

seek pecuniary penalty orders for serious breaches of the law;
seek civil remedies and penalties under the Securities Act where off er documents are likely to mislead investors, or for a breach of the disclosure provisions relating to contributory mortgages;
seek compensation orders for loss suff ered by investors;
seek management banning orders against a person if they –
have been convicted for an off ence under the Securities Act 1978; or
have had a pecuniary penalty order made against them; or
as a director have persistently contravened the securities laws, the Companies Act 1993, the Takeovers Act 1993 or the Takeovers Code;
seek orders to preserve assets pending an investigation or prosecution; and
make prohibition orders, corrective orders, and disclosure orders in relation to the
market manipulation, general misleading conduct, and disclosure laws, and disclosure and temporary banning orders in
respect of investment adviser and broker disclosure laws.

Regulations

The Ministry of Economic Development has recently published a discussion document seeking comment on regulations to be made under the new law.

The regulations could aff ect the detail of the new requirements, especially the disclosure required by investment advisers and the timing for giving some information to clients. They may also contain some further exemptions from parts of the law. The exact shape of the new rules will not be certain until the regulations are settled.

While the timing for the introduction of the new law is not known at this stage, we expect the content of the regulations to be known early this year, and the new rules to come into force around the middle of the year.

Liam Mason is General Counsel of the NZ Securities Commission.

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