New Securities Law

for: Investment Advisers

and: Market Participants

Adviser disclosure will be enforced from 29 February 2008

Asset Magazine January 2008

New disclosure obligations for investment advisers and brokers have been on the cards since October 2006 when Parliament repealed the Investment Advisers (Disclosure) Act 1996 and brought advisers' disclosure requirements into the Securities Markets Act 1988.

On 29 February 2008 this law comes into force and advisers must give every client a disclosure statement with information about themselves, the products they advise on, and the way they are paid.

The new law will be enforced by the Securities Commission. When advisers fail to comply with the law the Commission can make orders and it can take advisers to court to seek compensation and penalties.

Securities Commission orders
The Commission can make prohibition orders, corrective orders, disclosure orders and temporary banning orders.

By making a prohibition order the Commission can prohibit or restrict an adviser or broker from making any statement or distributing any documents that would contravene the law, or would further contravene the law if there has already been a breach.

The Commission can make a corrective order directing an adviser or broker who has breached the law to publish a statement correcting the breach. The Commission can set out what the statement must say, and how and when it must be published. It can require the person to publish the statement at their own cost.

A disclosure order can be made when the Commission believes an adviser or broker has breached the law. This can require the person to disclose information to comply with a disclosure obligation or make a corrective statement at their own cost.

If an adviser or broker persistently contravenes the law or persistently engages in misleading conduct the Commission can make a temporary banning order. This can:

ban a person from giving investment advice or receiving investment money from the public; or
stop a person from acting as a director, promoter, or manager of an entity that is an investment adviser or broker; or
stop a person from acting as an employee or agent of an investment adviser or broker.

A temporary banning order can also be made against a person who has been banned from being an investment adviser or broker overseas.

A temporary banning order prohibits or restricts the person from doing things set out in the order for up to 14 days.

Criminal offences
The new law includes criminal offences which carry heavy fines.

An adviser or broker commits a criminal offence if they are aware, or ought to be aware, of information that must be disclosed and do not disclose that information,. An adviser or broker who makes a disclosure statement that is deceptive, misleading or confusing commits a criminal offence.

The maximum fine for these offences is $100,000 for an individual and $300,000 for a body corporate.

It is also a criminal offence if an adviser or broker advertisement is deceptive, misleading or confusing. The maximum fine is $300,000 and, if the offence continues, a further fine can be imposed not exceeding $10,000 for every day which the offence continues. This also applies to investment product advertisements.

An adviser who recommends that a member of the public invest in securities which have been offered illegally commits a criminal offence if they know, or should know, that the offer is illegal. The same applies to a broker who accepts investment money for an illegal offer. These offences have a maximum fine of $300,000 and a further $10,000 per day if the offence continues.

It is a criminal offence to contravene a Commission order. This carries a fine of up to $30,000.

Civil remedies
The Commission can seek pecuniary penalty orders from the court for up to $1 million for breaches of adviser and broker disclosure obligations. If the order is made the money is paid to the Crown.

An adviser's client can apply for a civil remedy order if the adviser contravened the disclosure obligations. The person must satisfy the court that if the adviser had complied with the law a reasonable person would not have used the adviser or followed their advice. The court can order a fine of $100,000 for an individual and $300,000 for a body corporate.

The court can ban a person who:

is convicted of certain criminal offences; or
incurs pecuniary penalties under the Securities Markets Act; or
has persistently contravened the Securities Markets Act; or
has been banned overseas.

A banning order can ban a person for up to 10 years from:

being an investment adviser or broker;
being a director, promoter or manager of an incorporated or unincorporated body.

A banning order can also be made for:

deceptive, misleading or confusing advertisements; or
recommending or receiving money for an illegal offer; or
persistently contravening the law about investment advisers or brokers.

A person convicted of certain criminal offences under the Securities Markets Act or found liable for a pecuniary penalty under that Act is automatically banned for five years.

It is a criminal offence to contravene a banning order.

Guide to the law
A guide to the new law has been published by the Securities Commission. It covers the disclosure obligations of investment advisers and brokers as well as the Commission's powers to enforce the law discussed in this article.

The guide, New Securities Law for Investment Advisers and Market Participants 2008, also explains changes to insider trading law and substantial security holder disclosure, new law on market manipulation, and how these will be enforced.

The guide is available electronically from www.newsecuritieslaw.govt.nz or in hard copy at no charge from seccom@seccom.govt.nz.

… ends …

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