New Securities Law

for: Investment Advisers

and: Market Participants

Changes afoot for New Zealand investment advisers

inFinance, March 2007

New Zealand investment advisers and brokers will be required to make greater disclosure about themselves, the products they advise on, and the remuneration they receive, under new law to take effect later this year.

The new law repeals the Investment Advisers (Disclosure) Act 1996 which previously set out the requirements for advisers. Disclosure required by advisers and brokers is now in Part 4 of the Securities Markets Act 1988.

The changes are a further step in the Government's program over recent years to bring New Zealand's securities regulatory regime into line with similar jurisdictions overseas.

Liam Mason, General Counsel of the New Zealand Securities Commission answers some important questions about the new law and its implications, below.

How significant are the new obligations for investment advisers?

They are significant because investment advisers and investment brokers will have to revise their client disclosures from the time the law comes into force later this year. All investment advisers will need to be familiar with the new law to be enforced by the Securities Commission.

What are the new requirements for advisers and brokers?

They will have to give more information to clients about themselves, the products they advise on, and especially about fees and remuneration. An adviser must make full disclosure before giving investment advice to a member of the public. A broker must provide full disclosure before receiving investment money or investment property from a member of the public. The disclosure is mandatory. It must be made in a written disclosure statement, and provided without the client having to ask for it.

What is the purpose of this?

The 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. It includes 'soft' commissions and indirect benefits relevant to the advice being given to the client.

What else must they disclose?

Advisers must disclose their experience and qualifications, criminal convictions, the nature and level of fees charged, and other interests and relationships (including all remuneration). They must also explain the types of securities they give advice on. Brokers must disclose criminal convictions and their procedures for dealing with investment money and investment property.

Disclosure statements must be kept up-to-date and 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.

What other changes are there for advisers?

Under the new law it will be an offence to recommend or receive investment money for illegal offers of securities. Advisers and brokers who breach this requirement will commit a criminal offence if the adviser or broker knows or ought to know that the offer is illegal.

What are the penalties for breaches by advisers and brokers?

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.

The Commission will have powers 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 penalties of up to $1,000,000 can be imposed by the court.

Are there any other securities law changes?

Yes, insider trading law has been toughened, and there is new law about market manipulation. The amendments also provide for extensive public enforcement of the law.

What is the new focus of the insider trading regime?

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 being connected to the company to which the inside information relates.

What is the new term 'information insider'?

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 affect 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.

The market manipulation law is new. What is market manipulation?

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, wash trades, and capping and pegging.

There is also a broad-ranging prohibition against any conduct, in relation to any dealings in securities, that is likely to mislead or deceive. This is similar to the prohibition in the Fair Trading Act 1986 for misleading or deceptive conduct. Anyone who engages in misleading or deceptive conduct can be subject to prohibition or corrective orders made by the Securities Commission, and can be liable to pay compensation to anyone who suffers loss as a result of the conduct.

When does the new law come into force?

The changes to the Securities Act 1978 (extending the Commission's enforcement powers) have already come into force. Regulations will be passed to bring the rest of the changes into effect. We don't know the exact date yet, but we expect the content of the regulations to be known early in 2007, and the new rules to be in force around the middle of 2007.

What help is there for people who need to comply with the new requirements?

A handbook about the new law is being prepared by the Securities Commission. It will be published when the detail of the regulations is known. It can be ordered from www.newsecuritieslaw.org.nz or by email to seccom@sec-com.govt.nz.

ends

Back to articles

top

Print this page