New Securities Law

for: Investment Advisers

and: Market Participants

New disclosure obligations for lawyers who give investment advice

Law Talk, 26 February 2007, Issue 682

New disclosure obligations for investment advisers and brokers are likely to affect many lawyers.

Anyone who gives guidance, opinions, or recommendations about investing in securities in the course of their business is an investment adviser under the law. This may include many lawyers. The new rules apply to investment advice about securities given to members of the public.

The obligations arise from amendments to the Securities Markets Act 1988 made with the passing of the Securities Legislation Bill in October 2006. The Bill repealed the Investment Advisers (Disclosure) Act 1996. Client disclosure requirements for investment advisers and brokers will instead be set out in Part 4 of the Securities Markets Act.

In this article Securities Commission General Counsel Liam Mason explains new requirements for investment advisers under the law.

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.

"Members of the public" has a broad definition in securities law and will include most investors. The main exception is people whose principal business is investing money. Also relatives or close business associates of a particular issuer of securities will not be members of the public in respect of that issuer's securities. Because the definition is so broad, advisers are best to assume that most of their clients are members of the public.

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-to-date and must not be deceptive, misleading or confusing. 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 advertisements:

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, and on tv or radio; and also some newspaper columns and radio or tv broadcasts that contain investment advice or promoting securities (where these are not contributed by journalists).

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.

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.

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 penalties of up to $1,000,000 can be imposed by the Court.

Timing

The new law will come into effect when regulations are in place. We expect this to be around the middle of this year. The Commission is preparing a guide to the new law which will be available when the regulations are finalised. If you would like to receive a copy ring 04 472 9830 or email seccom@sec-com.govt.nz .

Website

The Commission has set up a website, www.newsecuritieslaw.govt.nz to help market participants and people who give investment advice to members of the public understand their obligations under the new law.

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