New Securities Law

for: Investment Advisers

and: Market Participants

New securities law comes into force this year

Chartered Accountants Journal, February 2007

Chartered Accountants could be affected by new securities law which will take affect from around the middle of 2007. The Securities Legislation Bill, passed in October 2006, introduced new law on investment advice and market manipulation, and amended and strengthened the law relating to insider trading and substantial security holder disclosure.

The Bill amended the Securities Act 1978 and the Securities Markets Act 1988 and repealed the Investment Advisers (Disclosure) Act 1996.

Until regulations are passed the final detail of the law is not known. However, this article explains the main changes in broad terms.

New law - Investment Adviser and Broker Disclosure Regime

An investment adviser is anyone who gives investment advice about securities to the public in the course of their business or employment. Many Chartered Accountants who give investment advice to their clients are likely to be investment advisers under the law.

The new disclosure law (in Part 4 of the Securities Markets Act) requires investment advisers to give more information about themselves and their business. They must make full disclosure upfront to members of the public, before investment advice and, in the case of investment brokers, before the receipt of investment money or investment property from members of the public. An investment broker is someone who receives such money or property as part of their job or business (and this means more than merely transmitting money from an investor to an issuer of securities). The disclosure is mandatory and must be made in a disclosure statement.

The new law requires more information for clients 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 property.

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

Advertisements for an investment adviser's services must tell investors that the disclosure statement is available, free of charge.

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 can be a criminal offence.

The Commission will enforce the new law and can 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 this law is an offence with fines of up to $300,000. Civil penalties of up to $1,000,000 can be imposed by the Court. Further penalties of up to $10,000 per day can be imposed where offending continues.

New law - Market manipulation and general dealing misconduct

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

The new market manipulation law prohibits:

making false or misleading statements or spreading information which is likely to induce a person to trade or which might affect the price of the securities;
creating a false or misleading appearance of securities trading.

Penalties for breaching the market manipulation laws will be similar to those for insider trading and include criminal offence provisions.

There is also a broad-ranging prohibition against any conduct related 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 orders made by the Securities Commission and can be liable to compensate anyone who suffers loss from the conduct.

Amended law - Insider trading

The new insider trading regime focuses on the threat that insider trading poses to the integrity and confidence of the market, rather than on duties owed bv officers to their companies. 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.

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.

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 offence. 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 takeover-related activity; and
trading where information is protected by Chinese Walls.

The safe harbour under the current law for company directors and employees who trade in shares of the company under an approved procedure will not be available under the new law.

The removal of this safe harbour is consistent with the focus of the new law, which views insider trading as harmful to the market as a whole rather than mainly to the company involved.

Directors and employees will still be able to hold shares in their companies. They will not have such a broad immunity from insider trading law, but there will be a defence from liability if they trade securities under a trading plan.

To qualify for this defence the person must have entered into the trading plan at a time when he or she did not have inside information. The trading plan must be for a fixed period during which the investor has no right of withdrawal and no input to trading decisions.

Amended law - Substantial Security Holder Disclosure

The aim of substantial security holder disclosure is to promote an informed market by ensuring that all market participants have information about trading by persons who control or influence significant voting rights in a public issuer.

The basic features of this law remain the same. Disclosure must be made when a person becomes a substantial security holder (at the 5% threshold), whenever a holding changes by 1%, and when a person ceases to be a substantial security holder.

However, there have been some important changes. These include-

a person becomes a substantial security holder by having a relevant interest in 5% of the listed securities in any class (rather than 5% of the total number of voting securities of an issuer); and
disclosure applies to listed voting securities only, not to unlisted securities; but
the Securities Commission can require further disclsoure, including about unlisted and non-voting securities.

Failure to comply with substantial security holder obligations will be a criminal offence, subject to a fine of up to $30,000. Civil penalties of up to $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.

Timing

We expect regulation to be promulgated early in 2007 and the law to come into effect around the middle of the year. The Commission is preparing a handbook on 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.

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