Advisers’ Disclosure Obligations

New legislation

Some of the provisions of the soon to be enacted Securities Legislation Bill affect investment advisers and brokers. The Bill will come into force on 1 November 2005 and the rules relating to investment advisers and brokers will come into force a little later (likely to be some time in 2006).

The Investment Advisers (Disclosure) Act is the piece of legislation that currently regulates investment advisers and brokers and it provides for a two-tier regime of mandatory disclosure and request disclosure.

The Bill revamps and tightens the regulation of investment advisers and brokers. It will repeal the Act and replace it with a regime that is based solely on mandatory disclosure and so a greater level of automatic disclosure will be required.

Why the change?

The Securities Commission identified a number of problems with the existing regime including:

• Members of the public seeking investment advice may not be aware of their ability to ask for important disclosure such as the adviser’s experience and matters that may indicate that the adviser has conflicts of interests (i.e. matters currently required as part of tier two disclosure);
• The disclosure statements do not contain other information that investors may find useful in making decisions about whether to ask for or rely on advice (e.g. dispute resolution facilities and whether the investment adviser is a member of a professional body);
• The absence of offence provisions for recommending products that investment advisers and investment brokers know do not comply with securities law heightens the risks for investors; and
• No public enforcement body has the responsibility for enforcing the law relating to investment advisers. It can be difficult for an individual investor to bear the costs or time involved in litigation, or to obtain the evidence they need to bring an action.

Increased disclosure obligations

• All current request-only disclosure such as the adviser’s qualifications and conflicts of interest will be mandatory.
• New mandatory disclosures will be required for investment advisers, including information about the adviser’s professional standing (membership of a professional body, professional indemnity insurance, dispute resolution facilities available to the adviser’s clients and any fees the adviser will charge), any adverse events in the previous five years before the advice is given (successful court action taken against the adviser in his or her professional capacity and any expulsion or prohibition from being a member of a professional body).
• For investment brokers, the current mandatory disclosure requirements are largely retained.
• Disclosure statements will be required to be up to date when the advice is given or when money is received and must not be deceptive, misleading or confusing.
• Any advertisement promoting the services of the adviser or broker must state that a disclosure statement is available on request and free of charge.

Territorial scope

All investment advisers operating in the New Zealand market will be required to comply with the new regime, regardless of where the adviser is based or whether the end result of the advice or service occurs outside New Zealand.

At present, those advisers and brokers who are based overseas but offer advice or services in New Zealand are not expressly covered.

New enforcement powers

The Bill does away with the current light-handed approach to enforcement by giving the Securities Commission extensive powers and introducing significant penalties for non-compliance. The Bill puts non-compliance with this regime on a par with non-compliance with securities law generally:

• New offences prohibit investment advisers and brokers from advertising in a misleading, deceptive or confusing way. Recommending or receiving investment money for illegal offers (i.e. offers in breach of the Securities Act) is also prohibited. Failure to comply will be a criminal offence attracting a penalty of up to $300,000 for a company (and $10,000 per day in the case of a continuing offence). Civil remedies will also be available. The Securities Commission will be able to apply for a pecuniary penalty order against a person of up to $1 million and compensatory orders will be available to investors who can show loss as a result of the contravention.
• Failure to comply with disclosure obligations will be an offence, as it is currently, but will attract an increased fine of up to $100,000 for individuals and $300,000 for companies. Persons who have received advice from or paid money to that adviser or broker will be able to seek pecuniary penalties (of up to $100,000 from an individual and $300,000 from a company).
• The Securities Commission is given a public enforcement role and may make various orders, including prohibiting an adviser or broker’s disclosure documents or advertising, directing a person to publish corrective statements, and temporarily banning an investment adviser or broker who has persistently failed to comply with New Zealand or overseas investment adviser or broker law.
• Automatic (5-year) investment adviser or broker bans will apply to persons who (for example) have been subject to certain pecuniary penalty orders or convicted of a breach of the regime and to persons convicted of a crime of dishonesty. Such bans will prohibit the person from giving investment advice or receiving investment money from the public (including as an employee or agent of an investment adviser or broker) or from being a director or promoter of, or involved in the management of, an investment adviser or broker. The Court may make more permanent investment adviser or broker banning orders (up to 10 years) for serious offenders.

Financial Intermediaries Task Force

Meanwhile, the closing date for responses has just passed in relation to the consultation paper produced by the Task Force, ‘Options for Change’.

Under its terms of reference, the Task Force is required to consider and report on the regulation of financial intermediaries, and suggest options for reform that will enhance the quality of financial information and advice provided to the public and assist New Zealanders to make the most of their savings.

The consultation paper assumes that the Securities Legislation Bill will be enacted and states that the investment adviser disclosure regime in the Bill should be extended.

As well as consumer information related issues, the Task Force is looking at financial intermediary standard related issues and consumer redress, sanctions and enforcement.

What’s the upshot?

Decisions consumers make about their finances, investments and retirement are critical. It is important that New Zealand has a regime where consumers have access to, and deal with, financial intermediaries with confidence.

There are changes in the offing for investment advisers and brokers with the desired outcome to enhance the quality of financial information and advice being provided to the public and in the long run, that might just be best for everyone.

If you are interested in receiving a further update from us regarding the developments mentioned in this summary please drop us a line at info@liontamer.com.

Note: This article is provided for general information purposes only and not as legal advice. If you have any questions on issues covered please contact your legal adviser.