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New Zealand Securities Commission |
Last Updated: 12 November 2014
New Securities Law for
Investment Advisers and Market Participants
2008
A guide to new requirements under the Securities Markets Act 1988
New Securities Law for Investment Advisers and Market
Participants
2008
A guide to new requirements under the Securities Markets Act 1988
q Securities Commission
8th Floor, Unisys House
56 e Terrace
PO Box
1179
Wellington 6011
New Zealand www.seccom.govt.nz
q December 2007
CONTENTS
Introduction
2 q What this guide is about
2 q Who this guide is for
2 q Features of this
guide
3
Investment Advisers and Investment Brokers 4
Insider Trading 33
Market Manipulation 45
Substantial Security Holders 55
Glossary 60
q is guide is provided for general information only. e Securities
Commission does not assume any responsibility for giving legal or
other professional advice and disclaims any liability arising from the use of
the information.
q If you require legal or other expert advice you should seek assistance from
a professional adviser.
q Securities Commission
8th Floor, Unisys House
56 e Terrace
PO Box 1179
Wellington 6011
New Zealand www.seccom.govt.nz
q December 2007
q1
INTRODUCTION
What this guide is about
is guide is about changes to the Securities Markets Act 1988 which
come into force on 29 February 2008. It explains the new
requirements and what
people affected by the new law need to do to comply with their
obligations.
e changes are to the sections of the Act relating to:
> investment advisers and investment brokers;
> insider trading;
> market manipulation;
> substantial security holder disclosure; and
> the Securities Commission’s powers to enforce this law.
Who this guide is for
e guide is for people who are affected by the new law. ey are:
> investment advisers and investment brokers; and
> other participants in the securities markets and their
advisers.
Many people including sharebrokers, financial planners, lawyers, accountants
and others will be investment advisers under this law
if they give investment
advice to the public. Every investment adviser is obliged to comply with the
new law.
e Investment Advisers (Disclosure) Act 1996, which previously set
out the requirements for advisers and brokers, is repealed.
Disclosure
requirements for investment advisers are now in the Securities Markets Act
1988.
q2
Features of this guide
e guide has chapters on investment advisers and investment brokers,
insider trading, market manipulation, and substantial
security holders. In each
chapter the Commission’s enforcement role is also explained.
A detailed index is provided at the beginning of each chapter. A glossary is
at the back of the Guide at page 60. All words in bold
when they first appear in
the text are defined in the glossary. Some bolded words are also defined in the
text.
Footnotes in this guide refer to relevant sections of the Securities Markets Act
1988 and to regulations of the Securities Markets (Investment Advisers and
Brokers) Regulations
2007.
q3
Investment Advisers and Investment
Brokers
INDEX TO THIS CHAPTER
INTRODUCTION
6
IMPORTANT PRINCIPLES 6 q Who
is an investment adviser?
6 q What is
investment advice? 8 q Who is a
member of the public?
9 q When is an
investor not a member of the public? 10 q What investments are
covered?
11 q Who is an investment
broker? 12
DISCLOSURE OBLIGATIONS OF INVESTMENT ADVISERS AND INVESTMENT BROKERS 13 q When do disclosure obligations apply? 13 q When and how must an adviser
or broker disclose? 13
q What are the requirements for a disclosure statement? 14 q What must an adviser disclose in a disclosure statement? 15 q What must an adviser disclose about experience
and qualifications? 15
q What must an adviser disclose about criminal
convictions? 16 q What must an adviser disclose about fees? 17 q What must an adviser disclose about other
interests and relationships? 17
q When must an adviser disclose fees and remuneration? 19
q What must an adviser disclose about the
investments they give advice on? 20 q What must a broker disclose in a disclosure statement? 22 q What must a broker disclose about criminal convictions? 22 q What must a broker disclose about procedures for
dealing with investment money and investment
property? 22
q Disclosure must not be misleading
24
q4
q Other information 24
q Disclosure statement must be kept up-to-date 24
ADVERTISEMENTS BY INVESTMENT ADVISERS
AND INVESTMENT BROKERS 26
OFFERS OF SECURITIES MUST COMPLY WITH THE LAW 27
ENFORCEMENT AND REMEDIES 28
q Prohibition orders
29 q Corrective orders
29 q Disclosure orders
29 q Temporary banning orders
29 q Procedure for making orders
30 q Criminal offences
30 q Court orders and injunctions
31 q
Civil remedies
31 q Banning orders
32
GLOSSARY
60
q5
Investment Advisers and Investment
Brokers
INTRODUCTION
is chapter describes the law that applies to investment advisers and investment brokers in the Securities Markets Act 1988 as amended in 2006 and in the Securities Markets (Investment Advisers and Brokers) Regulations
2007. is law comes into force on 29 February 2008.
e previous law which set out the requirements for investment advisers, the
Investment Advisers (Disclosure) Act 1996, is repealed.
Other securities law also applies to investment advisers and investment
brokers, for example, insider trading law and market manipulation
law which are
also covered in this guide. Investment brokers are also bound by the Financial
Transactions Reporting Act 1996 which
is not covered in this guide.
IMPORTANT PRINCIPLES
is section describes the important principles on which this law is
based. Words that have particular meaning in the Securities
Markets Act 1988 are
in bold the first time they are used in this guide. All words in bold when they
first appear are defined in
the glossary on page 60.
Who is an investment adviser?
An investment adviser is a person who gives investment advice about
securities to members of the public as part of their job
or business.
Sharebrokers, financial planners, lawyers, accountants and other people will
be investment advisers under this law if they give investment
advice to the
public.
An employee who gives investment advice to the public as part of their job
is an investment adviser. In most cases their employer
is also an investment
adviser.
q6
ere are some exceptions to who is an investment adviser.
An issuer of securities is not an investment adviser in
relation to advice given about those securities. But an issuer’s employees
are investment advisers
if they give investment advice as part of their
jobs.
Example: A finance company that recommends people buy its debentures is not an investment adviser because it is the issuer of the debentures. However, the company’s employees are investment advisers if they give investment advice as part of their jobs, even if this is only about the finance company’s
securities.
A person who only passes on investment advice given by an issuer will not be
an investment adviser provided they do not change the
advice or add anything to
it.
Example: A company’s call centre employee reading from a
prepared text is not an investment adviser.
Firms need to consider the roles of their staff, especially who can
give investment advice and who can only pass on information
received from
issuers. Staff need to understand that they have obligations as investment
advisers if they do more than pass
on issuers’ information
unchanged.
A person who advises clients only about bank term deposits or call debt securities (e.g. bank or building society current and savings accounts) is not
an investment adviser because these are not considered to be securities under
this law.
A person making a takeover offer under the Takeovers Code is not an investment adviser, nor is the target company. An independent adviser
appointed under the Takeovers Code is not an investment adviser.
A lawyer or chartered accountant who gives investment advice to a member of the public does not have to comply with the disclosure rules described in this guide if:
> the investment advice is given in the lawyer or chartered accountant’s professional capacity; and
> the investment advice is a necessary incident of the professional
legal or accounting advice being given.1
1 Regulation 6
q7
What is investment advice?
Investment advice is a recommendation, an opinion or guidance about investing
in securities, given to a member of the public.
Investment advice includes suggesting:
> that a particular securities investment would be a good investment to make;
> that a particular investment would not be a good idea;
> how an investment might suit a particular investor or a particular
type of investor.
Investment advice can be about:
> making an investment or not making an investment; or
> selling, holding on to, or terminating an investment.
Investment advice can be given in various ways including:
> a face-to-face conversation;
> over the telephone;
> in a letter or email;
> in a written report;
> in a newspaper or magazine article or advertisement;
> on a website;
> in a radio or television interview or advertisement;
> at a seminar.
Opinion, guidance or recommendations about securities published in the media
are not investment advice if the writer’s or broadcaster’s
main job
is journalism. Opinion, guidance or recommendations about securities
published in the media are investment advice
if written or broadcast by a
person whose main job is not journalism e.g. a financial planner writing a guest
column in a newspaper.
Guidance that is limited to the procedure for making an investment or selling
an investment is not investment advice.
Example: A person who tells a customer the bank account number to use
or the address to which an application must be sent to make an investment,
is
not giving investment advice.
Advice given in some offer documents is not investment advice.
ese are registered prospectuses, investment statements,
advertisements
authorised by
q8
the issuer of the securities, bank disclosure statements and documents used
in place of a prospectus or investment statement under
a Securities Act 1978
exemption.
Who is a member of the public?
A member of the public under this law is defined by the Securities Act. It
has a particular legal meaning which is broader than is
commonly understood by
the term a “member of the public”. Under this law most investors
are members of the public. An
adviser should assume a client is a member of the
public, and provide disclosure, unless satisfied that the client is not a member
of the public.
Whether or not a particular person is a member of the public can only be
judged by the person’s circumstances. is means
that it is not
possible to give a complete list of who is, and who is not, a member of the
public under the law. If in doubt an adviser
should discuss specific cases with
a lawyer.
An adviser’s existing clients are probably members of the public even
if they are long term clients who do regular business
with the adviser.
Whether or not a person is a member of the public will usually depend on either:
> the person’s profession – someone who habitually invests as part of their job is not a member of the public; or
> the existing relationship between the investor and the issuer of
specific securities or a director of the issuer.
In the second of these cases, it is not the relationship between the adviser
and the investor which determines whether an investor
is a member of the public.
An adviser’s best friend, close relative or spouse can be a member of the
public. What matters
is the connection between the investor and the issuer, or
the investor and a director of the issuer. is means an investor
might be
a member of the public for one investment, but not for other
investments.
Example: A person who buys shares in a company of which their brother
is a director will not be a member of the public when they buy those
shares, but
can be a member of the public for all other
investments.
q9
When is an investor not a member of the public?
A relative or a close business associate of an issuer is not a member
of the public when investing in securities offered by that issuer.
A
relative or close business associate of a director of the issuer is also not a
member of the public.
Most existing relationships with an issuer will not qualify for this
exception.
Example: A shareholder of a company would still be a member of the
public when buying additional shares in that company. A customer or employee
of
an issuer will still be a member of the public when investing money with that
issuer.
e term “close business associate” is not defined in the
law. e Courts have interpreted it to apply where
the business
relationship is sufficiently close to overcome the usual inequality
between an issuer and an investor. e
main inequality between issuers and
investors is access to information.
A person whose principal business is the investment of money is not a member
of the public. A person who, in the course of and for
the purposes of their
business, habitually invests money, is not a member of the public.
Only people whose business it is to invest money can fit into these
categories, including investment advisers, sharebrokers, and
institutional
investors. It will not include a person simply because he or she already has a
large investment portfolio or invests
frequently. Someone who habitually invests
for their personal ends but not as part of their principal business is still a
member
of the public.
ese exceptions are similar to those under the Securities Act. However, a person who buys at least $500,000 worth of securities in a single transaction is not a member of the public under the Securities Act, but can be a member of the public for the purposes of investment adviser law. If in doubt an adviser
should provide a disclosure statement as if the client were a member of the
public.
In rare cases the specific circumstances of an offer of securities can
mean an investor is not a member of the public for securities
law. However, if
there is any doubt, it is better to provide a disclosure
statement.
q10
What investments are covered?
Investment advice is advice given about securities.
A security is a share in an issuer’s capital, assets, earnings,
royalties or other property, given to an investor in return for money paid
to
the issuer.
An arrangement under which an investor gives another person money and the
other person has to repay that money in the future, is
also a security.
Examples of a security are:
> a share in a company;
> a finance company debenture;
> a unit in a unit trust or group investment fund;
> a share in a partnership;
> some investments in time shares;
> membership of a superannuation scheme;
> a life insurance policy including a term life policy.
Some investments are not securities. For example, most investments in land, mortgages or chattels are not securities. However, some investments in land,
mortgages or chattels will be securities, for example, where there is a
contributory scheme under which investors’ money is pooled and paid into
the scheme.
Some investments that are securities under some laws are not securities under the investment adviser or investment broker disclosure law. ese are bank term deposits that are issued by registered banks and call debt securities
issued by any institution.
Adviser disclosure is not required if the person advises clients only about
call debt securities or bank term deposits. However,
if a person advises about
call debt securities or bank term deposits as well as other types of securities,
they are an investment
adviser and are required to make disclosure to clients
when giving advice about securities.
Adviser disclosure is not required if a person gives advice only about a term life insurance policy, although in this case the adviser must still comply with
the advertising requirements of the Securities Markets Act (see
p.26).
q11
Who is an investment broker?
An investment broker is a person, including a company, who receives
investment money or investment property from members of the public as
part of their job or business. Investment money is any money received from,
or on account of, a member of the public in relation to buying or selling
securities. Investment property is any property received
for the same
purpose.
An employee who receives investment money or investment property as part of
their job is an investment broker. eir employer
is also an investment
broker.
An investment broker can also be an investment adviser.
Some people who are involved with an investment are not investment brokers
even if they receive investment money or investment property
for that
particular investment. ese people are any issuer, trustee, statutory
supervisor or security registrar for an offer
of securities.
Example: A company that receives money for its shares offered to
the public is not an investment broker.
A person who merely passes on investment money or investment property to the
issuer of the securities will not be an investment broker,
provided the person
cannot apply the money for any other purpose.
Example: An adviser who takes a cheque made out to an issuer from a
client, and sends the cheque on to the issuer, is not an investment broker.
However, a broker who operates a client funds account and receives funds into
that account to buy securities for clients is an investment
broker.
q12
DISCLOSURE OBLIGATIONS OF INVESTMENT ADVISERS AND INVESTMENT
BROKERS2
is section describes the main obligations of investment advisers and
brokers under the Securities Markets Act 1988. It does
not cover obligations of
advisers and brokers under other laws, for example insider trading law, market
manipulation law and the
Financial Transactions Reporting Act 1996.
When do disclosure obligations apply?
Obligations under the Securities Markets Act apply:
> where advice is offered to a member of the public in New Zealand;
> when broker services are performed for a member of the public in
New Zealand.
e obligations apply when advice or broking services are provided to
the public in New Zealand even if the person giving the
advice or performing the
broking services is not in New Zealand. e law also applies if the
investment is with an issuer
outside New Zealand or the money is sent for
investment outside New Zealand.
e obligations cannot be avoided by a term in an agreement between the
client and the adviser or broker, i.e. the client cannot
waive their right to
receive the information.
When and how must an adviser or broker disclose?3
An adviser must disclose before giving investment advice to a member of the public. e adviser’s disclosure must be made by giving the investor a
disclosure statement.
A broker must disclose before receiving investment money or
investment property from a member of the public. e broker’s
disclosure must be made by
giving the investor a disclosure statement.
e law sets out two ways in which a disclosure statement can be given. Either:
> the investor must receive the disclosure statement before the advice
is given, or the property or money is received or delivered;
2 Sections 41 to 41M
3 Sections 41A, 41G & 41J
q13
or
> the adviser or broker must have delivered or sent the disclosure
statement to the investor’s address before the advice is given, or
the property or money is received or delivered. e address must be the
last known address of the investor,
or any address given by the investor for
delivering the disclosure statement. It can be an electronic address.
An adviser or broker could meet the disclosure requirement by having a
standard procedure for new clients, such as providing a disclosure
statement
before any advice is given or investment money or property is received.
Organisations should have sound internal procedures for accepting new clients
and for transferring clients between different
advisers within the
organisation (because the new adviser will need to give their own disclosure
statement to the client). ese
procedures should also ensure that the
requirements of other laws are met, for example, the Financial Transactions
Reporting Act
1996.
e disclosure statement can be given to the investor in person when he
or she first goes to see an adviser or broker.
e disclosure statement can be sent electronically if the investor
gives the adviser or broker an electronic address (email
or fax) for this
purpose. It is not good enough for the disclosure statement to appear on a
website to which the investor has access.
If investment advice is given over the telephone, the disclosure can be
given verbally. All the disclosure must be made. Any information
needed to
update a disclosure statement that has already been given to the client can also
be given verbally. In either case the
adviser must also send the written
disclosure statement to the client within 5 working days.4
What are the requirements for a disclosure statement?5
A disclosure statement must not be deceptive, misleading or confusing. A disclosure statement must:
> be in writing;
> have a clear heading that includes the term “disclosure
statement”;
4 Regulations 4 & 5
5 Sections 41J & 41K and regulation 10
q14
> show the date it was prepared;
> give the name, address and business telephone number of the adviser or broker or their employer if the adviser is an employee of another adviser or broker;
> contain a specific heading for each item of information required under the law; and
> be at the front if it is contained within another document (for
example, a marketing brochure for a firm).
A disclosure statement must set out the information clearly, concisely, and
in a manner likely to bring the information to the attention
of a reasonable
person. Advisers should take care to make sure their disclosure statements will
be easily readable and are written
in a manner that will be easy for non- expert
investors to understand.
What must an adviser disclose in a disclosure
statement?6
An adviser must disclose five types of information in a disclosure statement:
> experience and qualifications;
> criminal convictions;
> fees;
> other relevant interests and relationships; and
> types of investments that the adviser advises on.
What must an adviser disclose about experience and
qualifications?7
If an adviser has qualifications that are relevant to giving investment advice, the disclosure statement must state:
> the nature of those qualifications;
> when those qualifications were obtained; and
> briefly how the adviser has kept up-to-date since getting the
qualifications.
e disclosure statement must describe briefly the adviser’s
experience as an investment adviser.
Example: An adviser might state how long they have been giving
investment advice, and who they have been associated with or employed by during
that time.
6 Sections 41B to 41F
7 Section 41B
q15
If an adviser is a member of a professional body relevant to giving
investment advice, the disclosure statement must state the name
of the
professional body.
If an adviser has professional indemnity insurance, the disclosure statement
must state the nature and scope of that insurance.
If dispute resolution facilities are available to the adviser’s clients, then the disclosure statement must state that dispute resolution facilities are available.
ese facilities may be provided internally, for example, by the
adviser having an internal complaints system. Or they may be
external, for
example, through complaints and disputes procedures offered by the
Insurance and Savings Ombudsman or the Banking
Ombudsman.
What must an adviser disclose about criminal
convictions?8
e disclosure statement must include any of the following which have happened to the adviser within the five years before the date the investment advice is given or the investment money or investment property is received.
e adviser must disclose if they have been:
> convicted of an offence under the Securities Markets Act 1988, the
Securities Act 1978, or of a crime involving dishonesty;
> a principal officer of a body corporate at a time when that body
corporate committed one of these offences;
> adjudicated bankrupt;
> prohibited by a law or a court from taking part in the management of a company or a business;
> the subject of an adverse finding by a court in any civil or criminal court action that has been taken against the adviser in their professional capacity;
> expelled from, or has been prohibited from being a member of, a
professional body.
If an adviser is a body corporate or an unincorporated body, the adviser must
also disclose whether any of these things have happened
to a principal
officer of the adviser. If the adviser has been placed in statutory
management or receivership within the last
five years, this must be
disclosed.
8 Section 41C
q16
What must an adviser disclose about fees?9
An adviser must disclose the nature and level of the fee that the adviser
will charge the client for investment advice. An adviser
does not always have to
disclose a fixed amount if this is not known, but must then disclose how any fee
will be calculated, so that
the nature and level of the fee is clear.
Examples:
> if an adviser charges on an hourly basis, the hourly rate must be disclosed;
> if the adviser charges a fee based on the amount invested, the formula for calculating the fee must be disclosed; and
> if the client has to pay a brokerage fee, this must be
disclosed.
e adviser should tell the investor when fees must be paid.
If the adviser deducts fees from a client’s money held by the adviser,
this deduction must be disclosed.
If the client has to pay any particular costs in relation to an investment or
a transaction, such as custodian fees passed on by
the adviser, these should be
disclosed as well, so that the client can see the total amount that an
investment will cost them, and
so that the fee disclosure is not
misleading.
What must an adviser disclose about other interests and
relationships?10
e disclosure statement must give details of the adviser’s
interests and relationships that a reasonable person
would find reasonably
likely to influence the adviser in giving the advice.
Details of any remuneration the adviser has received or will receive
from a person other than the investor in connection with the advice given, or
any transaction
resulting from that advice, must be disclosed.
Remuneration is defined widely in the Securities Markets Act. It includes a
commission, fee, brokerage or other benefit or advantage,
whether pecuniary or
not and whether direct or indirect. It does not include salary or wages of a
fixed amount but includes incentive
payments and bonuses that are connected
with giving advice.
9 Section 41D
10 Section 41E
q17
e adviser must disclose, as accurately as possible, the amount or
rate of remuneration and the name of the person who has
paid or will pay the
remuneration.
Remuneration received directly by the adviser must be disclosed, as well as
remuneration received indirectly. is includes
remuneration paid to a
company or trust in which the adviser has an interest, and also any remuneration
paid to a family member of
the adviser.
An adviser’s usual fixed salary and wages do not have to be disclosed
under this heading, but a bonus tied to investment product
sales must be
disclosed.
is information about remuneration must be disclosed before the advice
is given. An adviser may not be able to disclose the
exact amount at this time,
because the level of remuneration might depend on the amount of money the
investor chooses to invest,
or the investor might negotiate with the adviser to
share some of the benefit of remuneration that may be received by the adviser.
In this case, an adviser might disclose remuneration in a range, or in a series
of ranges relating to different products or
types of product.
An investment adviser must disclose the actual dollar amount or a percentage
formula of any fee or remuneration when giving advice
about a specific
investment.11
Types of remuneration that need to be disclosed include:
> commissions received from the investment product provider, such as initial commission, trail commission or retention commission;
> bonuses, incentives and profit-sharing arrangements;
> “soft commissions” such as overseas trips, goods, sponsorships;
> loyalty-based support services, for example, software and technology services; and
> any agreement with the issuer that the issuer will buy a stake in the
adviser’s business if the adviser sells a certain
amount of the
issuer’s securities.
Particular relationships that an adviser must disclose are:
> an association with another person connected with the investment;
> any financial or other relationship with any person connected with the
investment;
> a relationship with any other person who may reasonably be expected to
influence the content of the investment advice or how
it is given; and
11 Regulation 8
q18
> any other direct or indirect pecuniary or other interest in giving the
investment advice.
Other relationships or interests that must be disclosed include:
> the adviser owns the security that is being sold to the investor, for example, sharebrokers must disclose that sometimes they may act as principal when buying or selling securities for the investor;
> the adviser has a business interest in an issuer, for example, if the adviser is a director of the company in which the adviser recommends the
client invest;
> the adviser or the adviser’s firm has been appointed as the lead manager and/or underwriter in the public offer of securities that the adviser is recommending to the investor;
> the advisory firm is a member of the same group of companies as the
firm that is offering the securities.
Advisers do not need to disclose interests or relationships of their
employers if the advisers are prevented from knowing about interests
or
relationships by internal information barriers (Chinese walls). is also
applies to people who give investment advice
under contract as part of the
business of the person they are contracted to.12
Any remuneration or relationship described above needs to be disclosed if it
would be reasonably likely to influence the adviser in
giving investment advice.
If in doubt, disclose.
If there are no relationships or no remuneration that need to be disclosed,
the disclosure statement must state that the adviser
has no interests or
relationships that a reasonable person would find reasonably likely to
influence the adviser in giving the
investment advice.
When must an adviser disclose fees and remuneration?
Most of the information required to be given to clients must be provided before any investment advice is given. However, information about all fees and remuneration does not have to be given:
> if the initial investment advice is only of a general nature (i.e. not about a particular investment); and
> the information usually required about fees and remuneration is not
relevant in light of the general nature of the advice
being given at that
stage.13
12 Regulation 9
13 Regulation 7
q19
Information about fees and remuneration must be provided before advice is
given about any specific investment, and this must
comply with the
requirements for a disclosure statement.
Disclosure about fees can be given in stages so that an adviser can find out
what sort of investments a client is interested in before
giving the client
detailed information about fees and remuneration. It means that advisers who
give advice on a wide range of securities
do not necessarily have to give a full
list of possible benefits for all products before finding out what services or
products the
client wants.
Advisers should remember that if fees or remuneration about other products
are material to the client, then this information must
be provided.
Example: An adviser who gives advice about many types of securities will not have to provide a list of the remuneration applying to all products when seeing a client for the first time.
e adviser can find out what products might suit the client’s
needs. For example, if the client is only interested
in superannuation,
the adviser can give the client a written disclosure form setting out the fees
and remuneration that will apply
to any superannuation products advised on,
before going on to discuss the benefits and risks of specific
investments.
What must an adviser disclose about the investments they give advice
on?14
e disclosure statement must state the types of securities that the
adviser gives advice on.
Examples:
> If the adviser only advises about life insurance policies,
then the disclosure statement must state this.
> If the adviser gives advice only on investments offered by a
particular issuer or issuers, the disclosure statement must
state this and give
the name of each of the issuers.
14 Section 41F
q20
Summary of investment adviser disclosure
q experience and qualifications
q whether a member of a professional body
q criminal convictions
q bankruptcy
q prohibition from managing a company
q prohibition by a professional body
q nature and level of fees and when they must be paid
q relationships that might influence the advice given
q the types of
securities advised
on
q21
What must a broker disclose in a disclosure
statement?15
A broker must disclose two types of information in a disclosure statement:
> criminal convictions, insolvency and disciplinary proceedings; and
> procedures for dealing with investment money and investment
property.
What must a broker disclose about criminal
convictions?16
e disclosure statement must include any of the following which have happened to the broker within the 5 years before the date the investment money or investment property is received. e broker must disclose if the broker has been:
> convicted of an offence under the Securities Markets Act 1988, the
Securities Act 1978 or of a crime involving dishonesty;
> a principal officer of a body corporate at a time when that body
corporate committed one of these offences;
> adjudicated bankrupt;
> prohibited by a law or a court from taking part in the management of a company or a business;
> the subject of an adverse finding by a court in any proceeding that has been taken against the adviser or the broker in a professional capacity;
> expelled from, or has been prohibited from being a member of, a
professional body.
If a broker is a body corporate or an unincorporated body, the broker must
also disclose whether any of these things have happened
to a principal
officer of the broker. If the broker has been placed in statutory
management or receivership this must be disclosed.
What must a broker disclose about procedures for dealing with investment
money and investment property?17
e broker’s procedures for dealing with investment money and investment property must be described in the disclosure statement. If the broker is an
employee, then the broker’s employer’s procedures must be described. Some
brokers are required to have a trust account, for example, NZX Participants,
lawyers and accountants.
15 Sections 41H & 41I
16 Section 41H
17 Section 41I
q22
e description of the procedures must cover the following things as a minimum:
> how the investor is to pay money to the broker, e.g. by cheque, electronic transfer or cash;
> how the investment property is to be given to the broker e.g. by delivering a certificate of title;
> whether or not money or property is to be held on trust for the investor until the investor tells the broker what to do with the money or property;
> if the broker does not hold the money or property on trust, this must be disclosed;
> the records that will be kept by the broker about the investment money or investment property;
> access that the investor will have to records kept by the broker about the investor’s investment money or investment property, and the terms of that access;
> whether or not the broker’s handling of the investment money or investment property will be audited by an auditor;
> if the broker’s handling of the investment money or investment property is audited by an auditor, the name of the auditor;
> how (if at all) the broker can use the investor’s money or
property for someone else’s benefit. For example, if
the money is not to
be held on trust, the broker would have to disclose if the money could be used
by the broker to pay the broker’s
expenses.
Summary of investment broker disclosure
q criminal convictions
q bankruptcy
q prohibition from managing a company
q prohibition by a professional body
q receivership or statutory management
q how the investor is to pay money to the broker
q how the investor is to deliver property to the broker
continues...
q23
Disclosure must not be misleading18
A disclosure statement must not be deceptive, misleading or confusing to an
investor who is a member of the public. As this applies
whenever a disclosure
statement is given to a client, the disclosure statement must be kept
up-to-date.
Before giving a disclosure statement to a member of the public the broker or
adviser must consider whether changes (e.g. to commissions
or membership of a
professional body) since the disclosure statement was prepared make it
deceptive, misleading or confusing. If
so, the statement should be
revised.
Other information19
A disclosure statement can be accompanied by other information. If an
adviser or broker gives other information in or with a disclosure
statement,
that other information must not be deceptive, misleading or confusing. If the
disclosure statement is contained within
another document, the disclosure
statement must be at the front.
Disclosure statement must be kept up-to-date20
If an adviser has given a disclosure statement to a member of the public, and
the information in that statement has become out-of-date,
the adviser must give
the person the up-to-date information before giving any more investment advice
to that person.
If a broker has given a disclosure statement to a member of the public, and
the information in that statement has become out-of-date,
the broker must give
the person the up-to-date information before receiving any more investment
money or investment property from
that person.
18 Section 41K
19 Section 41L
20 Section 41M
q24
A disclosure statement will be out of date if:
> there has been a material change in any thing that must be disclosed in a disclosure statement; and
> a reasonable client would think that the change would materially affect their decision to take advice from the adviser, to follow the adviser’s advice, or to assess what weight they should give the advice; or
> a reasonable person engaging a broker would think that the change
would materially affect any decision to proceed with
giving investment
money or property to the broker.
Examples: Material changes that would require a disclosure statement to be amended and given to the client again include:
> an adviser or broker is convicted of an offence that needs to be disclosed;
> an adviser or broker changes employment and needs to disclose information about the new employer;
> an adviser or broker enters a relationship with a new investment product provider under which a new incentive will be provided;
> an adviser’s firm or broker’s firm is purchased by an investment product provider;
> a material change in the remuneration received for any product.
Advisers and brokers should have procedures to ensure that the accuracy of
disclosure statements is checked regularly, and to ensure
that if there are
changes that require a disclosure statement to be amended, these amendments are
made.
If a disclosure statement is outdated the adviser can address this by
providing up-to-date information separately. If this is done
without amending
and reprinting the disclosure statement, the adviser must ensure that the
correction is clear, and that clients
are not misled or confused about the
information and its relevance to previous
disclosure.
q25
ADVERTISEMENTS BY INVESTMENT ADVISERS AND INVESTMENT
BROKERS21
Any advertisement by an investment adviser or broker must state that
a disclosure statement is available on request and free of charge. An
advertisement
must not be deceptive, misleading or confusing.
ese requirements for advertisements are new requirements under the
2006 amendments to the Securities Markets Act 1988. ey
cover a large
range of communications that advisers or brokers make or are involved
in.
ere are three types of advertisement covered by this law. ey
are advice advertisements, product advertisements, and broker
advertisements.
An advice advertisement is any communication prepared by an adviser that
contains or refers to investment advice, or that is likely
to induce a reader to
seek investment advice.
A product advertisement is any communication prepared by an adviser that
contains or refers to an offer of securities to the
public, or that is
reasonably likely to induce people to subscribe for those securities, and that
is not an advertisement or prospectus
under the Securities Act.
A broker advertisement is any communication prepared by a broker that refers
to the broker, or is reasonably likely to induce a reader
to seek the services
of a broker.
ese requirements apply to communications including:
> advice given over the telephone or in a written report;
> a research report on an issuer or security prepared by an adviser to be given to clients;
> a flyer sent to clients informing them of a new investment product;
> an account operating form sent by an adviser or a broker to a client;
> an investment seminar run by an adviser or broker.
Examples: Advertisements that might be deceptive, misleading or confusing are:
> an advertisement that states an adviser has been approved as an NZX Adviser when this is not the case;
> a product advertisement that states that an issuer has assets of a
particular value, but omits the fact that the issuer
also has signifiant
liabilities;
21 Sections 41N & 41O
q26
> an advertisement that claims without foundation that a particular investment will generate high returns;
> an advertisement that says an adviser can obtain special rates on investments where this is not true;
> a claim that a particular investment is of a lower risk than it really is;
> overly broad claims that an investment is suitable for a particular
class or type of investor.
OFFERS OF SECURITIES MUST COMPLY WITH THE LAW22
An adviser must not recommend that a client invest in any offer of
securities that is illegal.
When recommending an investment in securities to a member of the public, an
investment adviser should check that the offer of
securities complies with
the law.
Before receiving investment money from a member of the public to acquire
securities, a broker should check that the offer of
securities complies
with the law.
Advisers and brokers should obtain from the issuer or investment product
provider the registered prospectus and investment statement
for an offer
of securities to the public, and should read these documents.
Some offers of securities can be made without an investment statement
or prospectus. Usually this is because the Securities
Commission has granted an
exemption from the law. Most exemptions have conditions which require the issuer
to provide alternative
information about the investment. Advisers and brokers
should obtain the alternative information and read it.
Advisers and brokers should check that the offer documents are
up-to-date and current.
If an issuer tells an adviser or broker that there is no prospectus or
investment statement for the offer of securities, the
adviser or broker
should ask whether the offer complies with the law and with the conditions
of any exemption. If the adviser
or broker cannot confirm this, or doubts that
the offer complies, the adviser or broker must not recommend that a member
of
the public invest in the securities. A broker should refuse to accept
investment money in similar circumstances.
22 Section 41S
q27
If an adviser recommends that a member of the public acquire securities, and
the offer of securities is illegal, the adviser
will commit a criminal
offence if the adviser knew or ought to have known that the offer
was illegal.
If a broker receives money from a client to invest in an illegal offer
of securities, the broker has committed a criminal offence
if the broker
knew or ought to have known that the offer was illegal.
Summary of steps to check that an offer of securities complies with the law
Investment advisers and brokers should
q
NOT recommend that a member of the public invest in an offer of securities
that does not comply with the law or accept investment
money for such an
offer
ENFORCEMENT AND REMEDIES23
e Securities Commission has powers under the Securities Markets Act
1988 to enforce the obligations of investment advisers
and brokers.
An investment adviser or broker who does not comply with the obligations
could also be charged with a criminal offence or be
sued in a court by a
person who suffered loss as a result of the breach. e Commission
can also go to court for a pecuniary
penalty or a banning order.
When an investment adviser or broker breaches the disclosure requirements the
Commission can make prohibition and corrective orders,
or disclosure orders.
e Commission can also make a temporary banning order.
23 Sections 42 to 43N
q28
Prohibition orders24
If the Commission is satisfied that a person has contravened or would contravene an investment advisers’ obligation or brokers’ obligation it can make a prohibition order. is may prohibit or restrict the making of any
statement or distributing any document in order to prevent contravention or
further contravention of the obligation.
Corrective orders25
If the Commission is satisfied that someone has contravened or would contravene an investment advisers’ or brokers’ obligation it can make a
corrective order. is may direct a person who has breached the law to
publish a corrective statement. e order can set out what statement must be
published, and how and when it must be published. e Commission can
require a person to publish a corrective statement at their
own cost.
Disclosure orders26
If the Securities Commission is satisfied that a person has contravened an investment advisers’ or investment brokers’ disclosure obligation it can make
a disclosure order. A disclosure order can require a person to disclose
information to comply with a disclosure obligation, or make a corrective
statement at their own cost.
Temporary banning orders27
If the Securities Commission is satisfied that a person:
> has persistently contravened the law that applies to investment advisers and brokers; or
> has persistently engaged in misleading conduct; or
> has been banned from being an investment adviser or broker overseas,
it can make a temporary banning order. is can prohibit or restrict a person
from doing things set out in the order for a maximum of 14 days.
A temporary banning order can:
> ban a person from giving investment advice or receiving investment
money or investment property from the public;
24 Sections 42 & 42A
25 Sections 42 & 42A
26 Sections 42B & 42C
27 Sections 42D & 42E
q29
> stop a person from acting as a director or a promoter of, or taking
part in the management of, any incorporated or unincorporated
body that is an
investment adviser, or acting as employee or agent of an investment adviser or
broker.
Procedure for making orders28
e Commission must give a person notice before making an order.
e Commission has to give only 24 hours notice of a
prohibition or
corrective order that would apply for less than 14 days, or a temporary banning
order. It must give at least 48 hours
notice of any other disclosure order, and
seven days notice for any other prohibition order or corrective order.
e notice must state:
> the nature of the alleged breach;
> the terms of the order the Commission wants to make; and
> the reasons why the Commission wants to make the order.
e person can make written submissions within the time frame set out
in the notice. In some cases this can be less than 24
hours if the Commission
thinks it should act quickly in the public interest.
When the Commission makes an order it must tell the person that the order has
been made. e Commission can also tell others
about the order, i.e. it
can make a release to the news media. If the Commission makes a temporary
banning order it must publish
details of this on its website.
Criminal offences29
It is a criminal offence to contravene an order made by the Securities
Commission. e maximum fine for this offence is $30,000.
It is a criminal offence if a person is aware of (or ought reasonably
to be aware of ) information that must be disclosed under
an investment
advisers’ or brokers’ disclosure obligation, and doesn’t
disclose that information. e maximum
fine is $100,000 for an individual
and $300,000 for a body corporate.
It is a criminal offence if an investment adviser or broker makes a
deceptive, misleading or confusing disclosure statement.
e maximum fine
is $100,000 for an individual and $300,000 for a body corporate.
28 Sections 42F, G & H
29 Sections 42J, 41P to 41T
q30
It is a criminal offence to make a deceptive, misleading or confusing broker or adviser advertisement, or product advertisement. e maximum fine is
$300,000, and if the offence continues, a further fine can be imposed
not exceeding $10,000 for every day or part of a day during
which the
offence continues.
It is a criminal offence if an investment adviser recommends that a
member of the public invest in securities which have been
offered
illegally, if the adviser knows or ought to know, that the offer was
illegal.
It is a criminal offence if an investment broker receives investment
money from a member of the public for securities that have
been offered
illegally if the broker knows, or ought to know, that the offer was
illegal.
e maximum fine for these offences is $300,000. If the
offence continues, a further fine can be imposed not exceeding
$10,000 for
every day or part of a day during which the offence continues.
Court orders and injunctions30
Any person (including the Securities Commission) can go to court for;
> an injunction to restrain a person from doing something that would contravene the obligations of investment advisers and brokers; or
> a corrective order or a disclosure order.
Civil remedies31
e Securities Commission can go to court to get a pecuniary penalty
order for a breach of an investment advisers’ or
brokers’
obligation, other than a breach of the disclosure obligations. e maximum
amount of a pecuniary penalty is
$1,000,000 which is paid to the Crown.
Anyone can go to court to get a compensatory order if they suffer loss
because of a contravention of an investment advisers’
or investment
brokers’ obligation other than a breach of the disclosure
obligations.
A person who has received advice from an investment adviser can apply to the
court for a civil remedy order if the adviser has contravened
an investment
advisers’ disclosure obligation. e court must be satisfied that if
the adviser had complied with the
obligation, a reasonable person:
30 Sections 42K, 42N & 42P
31 Sections 42T to 42ZD
q31
> would not have used the adviser or followed their advice; or
> would have acted in a materially different way from the way the
person acted on the advice.
e maximum amount a court can order is $100,000 for an individual and
$300,000 for a body corporate.
Banning orders32
A court can make a banning order against a person if:
> the person has been convicted of certain criminal offences or has been found liable to pay pecuniary penalties; or
> the person has persistently contravened the Securities Markets Act; or
> the person has been banned overseas.
A banning order can prohibit a person from being an investment adviser or
broker, or being a director or promoter, or being concerned
or taking part in
the management of an incorporated or unincorporated body, for any period up to
10 years. It is a criminal offence
to contravene a banning order.
A court can make a banning order against a person who has committed an
offence of a deceptive, misleading or confusing advertisement,
or
recommending or receiving money for an illegal offer, or persistently
contravening the law about investment advisers or
brokers.
People who are convicted of certain criminal offences under the
Securities Markets Act or the Crimes Act, or who are found liable
to pay a
pecuniary penalty under the Securities Markets Act are automatically banned for
five years.
32 Section 43F to 43O
q32
Insider Trading
INDEX TO THIS CHAPTER
INTRODUCTION
34
OVERVIEW
34
CONCEPTS
34 q What is insider trading?
34 q Who is an information insider?
34 q What is material
information?
35 q What is information that is generally available to the market?
36
INSIDER TRADING PROHIBITIONS
37 q Information insider must not trade
37 q Information insider must not disclose inside information 38
q Information insider
must not advise or encourage trading
38
EXCEPTIONS
38 q Exception for trading required by an enactment
38 q Exception for underwriters and sub-underwriters
39 q Exception for
knowledge of own intentions or activities
39 q Exception for agent executing trading instruction only
39 q Exception for takeovers
40 q Exception for certain redemptions
of units in unit trusts
40 q Exception for Reserve Bank of New Zealand
41
DEFENCES
41 q Lack of knowledge of trading
41 q Insider information obtained by independent research and analysis
41 q Equal information
defence
42 q Acting as an adviser
42 q Options and trading plans
42 q Chinese wall defence
42 q Application of the insider trading laws to futures contracts
43 q
Trading by directors and officers of public issuers
43
ENFORCEMENT 44
GLOSSARY 60
q33
Insider Trading
INTRODUCTION
is chapter provides information on the changes to insider trading law
made by the passing of the Securities Legislation Bill
in October 2006.
e Bill made changes to the Securities Markets Act 1988 which contains
the law relating to insider trading.
e changes are effective from
29 February 2008.
OVERVIEW
In general, the new insider trading laws focus 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 connection to the company to which the inside
information relates (or to another listed
company).
e new insider trading law applies to trading in securities that have already been allotted and are quoted on a registered exchange. It does not apply to new issues of securities or to securities that are not quoted.
CONCEPTS
What is insider trading?
Insider trading is trading in securities of a public issuer on
the basis of information about that issuer that is not generally available to
the market and which, if it was generally known,
would be likely to materially
affect the price of the issuer’s securities.
Who is an information insider1?
e law restricts trading and other activities by information insiders. A
person is an information insider of a public issuer if that person:
1 Section 8A
q34
> has material information about that public issuer that is not generally
available to the market; and
> knows or ought reasonably to know that the information is material information; and
> knows or ought reasonably to know that the information is not
generally available to the market.
An information insider of a public issuer can be liable for insider trading
in securities of that company.
What is material information2?
Information about a listed entity is material information if a reasonable
person would expect it to have a material effect on
the share price of the
company if it were generally known to the market.
e information must be about particular securities, and a particular
listed company or companies, rather than about securities
generally or public
issuers generally.
is is an objective test. It is irrelevant how the information insider
thinks the information would affect the price
of the securities.
It doesn’t matter where the information originates. It could be:
> information from the company, e.g. about its business results;
> information about specific business or regulatory changes directly affecting the company;
> information from other sources about the industry in which the company operates; or
> information about or from one of its competitors.
It is the effect of the information on the price of securities that
matters, rather than whether or not the information affects
the underlying
value of the securities.
For futures contracts that are listed for trading on an authorised
futures exchange, information is considered to be material information if a
reasonable
person would expect it to have a material effect on the value
of the futures contract. e information must be about
the particular
futures contract rather than about futures contracts generally.
2 Section 3 and 3A
q35
What is information that is generally available to the
market3?
Information is considered to be generally available to the market if it has
been published or if it is readily observable.
Information is also generally available to the market if it can be deduced,
concluded or inferred from published or readily observable
information.
Published information
Published information is generally available to the market if it has been
made known in a way that brings, or is likely to bring,
it to the attention of
regular investors who are likely to be affected by it. A reasonable period
of time must be allowed for
the information to spread among regular
investors.
e law gives one example of how information can be made known so that it will be generally available to the market, i.e. information given under a
continuous disclosure obligation. is information is available immediately
to participants in a registered exchange’s market.
Example: If an issuer sends information to New Zealand Exchange Limited (NZX) for release to the market under the continuous disclosure requirements of the NZSX Listing Rules, the information is generally available to the market as soon as it is announced to the market through NZX. Most
brokers who trade on NZX subscribe to services that give them access to
market announcements. is information is usually provided
electronically
together with trading information.
ere are other ways in which material information can be made known so that it will be generally available to the market. is depends on the type of information and the type of issuer and security. Information might be made known by appearing in:
> a daily or business newspaper, or a broadcast news report;
> public records;
> public governmental records e.g. registers held by the Companies Office;
> a publicly accessible web site; or
> a trade publication.
However, the information must have been made known in a way that it is likely
to come to the attention of regular investors in the
shares.
3 Section 4
q36
Example: If information about a pharmaceutical company
appears in a specialist medical publication, that information
may not be generally available to the market:
> if it has not been made known in another way; and
> if people who commonly invest in securities of pharmaceutical companies
do not get information from the publication.
e length of time needed to disseminate the information after it is
published depends on the type of security, the type of
information, and how it
was published. Information that appears in a publication regularly read by
investors will take less time
to be disseminated than information that appears
in a publication that investors read less often.
Readily available information
If information is readily available to people who commonly invest, then the
information is generally available to the market. Information
is readily
available if it can be obtained without difficulty. Information can be
readily available by observation, use of expertise,
purchase from another
person, or by any other means.
INSIDER TRADING PROHIBITIONS
Information insider must not trade4
An information insider of a public issuer must not trade securities of
the public issuer. e prohibition applies only to trades in securities
that are listed on a registered exchange.
A listed security can be traded in many ways. Both acquiring and disposing of securities are included. Some examples of trading in securities are:
> buying or selling on market or in an off market transaction;
> agreeing to buy a security at a future date;
> a holder of a security granting a call option over that security;
> a holder entering into an agreement to sell the security subject to
fulfilling particular conditions.
Acquiring or disposing of securities as a gift or inheritance is not
trading. is means that an information insider can gift
their shares
without breaching the prohibition. An information insider can also receive
securities under a will and not breach the
prohibition.
4 Section 8C
q37
Information insider must not disclose inside
information5
An information insider of a public issuer must not disclose inside
information to another person in some situations.
e insider must not give the information to another person if they know, or ought reasonably to know, or believe:
> that the other person will, or is likely to, trade securities of the public issuer;
> that the other person holds the securities of the public issuer and will, or is likely to, continue to hold them; or
> that the other person will, or is likely to, advise or encourage a
third person to trade or hold the securities.
An insider can disclose inside information if required to do so by an Act of
Parliament or regulations made under an Act, e.g. the Income Tax Act
2004.
Information insider must not advise or encourage
trading6
An information insider of a public issuer must not:
> advise or encourage another person to trade or hold securities of the public issuer; or
> advise or encourage another person to advise or encourage a third
person to trade or hold securities of the public issuer.
Encourage includes incite, counsel and procure.
EXCEPTIONS
e law allows an information insider to trade or disclose material
information in some situations.
Exception for trading required by an enactment7
An insider can trade if required to do so by an Act of Parliament or
regulations made under an Act.
5 Section 8D
6 Section 8E
7 Section 9A
q38
Exception for underwriters and sub-underwriters8
An insider of a public issuer can:
> buy or sell securities of the public issuer under an underwriting agreement or a sub-underwriting agreement;
> disclose inside information to a person for the sole purpose of negotiating an underwriting or sub-underwriting agreement with that person relating to the securities of the issuer;
> advise or encourage another person to buy, sell or hold securities for the sole purpose of persuading the person to enter into an underwriting or sub-underwriting agreement; or
> advise or encourage another person to advise or encourage a third
person to buy, sell or hold securities for the sole purpose
of persuading the
person to enter into an underwriting or sub-underwriting agreement.
Exception for knowledge of own intentions or
activities9
If a person intends to do something regarding a public issuer (such as launch
a takeover offer) then the person’s own
knowledge of their
intentions may be price-sensitive. However, having that knowledge about their
own intentions or activities does
not mean that the person cannot trade, so long
as the person has no other inside information.
An insider’s adviser who knows of the insider’s proposal can
advise or encourage the insider to buy, sell or hold securities.
However, the
adviser must have received the information through acting as the insider’s
adviser in relation to the securities,
the issuer or the issuer’s business
activities. is exception applies to advisers acting in their
professional capacity,
for example a lawyer, accountant or investment adviser,
and other advisers.
Exception for agent executing trading instruction
only10
An agent who trades securities on behalf of another person on that
person’s specific instructions can execute that trade, even
if the agent
is an information insider of the public issuer. To rely on this exception, the
agent must not disclose the inside information
to the other person, and must not
advise or encourage the other person to instruct the agent to
trade.
8 Section 9B
9 Section 9C
10 Section 9D
q39
Exception for takeovers11
An information insider can trade in securities where that trading results
from a takeover offer under the Takeovers Code.
An information insider can trade securities under a lock-up agreement which
requires the insider to acquire or dispose of the securities
at a fixed price
under a future takeover offer that complies with the Takeovers
Code.
In some situations an insider can disclose inside information to someone
else to enable or encourage that other person to make a
takeover offer or
take part in a takeover offer. For this exception to apply the other
person must be bound by a confidentiality
agreement in respect of the
information.
Under this exception inside information can be disclosed:
> to a prospective offeror under a prospective takeover offer under the
Takeovers Code;
> to encourage competing bona fide offers to be made in competition with a takeover offer under the Takeovers Code;
> by a prospective offeror for the purpose of forming a consortium to make a takeover offer under the Takeovers Code; or
> to an independent adviser so that the adviser can make a report
required by the Takeovers Code.
e directors of a company which is the target of a takeover
offer under the Takeovers Code can advise or encourage the
company’s
shareholders about trading or holding their securities.
A prospective offeror under a prospective takeover under the Takeovers
Code can advise or encourage persons to buy, sell or
hold securities of the
public issuer for the purposes of forming a consortium to make a takeover
offer.
Exception for certain redemptions of units in unit
trusts12
An information insider can redeem units in a unit trust if the redemption
price for each unit is calculated by reference to the underlying
value of the
assets of the financial business or scheme.
11 Section 9E
12 Section 9F
q40
Exception for Reserve Bank of New Zealand13
e Reserve Bank can trade in securities issued by the Reserve Bank or the
Crown even if it is an information insider.
DEFENCES
e law sets out a number of defences that, if proven, can mean that an information insider will not be found by a court to have breached the insider
trading law. e information insider must prove these defences
“on a balance of probabilities”.
Lack of knowledge of trading14
Information insiders of a public issuer who traded in securities of the
public issuer, will not have breached the law if they can
prove that they did
not know and could not reasonably be expected to know, that they traded the
securities.
ere is no similar defence for disclosing or advising.
Inside information obtained by independent research and
analysis15
Information insiders of a public issuer:
> who trade in securities of the public issuer, or disclose inside information, will not have breached the law if they can prove that the information was obtained by research and analysis, and was not obtained directly or indirectly from the public issuer;
> who advise or encourage another to trade, will not have breached the
law if they can prove that they advised or encouraged
on the basis of inside
information obtained by research and analysis, and not obtained directly or
indirectly from the public issuer.
Research is defined as planned investigation undertaken to gain new knowledge
and understanding.
13 Section 9G
14 Section 10
15 Section 10A
q41
Equal information defence16
Information insiders of a public issuer:
> who trade in securities of the public issuer will not have breached the law if they can prove that the opposite party to the transaction knew, or ought reasonably to have known, the same inside information that the insider knew before entering into the transaction;
> who disclose inside information will not have breached the law if they
can prove that the person to whom the information was
disclosed knew or ought
reasonably to have known the same inside information before it was
disclosed.
Acting as an adviser
Advisers who are information insiders and who can prove that they became an
information insider or obtained inside information only
through acting as
adviser for a client, will not breach the law by disclosing the inside
information to the client, or by advising
the client to buy, sell or hold
securities of the public issuer. is defence is available to advisers
acting in a professional
capacity, and includes lawyers, accountants, or
investment advisers.
Options and trading plans17
Information insiders of a public issuer who trade in securities of the public issuer will not breach the law if they can prove that they traded under a fixed trading plan or under options to acquire existing shares with a fixed exercise price. e information insiders must also prove that:
> they entered into the options or the fixed trading plan before obtaining the inside information; and
> that in doing so they did not intend to evade the prohibition on
trading on inside information.
A fixed trading plan is a plan that is fixed for a period of time during
which the investor cannot withdraw from the plan. e
investor cannot
influence trading decisions after the plan has begun.
Chinese wall defence18
e Chinese wall defence can be used in respect of trading,
disclosure of inside information, advice or encouragement to trade or disclose.
ese
actions are
16 Section 10B
17 Section 10C
18 Section 10D
q42
called active decisions. is defence is provided so that incorporated bodies
can set up arrangements and procedures to ensure that inside information is
not spread within the organisation.
e incorporated body does not breach the insider trading prohibitions
if the procedures are followed by all those involved
so that the people making
the active decisions are not aware of the inside information.
To prove this defence, the organisation must prove that the arrangements could reasonably be expected to ensure that those making the active decisions:
> would not receive or have access to the inside information; and
> would not be influenced in relation to the decisions by someone who
had the inside information.
e organisation must also prove:
> that the arrangements were effective, i.e. that no person who took part in the active decisions had received or had access to the inside information or was influenced in relation to that decision by someone who had the information; and
> that every person who had the information and every person who took
part in the active decisions acted in accordance with the
arrangements or
procedures.
Application of the insider trading laws to futures
contracts19
e new insider trading laws also apply to futures contracts listed on an authorised futures exchange. ere are some modifications because of the nature of the futures contract, such as:
> the reference to information insider of a public issuer must be read as information insider in relation to a futures contract; and
> reference to trade or hold the securities of a public issuer must be
read as trade or hold the futures contract.
Trading by directors and officers of public issuers
An important difference between the new law and the old insider trading
law is that there is no “safe-harbour” defence
for trading by
directors and officers of public issuers who follow an approved procedure
and get the issuer’s permission
to trade.
19 Section 11E
q43
Directors and employees of public issuers can still own and trade shares in
their own companies, but need to be careful that they
do this only when they are
not in possession of inside information, or that their trading qualifies for one
of the exceptions, such
as a fixed trading plan.
Public issuers can help their directors and employees to comply with the law
by putting in place a share trading policy that explains
the ban on insider
trading. All public issuers should consider adopting a formal trading policy as
a governance and risk management
tool.
e Listed Companies Association has published guidelines and a template policy that could assist issuers with their policies. ese guidelines are available on the Listed Companies Association website at www.listedcompanies.co.nz. Each company should consider its own business and governance circumstances in formulating their policy.
ENFORCEMENT
Under the new law it is a criminal offence20 to knowingly
breach insider trading laws. If convicted, an individual is liable for a term
of up to 5 years imprisonment or a fine
not exceeding $300,000 or both, while a
body corporate is liable for a fine not exceeding $1 million.
e changes also include greater civil penalties21 for breach of the insider trading laws. e Commission can take cases seeking penalties and compensation. e maximum penalty that can now be imposed is the greater of:
> the consideration paid for the transaction;
> 3 times the profit made or loss avoided; or
> $1 million.
20 Sections 8F and 43
21 Section 42W
q44
Market Manipulation
INDEX TO THIS CHAPTER
INTRODUCTION
46
PROHIBITION AGAINST FALSE OR
MISLEADING STATEMENTS OR INFORMATION 46 q What kind of statements or information is prohibited? 47 q What must the person know about the truth of
statements or information? 47
q What effect must the statement or information have
to be prohibited? 47
PROHIBITION AGAINST FALSE
OR MISLEADING APPEARANCE OF TRADING 48 q What effect must the act or omission have? 49 q What must the person know about the effect
of the act or omission? 49
q A person can be presumed to have contravened the prohibition 49
q Exemptions
50
GENERAL DEALING MISCONDUCT 51
EXCEPTIONS FOR CONDUCT COVERED BY OTHER LAWS 52
ENFORCEMENT AND REMEDIES
52 q Prohibition orders
52 q Corrective orders
52 q Procedure for making
orders
53 q Criminal offences
53 q Court orders and injunctions
53 q Civil remedies
54 q Banning orders
54
GLOSSARY
60
q45
Market Manipulation
INTRODUCTION
is chapter describes the law in the Securities Markets Act 1988 that
prohibits market manipulation1. e law aims to prevent conduct
that harms the integrity of the New Zealand securities markets.
Some prohibitions apply only to particular conduct relating to securities of a listed issuer traded on:
> a registered stock exchange; or
> an authorised futures exchange.
A broader ban applies to conduct that relates to dealing in any type of security
or futures contract.
PROHIBITION AGAINST FALSE OR MISLEADING STATEMENTS OR INFORMATION
Market manipulation law aims to stop manipulative behaviour that may
affect the New Zealand securities markets. A person who
spreads false or
misleading market information might be able to move the price of a security in a
way that favours them. ey
might be able to increase the price so they
can sell a security they hold at a profit. ey might be able to reduce
the price
of a security so that they can buy the security more cheaply.
Market manipulation law prohibits any person from making false or misleading
statements or spreading false or misleading information
that affects
securities listed on a registered exchange or traded on an authorised futures
market.
e law also bans false or misleading statements or spreading false
or misleading information that is likely to affect
the way a person votes
on a transaction involving securities.
1 Sections 11 to 19, Securities Markets Act
1988
q46
What kinds of statements or information are prohibited?
e ban applies to “statements” and “information”. ese terms are wide and include:
> written statements distributed in hard copy or electronically;
> spoken information;
> information provided in pictures or graphs.
A statement or information is prohibited if:
> a material aspect of the statement or information is false; or
> the statement or information is materially misleading.
Every important aspect of the information or statement must be accurate and
balanced. e information or statement as a whole
must be accurate and
balanced. Statements or information will be prohibited if they omit important
aspects, and the omission makes
the statement or information as a whole
materially misleading.
e law does not prohibit minor errors or inaccuracies that are of
little significance or importance.
What must the person know about the truth of a statement or
information?
A person breaches the prohibition if they make a statement or spread
information that they know is false or misleading.
A person will also breach the law if they ought reasonably to know that a
statement or information is false or misleading.
If a person is in a position that indicates they ought to know that the
information is false or misleading, the law will assume that
they do know the
information is false or misleading.
Example: If a company issues a false press release about its business
prospects, the Chief Executive is likely to be assumed to have known
that the
press release was false because the CEO is assumed to be in a position to know
the truth, or to ensure that the press release
is
correct.
q47
But, to be criminally liable, the person making the statement or
disseminating the information must actually know that the statement
or
information is false or misleading.
What effect must the statement or information have to be
prohibited?
e law prohibits a person from making a statement or spreading information that is false or misleading, if the statement or information is likely to:
> induce a person to trade in the securities listed issuer; or
> increase, reduce, maintain, or stabilise the price of the securities of a public issuer; or
> induce a person to vote for, or vote against, a transaction, or to
abstain from voting in respect of a transaction.
PROHIBITION AGAINST FALSE OR MISLEADING APPEARANCE OF TRADING
e law bans behaviour that gives, or is likely to give, a misleading appearance of trading in listed securities. is type of activity might enable a person to move the price of a security in a way that favours them. Some examples of practices that the law is aimed at are2:
> painting the tape - engaging in a series of transactions that are reported on a public display facility to give the impression of activity or price movement in a security. Wash sales and improper matched orders are often used when painting the tape.
> wash sales - transactions in which there is no real change in ownership of the security.
> improper matched orders - transactions where buy and sell orders are entered at the same time, with the same price and quantity, by different but colluding parties.
> advancing the bid - increasing the bid for a security to increase its price.
> pumping and dumping - buying at increasingly higher prices. Securities are sold in the market (often to retail investors) at the higher prices.
> marking the close - buying or selling securities at the close of the
market to try to alter the closing price of the security.
q48
> corner - securing sufficient control of any commodity or security so that its price, or the price of derivatives that rely on the commodity, can be manipulated or controlled.
> squeeze - taking advantage of a shortage in an asset on a particular
date to artificially raise the price.
e ban applies to both acts and omissions. Sometimes a person can be
presumed to have breached the prohibition unless they
can prove they had a
legitimate reason for their behaviour.
What effect must the act or omission have?
An act or omission is prohibited if it creates, or is likely to create, a false or misleading appearance regarding:
> the extent of active trading in the securities of a public issuer; or
> the supply of or the demand for the securities; or
> the trading price or the value of securities.
What must the person know about the effect of the act or
omission?
If the person knows that their act or omission will have, or is likely to
have, a particular effect, they will breach the prohibition.
A person who ought reasonably to know that their act or omission will have,
or is likely to have, a particular effect, will
also breach the
prohibition.
To be criminally liable, the person must have actual knowledge that the act
or omission will have, or is likely to have, that effect.
A person can be presumed to have contravened the prohibition
A person who is a direct or indirect party to trading in listed securities
will be presumed to have breached the market manipulation
law if there is no
change in beneficial ownership.
A person will be presumed to have breached the ban if they make an
offer to trade securities and then make, or propose to make,
an opposite
offer that largely matches the number and price of securities in the first
offer.
A person will be presumed to have breached the ban if they make an
offer to trade securities knowing that their associate has
made, or
proposes to make,
q49
an opposite offer that largely matches the number and price of the
securities they offered to trade.
e presumption will not apply, and a person has a defence in any
proceedings for giving a false or misleading appearance
of trading, if they can
prove there was a legitimate reason for the trading, or the offer to
trade.
e presumption also will not apply if a person trades and there is no change of beneficial ownership if they can prove that:
> they acted on behalf of another person; and
> they did not know (and ought not reasonably to have known) that no
change in beneficial ownership would result when the securities
were
traded.
Exemptions
e Securities Markets (Market Manipulation) Regulations 2007 set out
three exemptions from the market manipulation provisions
of the law.
Market stabilisation
Market stabilisation is where someone buys securities at a certain price in
order to stabilise the price of those securities. e
Regulations set out
conditions under which a company that is undertaking an initial public
offer of securities can arrange
for market stabilisation to occur.
ese conditions are detailed, and any company considering using this
exemption should take
legal advice to ensure that the conditions are carefully
followed.
e conditions for market stabilisation under the Regulations aim to
ensure that the potential for stabilisation is disclosed
in advance to
investors, that stabilisation bids are not used to raise the price of securities
and are identified and reported regularly
to the market. Any company undertaking
market stabilisation must appoint in advance a stabilisation manager to oversee
the process.
is person must satisfy the Securities Commission that it
has satisfactory Chinese walls in place to prevent confidential
information
about the market stabilisation from passing to employees or others who are not
concerned with the stabilisation.
Short selling and crossing of trades
Short selling is a sale of a security by a person who does not, at the time
of the trade, actually own the security.
A crossing is a trade where the same market participant acts as agent for
both the buyer and the seller, or acts as agent for one
and is the principal on
the other side of the trade.
q50
It is possible that both of these activities could give a misleading appearance of trading. e Regulations clarify that short selling and crossings are not market manipulation for the purposes of the law merely by reason of being short selling or crossings.
GENERAL DEALING MISCONDUCT
e law prohibits any conduct relating to dealings in securities that
is misleading or deceptive or likely to mislead or deceive.
e prohibition is a general prohibition against misleading or
deceptive conduct in relation to securities and the Securities
Commission is
the principal agency responsible for enforcing it.
is ban is in addition to the general prohibition on misleading or
deceptive conduct in trade in the Fair Trading Act 1986.
If court action is
taken against a person under the Fair Trading Act 1986 for conduct that is
regulated under the market manipulation
law, and the person is not liable under
the market manipulation law for that conduct, then the person cannot be found
liable for
that conduct under the Fair Trading Act.
is ban applies more widely than the bans on false or misleading statements and information. It applies:
> to any type of security, whether or not it can be traded on a registered securities exchange or an authorised futures exchange; and
> to all dealings, not only trading. It could apply to a new issue of
securities as well as the sale or transfer of previously
allotted securities,
and also to underwriting securities or taking steps in preparation for any
dealings in securities, such as giving
investment advice.
e prohibition is effect-based. at means it applies to
conduct that is likely to mislead people who are affected
by it. It
doesn’t matter whether the purpose was to mislead or deceive, or whether
the person knew that the conduct was misleading
or deceptive.
e ban applies to conduct in New Zealand. It also applies to conduct
outside New Zealand by a person who lives in, or is incorporated
in, or carries
on business in New Zealand and the conduct relates to securities dealings that
occur (in part or otherwise) in New
Zealand.
q51
EXCEPTIONS FOR CONDUCT COVERED BY OTHER LAWS
Parts of the market manipulation law do not apply to some conduct that might
be prohibited under this law if other laws also regulate
the conduct.
None of the market manipulation law described in this guide applies to
conduct regulated by the Takeovers Code or the Takeovers Act
1993.
e general dealing misconduct prohibition does not apply to conduct regulated by:
> the law about repurchase of shares under the Companies Act 1993;
> the law about offers of securities to the public for subscription under the Securities Act 1978; and
> the law that applies to disclosure by investment advisers or investment brokers under Part 4 of the Securities Markets Act.
ENFORCEMENT AND REMEDIES
e Securities Commission has powers to enforce the market manipulation law. A person who breaches the requirements:
> could be charged with a criminal offence; and
> could be sued in a court by a person who suffered loss as a result of the breach; and
> could be subjected to a banning order.
e Securities Commission can also go to court for a pecuniary penalty
and it can make prohibition and corrective orders.
Prohibition orders
e Commission can make a prohibition order if it is satisfied that a
person has contravened or would contravene a market manipulation
prohibition or
exemption or the general dealing misconduct prohibition. A prohibition order may
prohibit or restrict any statement
or distribution of any document in order to
prevent contravention or further contravention of the obligation.
Corrective orders
e Commission can make a corrective order if it is satisfied that
someone has contravened or would contravene a market manipulation
prohibition
or
q52
exemption or the general dealing misconduct prohibition. A corrective order
may direct a person who has breached the law to publish
a statement to correct
the breach. e order can set out what statement must be published, and
how and when the corrective
statement must be published. e Commission
can require a person to publish a corrective statement at their own
cost.
Procedure for making orders
Before making an order the Securities Commission must give the person the order is directed at:
> notice of the nature of the alleged breach;
> the terms of the order the Commission intends to make; and
> the reasons why the Commission intends to make the order.
e law requires the Commission to give a person 24 hours written notice before it makes a prohibition order or a corrective order directed at him or her.
e Commission must give a person the opportunity to make written
submissions within the time frame set out in the law. e
Commission can
give less than 24 hours notice in urgent cases when it thinks it needs to act
quickly in the public interest.
If the Commission makes an order directed at a person, the Commission must
tell the person that the order has been made. e
Commission can also tell
others about the order.
Criminal offences
It is a criminal offence to contravene an order made by the
Securities Commission under market manipulation law. A person
who contravenes an
order commits an offence and can be fined up to $30,000.
A person convicted who knowingly breaches the market manipulation law commits a criminal offence. An individual convicted of this can be sentenced to imprisonment for up to 5 years, and can be ordered to pay a fine of up to
$300,000. A body corporate convicted of market manipulation can be ordered to
pay a fine of up to $1 million.
Court orders and injunctions
Any person (including the Securities Commission) can go to court to get an
injunction to stop a person from doing something that would
contravene
the
q53
market manipulation law. Any person (including the Securities Commission)
can go to court to get a corrective order.
Civil remedies
e Securities Commission can go to court to get a pecuniary penalty order for a breach of a market manipulation prohibition or exemption. e maximum amount of a pecuniary penalty is the greater of:
> the consideration for the transaction that constituted the breach (if any);
> 3 times the amount of any gain made or loss avoided by the person committing the breach; or
> $1,000,000.
A pecuniary penalty is payable to the Crown.
Anyone can go to court to get a compensatory order if they have
suffered loss because of a contravention of a market manipulation
prohibition or exemption or the general dealing misconduct prohibition.
Anyone can go to court to get a range of other orders if the court is satisfied that a person has breached, or intends to breach, a market manipulation prohibition or exemption or the general dealing misconduct prohibition. e range of orders includes orders:
> stopping a person exercising a vote attached to securities;
> stopping the issue or allotment, or the sale, purchase or transfer of securities; and
> directing that securities be forfeited or cancelled.
Banning orders
A person convicted of an offence against a market manipulation prohibition, or fined for contravening a market manipulation prohibition, will be automatically banned for 5 years from:
> being a director or promoter of a company or other incorporated or unincorporated body; or
> being concerned with or taking part in the management of an
incorporated or unincorporated body.
A court can also make a banning order against such a person for any period up
to 10 years. It is a criminal offence to contravene
a banning
order.
q54
Substantial Security Holders
INDEX TO THIS CHAPTER
INTRODUCTION 56
SUMMARY OF CHANGES 56
WHO IS A SUBSTANTIAL SECURITY HOLDER? 56
DISCLOSURE OF SUBSTANTIAL SECURITY HOLDINGS 58
ENFORCEMENT 59
GLOSSARY 60
q55
Substantial Security Holders
INTRODUCTION
e aim of substantial security holder disclosure is to promote an
informed market and deter insider conduct, market manipulation,
and secret
dealing in potential takeover bids.
Disclosure by substantial security holders of changes to their holdings helps
achieve this by ensuring that all market participants
have information about
trading by persons who control or influence significant voting rights in a
public issuer.
SUMMARY OF CHANGES
Changes to the Securities Markets Act coming into force on 29 February
2008 include a re-write of this law. While the basic features of the law remain the same, there have been some important changes. ese 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 any person to disclose the
nature and extent of any relevant interests in securities
of a public issuer,
including in unlisted and non-voting securities.
Under the new law, non-disclosure of substantial security holdings is a criminal offence.
WHO IS A SUBSTANTIAL SECURITY HOLDER?
A substantial security holder is a person who has a relevant interest in 5%
of a class of listed voting securities of a public issuer.
A person has a relevant interest in a security if that person:
> is the registered holder of the security; or
> is a beneficial owner of the security; or
q56
> has the power to exercise, or to control the exercise of, a right to vote attached to the security; or
> has the power to acquire or dispose of, or to control the acquisition
or disposition of the security.
Under this law it does not matter how a person came to have power or control
over securities or voting, or whether the power is expressly
stated or implied,
direct or indirect, or whether it is legally enforceable.
If two (or more) people jointly have a power or control over securities or
voting, then each of them is taken to have that power or
control individually
for the purposes of this law.
However, the fact that a person has a power to cast one of many votes does
not give that person a joint power under this law. is
means that each
shareholder in a company is not taken to have the combined power of all the
votes of the company just because all
shareholders together could control the
voting of the company’s shares.
A person is taken to have a power or control also if that person may have the
power or control at some time in the future because
of some trust,
arrangement, or understanding.
Some people are deemed to have relevant interests that are held by certain
others, such as related companies, people who are accustomed
to act under
instructions, or people who have some arrangement or agreement to act in
concert.
Some situations do not give rise to a relevant interest for the purposes of substantial security holder law. ese are:
> securities held by banks and financial service providers as security for loans;
> securities held by sharebrokers in the course of ordinary trading activity on a registered exchange;
> voting powers held by someone who has been authorised by the directors of a company to act as their representative at a meeting of the public issuer (so long as the resolution authorising this is given to the public issuer in advance);
> voting powers held by someone who is appointed as a proxy by other shareholders to vote at a meeting of the public issuer (if the document appointing the person as proxy is given to the public issuer in advance of the meeting);
> securities held by a bare trustee;
q57
> any power directors of a company may have individually over securities held by that company (i.e. if a company owns some shares in a public issuer, each director of the company that owns the shares is not taken to have a relevant interest in those shares merely by reason of his or her position as a director);
> pre-emptive rights on transfer of securities held by members of a body
corporate under the constitution.
DISCLOSURE OF SUBSTANTIAL SECURITY HOLDINGS
Four events require disclosure:
> becoming a substantial security holder;
> a movement of 1% or more in a substantial security holding;
> a change in the nature of any relevant interest held by a substantial security holder (e.g., the exercise of options over listed voting securities);
> ceasing to be a substantial security holder.
Disclosure of each of these events must be given as soon as the person knows,
or ought to know, that the event has arisen.
Disclosure of substantial security holdings must be made to:
> the public issuer concerned; and
> any registered exchange on which the securities of the public issuer
are listed.
e forms used for substantial security holder disclosure have been
redesigned to simplify disclosure and to promote electronic
disclosure of
holdings.
Registered exchanges can set forms and also the methods of delivery, subject
to approval by the Minister of Commerce. If a registered
exchange sets forms and
specifies the method of delivery, then these must be used unless doing this
would delay the disclosure.
e law sets out default forms to be used if a registered exchange does
not set its own forms.
Default forms are available for disclosure when:
> a person first becomes a substantial security holder;
> a substantial security holding changes by 1% or more or the nature of a holding changes; and
> a person ceases to be a substantial security holder.
q58
e default forms can be found in the Securities Markets (Substantial Security
Holders) Regulations 2007.
If the default forms are being used, disclosure to the registered exchange must be made, if this is reasonably possible, in the electronic format required by the registered exchange. If it is not reasonably possible to use that format, then disclosure must be made:
> by email in some other format; or
> by another electronic method; or
> by fax.
If none of these options is reasonably possible, then disclosure can be made
by physical delivery. Disclosure cannot be made by post.
Disclosure to the public issuer can be made using either the registered
exchange’s form or the default form for the type of
disclosure. Disclosure
to the public issuer must be made by email or some other electronic method, fax,
or delivery. Disclosure cannot
be made by post.
ENFORCEMENT
Failure to comply with substantial security holder obligations is 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 on the
application of the Commission. e court can also make
a range of orders
relating to any holding of securities, including orders to forfeit or dispose of
securities.
e Commission has administrative powers to prohibit or require
correction of substantial security holder
notices.
q59
Glossary
Active decision
A decision, in relation to the Chinese wall defence for insider trading, to
trade the securities or disclose the inside information
or advise or encourage
as the case may be.
Advice advertisement
Any form of communication:
> that is or will be distributed to someone; and
> is authorised by an investment adviser or prepared with the investment adviser’s involvement; and
> contains or refers to investment advice or is reasonably likely to
induce someone to seek investment advice.
Aggrieved person
A person who has suffered or is likely to suffer loss or damage, as a result of a civil remedy provision (other than an investment advisers’ or brokers’
disclosure obligation or exemption) being contravened.
Association
A person will be associated with another person if:
> both are members of the same partnership;
> both are relatives or de facto partners;
> both are companies that have substantially the same shareholders or are
under the control of the same person or persons;
> one is a body corporate and the other has the power, directly or
indirectly, to exercise, or control the exercise of, the right to vote
attached to 25% or more of the voting securities of the body corporate;
> one is a body corporate and the other is a director or principal officer
of the body corporate.
Authorised futures exchange
A body corporate authorised under the Securities Markets Act to operate a
futures market in New Zealand. Currently the Sydney Futures
Exchange is
the
q60
only active authorised futures exchange in New Zealand. Futures contracts
based on New Zealand securities are traded on the Sydney Futures
Exchange.
Balance of probabilities
e standard of proof that must be met to prove a civil
case.
Bank term deposit
A fixed term deposit product offered by a registered bank in New
Zealand.
Banning Order
An order made by the court against a person for certain breaches of the law
which bans the person from acting as a director, promoter,
or manager of a
company, or from being an investment adviser or broker.
Body corporate
A body corporate is a person created under law with a separate legal identity
from the individuals who are involved in the organisation,
like a company or an
incorporated society.
Broker advertisement
Any form of communication:
> that is, or is to be, distributed to a person;
> is authorised by an investment broker or is prepared with the investment broker’s involvement; and
> refers to the investment broker or is reasonably likely to induce
someone to seek an investment broker service.
Call debt securities
A debt security under which the principal must be repaid in full at any time
on demand, and within 1 working day of the demand, with
no penalty, fee, or
reduction in interest being applied because of the repayment demand. An example
of a call debt security is a
bank current
account.
q61
Chattel
Moveable property, like a car, a piece of furniture or livestock, but
doesn’t include a book debt or a negotiable instrument
like a
cheque.
Chinese wall
Controls on the flow of information within a business, in particular between
different divisions of a business that offers
several
services.
Civil remedy provisions
e provision in the law for civil remedies for contravening:
> insider trading and market manipulation prohibitions or exemptions;
> general dealing misconduct prohibitions;
> continuous disclosure obligations or exemptions;
> substantial security holder disclosure obligations or exemptions; and
> investment advisers’ or brokers’ obligations or
exemptions.
Compensatory order
An order made by the court to compensate a person who has suffered loss
or damage when a civil remedy provision (other than
an investment
advisers’ or brokers’ disclosure obligation or exemption) has been
contravened.
Continuous disclosure
e notification of material the continuous disclosure provisions of the listing rules of a registered exchange. A public issuer is required by law to
make continuous disclosure when party to a listing agreement with a
registered exchange.
Contributory scheme
An investment scheme where a number of investors have similar interests in
the scheme. ere must be at least 6 investors. If
the scheme manager (or
someone associated with the manager) manages more than one similar scheme,
these will be counted together
to determine whether or not there is a
contributory scheme.
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Corrective order
An order made by the court or the Securities Commission that directs a
person who has breached the law to publish a corrective statement.
e
order can set out what statement must be published, and how and when the
corrective statement must be published. e
person can be required to
publish a corrective statement at their own cost.
Declaration of contravention
A declaration issued by the court when it finds that a civil remedy provision
has been contravened. It can be used by a person applying
for a compensatory
order or other civil remedy order. A declaration of contravention is conclusive
evidence of the matters that must
be stated in it, and a person will not be
required to prove the contravention.
Disclosure order
An order made by the court or by the Securities Commission that requires a
person to disclose information to comply with a disclosure
obligation, or make a
corrective statement at their own cost.
Disclosure statement
A disclosure statement is the document that an investment adviser or investment broker must use to make disclosure about themselves and the investments they give advice on. e document can be in electronic form.
e requirements for a disclosure statement are described on page
14.
Futures contract
A contract to buy or sell an underlying asset or instrument, at a certain
date in the future, at a pre-set price.
Independent adviser
A person approved by the Takeovers Panel to advise shareholders on the merits
of a takeover offer under the Takeovers
Code.
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Information insider
A person who has material information regarding a public issuer that is not
generally available to the market, and knows or ought
reasonably to know that
the information is material information, and knows or ought reasonably to know
that the information is not
generally available to the market.
Injunction
An order made by a court that stops a person from certain conduct that
contravenes or will contravene the law.
Insider trading
Trading in securities with information that is not generally available to the
market and which, if it was generally known, would be
likely to materially
affect the share price.
Investment advice
A recommendation, an opinion or guidance about investment or investing in
securities given to a member of the public.
Investment adviser
A person who gives investment advice about securities to members of the
public as part of their job or business.
Investment advisers’ disclosure obligation
Any of the obligations placed on investment advisers to make disclosure under
the Securities Markets Act.
Investment advisers’ obligation
Any of the following:
> investment advisers’ disclosure obligation under the Securities Markets Act;
> the obligation that an advice advertisement or a product advertisement is not deceptive, misleading or confusing; and
> the obligation not to recommend an illegal
offer.
q64
Investment broker
A person who receives investment money or investment property as part of
their job or business.
Investment brokers’ disclosure obligation
Any of the obligations placed on investment brokers to make disclosure under
the Securities Markets Act.
Investment brokers’ obligation
Any of the following:
> an investment brokers’ disclosure obligation under the Securities
Markets Act;
> the obligation that advertising must not mislead, deceive, or confuse; and
> the obligation to refuse to accept investment money for an illegal
offer of securities.
Investment money
Any money received from, or on account of, a member of the public in relation
to buying or selling securities.
Investment property
Security certificates or other valuable property received from, or on account
of, a member of the public in relation to buying or
selling securities.
is applies only to investments in securities. An example of investment
property is a share certificate
showing an investment in a company.
Issuer
An entity or fund or individual, which issues securities to the public for
subscription. The most common type of issuer relevant to
the new law is a listed
company whose ordinary shares are traded on a registered exchange. Issuers
include listed companies, finance
companies who offer securities to the public,
and banks. Managers of unit trusts and other managed funds, trustees of
superannuation
schemes, and life insurance companies are also
issuers.
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Listed futures contract
A standardised futures contract that is listed on an authorised futures
exchange.
Listed securities
Securities approved for trading on a registered exchange’s market.
Securities will remain listed even if trading is suspended.
Material information
Material information in relation to:
> an issuer (but not in relation to a futures contract), is information
about the issuer’s listed securities that a reasonable person would expect, if it were generally available to the public, to have a material effect on the price of the securities;
> a futures contract listed on an authorised futures exchange, is
information that a reasonable person would expect, if it were
generally
available to the market, to have a material effect on the value of that
futures contract.
Member of the public
Most investors are members of the public unless they are:
> a relative or a close business associate of the issuer of a security they are
investing in; or
> a relative or a close business associate of a director of a company when he or she is investing money with that company; or
> an habitual investor as part of their job; or
> any other person who in all the circumstances can properly be regarded
as having been selected otherwise than as a member of
the public.
Principal officer
A director of a body corporate or other body or a person whose instructions
the directors commonly follow.
q66
Product advertisement
Any form of communication authorised or prepared by an investment adviser that:
> contains or refers to an offer of securities to the public; or
> is likely to induce someone to buy such securities.
Prohibition order
An order made by the court or the Securities Commission to prohibit or
restrict the making of any statement or distributing any document
to prevent
contravention or further contravention of an investment adviser or broker
obligation.
Public issuer
A person who is party to a listing agreement with a registered stock exchange
who is the issuer of securities that are listed on that exchange. An entity will
continue to be a public issuer relating to events that occurred while it was
party to a listing agreement even if it has since ceased to be a party to a
listing agreement.
Registered stock exchange
A body corporate registered under the Securities Markets Act to operate a
securities market in New Zealand. New Zealand Exchange Limited
is the only
registered exchange under the Securities Markets Act and operates a number of
securities markets in New Zealand.
Relative
A person is considered to be a relative of another person if they are:
> married to each other;
> in a civil union with each other;
> brother and sister;
> parent and child;
> aunt or uncle, or niece or nephew of the person.
Remuneration
Remuneration means a commission, fee, or other benefit or advantage, whether
pecuniary or not and whether direct or indirect; but
does not include salary or
wages of a fixed amount.
q67
Research
Research is the planned investigation undertaken to gain new knowledge and
understanding.
Security
A security is where an investor gives another person (an issuer) money in
return for an interest or share in the other person’s capital, assets, earnings,
royalties or other property, or where an investor gives another person money
and the other person has to repay that money in the future.
For the purposes of the insider trading law, the definition is limited to securities that have been allotted and which are listed on a registered exchange’s market or on an authorised futures exchange, but does not include previously allotted securities where they are offered in a prospectus and investment statement under the Securities Act. e definition also includes other interests in a security as defined above, such as:
> any form of beneficial interest in the security;
> the power to exercise, or control the exercise of any right to vote attached to the security;
> the power to acquire or dispose of, or control the acquisition or disposition of the security;
> any power to do any of the above things under a trust, agreement,
arrangement or understanding relating to the security.
Substantial security holder
A person who has a relevant interest in 5% or more of a class of the listed
voting securities of a listed company.
Takeovers Code
e Takeovers Code is the schedule to the Takeovers Code Approval Order
2000. It came into force in 2001. e Code sets the rules for takeovers
of companies which are defined as code companies. ese
include all
listed companies (and companies which have delisted in the past 12 months) and
all companies with 50 or more shareholders.
q68
Target company
e company whose voting securities are the subject of a takeover
offer or that has received a takeover notice.
Temporary banning order
An order made by the Securities Commission which can prohibit or restrict a
person from doing things set out in the order for a maximum
of 14 days. A
temporary banning order can ban a person from giving investment advice or
receiving investment money or investment
property from the public. A temporary
banning order can stop a person from acting as a director or a promoter of, or
taking part
in the management of, any incorporated or unincorporated body, or
acting as an employee or agent of an investment adviser or broker.
Term life insurance policy
A life insurance policy that is for a set term, which must be less than the
life expectancy of the insured person, and where money
is only paid out for the
insured person (or their beneficiaries) if that person becomes ill or disabled
or dies during the term of
the policy.
Trade securities
To acquire or dispose, buy or sell securities. Trading does not include
acquiring or disposing via an inheritance or gift.
Unincorporated body
A group of individuals who have joined together for a common purpose, but who
have not taken the steps needed to set up a body corporate
with a separate legal
identity. e most common example of an unincorporated body is a
partnership.
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q70
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