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Investment adviser statements - consultative document [2007] NZSecCom 11 (21 December 2007)

Last Updated: 12 November 2014

Consultation Document – investment adviser statements

21 December 2007

The “Important Information” section of investment statements prepared under the Securities Act 1978 needs to be changed to take account of new disclosure requirements for investment advisers that come into force early on 29 February 2008.

The changes to investment adviser disclosure arise from the Securities Markets Amendment Act 2008. That Act, when it comes into force, will repeal the Investment Adviser (Disclosure) Act 1996, and will replace this with new disclosure rules for investment advisers, to be located in Parts 4 and 5 of the Securities Markets Act 1988.

The new law will require investment advisers to give certain information to all prospective clients before any investment advice is given. This differs from the current law, which only requires most information to be given on request. The new law will also require investment advisers to provide more information about relevant fees, commissions, and other incentives.

The new investment adviser law will have an effect on investment statements because the “Important Information” section of an investment statement includes information for investors about the disclosure they can expect from an investment adviser.

The existing statement about investment advisers that is required in an investment statement is as follows:

Choosing an investment adviser

You have the right to request from any investment adviser a written disclosure statement stating his or her experience and qualifications to give advice. That document will tell you –

Whether the adviser gives advice only about particular types of investments; and
Whether the advice is limited to the investments offered by 1 or more particular financial organisations; and
Whether the adviser will receive a commission or other benefit from advising you.

You are strongly encouraged to request that statement. An investment adviser commits an offence if he or she does not provide you with a written disclosure statement within 5 working days of your request. You must make the request at the time the advice is given or within 1 month of receiving the advice.

In addition –

If an investment adviser has any conviction for dishonesty or has been adjudged bankrupt, he or she must tell you this in writing; and If an investment adviser receives any money or assets on your behalf, he or she must tell you in writing the methods employed for this purpose.

Tell the adviser what the purpose of your investment is. This is important because different investments are suitable for different purposes.

This information, which is required by clause 1 of Schedule 3D of the Securities Regulations 1983, tells investors about their right to request a disclosure statement from their investment adviser. Under the new law investors should receive this disclosure as of right, without needing to request it. Once the new investment adviser law comes into force the existing statement will no longer be strictly accurate, and should be updated to reflect this change. Accordingly, the Commission proposes to recommend an amendment to clause 1(1) of Schedule 3D to the Regulations to address this.

Under section 70 of the Securities Act 1978, regulations can be made on the recommendation of the Securities Commission. Before making any recommendation the Commission must consult with people who are likely to be affected by the new regulations (except in urgent cases).

A draft of the statement that we propose to recommend as a replacement for the current information about investment advisers in investment statements follows in the Appendix. The Commission seeks comments on the proposed statement. In particular, we would be interested to receive comments on whether the statement could be simplified to a brief statement to the effect that investors are entitled to receive a document from their investment adviser, and that they should consider the information contained in this document carefully before choosing their adviser.

Timing

The new investment adviser disclosure laws come into force on 29 February 2008. As the changes proposed to investment statements are minor the Commission considers that the new wording could be used in any investment statement prepared after that date, without causing significant cost or difficulty for issuers. Accordingly we would propose that the amendment regulations come into force at the same time as the new investment adviser law, or very shortly afterwards. We invite comment on this also, and on any costs that would be associated with this change.

Existing investment statements

Although the changes to investment adviser disclosure laws are significant, the change needed to reflect these in investment statements is relatively minor, and in our view is not, in and of itself, material to the offer of securities by an issuer. For this reason the Commission is of the opinion that existing stocks of investment statements can still be used after the new law comes into force. We propose that the amendment to the regulations apply only to investment statements prepared after the amendment comes into force.

Issuers who distribute existing investment statements after that date can take steps to ensure that the information about investment advisers in their investment statements is not inaccurate by distributing a copy of the new investment adviser statement with each investment statement (or they could amend an existing investment statement by placing the new statement over the old one).

The Commission encourages issuers to take steps such as these to inform investors about their rights under the new investment adviser law, but does not have any objection to issuers continuing to use existing stocks of investment statements.

Comments sought

Please provide any submissions you wish to make by Tuesday, 22 January 2008.

Send your submissions to Liam Mason, General Counsel, via e-mail - liam.mason@seccom.govt.nz or by post to Securities Commission, PO Box 1179, Wellington.

Appendix - Proposed new wording for investment statement

Choosing an investment adviser

An investment adviser must give you a written disclosure statement that contains information relevant to your choice of adviser and his or hear ability to give advice. That document will tell you -

• the adviser's relevant professional standing, experience and qualifications; and
• whether the adviser gives advice only about particular types of investments; and
• whether the advice is limited to investments offered by one or more particular financial institutions; and
• information that may be relevant to the adviser's character, including certain criminal convictions, bankruptcy, and any adverse findings against the adviser by a court or professional body.

The adviser must tell you about fees and remuneration when this becomes material to the advice or when an adviser gives you advice about a specific investment. The information must include -

• what fees you will be charged for receiving the advice; and
• whether the adviser will receive a commission or other benefit from advising you.

In addition, if an investment adviser receives any money or assets on your behalf, he or she must tell you in writing the methods employed for this purpose.

Tell the adviser what the purpose of your investment is. This is important because different investments are suitable for different purposes.

You are strongly encouraged to consider the disclosure statement when choosing an adviser. An investment adviser commits an offence if he or she does not provide you with the disclosure information as required under the legislation.