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23 July 1997

News release

Changes to the Law Relating to the Offering of Securities and the Conduct of Investment Advisory Business in New Zealand

From 1 October 1997 the law concerning securities offerings and investment advisers will change. An overview appears below.

Background

In 1993 the Government agreed to the formation of a Working Group on Improved Product and Financial Adviser Disclosure. The objective was to improve disclosure for "prudent but non-expert investors".

The final report of the Working Group was released on 21 December 1995. New legislation giving effect to its recommendations was enacted on 2 September 1996. The legislation will come into force on 1 October 1997¹.

The Changes to the law

Product disclosure

The new legislation contains important changes to the law concerning securities offerings and investment advisers. In general terms, these are as follows:

• The offering of interests in superannuation schemes, life insurance policies and unit trusts and will be brought under the Securities Act 1978.
• A new disclosure document called an "investment statement"² will be required. The purpose is to provide the prudent but non-expert investor with key information;
• The investment statement will be the primary disclosure document. Investors must receive an investment statement before subscribing for securities. A prospectus will still have to be registered. The prospectus need only be provided upon request;
• Where financial statements have been registered under the Financial Reporting Act 1993, those financial statements need not be contained in the prospectus. However, they must always accompany the prospectus;
• The life of a prospectus can be extended (beyond the present 9 months) to up to 18 months after the balance date of the financial statements contained, or referred to, in the prospectus. The directors of the issuer must certify that the prospectus is not misleading. They must also certify that the financial position of the issuer has not materially and adversely changed.

To give effect to these changes, the Securities Regulations 1983 will require amendment. The Securities Commission has recommended amendments to the Government. It is expected that these will be promulgated in early August 1997.

Investment Advisers

All persons who, in the course of their business or employment, give investment advice to the public or receive investment money as intermediaries will be required to disclose certain information.³ This may be categorised as information which must initially be disclosed and information which must be provided upon request.

All investment advisers must initially disclose whether in the five years preceding the giving of the advice or receiving of investment money they have:

• been convicted of a crime involving dishonesty
• been adjudged bankrupt
• been prohibited by an Act or a court from taking part in the management of a company or business.

The information which must be disclosed by an investment adviser upon request includes:

• the name of any relevant organisation with which the adviser has a relationship and the nature of that relationship
• the adviser's qualifications and experience
• whether the adviser or any person associated with the adviser has any pecuniary or other interest in giving the investment advice and, if so, the nature of that interest
• whether the adviser or a person associated with the adviser has, will or may receive a commission from a third party that is reasonably likely to influence the adviser in giving the advice and, if so, the name of the third party and amount of the remuneration.

Review of exemption notices

As a result of the new legislation many of the exemption notices previously issued by the Commission will no longer be required. Others will need to be re-written in order to take account of the changes to the law. The Commission is reviewing all exemption notices issued by the Commission to 30 June 1997. There are some 642 notices. The Commission has written to all exemption holders enquiring:

• whether they will still require an exemption after 1 October 1997
• what amendments will need to be made to their exemption notices.

The Commission has taken primary responsibility for reviewing certain exemption notices of general application.

The new legislation provides for a transitional period from 1 October 1997 to 31 March 1998. This allows securities to be offered in accordance with either the new law or the old law during this period. In keeping with this transitional provision, the Commission proposes to allow issuers to have the benefit of exemptions currently in force until the close of 31 March 1998. These exemptions may only be used in respect of offers made under the law in force immediately before 1 October 1997.

1. This legislation comprises:
   • the Securities Amendment Act 1996;
   • the Investment Advisers (Disclosure) Act 1996;
   • the Financial Reporting Amendment Act (No. 2) 1996;
   • the Superannuation Schemes Amendment Act 1996;
   • the United Trusts Amendment Act 1996
2. The requirement to issue an investment statement will not apply in certain limited situations - in particular, in the case of an offer of a "call debt security", a "call building society share" or a "bonus bond".
3. The Investment Advisers (Disclosure) Act 1996