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New Zealand Securities Commission |
Last Updated: 16 November 2014
Guidance Note
KiwiSaver Distribution and Disclosure
24 March 2010
1 Introduction
1.1 The Securities Commission is responsible for the enforcement of
securities law.
1.2 All issuers of KiwiSaver schemes are required to comply with the
securities law when offering membership in their schemes to
the
public.
1.3 The Commission acknowledges the importance of the
KiwiSaver scheme in encouraging New Zealanders to make
provision for their
retirement. The Commission notes 1.3 million people and $4.88 billion of their
money are invested in KiwiSaver
schemes. Accordingly it is important that
investors can have confidence in the integrity of the processes by which they
choose to
join a KiwiSaver scheme and the accuracy of the materials they
consider in reaching that decision.
1.4 The Securities Act provides a number of remedies to investors when
securities are offered or allotted in contravention of the
securities law. The
primary remedy available is a right to obtain a full refund of money invested.
However by the nature of the
KiwiSaver regime this remedy is not fully available
in relation to KiwiSaver contributions. While a member may require a KiwiSaver
issuer that has allotted securities in contravention of the Securities Act to
refund contributions, those contributions must be transferred
to another
KiwiSaver provider, and are not available to the investor until they are
entitled to make a withdrawal under the KiwiSaver
regime.
1.5 Accordingly, as a decision to join and contribute to KiwiSaver is
irrevocable, the Commission believes that particular care
needs to be taken by
KiwiSaver issuers to ensure that the required disclosures and other promotional
materials are accurate, clear,
unambiguous and that the methods of distribution
utilized are within the requirements of the law and are fair and
transparent.
1.6 This technical guidance is directed to KiwiSaver issuers and managers.
It sets out the Commission’s expectations of them
in the promotion and
distribution of their schemes, and in particular:
b. The calculation and presentation of investment performance figures;
and
c. The disclosure and application of investment mandates and investment
practices.
1.7 The Commission is considering issuing further, less technical
information directed to members of the public considering investing
in a
KiwiSaver scheme. This will address matters the Commission believes a
person should make themselves aware of and
address when considering
joining a KiwiSaver scheme.
1.8 The Commission also notes that while this guidance note specifically
addresses issues arising in relation to KiwiSaver schemes,
the compliance
matters raised are equally applicable to all managed fund issuers and
promoters.
2 Distribution
2.1 The Commission has become aware of a number of circumstances where
KiwiSaver membership has been solicited in an unusual
or confusing
manner. These have included door to door sales techniques, sales approaches
from suppliers of other household
services and inclusion of KiwiSaver membership
within unrelated household arrangements. In some cases investors have been
unaware
that they were committing to KiwiSaver membership, with some believing
they were purchasing household products. In other cases
immediate
inducements have been offered for long term membership.
2.2 Section 35 of the Securities Act prohibits the offering of securities
on a door to door sales basis. The Commission also
believes that other
forms of high pressure or coercive or misleading selling are inappropriate
for KiwiSaver schemes.
2.3 Where KiwiSaver issuers utilise direct distributors to distribute
their products, the Commission will hold the issuer responsible
for any false,
misleading or confusing statements or conduct arising from those activities. The
Commission would expect that before
an application for membership of a scheme
was accepted, the issuer would have taken reasonable steps to satisfy themselves
that the
applicants were aware of the nature and extent of the obligations they
were incurring and had made the investment decision fairly
freely and on a
properly informed basis.
2.4 KiwiSaver issuers should also be aware of the requirements of the incoming Financial
Advisers Act and its effect on the requirements for distribution of their
products.
2.5 Finally the Commission notes that identical concerns are applicable to
members who are being encouraged to rejoin a scheme
from which they may have
withdrawn. Where a KiwiSaver issuer or manager seeks to encourage a former
member to rejoin a scheme (or
“reinstate” scheme membership) the
full disclosure and application process must be completed, on the same basis as
if
the member were a new member joining the scheme.
3 Disclosure of Investment Performance
3.1 Clause 4(7) of Schedule 3C of the Securities Regulations
19831 requires each KiwiSaver scheme to disclose in its registered
prospectus the investment performance of the scheme (or each fund within
the
scheme) over the preceding five years, together with a statement of the basis of
the calculation of that figure.
3.2 The Commission interprets this as a requirement to disclose the
performance of the investments made by the fund in the ordinary
course of its
investment mandate. This is distinct from the overall financial performance of
the fund or the fund’s return
to investors. The financial performance of
a fund may be affected by a number of factors other than the level of investment
returns.
These include the level of fees charged to the fund, extraordinary
non-investment income and usual fees and expenses rebated to
the fund.
Transactions with related parties on other than arms length terms, such as at
below market prices and ex gratia payments
can also materially influence a
fund’s financial performance. These factors must be excluded
from the statement
of investment performance and the existence of the
transactions clearly disclosed. While the Commission does not currently have
jurisdiction in relation to the management conduct of KiwiSaver issuers and
managers, it regards transactions with related parties
on other than arm’s
length terms as questionable behaviour. The Commission will consider making
recommendations regarding
further regulation in this area during any review of
the law relating to KiwiSaver schemes or managed funds generally.
3.3 A common means of calculating “investment performance” is
use of the change over a period in the unit price applicable
to interests in
unitised schemes. However where unit prices are calculated by reference to
fund net asset values, extraordinary
non- investment income and rebated
management or administration fees can affect this calculation. Where this
results in material
variation from the underlying investment performance these
factors must be excluded, and the nature and effect of the extraordinary
items
on fund performance or investor return disclosed. Furthermore, where unit
price variations are used as an indicator of investment
performance, the
explanation of the method of calculation of the performance figures should
include an explanation of the means of
calculating those unit
prices.
3.4 In addition, any non-investment income or returns should not be
reported as, and should be clearly separated from, investment
returns in the
financial statements contained or referred to in a prospectus. Where
investment returns are materially affected
by related party or other
extraordinary or non-recurring transactions, the Commission expects these
transactions and their effect
to be disclosed. This disclosure should be made
both in the financial statements and wherever the figures contained in the
financial
statements are otherwise used.
3.5 Generally, where any information is rendered misleading by
omission of material details, the law requires those additional
details to be
disclosed. This is equally applicable to statements of investment and fund
performance. For example, this will occur
where:
1 See also Clause 4(7) of Schedule 6 of the Securities
Regulations 2009.
3.6 Regulation 9 of the Securities Regulations 19832 requires
material used in advertising to be consistent with the disclosures contained in
the prospectus. Accordingly issuers must
take great care to ensure that basis
of calculation and presentation of investment performance used in advertising
is consistent
with the investment performance disclosed in the
prospectus.
3.7 Further, while issuers are free to use performance indicators other
than investment performance (such as fund performance or
a fund’s return
to investors) in advertising, if those performance indicators vary
materially from the investment performance
disclosed in the prospectus, the
Commission expects that variation to be clearly disclosed and reference made to
the investment performance
information contained in the prospectus.
3.8 Where other performance indicators (such as fund performance or a
fund’s return to investors) are used, in addition to
consistency with the
regulatory compliance, those statements must also not be misleading or
confusing in their own right.
The Commission believes that the treatment of
fees, extraordinary items and fee rebates also have the potential to produce
misleading
or confusing results in this area. The Commission will have regard to
compliance with accepted industry standards3 when assessing the
accuracy of these calculations.
3.9 Where comparisons between the investment or fund performance of
various KiwiSaver schemes are made in advertisements, these
comparisons must not
be misleading. In particular, care must be taken to ensure the returns
compared are calculated on an equivalent
basis, are calculated for comparable
periods and that the comparisons made are otherwise fair and reasonable.
Comparisons of funds
with materially different investment policies and practices
may also be misleading. The source and method of calculation of comparisons
should be disclosed.
3.10 Further, where the figures used to make those comparisons are calculated
by the KiwiSaver issuer or manager rather than an independent
body, this must be
disclosed along with the method of calculation. The same considerations apply
where figures produced by an independent
body are recalculated, averaged or
aggregated by the KiwiSaver issuer or manager.
3.11 The Commission notes that the law does not currently prescribe
or favour any particular method of calculating investment
performance.
However, the Commission believes that consistency and comparability in this area
is highly desirable. The Commission
would encourage industry participants and
their industry bodies to work together to develop a standard method for
measurement of
investment performance that is consistent with the requirements
of the securities legislation. If such a consensus can
2 See also regulation 24 of the Securities Regulations 2009.
3 For example the CFA Institute “Global Investment
Performance Standards”
be achieved, the Commission will consider issuing further guidance as to the
acceptability of such a methodology as sufficient compliance
for its enforcement
purposes. In the absence of a consensus the Commission may need to consider the
need to recommend legislative
intervention in this area.
4 Disclosure of Investment Mandates and Investment Practices
4.1 Clause 4(6) of Schedule 3C of the Securities Regulations
19834 requires each KiwiSaver scheme to disclose the investment
objectives and policy of the scheme (or each fund within the scheme) together
with a statement of the means by which those objectives and policies may be
changed.
4.2 Where scheme mandates or statements of investment policies and
objectives are widely drawn so as to effectively allow unlimited
investment
discretion, the disclosures made should include the issuer’s actual
investment intentions during the currency of
the prospectus. The Commission
does not believe that the requirements of the regulations are met by statements
of investment policies
so broad and all encompassing as to give no meaningful
indication of the actual investment activities that will be undertaken. The
disclosures made should be sufficient to enable potential members to identify
the nature of the fund concerned and the risks and
likely returns of
investment.
4.3 The names and descriptions attached to funds should also fairly
reflect the true nature of the investment objectives and policies,
and must not
mislead as to the actual nature of the investment.
4.4 Again while issuers are free to make other statements as to investment methodologies and practices in their investment statements and other advertisements, regulation 9 of the Securities Regulations 19835 requires these documents to be consistent with the disclosures made in the prospectus. While this does not necessarily require the disclosures to be made on identical terms, issuers should exercise extreme care when making more expansive statements, such as statements of current, intended or likely
practice. Where the description of the nature or scope of that practice or intention
varies materially from the disclosure made in the prospectus, the Commission
expects that variation to be clearly disclosed and reference
to be made to the
information contained in the prospectus.
4.5 Statements of investment mandates and practices must in all cases be true and accurate.
Where actual practice materially varies from the disclosed policies and
objectives this will render the prospectus or advertising
misleading. The
Commission expects that where any such material variations arise they be
disclosed by immediate amendment of the
KiwiSaver scheme prospectus and
withdrawal of misleading advertising. This can apply where a fund invests
outside its stated policies
and practices and where a fund limits its investment
to a narrower selection of investments than disclosed in its stated policies
and
practices. In both cases this can be misleading as to the true nature of the
investment offered.
5 Compliance Responsibility
4 See also Clause 4(6) of Schedule 6 of the Securities Regulations 2009
5 See also regulation 24 of the Securities Regulations
2009
5.1 The trustee of each scheme is the issuer of those securities, and thus
the trustee (and its directors) bear primary responsibility
for ensuring the
accuracy and compliance of the scheme documentation. The Commission does not
accept any lower standard of responsibility
from professional trustees or
Trustee Companies who may be acting for unrelated KiwiSaver fund
managers.
5.2 Scheme promoters such as scheme managers and their directors will also
bear responsibility, but not to the exclusion of the
trustees’
obligations.
5.3 While directors may engage or utilise company officers, staff and
external advisors to prepare disclosure documents, they bear
the ultimate
responsibility for the documents they sign or approve, and must ensure that any
reliance on third parties is reasonable
and justifiable.
6 Guidance Only
6.1 This notice is intended for general guidance. The Commission cannot
give rulings on the interpretation of the law or provide
legal advice. This note
signals the approach the Commission intends to take to the law, but does not
bind the Commission to any particular
interpretation or action. The Commission
may publish further guidance notes over time, and the Commission is not bound by
this
or any other guidance note.
ENDS
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