Those relying on wholesale investor (including eligible investor) exclusions for offers of financial products and financial services should take note of key lessons coming out of a recent review of the sector by the Financial Markets Authority (FMA).

The FMA found a number of undesirable practices in the market for wholesale offers. The FMA has published its expectations for wholesale investor offerors going forward, and now expects a higher level of compliance in this space.

We recommend that all wholesale financial market and services participants pro-actively consider their systems and controls for keeping within wholesale offer advertising and certification requirements. Although the FMA’s review focused on wholesale offers made in connection with property development, its findings and expectations are applicable to all wholesale offers. The FMA is an active regulator that can be expected to continue to target wholesale market compliance. It is usually more efficient (and comfortable) to invest in a pro-active review than to have to address short-comings identified in an FMA investigation.

Our key takeaways for wholesale investment offerors are:

Promotional / advertising materials

• Make clear that offer is wholesale only: All advertising of a wholesale offer must clearly and prominently state that the offer is open to wholesale investors only.

• Don’t single out “eligible investors”: Avoid using the term “eligible investor” or similar alongside the term “wholesale investor” in promotional materials. This could give the impression that an offer is available to someone other than a wholesale investor when it is not, as an “eligible investor” is a type of wholesale investor.

• Overall impression critical: Ensure the overall impression of an advertisement is not misleading or deceptive, especially when using mainstream advertising channels that would inevitably reach people who may be searching for investments of a significantly different nature to the wholesale offer. Examples of undesirable practices include making misleading comparisons between financial products that have different value and risk profiles (eg comparing an investment in a managed fund to an investment in a bank term deposit) or emphasising high fixed returns but downplaying any risks involved.

Relying on eligible investor certificates

• Check grounds make sense in eligible investor certificates: If relying on an eligible investor certificate, the offeror does not have to verify the information in the certificate, but must ensure that the investor provides relevant grounds and discloses previous experience in acquiring or disposing of financial products that is relevant to assessing the merits of the financial products being offered.

• Examples: Examples of non-compliant practices identified by the FMA include:

  • Generic/vague: certificates that provide generic and vague grounds;

  • No actual financial product experience: grounds for certification that do not refer to any past acquisition or disposal of financial products (eg relying on experience in building and selling real estate as grounds for having previous experience in acquiring or disposing of financial products - although people see real estate as an investment, it is not a financial product); or

  • Irrelevant experience: grounds referencing dissimilar financial products to those being offered (eg relying on experience in term deposits and KiwiSaver as grounds for having the experience necessary to assess a wholesale offer in a managed fund).

• Don’t put words in their mouths: Any form of eligible investor certificate should allow investors to articulate the grounds for certification themselves (eg through use of free-form text boxes). An example of an undesirable practice is using eligible investor certificates that provide pre-populated lists which include irrelevant grounds for certification.

• Good processes for checking grounds: Offerors should record their processes for satisfying themselves that they are able to rely on an eligible investor certificate (and should follow them).

• Good processes for checking the certifier: Offerors should have processes in place to verify that the financial adviser, qualified statutory accountant or lawyer who has confirmed an eligible investor certificate is not an associated person of the offeror, or has not within two years of the offer provided professional services to the offeror or a related party.

Please get in touch if you would like more information or guidance, or would like us to help you review or further develop your systems and controls for keeping within wholesale offer advertising and certificate requirements.

Special thanks to Josiah Koh for his assistance in writing this article.