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Legislative Framework For AFA's > Module Two > Flashcards

Module Two Flashcards

1
Q

Under the FAA 2008, when must a disclosure statement be provided?

A

When providing a personalised service to a Retail client.

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2
Q

What is the primary piece of legislation applying to AFA disclosure obligations?

A

Financial Advisors (Disclosure) Regulations 2010

Secondary: FAA 2008

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3
Q

When should you provide your disclosure statement?

A

Before providing the service, or as soon as practicable after providing the service.

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4
Q

Any advertisement for AFA services must declare…

A

That a disclosure statement is available on request and free of charge.

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5
Q

When should you provide your disclosure statement for personalised retail DIMS?

A

Before the investment authority is granted and before exercise of that authority. If not before then as soon as practicable after.

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6
Q

Where can you find the prescribed form for the primary disclosure statement?

Where can you find the prescribed form for the secondary disclosure statement?

A

Schedule 1 of the FADR.

Schedule 2 of the FADR.

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7
Q

Summarise the QFE Disclosure document/s.

A

Only one simplified document is required, prepared by the QFE.

It must include complaints procedure, DRS details, licensed services provided and other matters req.d to be disclosed.

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8
Q

Summarise RFE Disclosure document/s.

A

Found in Schedule 3 of the FADR, this is a simplified document including summary of service provided and complaints resolution process.

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9
Q

5 points - Accepted AFA disclosure documents must:

A
  • follow the prescribed format in FADR
  • be customised
  • printed in easily readable font type and size
  • must not include extra information not required under regulation.
  • must not be misleading
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10
Q

Exemptions from providing a written disclosure statement apply where:

A

An RFE, AFA, or QFE adviser is giving advice on a category two product by telephone or video conference.

They must state their designation, DRS, any other disclosure required, and that full disclosure can be provided on request.

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11
Q

3 points, What additional conduct obligations apply to DIMS providers?

A
  • there must be a written client agreement for each retail client, at the same time or before an investment authority is granted.
  • Each retail client must sign a written investment authority which must cover client objectives and scope of authority eg type of investment, limits.
  • An independent custodian must hold client money or property unless the client holds it.
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12
Q

Conditions/conduct for brokers holding client money, 6 points:

A
  • held in trust.
  • paid to trust account at NZ bank or approved overseas bank.
  • client money held separately from other funds.
  • account to the client for money held.
  • keep clear records.
  • only use funds as directed by client.

(Applies to retail and wholesale investors under retail DIMS).

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13
Q

Conditions/conduct for custodians holding client money, 4 points:

A

As for brokers, plus:

  • 6 monthly reports including transactions
  • reconcile records of client funds/property
  • promptly rectify discrepancies in records
  • obtain assurance from qualified auditor within 4 mths of close of custodians accounting period.
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14
Q

Personalised DIMS: customised investment strategy.

Regulated by?

A

Authorised by FMA, and subject to FAA

OR

Licensed and subject to FMCA

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15
Q

Class DIMS: model portfolios and model asset allocation.

Regulated by?

A

Licensed and subject to the FMCA.

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16
Q

The holder of an FMCA DIMS license or their employee can provide which services?

A

Class and Personalised DIMS.

Employees don’t have to be AFA’s but if they are AFA’s then it is the licence holder (not AFA) providing the service.

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17
Q

When is there an exemption from holding a DIMS license?

A
  • the service is not provided to retail clients
  • you’re authorised by FMA to provide personalised DIMS
  • the service is in a contingency basis.
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18
Q

In the ‘Standard Conditions for Discretionary Investment Management Services (DIMS) Licenses’ what are the 8 Standard conditions?

A

Skills/Expertise - notify key staff changes
Incidental Fin. Advice - maintain procedures/protections for retail clients
Outsourcing - Legally binding agreements, providers meet requirements of licensing agreement
Records - kept and readily available.
Reg.ty Returns - updated info on size, nature, and complexity of business
Compliance - systems, policies, procedures
Governance - the same or better than at time of licence issue
Fin. Resources - calculate Net Tangible Assets at least monthly, report any Neg. result, qualified audit each year at balance date.

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19
Q

In the ‘Standard Conditions for Discretionary Investment Management Services (DIMS) Licenses’ what are the two specific conditions?

A

Limits - to license may be set on request or based on demonstrated capacity.

Custody - the FMA will specify who is approved/may be used.

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20
Q

In the ‘Standard Conditions for Discretionary Investment Management Services (DIMS) Licenses’ what 3 conditions are imposed by the Financial Markets Conduct Regulations 2014?

A

191 General Reporting Condition
193 Keep Documents and provide on request
194 Disclosure/warning of Wholesale service

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21
Q

In the ‘Standard Conditions for Discretionary Investment Management Services (DIMS) Licenses’, condition 191 General Reporting Condition - Summarise:

A

Notify FMA of insolvency/bankruptcy of key personnel, appointment/resignation of key personnel, change of name or legal structure, major transactions causing loss of control.

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22
Q

In the ‘Standard Conditions for Discretionary Investment Management Services (DIMS) Licenses’, condition 193 Document Availability - Summarise:

A

Keep required documents for seven years.

Make available to investor on request, within ten days.

Reasonable admin fees may apply.

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23
Q

In the ‘Standard Conditions for Discretionary Investment Management Services (DIMS) Licenses’, condition 194 Wholesale Services Disclosure - Summarise:

A

If providing a wholesale service you must give a warning statement that the service is not a retail service and is not covered by your license.

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24
Q

When should a Service Disclosure Statement (SDS) be provided?

A

Before the Investment Authority is granted.

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25
Q

What is the purpose of the Service Disclosure Statement?

A

To help the investor decide whether to use the service or change any instructions relating to the service.

26
Q

How should/can the Service Disclosure Statement be delivered?

A

In writing.

Given directly, or sent/emailed to last known address.

It can be combined with your AFA Disclosure Statement.

27
Q

Points on accuracy of the Service Disclosure Statement, 2.

A
  • no misleading statements

- must not omit and required information under FMC Regulations.

28
Q

Content of the Service Disclosure Statement, 3+ points:

A
  • preparation date
  • Name and contact details
  • information set out in schedule 21 of the FMC Regulations.

Includes; description of service, who, how, risks, conflicts, tax, complaints, sources of info, how to enter client agreement.

29
Q

When is the Investment Proposal provided?

A

At the same time or before Investment Authority is granted.

30
Q

What content should the Investment Proposal contain?

4 points.

A
  • Investment Authority and Strategy
  • historic performance of the investment strategy
  • fees and costs
  • risks
31
Q

Duties and Obligations of a DIMS provider (5):

A
  • written client agreement
  • written Investment Authority
  • money held by independent custodian
  • comply with conduct and disclosure
  • monitor compliance and reporting
32
Q

Key steps for setting up new retail DIMS client, 5 points:

A
  • Disclosure statements
  • Investment Proposal
  • Client Agreement
  • Investment Authority
  • arrange independent custodian if required.
33
Q

The following events must be Reported to the FMA, 4:

A
  • material change in circumstances (s412 FMCA)
  • breach or likely breach of license obligations (s412 FMCA)
  • certificates provided to clients re. Third party benefits (s236 FMCR)
  • Limit Breaks*
  • material breaches of limits under investment authority
    (s167 FMCA and s230-231 FMCA regulations)
34
Q

DIMS Reporting: You are required to provide the client with?

A

Ongoing Reporting of transactions made by you on behalf of the investor (s210 FMC regulations).

A yearly report on the investment strategy, the portfolio, and its performance. (s211 FMC regulations).

35
Q

Enforcement of the Financial Markets Conduct Act Part 6:

In the case of a material contravention of licensing Obligations or material change of circumstances the FMA may (4)?

A
  • censure you
  • require an action plan
  • give direction on actions to undertake
  • suspend or cancel license
36
Q

Enforcement of the Financial Markets Conduct Act Part 6:

For other (non license related) market contraventions (s449) the FMA may apply to the High Court (s484) for a civil liability order including (4):

A
  • declaration of contravention
  • a pecuniary penalty order
  • a compensatory order
  • other civil liability orders (s497)
37
Q

Client agreement

Under s 430 and s 431 of the FMCA the client agreement must:

A
  • be entered into at the same time as, or before the investment authority is granted by the investor
  • be in writing.
38
Q

s 226 of the FMC Regulations requires you to provide details about custodial arrangements, including:

A
  • state how the investment authority may be changed.

- allow the investor to terminate the agreement, without penalty, by giving reasonable notice.

39
Q

Investment authority

Under s 437 of the FMCA, the investment authority must:

A
  • be in writing
  • adequately provide for the client’s investment objectives and scope of the authority; for example:
  • the nature and type of investments, and their limits
  • how the investment strategy is developed, and how its performance is measured.
40
Q

Custodian

You’re jointly and severally liable with the custodian.

Under s 445 of the FMCA, the custodian:
3 points

A
  • must be a body corporate that you believe appropriate to hold and safeguard the money or property
  • may be an associated person, if that is a condition of your licence
  • must comply with broker obligations under the FAA.
41
Q

Conduct obligations

FMCA conduct obligations require DIMS licensees to: 6 points

A
  • provide the service in accordance with a client agreement and an investment authority
  • use care, diligence and skill
  • act honestly and in the best interests of the investors
  • not use information to gain improper advantage or cause negative outcomes
  • not enter a transaction that provides a third party benefit, unless in the best interests of investors
  • comply with broker obligations in the FAA (see earlier section).
42
Q

For the purposes of the AML-CFT 2009, FSP’s and AFA’s are referred to as…

A

Reporting entities.

43
Q

Summarise: when do AFA’s have obligations under AML-CFT?

A

When money is changing hands, I.e. Advising a client to buy certain products, acting as the intermediary for purchases, providing a broking service or DIMS.

44
Q

Under AML-CFT, what are 5 key obligations?

A
  • risk assessment
  • establish and maintain policies and procedures
  • Due diligence with client ID & verification
  • report suspicious transactions
  • keep good records
45
Q

AML- CFT Risk assessment: Summarise

A

A written risk assessment that is audited every 2 years.

Identifies risk, enables preparation of programme to mitigate those risks, and describes how it will be kept updated.

46
Q

Your AML-CFT programme should include policies/procedures/controls for…?

A

Managing risks identified in assessment, vetting and training staff, CDD, suspicious transaction reporting, record keeping, preventing anonymous transactions or products, adherence and review/audit of programme.

47
Q

Under AML-CFT your business must have a designated __________ __________ and prepare and submit an ________ ________ on your risk assessment and programme to the ___ .

A
  • Compliance Officer
  • Annual Report
  • FMA
48
Q

AML-CFT, CDD applies to the customer, any PAOB, and any Beneficial owner. A beneficial owner refers to…

A

Any person who owns 25% or more of the customer, or who has effective control.

49
Q

AML- CFT - The 3 levels of CDD?

A

Standard - s14, most customers

Enhanced - s22, high risk, certain customer types such as Trusts, and complex or unusually large transactions.

Simplified - s18, Rare, includes listed issuers and govt. dept.s

50
Q

AML-CFT, Verification Requirements

Which document prescribes best practice for meeting the verification requirements?

A

Amended Identity Code of Practice 2013 (FMA).

51
Q

AML-CFT Suspicious Activity

Two key suspicious activities:

A
  • People placing large amounts of money into the financial system, especially cash.
    Ask where the money has come from.

-Layering: breaking up Funds and moving them around to hide the original source.

Note: look out for funds spread across an unnecessarily large number of providers, funds moved/liquidated without rational economic reason, or transactions that do not match their profile.

52
Q

AML-CFT Suspicious Activity

Under s40 when must you file a Suspicious Transaction Report (STR) with police?

A
  • a person conducts a transaction you suspect may be or linked to criminal activity
  • a person attempts to conduct a transaction you suspect may be or linked to criminal activity, even if you don’t complete it
53
Q

AML-CFT Suspicious Activity

The STR goes to the NZ Police Financial Intelligence Unit (FIU)

As per s40 the STR must contain (3):

A
  • details required under AML- CFT (requirements and compliance) regulations 2011
  • a Statement of the grounds on which you hold the suspicion
  • be signed by you or a person authorised by you to sign an STR
54
Q

AML-CFT Suspicious Activity
Case Study

If a customer presents with an unusually large sum of money or requests unusual transactions, what steps should be followed?

A
  1. Enhanced CDD, Identification, Verification, and Information on the source of funds.
  2. Decision on sending an STR
  3. Keep a confidential record of the transaction.
55
Q

AML-CFT Enforcement

Who supervises Financial Advisors and Brokers under the act?

A

The FMA - supervises all Reporting entities listed under s130.

56
Q

AML-CFT Enforcement

Who supervises Banks, Life Insurers, and non bank deposit takers?

A

RBNZ

57
Q

AML-CFT Enforcement

Who supervises Casinos, non-deposit taking lenders, money changers, and reporting entities not covered by other supervisors?

A

The Dept. of Internal Affairs

58
Q

AML-CFT Enforcement

Sanctions as covered under Part 3 include:

A
  • formal warning
  • Enforceable undertaking
  • Serious penalties, fines from $300k for individuals up to $5 million for an entity
  • 2 years imprisonment
59
Q

DIMS - General Reporting Condition

A
  • insolvency of business
  • bankruptcies of key personnel
  • appointment or resignation of directors, auditors or key personnel
  • change of name or legal structure
60
Q

DIMS - Document Availability

A
  • kept seven years
  • provided within 10 days of investor request
  • admin fees may apply
61
Q

DIMS - Wholesale Services Disclosure

A

If a wholesale service is provided you must give a warning statement that it is not a retail service and is not covered by your license.

Legislative Framework For AFA's (5 decks)

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