A Board Seat, a Bond Issue and Personal Trading

Ms T has a clear conflict. She owes duties to her employer and its clients, and she also sits on the board of the issuer. Her personal purchase on 13 May, one day after learning the launch date and coupon, puts her own financial interest ahead of the firm's and clients' interests. The fact that Kōwhai is unlisted does not make the bonds outside the market conduct rules; they are financial products, and the information about the launch date, coupon and use of proceeds is material and not yet public. Trading on that information for her own account is a serious insider-trading risk. Recommending the bonds to three retail clients without disclosing her board role, her personal holding and the firm's arranging role is also misleading by omission. The clients would reasonably want to know that the person recommending the bonds sits on the issuer's board and had just bought the same bonds.

The firm's conflicts policy was not followed: no disclosure of the directorship to compliance, no pre-clearance, and no restricted-list entry. The absence of Kōwhai from the restricted list is not a defence; the policy requires pre-clearance precisely for securities of companies where the dealer is a director. The arranging-dealer role adds another layer: the firm has a commercial interest in the success of the issue, and client recommendations must be managed separately from that interest.

Ms T should have disclosed the Kōwhai directorship to compliance when she was appointed, and updated that disclosure when the bond issue arose. She should have sought pre-clearance before buying any Kōwhai bonds. Given her board knowledge, pre-clearance should have been refused or granted only with a blackout period and a requirement that she not trade until the information was public. The firm should have placed Kōwhai on the restricted list as soon as it knew of the issue, and should have imposed an information barrier around the arranging team. Ms T should not have recommended the bonds to clients while personally holding them and while sitting on the issuer's board, unless the conflict was disclosed and managed.

For the client recommendations, the firm needed a suitability assessment, a clear explanation of the product and risks, and disclosure of the firm's role as arranging dealer and Ms T's board position. The clients should have been told that the bonds were unlisted, that the 6.5% coupon was not a guarantee, and that the firm had a commercial interest in the issue. If the firm could not manage the conflict, it should have declined the recommendation. The compliance team should have approved any marketing or client communication before it went out. The key point is that disclosure to the client is necessary but not sufficient; the firm also needed pre-clearance and a restricted list.

The firm should immediately suspend Ms T from further Kōwhai-related work, review her personal trade and the three client files, and preserve all records: board papers, emails, order tickets, client communications and pre-clearance requests. It should assess whether the personal trade breached insider-trading prohibitions or the firm's policies, and whether the clients should be offered remediation, such as a review of the recommendation and an exit or compensation if the advice was unsuitable. The firm should notify the FMA if it concludes there has been a material breach, and should take legal advice on whether the personal trade is reportable or requires a suspicious-activity assessment. It should also inform the issuer and the other arranging dealers as appropriate, while managing confidentiality.

Controls should change. All outside directorships must be recorded in a central register and reviewed for conflicts. The restricted list should be updated whenever the firm has a mandate or an employee has a board role, not only when a deal is announced. Personal trading in securities connected to an employee's outside role should require pre-clearance with a blackout period. Client-facing staff should receive training on disclosure of personal holdings, issuer relationships and arranging roles. The compliance committee should review the three client files and test whether similar undisclosed holdings exist elsewhere. Finally, the firm should consider whether its incentive structure rewarded product recommendations without adequate conflict checks, and adjust supervision accordingly.