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Securities Commission report on advisers

Read (or download) the full Securities Commission discussion document here.

Tuesday, August 28th 2001, 11:38AM

EXECUTIVE SUMMARY

Investment advisers are important. They help people decide who to invest with and how to select investment products that best suit their needs. The law about investment advisers is important. We consider it timely to review this law. This paper raises questions, makes proposals for reform and invites comment.

Investment adviser law is chiefly derived from the Investment Advisers (Disclosure) Act 1996 but also comes from the Securities Act 1978, the Crimes Act 1961, the Consumer Guarantees Act 1993, the Fair Trading Act 1986, common law and equity. The effects of each of these are discussed in this paper.

This summary outlines the major proposals canvassed. For a full list of questions see page 54.

The Principle of Disclosure
The principle of disclosure is central to New Zealand securities law. The Investment Advisers (Disclosure) Act's purpose is consistent with that principle. It aims to ensure that people have sufficient information about advisers available to them to be able to make informed decisions as to whether to ask for investment advice and whether to rely on advice received.

Proposals canvassed in this paper

A Replacing the present two-tier disclosure regime with the requirement for a single disclosure document to be given to clients before investment advice is given.

Issues
The Investment Advisers (Disclosure) Act provides a two-tier disclosure regime with a distinction between initial disclosure and request disclosure. The investor will not receive all information about an investment adviser prescribed under the Act unless he or she requests it. Many people are unaware of their right to request investment adviser disclosure. Accordingly a client may make a decision about whether to engage an investment adviser and whether to act on his or her advice without having all relevant information. This could, for example, result in a client treating someone with limited qualifications and experience as more knowledgeable than they are.

The investment adviser may have two functions, to advise clients on investment products and to market investment products for issuers. Both these functions are important. However placing both functions in one person can create conflicts of interest. Often a significant portion of an investment adviser's remuneration is from commissions provided by issuers of investment products. This economic interest may conflict directly with a client's interest in making an investment that results in the outcomes that he or she is looking for. The client may not be aware of this.

Proposals for reform
We propose for consideration that the information in both tiers of disclosure should be disclosed to an investor before investment advice is given. We propose that an investment adviser should not be free to give investment advice to a client until disclosure has been made.

We are also reviewing the content of the investment adviser disclosure document. We think it is important that a client of an investment adviser has all information relevant to making a decision whether to engage an investment adviser and whether to rely on advice. The Australians prescribe some content to their investment adviser disclosure documents from which we may want to borrow.

B Reviewing the exclusions from the definition of investment adviser

Issues
The definition of investment adviser in the Investment Advisers (Disclosure) Act excludes the issuers and promoters of securities to which the investment advice applies. It would appear also to exclude employees of issuers or promoters. In addition it excludes persons who only transmit investment advice relating to particular securities given by the issuer or promoter.

Proposals for reform
We raise for consideration whether these exclusions from the Act are appropriate.

C All material benefits to be disclosed

Issue
A concern has been expressed that the present requirements to disclose may be too limiting and that other material benefits for example trailing commissions or last resort financing facilities may not be sufficiently clearly covered or may be outside the disclosure requirements.

Proposal for reform
We propose for consideration a more general obligation to disclose all material benefits. We propose that the term "reasonably likely to influence" also be re-assessed.

Making the Recommendation of Illegal Offers of Securities an Offence

Issues
Illegal offers are a significant problem. These are often fraudulent. Often they originate from overseas. It is difficult to impose discipline on the overseas issuers. Sometimes these offers are made through New Zealanders, acting as investment advisers. If an offer of securities does not comply with the law an investor may be dealing with an incompetent or dishonest adviser and an incompetent or dishonest issuer.

Proposals for reform
We propose for consideration that it should be an offence for an adviser to recommend illegal investment products unless the adviser did not know that the offer documents did not comply with the law, or that the illegality of the offer of securities was in respect of immaterial matters.

Strengthening the Enforcement of Investment Adviser Law

The law relating to enforcement, in regard to investment advisers, is important. Clients place their trust in the honesty and ability of investment advisers. They apprehend that the law will be enforced when it should be. Because of the position investment advisers hold in the community and the wider economy, it is important that enforcement action can be taken where necessary.

Issues
Currently civil actions can be taken by disadvantaged investors seeking redress against an investment adviser who has not complied with the law or who has made misleading statements. However often it is not practical for an investor to take such action.

The existing law does not clearly identify a single regulatory body as responsible for enforcement in regard to investment advisers. We consider there should be specific provision for the Commission to take or recommend enforcement action where necessary.

Proposals for reform
We propose for consideration that the Commission have the power to:

  • Suspend and prohibit investment adviser disclosure statements where it is of the opinion that the disclosure statement does not comply with the Investment Advisers (Disclosure) Act.
  • Prohibit an advertisement of an investment adviser where it is of the opinion that it is likely to deceive, mislead or confuse.
  • Apply for injunctions under the Investment Advisers (Disclosure) Act to restrain a person from contravening the Act, to order disclosure of information and to prohibit the giving of investment advice or the receiving of investment property.
  • Prohibit an investment adviser from giving investment advice. A prohibition could be made in respect of any particular product, in respect of the products of any issuer and associated parties, or in respect of giving investment advice generally. This would allow the Commission to act swiftly where it detects rogue investment advisers. Any such action taken by the Commission would be subject to review by the Courts in accordance with the existing law.

This is the Executive Summary of the Securities Commission's discussion document on Investment Advisers.
The full discussion paper can be viewed as a word document here

To download this document onto your hard drive right click here and choose "Save Target As"

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