On 21 February 2002 Commerce Minister Paul Swain presented the recommendations of the Securities Commission for reform of the Investment Advisers(Disclosure) Act 1996 ('the Act'). The recommendations follow a formal review of the Act over several months and incorporate submissions made to the Securities ommission ('the Commission'). Below is a brief summary of the major proposals made by the Commission.
DisclosureThe Act currently provides for a two-tier system of disclosure:
The first tier consists of matters that it is mandatory to disclose before giving nvestment advice. This includes whether in the preceding 5 years the person oncerned has been convicted for a crime involving dishonesty, adjudged ankrupt or has been prohibited from taking part in the management of a ompany or business. If investment money or property is received, then a brief description of the handling procedures is required.The second tier consists of matters that need only be disclosed on request. This relates to the qualifications and experience of the investment adviser and matters that could indicate conflicts of interest (such as relationships with relevant organisations, commissions and other interests). The Commission recommends that the information in both tiers should be disclosed to an investor before investment advice is given. In addition, it should be compulsory to disclose:
the date on which the disclosure statement was preparedthe nature and rate of fees that will be charged for the servicewhether the investment adviser is a member of a professional body, andwhat dispute resolution facilities are available.The Commission also recommends that:
The present requirement to disclose any material benefit 'that is reasonably likely to influence the adviser giving the advice' be re-assessed and expanded. This is to ensure that benefits that could indicate a conflict of interest such as trail commissions or last resort financing facilities are within the disclosure requirements.Partial exemptions from the disclosure requirements for people who give investment advice to the public by way of broadcast, newspapers or periodicals. In such a situation it would be mandatory to refer to the availability of investment adviser disclosure information. Where an investment adviser fails to provide updated information in respect of matters that are not material, it shall be a defence in any proceeding that they had previously provided information that complied with the Act to the member of the public.DefinitionsThe Commission recommends that the definitions of 'investor' and 'investment adviser' be re-assessed. At present it is unclear whether the definition of an 'investor' in the Act includes members of the public generally or is limited to existing investors only. The Commission recommends replacing the term 'investor' with 'member of the public' to avoid confusion.
The definition of 'investment adviser' also needs clarification. At present it is broadly drafted to include anyone who gives investment advice on securities in the course of their business. A 'security' is defined as any interest or right to participate in any capital, assets, earnings, royalties, or other property of any person, including a life insurance policy. In light of this, financial planners, stock brokers, life insurance agents and in some cases accountants and lawyers could be considered 'investment advisers'.
However, the definition of 'investment adviser' expressly excludes the issuers, promoters and trustees of the securities to which the investment advice relates. It also excludes persons who only transmit investment advice relating to particular securities given by the issuer, promoter or trustee. The Commission recommends making it clear that this exclusion does not extend to employees, agents and persons otherwise associated with issuers, promoters and trustees who give investment advice.
The Commission also recommends introducing definitions of 'advice advertisement', 'broker advertisement' and 'product advertisement' similar to those in the Securities Act 1978. All definitions would be broadly drafted to include any form of communication reasonably likely to induce persons to obtain advice, broker services or to subscribe to a product. To qualify, the advertisement would have to be authorised or instigated by, or on behalf of, an investment adviser or broker.
An offence to recommend or act as an investment adviser or broker for illegal offers of securitiesAn increasing number of illegal offers of investment products, often sourced from outside of the country, are being recommended to New Zealanders by investment advisers. It is proposed that it be an offence for an adviser to recommend illegal investment products if they know, or ought reasonably to have known, that the offer documents do not comply with the law. This is a significant move that may require investment advisers to carefully examine the products they promote.
EnforcementCurrently civil actions can be taken by disadvantaged investors seeking redress against investment advisers who have not complied with the law or who have made misleading statements. However, it is often 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 such circumstances. The Commission recommends that there be specific provision for it to take or recommend enforcement action where necessary. In particular it proposes that it 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 Actprohibit advertisements relating to securities products instigated or distributed by investment advisers that are likely to deceive, mislead or confuseapply for injunctions under the 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; andfreeze investment adviser accounts and order that investment money or property be either paid back to the member of the public who provided it or placed in a trust account.The Commission recommends that it be an offence on summary conviction to breach a Commission order. This would enable the Commission to make interim prohibitions that could later be made permanent by application for a Court injunction under the Act.
The situation in AustraliaInvestment advisers in Australia are regulated by the Corporations Act 2001 as amended by the Financial Services Reform Act 2001. The basis of this system is the requirement that all providers of investment advice hold an Australian Financial Services Licence. Licensees must supply members of the public with information similar to both our tiers of disclosure before giving investment advice. In addition, licensees in Australia must disclose any interests or associations that could influence their advice. Investment advisers who breach these conditions can have their licence revoked.
A number of industry associations in Australia have also developed voluntary codes of practice outlining expected service standards. The Code of Practice for Advising, Selling and Complaints Handling in the Life Insurance Industry is a good example of this. It outlines detailed disclosure requirements and requires a life insurance adviser to undertake a thorough fact finding exercise before advice is given. This ensures that advice is given on a reasonable basis and is appropriate for each individual customer.
ConclusionThe recommendations made by the Commission seek to strengthen the integrity of the investment process in New Zealand and raise public confidence in the investment advisory industry. The recommendations would fit neatly into the package of reform of the securities markets embarked on by the government, and bring New Zealand investment adviser law closer to that of Australia. However, the introduction of a licensing regime in New Zealand similar to that in Australia has not been recommended and would be a major policy shift. At this stage it appears unlikely that New Zealand investment advisers will be required to disclose the additional information proposed under the Australian codes of practice.
Hon Paul Swain asked officials to report back on the issues raised by the Commission's recommendations by the end of March. For a copy of the recommendations contact the Securities Commission on +64 4 472 9830 or fax +64 4 472 8076 or visit their web site at www.sec-com.govt.nz
This is a general summary only and should not be taken as a substitute for specific advice.
For further information or assistance in reviewing current practice, please contact a member of the Financial Services team at Phillips Fox.
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