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New Zealand Securities Commission |
Last Updated: 5 November 2014
Law Reform: Investment Advisers
A Discussion
Paper
27 August 2001
TABLE OF CONTENTS
To respond to the discussion questions directly from this
site click here. 
Securities
Commission
12th Floor, Reserve Bank Building
2 The Terrace
PO Box
1179
WELLINGTON 6011
Ph (04) 472 9830
Fax (04) 472 8076
E mail seccom@seccom.govt.nz
Web site www.seccom.govt.nz
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:
CHAPTER 1 INTRODUCTION
 1.1 |
The Securities Commission ("the Commission") is an independent statutory
body. Its functions include to review the law relating to
securities and to
recommend changes it considers desirable. This discussion paper has been
prepared in accordance with that function.
|
|
1.2
|
We consider the regulation of investment advisers to be of such
significance as to merit this review. The Commission is seeking comments
on a
number of proposals to amend the Investment Advisers (Disclosure) Act 1996. In
brief these proposals are to:
|
|
1.3
|
We consider these to be areas where the law could be improved. This paper
invites comment on the utility of such amendments.
|
|
1.4
|
The New Zealand investment adviser regulatory regime has a different policy
emphasis from that in many other jurisdictions. The principal
difference is that
we do not license investment advisers. Rather we have rules for disclosure of
matters relevant to investment advisers.
We do not review this policy difference
in this present paper. We consider that it is better left for others, in
particular the Government,
to consider whether that is an issue or whether there
should be a change. We nevertheless consider that these disclosure rules can
be
improved within the general policy of the existing law. We should note that as
the changes we are suggesting generally fit within
the existing policy we have
not undertaken an economic analysis of this policy. Our aim is to ensure that
the existing law works
effectively and efficiently.
|
|
1.5
|
The purpose of this paper is to promote public discussion about investment
adviser disclosure and related matters. The Commission
welcomes submissions and
comments from interested parties. We shall carefully consider these before
making any recommendations to
Government.
|
Invitation to Comment
|
1.6 |
Any reform of the law gives rise to a number of important and at times
complex questions. A number of discussion questions arise in
the course of this
present review. They are set out in appendix "A" at the end of the paper. We are
interested in your views on these
questions and any others you consider relevant
to this review not already raised.
|
|
1.7
|
Any comments or submissions received are subject to the Official
Information Act 1982. It is the practice of the Commission to make
submissions
available on request and where appropriate to draw attention to them in any
further paper. If you would like us to withhold
information included in comments
on this paper would you please let us know. Any request to withhold information
will be considered
in accordance with the Official Information Act
1982.
|
|
1.8
|
This paper may be downloaded from the Commission's website (www.seccom.govt.nz). Comments on this discussion
paper should be sent to the Commission by 22 October 2001. They can be emailed
to toby.norgate@seccom.govt.nz or sent in
hard copy to:
Toby Norgate Lawyer Securities Commission Facsimile: (04) 472 8076 PO Box 1179 WELLINGTON |
CHAPTER 2 PUTTING INVESTMENT ADVICE IN CONTEXT
Investment Advice is Important
|
2.1 |
Investment advice can, over time, have a significant effect on the New
Zealand economy. It can direct the flow of investment capital
into areas of
value and can help investors plan for the future and, in particular, for
retirement. This is increasingly important
for the community as the average age
of the New Zealand population rises.
|
|
2.2
|
Products and services available in the financial markets are complex. It is
not always easy to understand the nature of investments.
The investment adviser
is expected to act as a conduit between the issuer (the raiser of capital) and
the investor, by explaining
and commenting on the issuer's product. The
investment adviser can assist to channel an investor's funds into investment
products
that best fit that investor's needs.
|
Regulation of Investment Advisers is Important
|
2.3 |
Effective regulation of the investment adviser industry is important.
Regulation reflects the standards of acceptable conduct and
if properly devised
can foster compliance with these standards. Investment adviser regulation should
aim to ensure that people are
well informed and confident when dealing with
investment advisers. It should not impose unnecessary costs on either the
investment
adviser or the client. In achieving these goals, regulation should
provide incentives for the investment adviser to adhere to high
professional
standards and to give good advice. Regulation should aim to ensure that the
investor is able to recognise advisers who
meet these standards and, within
reason, to rely on them. Consistent with this policy, regulation at present
concentrates on effective
rules for disclosure of relevant information by people
who give investment advice to the public or receive money or property for
investment from the public as intermediaries.
|
Regulation of Investment Advisers can be Improved
|
2.4 |
We consider that the present law can be improved by clearer and more
complete rules about disclosure, stronger rules for dealing with
matters such as
fraud or conduct which is likely to deceive, mislead or confuse and more
practical provisions for enforcement.
|
|
2.5
|
To assist our analysis we have divided our discussion of questions relating
to regulation of investment advisers into three chapters.
These relate to
disclosure, advice on illegal offers of securities and enforcement. We consider
these to be the three main areas
where the law relating to investment advisers
is in need of review. First, however, we consider the current
law.
|
CHAPTER 3 THE CURRENT REGIME
|
3.1 |
Investment adviser regulation is currently derived from a number of
sources. These sources include both common law and legislation.
The relevant
legislation includes the Investment Advisers (Disclosure) Act 1996, the
Securities Act 1978, the Crimes Act 1961, the
Consumer Guarantees Act 1993 and
the Fair Trading Act 1986. For ease of reference a copy of the Investment
Advisers (Disclosure)
Act is attached as appendix "C".
|
A. Investment Advisers (Disclosure) Act 1996
|
3.2 |
The Investment Advisers (Disclosure) Act 1996 provides for the disclosure
of information by people who give investment advice to,
or receive investment
money or investment property from, the public. Investment advice means a
"recommendation, opinion, or guidance given to a member of the public in
relation to buying or selling (or not buying or selling)
securities"
(section 2). It does not include a recommendation, opinion or guidance given by
a journalist as a journalist and any guidance about
the procedure for buying or
selling securities. Investment money means "any money received from, or on
account of, a member of the public in relation to buying or selling
securities". Investment property has an equivalent meaning.
|
|
3.3
|
The Act applies in respect of investment advisers and in respect of
investment brokers. An "investment adviser" is a person who gives
investment advice in the course of their business or employment. The definition
of investment adviser is wide
and could apply to (amongst others) financial
planners, stock brokers and in some cases accountants and lawyers. An
"investment broker" is a person who receives investment money or
investment property in the course of business or employment. These terms do not
include
an issuer, a trustee or a statutory supervisor or in regard to
investment brokers a person who only transmits investment money or
investment
property to an issuer, a trustee or a statutory supervisor without being able to
apply the money or property for any other
purpose.
|
|
3.4
|
The Act provides for initial disclosure and request disclosure. Initial
disclosure is disclosure which the investment adviser is required
to make before
giving advice or the investment broker is required to give before receiving
client money. Request disclosure is that
which the investment adviser must make
as soon as practicable and in any event not later than 5 working days after the
request.
|
Section 3 - Initial Disclosure
|
3.5 |
Before giving investment advice an investment adviser must disclose any of
the matters set out in section 3(1) (a) to (d) which apply.
These include any of
the following that took place in the five years preceding the advice:
|
|
3.6
|
Before receiving investment money or property an investment broker must,
under section 3(2) of the Act, give to the investor a brief
description of the
procedures of the broker (or the broker's employer) relating to the receipt and
disbursement of money or property.
The description must include:
|
Section 4 - Request Disclosure
|
3.7 |
Section 4(1) of the Act details matters to be disclosed on request, such as
the investment adviser's qualifications, experience, relationship
with the
issuer and remuneration that is likely to influence the adviser in giving
advice. Disclosure must be made within five working
days of the request of a
person who has received investment advice from the adviser within the preceding
month. If a request is made
in relation to any one of the matters in section
4(1) disclosure must be given for all of the matters. The matters that must be
disclosed
to the investor under Section 4 include:
|
Enforcement
|
3.8 |
The Investment Advisers (Disclosure) Act contains a number of measures for
enforcement of the law through the Courts including orders:
|
|
3.9
|
Civil actions are available for failure to disclose information as
prescribed. Under section 10 an application may be made by any
person who has
received investment advice from an investment adviser, or whose investment money
or property has been paid or delivered
to an investment adviser or investment
broker. Where the Court is satisfied that the adviser or broker has engaged in
conduct constituting
a significant contravention of the Act the Court may order
that adviser or broker to pay to the person an amount not exceeding $10,000
if
the adviser or broker is an individual or an amount not exceeding $30,000 in any
other case.
|
|
3.10
|
Further, an investment adviser who fails to comply with a requirement to
disclose information under the Act commits an offence. In
the case of an
individual the investment adviser may be subject to a maximum fine of $10,000
and otherwise to a maximum fine of $30,000.
|
|
3.11
|
To date no enforcement actions have been taken under the Act by regulatory
bodies or, to our knowledge, by any private person. There
is no explicit
provision in the Act for a regulator to be involved. While the Securities
Commission might come within the generic
"any person" provision in the
Act, its functions are prescribed in section 10 of the Securities Act and do not
include a role under the enforcement
provisions of the Investment Advisers
(Disclosure) Act. It is doubtful that the Commission has standing to bring
proceedings under
that Act. In any event the Commission has not been funded for
enforcement work in the Courts in recent years.
|
CHAPTER 3 THE CURRENT REGIME (Cont...)
B. Securities Act 1978
|
3.13 |
The Commission may make an order under section 38B of the Securities Act
prohibiting the distribution of any advertisement that contains
or refers to an
offer of securities to the public that is "authorised or instigated by, or on
behalf of, the issuer of the securities or prepared with the co-operation of, or
by arrangement
with, the issuer of the securities" where the Commission is
of the opinion that the advertisement:
|
|
3.14
|
Every person who has notice of this order and contravenes it commits an
offence and will be liable on summary conviction to a fine
not exceeding $5,000
(section 38B(5)). This appears to extend to investment advisers distributing
advertisements in contravention
of the prohibition.
|
|
3.15
|
The Commission is obliged to notify the issuer of the order. It may also
notify any other person. An investment adviser who has been
notified must comply
with a Commission order.
|
|
3.16
|
This provision does not apply to an advertisement distributed by the
investment adviser that has not been authorised or instigated
by the
issuer.
|
Section 67 - Requests to the Registrar of Companies for Inspection
|
3.17 |
Under section 67, the Securities Commission may request the Registrar of
Companies to inspect documents of investment advisers or
investment brokers. The
inspection may be for the purposes of the Securities Act, the Investment
Advisers (Disclosure) Act or any
of the Acts specified in the First Schedule to
the Securities Act. The power of inspection may not be applied for general law
enforcement
work unrelated to the specified legislation.
|
|
3.18
|
It is an offence under section 60(1)(a) for any person to refuse or fail to
produce for inspection any document when required to do
so by the Registrar in
accordance with section 67. This offence carries a maximum fine of
$1,000.
|
|
3.19
|
The Registrar may consider after the inspection whether to issue
proceedings under the Investment Advisers (Disclosure) Act.
|
Section 10 - Function of the Commission to Keep Under Review Practices Relating to Securities and to Comment Thereon to Any Appropriate Body
|
3.20 |
While the legislation does not provide, at least in explicit terms, for the
Commission to take prosecutions, the Commission can and
does have power to keep
under review practices relating to securities and to comment to any appropriate
body (section 10). The Commission
may also publish reports (section 28A). It may
use these powers to comment publicly or privately about investment advisers. We
consider
these powers to be useful in the regulation of securities
markets.
|
C. Crimes Act 1961
|
3.21 |
There are a number of provisions in the Crimes Act whereby an investment
adviser may be a party to an offence, either directly or
by aiding or abetting.
The relevant sections of the Crimes Act include:
|
D. Secret Commissions Act 1910
|
3.22 |
The Secret Commissions Act 1910 is aimed at preventing agents taking secret
commissions or gifts without the consent or knowledge
of their principal. Under
section 8(1) it is an offence to advise any person to enter into a contract with
a third person and receive
from the third person, without the knowledge and
consent of the person being advised, any gift or consideration as an inducement
or reward for the giving of the advice or the procuring of the contract. This
prohibition does not apply if the adviser is, to the
knowledge of the person
being advised, the agent of that third person. No prosecution may be commenced
under this Act without the
leave of the Attorney General.
|
|
3.23
|
This provision appears to apply to the relationship between an investment
adviser and a client where the adviser is not an agent but
nevertheless receives
reward from the issuer for giving advice to the client.
|
E. Consumer Guarantees Act 1993
|
3.24 |
The Consumer Guarantees Act appears to apply to investment advisers as
people who in trade supply services to a consumer. This Act
deems certain
guarantees to be given on the supply of goods or services to consumers and
confers rights of redress for any breach
of these guarantees. These may help an
investor who has been disadvantaged by the actions of an investment
adviser.
|
|
3.25
|
The guarantees in the Consumer Guarantees Act most relevant to investment
advisers are:
|
|
3.26
|
The rights of redress are available to the consumer directly and do not
involve a regulatory body.
|
CHAPTER 3 THE CURRENT REGIME (Cont...)
F. Fair Trading Act 1986
|
3.27 |
The Fair Trading Act has wide application and appears to apply to the
activities of investment advisers. The key requirement for its
application is
for a person to engage in conduct "in trade". The definition of "in
trade" seems likely to cover the provision of most professional services for
reward including investment advice. The more relevant provisions
of the Act are
set out below. The law would in principle appear to have widespread application
to many of the scam products which
have been promoted by New Zealand people in
New Zealand in recent times.
|
Section 9 - Misleading and Deceptive Conduct Generally
|
3.28 |
Section 9 is the core provision of the Fair Trading Act. It has wide effect
and, according to the case law, may not be contracted
out of (see for example
Picture Perfect Ltd v Camera House Ltd [1996] 1 NZLR 310). Section 9 provides:
"No person shall, in trade, engage in conduct that is misleading or
deceptive or is likely to mislead or deceive."
|
Section 11 - Misleading Conduct in Relation to Services
|
3.29 |
Section 11 of the Fair Trading Act can also be directly relevant to the
work of investment advisers. Section 11 provides:
"No person shall, in trade, engage in conduct that is liable to mislead
the public as to the nature, characteristics, suitability
for a purpose, or
quality of services."
|
Section 13 - False or Misleading Representations
|
3.30 |
Section 13 contains equivalent provisions prohibiting false or misleading
representations. It appears to prohibit an investment adviser
from making false
or misleading representations about the investment advisory services provided.
For example it appears to prohibit
an investment adviser from asserting that he
or she has qualifications that he or she has not obtained.
|
Section 19 - Bait Advertising
|
3.31 |
Section 19 prohibits a person from advertising in trade the supply of
services at a price that the person does not intend to offer
the services for,
or does not have reasonable grounds for believing can be supplied at that
price.
|
Enforcement and Remedies
|
3.32 |
It is an offence not to comply with various provisions of the Fair Trading
Act. The Commerce Commission holds responsibilities for
enforcing the
Act.
|
|
3.33
|
The Fair Trading Act provides a number of remedies to deal with breach of
its provisions. Section 40 establishes certain offences
to which there are a
number of statutory defences. Section 41 empowers the Court to grant injunctions
restraining persons from engaging
in conduct, or acting as a secondary party to
conduct, that contravenes provisions of the Act (on application of the Commerce
Commission
or any other person).
|
|
3.34
|
On the application of the Commerce Commission the Court may order a person
who has contravened the Act to disclose information or
to publish corrective
statements (section 42).
|
|
3.35
|
The court may make orders under section 43:
|
|
3.36
|
It is our impression that in practice the public enforcement provisions of
the Fair Trading Act have seldom been applied to investment
advisers. The
Securities Commission does not have standing or a mandate to engage in such
proceedings. The Commerce Commission has
preferred to refer securities and
investment matters to the Securities Commission as the lead regulator. We are
informed, however,
that the Commerce Commission will be reviewing its approach
to investment advisers as a result of proposed new enforcement responsibilities
in what it sees as the related area of consumer credit law.
|
|
3.37
|
We think that it would be timely to reappraise the place of the Fair
Trading Act in securities markets and the procedures for enforcement
if it is to
continue to apply.
|
G. Common Law and Equity
|
3.37 |
There are a number of grounds for relief against investment advisers
available under the general law of the land. These are available
to the
investors directly and are not enforceable by regulatory bodies on the
investors' behalf.
|
|
3.38
|
Nevertheless investment advice is often about future and projected
outcomes. We note the difficulties in enforcing common law in relation
to
predictions about future events or outcomes. In such cases it is more difficult
to establish fraud or misrepresentation than in
respect of statements of fact
about past events.
|
Contract
|
3.39 |
Investment advisers will have both express and implied contractual
obligations to their clients, breach of which may give rise to
civil
remedies.
|
Tort
|
3.40 |
A duty of care has been developed, in relation to the giving of advice by
persons holding themselves out as possessing skill and competence
in the giving
of such advice, from the House of Lords decision in Hedley Byrne and Co Ltd v
Heller and Partners [1963] UKHL 4; [1964] A.C 465.
|
|
3.41
|
A duty of care has also been based upon collateral contact developed by the
English Court of Appeal in Esso Petroleum Co Ltd v Mardon [1976] EWCA Civ 4; [1976] 2 All ER
5.
|
|
3.42
|
Civil remedies may be available if these duties of care are breached.
|
Fiduciary Duties
|
3.43 |
Investment advisers may be fiduciaries. This will depend on the
relationship of the investment adviser with the investor.
|
|
3.44
|
In Cook v Evatt (No 2) [1992] 1 NZLR 676 Fisher J concluded that FMS
Ltd, the defendant financial advisers, owed fiduciary obligations to the
plaintiff who relied on them.
In that case the financial advisers had held
themselves out as providing impartial financial information. They had
information regarding
the plaintiff's financial situation. On the financial
advisers' recommendations the plaintiff purchased two property units. Unknown
to
her the financial advisers had earlier purchased the units at a lower price and
were on-selling them to her at a profit. Fisher
J held that when the plaintiff
agreed to purchase the units the financial advisers had a duty to make full
disclosure of any matters
which might influence the plaintiff's decision to
purchase. Fisher J held that in acquiring the property the defendants had made
use of the knowledge gained from their fiduciary office as to the plaintiff's
needs and resources and they acquired it in circumstances
where their duty to
her conflicted with their own interest in purchasing for themselves. They
accordingly acquired the property as
constructive trustees for the plaintiff
thus entitling her to the secret profit which they later made when they sold the
flats to
her.
|
|
3.45
|
The characteristics of a fiduciary relationship were described by Wilson J
in the Supreme Court of Canada's decision in Frame v Smith [1987] 2 SCR
99, 137 which was endorsed by our Court of Appeal in DHL International (NZ)
Ltd v Richmond (1993) 4 NZBLC 103, 101 as:
|
|
3.46
|
Although the precise content of fiduciary duties will vary according to the
nature of the fiduciary relationship, fiduciaries are
generally not free to
pursue their separate interests and are bound by certain standards of conduct.
Breach of these duties may allow
clients of investment advisers to pursue civil
remedies.
|
CHAPTER 4 THE DISCLOSURE REGIME: PROBLEMS AND POSSIBLE CHANGES TO THE LAW
|
4.1 |
The principle of disclosure holds a central position in securities law. It
is considered that the better informed a market is, the
more efficient and the
more fair it is likely to be. A free flow of reliable information is likely to
encourage investment. This
principle has been applied in New Zealand in
particular to the primary market by the Securities Act which requires all
material information
about an offer of securities to the public to be
disclosed.
|
|
4.2
|
Consistent with general securities policy, the purpose of the Investment
Advisers (Disclosure) Act is not to prescribe what advice
an investment adviser
should give or to evaluate that advice (the standard of advice given is dealt
with to some extent by the rules
of common law such as negligence and contract).
Rather the Act's purpose is to ensure that the public has access to sufficient
information
about the advisers they deal with to be able to make informed
decisions as to whether to ask them for investment advice and whether
to rely on
investment advice received.
|
Investment Advisers Need Only Provide Full Disclosure on a Request
|
4.3 |
As previously noted, the Investment Advisers (Disclosure) Act provides a
two-tier disclosure regime for investment advisers. We understand
that this
regime was enacted in a two-tier form due to concerns that certain information
currently in the second tier would only
be available after advice had been given
and a product had been purchased. In particular it was considered that there may
be difficulties
in providing investors with information regarding any direct or
indirect pecuniary or other interest (being an interest that is reasonably
likely to influence the adviser in giving the advice) in initial disclosure.
Many investment advisers now have a single standard
disclosure document
containing the information for both the first and second tiers of disclosure.
They distribute this before giving
investment advice.
|
|
4.4
|
It is not always easy for investors to understand and compare the natures
of services offered to them. They may not know what questions
to ask. An
investment adviser disclosure statement will assist in providing key information
on the nature of advisory services offered.
It will indicate the types of
investments with which an investment adviser has had experience and the
qualifications he or she holds.
|
|
4.5
|
With relevant information the potential client can decide whether to engage
the investment adviser and what weight to put on any investment
advice received.
It gives a basis for a client to decide. However the law creates a distinction
between initial disclosure and request
disclosure. The client will not receive
all the prescribed information unless he or she asks for it. Many people are
unaware of their
right to request investment adviser disclosure. Accordingly a
client may come to a mistaken view about the adviser and may, for example,
treat
someone with limited qualifications and experience as more knowledgeable then he
or she actually is.
|
Conflicts of Interest
|
4.6 |
The investment adviser may have two functions, to advise the client on
investment products and to market investment products for the
issuer. They are
both important. However placing both functions in one person can create
conflicts of interest. It is all the more
important that the client should have
access to all prescribed information. Otherwise conflicts of interest, for
instance, may remain
unknown.
|
|
4.7
|
Often a significant portion of an investment adviser's remuneration is from
commissions provided by issuers of investment products.
To the extent that an
individual is a self-interested and self-maximising unit, the incentive on an
investment adviser to recommend
the product that will bring him or her the
highest commission is a relevant consideration. 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 (for example higher returns
or
greater security or long term savings or readily accessible
money).
|
|
4.8
|
We do not think that an interest in, or a bias towards, a particular
product is always a problem. If the interest or bias is disclosed,
investors can
take this into account in weighing up advice given by the adviser. This may be
accomplished if an initial disclosure
document containing all material matters
is provided.
|
Mandatory Disclosure Statements
|
4.9 |
The two-tier system appears arbitrary. We consider that the information
currently in the second tier of disclosure should be merged
with that in the
first tier so that all material matters prescribed are disclosed to an client
before investment advice is given.
We consider that an investment adviser should
not be free to give investment advice to a client until disclosure has been
made.
|
|
4.10
|
Such disclosure will provide the investor with a better basis on which to
evaluate the competence of the investment adviser and the
quality of any advice
to be given. This mandatory initial disclosure would be analogous to an
investment statement. Currently an
issuer may not allot securities unless the
subscriber has received an investment statement.
|
|
4.11
|
It is our impression that there should not be any particular difficulties
in providing additional disclosure of matters. We would
like to proceed on the
basis that all material information can be disclosed before advice is given and
that the disclosure is sufficient
to reveal both the cost and the benefit to the
investment adviser in providing the service. If this is not so we would like to
hear
about it. If this is not so we would be interested to receive proposals
consistent with our proposed single-tier investment adviser
disclosure
regime.
|
|
4.12
|
Extending the commitment to initial disclosure would make the investment
advice more useful and practical. The change would provide
greater information
upon which to base investment decisions. An investment adviser disclosure
statement would be required before
advice is given in all cases.
|
|
4.13
|
We do not think an obligation to provide further initial disclosure would
be a major or onerous change for the industry. We understand
that the Financial
Planners and Insurance Advisers Association already encourages its members to
provide a full disclosure statement
containing the information from both tiers
of investment adviser disclosure to potential investors before advice is given.
As one
disclosure document is likely to be sufficient for all clients in nearly
all cases, the additional ongoing costs will be minimal.
|
|
4.14
|
A further question is whether a disclosure update should be provided to an
investor if the circumstances of the investment adviser
change? Should relevant
new information be disclosed if the client is in an ongoing relationship with an
investment adviser and is
continuing to receive advice or act on the investment
adviser's previous advice? The new information could be used to reassess the
reliance a client places on the investment adviser's previous
advice.
|
|
4.15
|
If preliminary mandatory disclosure is necessary then should advertisements
for investment advisers state that an investment adviser
disclosure statement is
available? This would be analogous to the current situation under the Securities
Act for advertisements for
offers of securities. Generally advertisements for
offers of securities must refer to an investment statement.
|
Exclusions from the Definition of Investment Adviser
|
4.16 |
The definition in the Investment Advisers (Disclosure) Act of investment
adviser expressly excludes issuers or promoters of the securities
to which the
investment advice relates. This exclusion applies to employees of the issuer or
promoter. This exclusion was the subject
of discussion in the original
development of the legislation. It was considered that employees of an issuer
were sufficiently regulated
by their contracts of employment and the terms of
general securities law.
|
|
4.17
|
This exclusion removes a large part of the investment advisory industry
from the scope of the Act. It may exclude bank officers and
advisers connected
with managed funds, life insurance and superannuation. We would like to raise
the question whether such an exclusion
remains appropriate, in the case of
employees of the issuer or promoter. Are the matters within the scope of the
Investment Advisers
(Disclosure) Act matters that would appropriately apply not
only to the employees of the investment advisory firms but also to employees
of
issuers who give investment advice on their employer's product? Are the
qualifications and experience of an employee of an issuer
giving investment
advice relevant to the decision whether to rely on the investment
advice?
|
|
4.18
|
There is also an exclusion from the definition of investment adviser for
persons who only transmit investment advice relating to the
particular
securities given by the issuer or promoter. Has it been clear in practice when
people just transmit advice rather than
give investment advice? Does this
exclusion fit with the purposes of the Act?
|
Updating the Contents of Disclosure Statements
|
4.19 |
We consider that a disclosure statement should include the matters
currently included in the two levels of disclosure in the Investment
Advisers
(Disclosure) Act. We also think that there is a good case for considering
whether to expand the prescribed contents of disclosure
by adding additional
prescribed categories. We consider that those who use investment adviser
disclosure statements both in the industry
and as consumers are in a good
position to comment on the usefulness of disclosure information. We would
welcome expressions of opinion
from the community generally as to whether
further matters should be included in disclosure statements and if so what.
There may
also be opinions on the workability or non-workability of any possible
additions and on matters in the existing list that should
be amended.
|
Disclosure of Direct or Indirect Pecuniary or Other Interests and Remuneration
|
4.20 |
Subsections 4(1)(e) and (f) oblige investment advisers to disclose on
request any remuneration and any direct or indirect pecuniary
or other interest
"that is reasonably likely to influence the adviser in giving the
advice". We understand that there have been some difficulties in applying
these subsections. Should these provisions be amended?
|
|
4.21
|
We think that all material benefits should be disclosed. Do these
subsections catch all material benefits?
|
|
4.22
|
We understand that there are widespread practices within the industry of
providing trailing commissions. We understand that last resort
financing
facilities are also available in some cases in Australia if not in New Zealand.
We consider these matters to be material
to the decision to take investment
advice. Are these matters sufficiently covered by the Act? Are there any other
types of benefit
that may not be sufficiently covered by the Act? Could the Act
be amended to better cover these?
|
|
4.22
|
Is the expression "reasonably likely to influence" difficult to
apply in practice. Would it be better to refer to any "benefit" that is
reasonably likely to influence the adviser in giving advice? Should disclosure
be made of any "material" benefit rather than any benefit that is
"reasonably likely to influence" the adviser? Is there any better way of
handling this matter?
|
CHAPTER 4 THE DISCLOSURE REGIME: PROBLEMS AND POSSIBLE CHANGES TO THE LAW (Cont...)
Potential Additions
|
4.23 |
There may be a good case for adopting items (a) and (b) of the prescribed
Australian disclosure requirements (see paragraph 4.31).
That is information
sufficient to enable a prospective investor to clearly understand the nature of
the investment advice service
being offered and information sufficient to
compare the services offered by the investment adviser with similar services
offered
by other investment advisers. We consider that disclosure of these
matters would be of value to the prospective investor and that
inclusion in an
investment adviser disclosure statement is appropriate. We also ask whether
there would be an advantage in bringing
the New Zealand statement closer to that
provided for in Australia, while recognising that in Australia the disclosure
rules are
adjunct to a licensing system.
|
|
4.24
|
To further stimulate discussion we note a number of potential additions to
investment adviser disclosure that interested persons may
wish to consider.
Should the content of investment adviser disclosure also include:
|
|
4.23
|
There may be some difficulties in disclosing some of these matters. For
example insurers may prefer that details of the insurance
that they provide be
kept confidential. Other matters such as fees may be considered logical and
useful additions to an investment
adviser disclosure statement.
|
Format
|
4.24 |
There are other related questions. These include:
|
Investment Advisers (Disclosure) Regulations
|
4.25 |
Under section 12(1) of the Investment Advisers (Disclosure) Act the
Governor General may, by Order in Council, in accordance with
the recommendation
of the Securities Commission, make regulations for the following purposes:
|
|
4.26
|
Section 12(2) provides that the Securities Commission must publicly notify
any recommendation under Section 12(1) in accordance with
the provisions of
section 70(3) of the Securities Act 1978.
|
|
4.27
|
There may be some merit in placing the matters that need to be disclosed in
an investment adviser disclosure statement in Investment
Adviser (Disclosure)
Regulations. This would make it easier to update the content of investment
adviser disclosure in future. In
the meantime any addition, but not deletion, to
the list of items to be disclosed may be made by regulation.
|
Australian Investment Adviser Disclosure Requirements
|
4.28 |
For comparison we provide a brief account of the Australian investment
adviser disclosure requirements. Australian regulation of investment
advisers is
based upon a licensing regime. Investment adviser disclosure requirements are
expressed as licence conditions. The Australian
Corporations Regulations set out
the main disclosure requirements for a licensed investment adviser who gives
investment advice to
retail investors. Generally a licensed investment adviser
must give to a retail investor an Advisory Services Guide:
|
|
4.29
|
This does not apply if the investment adviser has already given an Advisory
Services Guide to the retail investor or the investment
advice given is general
securities advice given to persons generally in a non-personal context (for
example, at an investment seminar,
by means of brochures or newsletters or
through advertisements).
|
|
4.30
|
A licensed investment adviser must be a member of an external complaints
resolution scheme approved by the Australian Securities and
Investments
Commission ("ASIC"). A licensed investment adviser must also have internal
complaints handling procedures.
|
|
4.31
|
The information that must be contained in the Advisory Services Guide is
specified in the Regulations. The information required to
be disclosed is not
prescribed in detail. The Guide must contain information that a retail investor
"reasonably requires" to:
|
|
4.32
|
If a change occurs relating to information in the above list and the
relationship between the licensee and the retail investor to
whom the licensee
has given an Advisory Services Guide is continuing, or the licensee has a
reasonable expectation that the retail
investor will seek further investment
advice from the licensee, the investor must give, at the earliest practicable
opportunity after
the change, an updated Advisory Services Guide to the retail
investor.
|
|
4.33
|
The Regulations also provide that certain warnings must be given if general
securities advice is given including that in preparing
the advice, the licensee
did not take into account the investment objectives, financial situation and
particular needs of any particular
person and before making an investment
decision on the basis of that advice, the retail investor or prospective retail
investor needs
to consider, with or without the assistance of a securities
adviser, whether the advice is appropriate in light of the particular
investment
needs, objectives and financial circumstances of the retail investor or
prospective retail investor.
|
|
4.34
|
Warnings must also be given if advice is given without the retail investor
having provided the adviser relevant personal information
necessary for making a
securities recommendation.
|
CHAPTER 5 ADVICE ON ILLEGAL OFFERS OF SECURITIES: PROBLEMS AND POSSIBLE CHANGES TO THE LAW
|
5.1 |
As noted in the previous chapter the Investment Advisers (Disclosure) Act
deals with disclosure. Currently dissatisfaction with the
content of advice is
generally dealt with by common law remedies. Nevertheless we are proposing that
there should be rules against
recommending illegal securities. We consider that
such rules could strengthen the integrity of the investment process.
|
Recommending Illegal Offers of Securities
|
5.2 |
When looking at illegal offers of securities and the role of investment
advisers it is useful to analyse the position that investment
advisers occupy in
the wider industry context of raising funds. Clearly monies should not be raised
for securities where the offer
does not comply with the law. We consider that
the Securities Act and Regulations credibly regulate the role of the issuer and
the
promoter. However we consider that questions arise regarding regulation of
the role of investment advisers in acting as a conduit
for illegal offers of
securities.
|
|
5.3
|
Problems can occur where an investment adviser recommends a product that
does not comply with securities law. In such a case the investor
may have
subscribed to a product without having access to the information needed to make
a prudent investment decision. Further the
investment contract may be void under
securities law. This will often lead to future problems for both the investor
and the issuer.
|
|
5.4
|
The extent to which an offer of securities complies with the law can often
be indicative of the more general integrity of the scheme
and those who promote
or advise on it. If an offer of securities does not comply with the law an
investor may be dealing with an
incompetent or dishonest investment adviser and
an incompetent or dishonest issuer. We are proposing that investment advisers
should
not give advice on investment products to the public where at least with
the knowledge of the investment adviser the offer documents
do not comply with
the law. We consider that, subject to appropriate defences, it should be an
offence to do so.
|
|
5.5
|
We regularly see offers of so called investments that quite obviously will
not provide the promised returns. Many of these schemes
seem to us to be
seriously suspect and likely to be fraudulent. We consider the central
proposition, that the issuer and the promoter
are responsible for the content of
offer documents relating to securities, to be sound. The investment adviser is
not responsible
for offer documents. However we think that an investment adviser
should be accountable under the law for recommending investment
in a scheme that
is non-compliant where this is done knowingly.
|
A Conduit for Rogue Overseas Products
|
5.6 |
Unconventional rogue products, or scams, that originate from outside of New
Zealand are a significant problem. These are often fraudulent.
While many
off-shore investment documents which are distributed in New Zealand are not
problematic, we receive a large number of
complaints about offers made by
issuers situated in overseas jurisdictions. It is difficult to impose discipline
on these overseas
issuers. Issues of jurisdiction and difficulties of
enforcement often arise.
|
|
5.7
|
To solicit funds in New Zealand, and sometimes we suspect to enable the
issuers to avoid having a presence in New Zealand, offers
are often made through
New Zealanders acting in a capacity of investment adviser. We consider that a
provision for action under New
Zealand law against any person acting as an
investment adviser would help address this problem.
|
|
5.8
|
An example was recently brought to our attention where an individual was
approached by two men calling themselves financial specialists.
They recommended
that he invest offshore with two schemes, one named the Quantum Advance Fund and
the other named Big International.
We had previously released media warnings
about both these schemes. Neither had registered prospectuses or investment
statements.
Both promised outlandish returns. Advertising for the Quantum
Advance Fund had been prohibited by the Commission. After investing
on the basis
of the recommendations the investor found that he was unable to retrieve his
money. We have many similar examples.
|
|
5.9
|
Often these come in the form of so called "prime bank" schemes. Promotional
material is provided which promises extremely high returns,
sometimes between
10% to 40% per month. The promotional material states that investors' funds are
used in the trade of "prime bank"
instruments. These are allegedly traded on a
secret market open only to the very rich and the large financial institutions.
Investors
are advised to keep their knowledge of the scheme confidential. They
are told that the authorities do not like the schemes because
they lead to money
being sent offshore and consequently drain the tax revenue. Inevitably after
investors funds are contributed it
becomes practically impossible for the
investor to retrieve them.
|
|
5.10
|
New Zealanders acting in the role of investment advisers are usually
rewarded for their involvement in this activity by being paid
commissions for
each New Zealander they can influence to contribute to the scheme. New
Zealanders acting as investment advisers use
various means of eliciting
investors' funds. Sometimes ethnic or religious ties are used to give legitimacy
to the schemes. We have
seen examples of promotional material claiming that
profits from funds contributed to such schemes are used to help disadvantaged
people around the world (as well as providing a tidy profit to investors).
Promotional material for one scheme we encountered last
year claimed that a
Hercules aircraft had already been equipped with disaster relief gear from past
profits.
|
An Offence to Recommend Illegal Offers of Securities
The Offence
|
5.11 |
We propose for consideration that it should be enacted as an offence, in
certain circumstances and subject to certain defences, for
an investment adviser
in the course of business or employment to recommend, encourage or knowingly
assist a client to acquire securities
where the offer of those securities does
not comply with the Securities Act or Regulations.
|
|
5.12
|
In deciding whether liability would attach the following questions could
arise:
|
|
5.13
|
One defence to liability for involvement with an illegal scheme might be
that the investment adviser considered on reasonable grounds
that the offer
documents for that offer of securities complied with the law. The standard for
this would be that of the reasonable
investment adviser, not that, for instance,
of a practising lawyer. Alternatively it might be a defence that the investment
adviser
did not know that the offer documents for that offer of securities were
not compliant with the law.
|
|
5.14
|
There could also be a defence that the securities were non-compliant only
in respect of matters which were immaterial. This would
put the offence on a
similar basis to Securities Act offence provisions (sections 58, 59, and 60).
These also deal with non-compliant
securities.
|
|
5.15
|
The offence and defence provisions could be:
"(1) Subject to subsection (2) of this section any investment adviser who in the course of business or employment recommends, encourages or knowingly assists a client to acquire securities where the offer of those securities does not comply with the Securities Act or Regulations commits an offence. (2) No person shall be convicted of an offence, as set out in subsection (1), if the contravention of the law by the offer of securities was in respect of matters which in the opinion of the Court dealing with the case were immaterial; or the investment adviser considered on reasonable grounds that the offer
documents for that offer of securities complied with New Zealand
law."
|
|
5.16
|
In some cases there may be an overlap between such an offence and an
offence of contravening an order under section 38B of the Securities
Act
prohibiting distribution of an advertisement to which securities law applies.
The Commission may make an order prohibiting advertising
for an offer of
securities on the basis that an advertisement containing an offer of securities
does not comply with the Securities
Act. If the Commission has made the
investment adviser aware of this order and the investment adviser continues to
encourage clients
to acquire the securities the investment adviser may be
offending, both in regard to breach of the Commission's order and in regard
to
an offence of recommending illegal offers of securities. We consider that it is
desirable to have a separate primary offence provision
that does not depend on
the Commission having made an order in respect of an advertisement to which the
issuer of the securities
is a party and having communicated knowledge of that
order to the investment adviser.
|
Penalties
|
5.17 |
We raise for consideration whether penalty provisions for such an offence
should be equivalent to penalties for breaches of securities
law by issuers and
promoters, examples of which we outline below (in doing so we also note that
there is a question whether penalties
for securities law should be reviewed).
The Court will have discretion as to the culpability of the investment adviser.
This can
be reflected in sentencing.
|
|
5.18
|
Under section 58 the Securities Act criminal liability is imposed on
issuers for misstatements in advertisements or registered prospectuses.
Every
person who commits such an offence is liable on conviction on indictment to
imprisonment for a term not exceeding 5 years or
to a fine not exceeding
$25,000. On summary conviction every person who commits such an offence is
liable to imprisonment for a term
not exceeding 3 months or a fine not exceeding
$15,000.
|
|
5.19
|
Under section 59 of the Securities Act criminal liability is imposed for
offering, distributing or allotting in contravention of the
Securities Act.
Penalties include liability on summary conviction to a fine not exceeding
$15,000.
|
|
5.20
|
The penalty provision for an offence to recommend illegal securities could
include provision for the Court to order some of any fine
payable to be paid to
investors in the non-compliant scheme who invested on the recommendation of the
investment adviser.
|
CHAPTER 6 ENFORCEMENT AND REMEDIES: PROBLEMS AND POSSIBLE CHANGES TO THE LAW
General Observations
|
6.1 |
We consider that the law relating to enforcement, in regard to investment
advisers, is important. Clients place their trust in the
honesty and ability of
investment advisers. Investment advisers can appear charismatic and credible to
the unsophisticated investor.
With dishonest investment advisers it is often the
lack of honesty when they describe investments that enables them to be
particularly
persuasive to unsophisticated investors. Promises of high returns
can seem too good to miss. For these reasons and because of the
position
investment advisers hold in the community and the wider economy, it is important
that effective enforcement action can be
taken where necessary.
|
|
6.2
|
A key aim of the enforcement provisions of the present law is to deal with
dishonest investment advisers. In addition a number of
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
it is often not practical for an investor to take action for many reasons
including
the cost of litigation and the difficulties in obtaining documentary
evidence. We consider there should also be specific provision
for the Commission
to take or recommend enforcement action where necessary.
|
Purpose of Public Enforcement
|
6.3 |
In this paper we are proceeding on this basis that public enforcement
provisions should be for the purpose of:
|
Private and Public Enforcement
|
6.4 |
The legal regime splits responsibility for enforcement of the law relating
to investment advisers into private enforcement and public
regulatory
enforcement. There has been much debate about the proper division of
responsibility for enforcement. In this paper we
will not discuss where such a
division should lie but note that the possible changes considered in this
chapter primarily relate
to public enforcement.
|
|
6.5
|
We note that the civil enforcement provisions in sections 7,8 and 9 of the
Investment Advisers (Disclosure) Act would be available
for use where an
investment adviser had been convicted of any new offence of recommending illegal
offers of securities. We propose
for consideration that section 10 should also
apply in regard to any new offence. We also propose for consideration that the
amount
of money prescribed in section 10 be increased. If section 10 is amended
in these ways should we also consider the effect of this
type of provision on
common law remedies? Would it be appropriate to add a further section to the Act
stating that common law remedies
are preserved?
|
|
6.6
|
Whether there should be additional remedies of compensation to investors
under this Act or otherwise is not addressed in this paper.
However we would
welcome any comments readers may wish to make on this.
|
Responsibility for Enforcement
|
6.7 |
The existing law does not identify a single regulatory body as responsible
for enforcement in regard to investment advisers. The Commerce
Commission has a
role under the Fair Trading Act. The Registrar of Companies has a general role
in regard to enforcement of securities
law. The Serious Fraud Office may become
involved if an investment adviser is involved in serious fraudulent activities.
Similarly,
the police may become involved if an investment adviser has committed
an offence. The Securities Commission has a role through its
functions to review
securities practices and law. However no agency is designated for enforcement
work under the Investment Advisers
(Disclosure) Act 1996. The assumption has
been that the Act has been left for private enforcement. Yet to date no
enforcement action
has been brought under the Act to our knowledge. We consider
this speaks for itself as to the effectiveness of the present
remedies.
|
|
6.8
|
The Commission has various strong prohibition and suspension powers to deal
with offers of securities to the public for subscription
but not in other areas
in the securities market including investment advisers.
|
|
6.9
|
The question arises whether the Commission should have enforcement powers
under the Investment Advisers (Disclosure) Act. This could
be by way of giving
the Commission standing to apply for orders as provided for under the Act or by
giving the Commission the power
to make orders against investment advisers
subject to High Court review or confirmation. It seems all the more important to
address
this issue if we are considering a new offence to recommend illegal
offers of securities.
|
Prohibition of Investment Adviser Disclosure Statements and Advertisements for Securities
Prohibition of Investment Adviser Disclosure Statements
|
6.10 |
We propose for consideration that the Commission should have the power to
suspend and prohibit investment adviser disclosure statements.
This would be
consistent with the Commission's powers under section 38F of the Securities Act
to suspend and prohibit investment
statements. Under section 38F the Commission
may suspend or prohibit an investment statement where it is of the opinion that
the
investment statement:
|
|
6.11
|
We propose for consideration that the Commission should be able to suspend
or prohibit an investment adviser disclosure statement
where it is of the
opinion that the disclosure statement does not comply with the Investment
Advisers (Disclosure) Act. This would
include where the Commission is of the
opinion that an investment adviser disclosure statement does not comply with
section 6 of
the Act in that it is deceptive, misleading, or confusing in a
material respect.
|
|
6.12
|
To make this effective we propose for consideration that distribution of an
investment adviser disclosure statement in contravention
of an order should be
an offence where the investment adviser has knowledge of that order. This would
be similar to the existing
offence provision for distributing advertisements
(including investment statements) in contravention of a suspension or
prohibition
order made by the Commission.
|
Prohibition of Advertisements for Securities
|
6.13 |
The Commission does not have jurisdiction to prohibit an advertisement
published on behalf of anyone that is not "authorised or instigated
by, or on
behalf of, the issuer of the securities or prepared with the co-operation of, or
by arrangement with, the issuer of the
securities" (see the definition of
advertisement in section 2A of the Securities Act). We consider that there are
occasions where
it may be appropriate for the Commission to prohibit a
deceptive, misleading or confusing advertisement relating to securities products
that is instigated or distributed by an investment adviser.
|
|
6.14
|
This would fit alongside the Commission's present powers to prohibit
advertisements for initial offers of securities. It would also
sit alongside any
power of the Commission to prohibit an investment adviser disclosure statement.
Again to make this effective we
think that it should be an offence to contravene
such a Commission order where the investment adviser has knowledge of that
order.
|
|
6.15
|
There may in some circumstances be an overlap between an offence of
contravening such an order and an offence of recommending an offer
of securities
knowing that it does not comply with the Securities Act or Regulations as
outlined in chapter 5. This overlap would
be similar to that discussed in
paragraph 5.16. We do not consider this to be a problem. We think that there is
value in having both
of these offences.
|
Enforcement of the Investment Advisers (Disclosure) Act 1996 and Injunctive Remedies
|
6.16 |
The Investment Advisers (Disclosure) Act provides for injunctions under
sections 7, 8 and 9. As noted above, no public enforcement
body has
responsibility for obtaining such injunctions.
|
|
6.17
|
There are questions about the usefulness of enforcement action under the
Investment Advisers (Disclosure) Act in its present form
and the content of
matters for which enforcement action may be taken. Is the effort of undertaking
injunctive proceedings justified
to ensure that disclosure as presently required
is made? The cost and burden of undertaking legal action to obtain disclosure
may
outweigh the benefits of enforcing disclosure. The section 7 injunction
against acting as an investment adviser may be valuable for
regulatory action.
We consider that creating an offence under the Investment Advisers (Disclosure)
Act to recommend securities which
do not comply with the law, would improve the
usefulness of section 7 and section 8 injunctions for protecting the
public.
|
|
6.18
|
One option is to amend the Investment Advisers (Disclosure) Act to give the
Securities Commission explicit authority to make injunction
applications in
regard to investment advisers. This could be by giving the Commission standing
under the Investment Advisers (Disclosure)
Act to apply for injunctions to
prevent persons from giving investment advice or receiving investment money or
investment property.
This could be similar to the Commerce Commission's ability
to apply for injunctions under the Fair Trading Act in regard to section
9 of
that Act.
|
|
6.19
|
Together with litigation funding this would allow the Securities Commission
to become more proactive in preventing fraudulent investment
adviser activity.
Alternatively another body could be given responsibility for taking injunctive
action, for example the Registrar
of Companies.
|
Prohibition of Investment Advisers
|
6.20 |
An alternative solution would be to empower the Commission to take action
to 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 could be an equivalent to the Investment Advisers (Disclosure)
Act section 7 injunction. It could be used where the Commission considers that
an investment adviser has not complied with the Investment
Advisers (Disclosure)
Act or where any of the matters in section 7(1)(a) to (c) apply. There would be
provision for appeal rights
against an order of the Commission.
|
|
6.21
|
This power could complement the existing powers of the Commission under
sections 38B, 38F, 44 and 44B of the Securities Act and would
fit alongside the
Commission's power to prohibit advertisements and the Commission's powers in
regard to contributory mortgage schemes.
Such a power would be analogous to the
Registrar of Companies' power to prohibit directors and managers in section 385
of the Companies
Act 1993. This empowers the Registrar of Companies to prohibit
a person from being an officer or promoter or taking part in the management
of
any company for a period of up to five years.
|
|
6.22
|
This solution would allow for rapid action against rogue elements. It would
allow the Commission to act swiftly where it detects rogue
investment advisers.
To complement and make this prohibition effective we would suggest establishing
it as an offence with a substantial
penalty for an investment adviser to fail to
comply with an order of the Commission.
|
|
6.23
|
If it is considered that such a power is better left in the hands of the
Courts a mid-way point between Commission ordered prohibitions
and injunctive
Court proceedings could be devised. This could provide the Commission with power
to make interim prohibitions that
could later be made permanent by application
to the Court.
|
Australia's Licence Revocation and Banning Order Laws
|
6.24 |
Comparison with Australia's licence revocation banning order laws may be
useful (sections 824 to 840 of the Corporations law). The
Australian Securities
and Investments Commission ("ASIC") has powers to revoke licenses of investment
advisers in certain circumstances.
This has the effect of excluding these people
from the industry as a license is needed to legally undertake the business of an
investment
adviser. The situations in which the ASIC may revoke a licence are
outlined in appendix "B".
|
CHAPTER 7 DEFINITIONS
|
7.1 |
There are a number of matters relating to definitions in the Act that we
would like comments on.
|
Definitions
|
7.2 |
If increased emphasis is placed on disclosure, more situations are likely
to be caught by the Investment Advisers (Disclosure) Act
1996. Therefore it is
important that its definitions are clear. We have noted some issues relating to
definitions below. We will
be interested to receive comments from people who use
the legislation as to whether they think there are other words and definitions
in the Act that could be clarified.
|
"Investor"
|
7.3 |
There may be a chicken and egg problem with the definition of investor and
the current section 3. "Investor" means "a member of the public to whom
investment advice is given or on whose behalf investment money or investment
property is held by an
investment adviser or an investment broker". Section
3 requires an investment adviser to provide initial disclosure to the
investor before giving the investment advice or receiving the investment
money or the investment property. Will the definition of investor,
with
increased emphasis on initial disclosure, become a problematic circular
definition?
|
|
7.4
|
Would it be better to state that initial disclosure must be made to any
"member of the public" before investment advice is given or before
investment money or investment property of the member of the public is held by
the investment
adviser?
|
"Investment Adviser"
Computer Software
|
7.5 |
Does the definition of investment adviser need to be altered to cover
distributors of investment advisory computer software?
|
"Relationship"
|
7.6
|
Section 4(1)(a) of the Investment Advisers (Disclosure) Act states that
second tier request disclosure must include "the name of any relevant
organisation" with which the adviser has a relationship and a description of
that "relationship". We are informed that there are difficulties in
interpreting the word "relationship". Does the term lend itself to
definition? Should a definition be provided for "relationship"?
|
CHAPTER 8 OTHER MATTERS
|
8.1 |
There are also a number of other areas of possible change. We have not
undertaken an analysis of the possible alternatives and are
not requesting
detailed comment. However we have, for the sake of completeness, briefly
mentioned these matters below.
|
Licensing or Registration
|
8.2 |
Licensing or registration is the chief form of regulation in many overseas
jurisdictions. Australia, the United Kingdom and the United
States of America
prohibit undertaking the business of giving investment advice unless the
provider of that advice is licensed or
authorised in some form.
|
|
8.3
|
Although New Zealand does have a system of authorisation for futures
dealers, trustees and statutory supervisors (and licensing for
stock brokers)
instituting a licensing or registration regime to cover investment advisers
would entail a major policy shift.
|
Compulsory Membership in a Professional Body
|
8.4 |
Lawyers in New Zealand must be members of the New Zealand Law Society ("the
NZLS"). The NZLS has certain standards of conduct which
it can enforce. The NZLS
also has certain standards which persons wishing to become lawyers must meet. A
similar system could be
instituted for investment advisers.
|
|
8.5
|
The United Kingdom has a system whereby investment advisers must be
registered. In the past, in most cases, they must be members of
a self
regulatory organisation (SRO) to be registered. The government regulator
approves and supervises SROs. The Financial Services
Act provides that members
of SROs recognised by the government regulator are treated as registered
(technically authorised to carry
on investment business) by virtue of their
membership of the SRO. There are a few firms that are registered directly with
the government
regulator. The SROs are in principle responsible for different
sectors of the market to reflect the regime's approach of regulating
on a
functional rather than on an institutional basis. However we note that the
United Kingdom is now moving away from this model.
|
|
8.6
|
Self-regulation does have some precedents in New Zealand. For example
listed companies are party to the listing rules of the New Zealand
Stock
Exchange. These impose contractual obligations that can be enforced by the
Exchange.
|
Statutorily Reserved Professional Designation
|
8.7 |
An alternative to licensing persons to undertake the business of investment
advisers would be to restrict the use of generic terms
such as "certified
financial planner" to persons who were authorised for this
purpose.
|
|
8.8
|
A statutorily reserved professional designation could take a similar form
to that of Chartered Accountants. Designation could be attained
by meeting
certain criteria (for example educational qualifications) and could be
administered by approved statutorily empowered
industry bodies approved by the
Commission. This could be a step towards a system of self-regulatory
bodies.
|
Know Your Client Rules
|
8.9 |
Some jurisdictions have developed know your client rules. One such system
would be where investment advisers and clients must come
to an agreement. The
investment adviser would be required to ask the client certain things so that he
or she will be able to provide
investment advice that fits the client's personal
circumstances. This may include seeking information from its customers about
their
financial situation, investment experience and investment objectives
relevant to the services to be provided. The adviser would be
required to make
reasonable inquiries about the appropriateness of the product and have regard to
the client information in the recommendation.
We note that the New Zealand Stock
Exchange has developed know your client rules for its members.
|
Cold Calling and Telephone Solicitation Rules
|
8.10 |
Recently we have seen an increase in problems relating to people we would
categorise as overseas investment advisers and investment
brokers who are cold
calling New Zealanders. We have not encountered problems with cold calling
originating from within New Zealand.
Often the overseas brokers appear to target
small businesses and persons with limited investment experience. The general
pattern
appears to be that the overseas brokers will make an initial call. This
will be followed by use of hard-sell techniques. If the New
Zealander sends
money overseas often all goes well until he or she decides to cash in the
investment. At this point the overseas
broker may stop making or receiving
telephone calls and there can be no way of recovering the investment
money.
|
|
8.11
|
It is difficult to effectively deal with this problem by direct means. The
brokers are outside the jurisdiction. We can encourage
better standards of
decision making by investors. We consider that making an initial disclosure
statement mandatory would help. If
investors expect to and are in the habit of
receiving a disclosure statement before investing funds they may be more
cautious before
remitting money on the basis of an unsolicited telephone call
from people they know nothing of. They will understand that they should
not
receive or act on investment advice over the telephone until they have more
information about the investment adviser.
|
|
8.12
|
Some jurisdictions, including Australia, the United Kingdom and Hong Kong,
have rules pertaining to telephone solicitation. We may
wish to consider a
similar rule. This could either prohibit cold calling by investment advisers and
investment brokers or make telephone
contracts with investment advisers (or
investment brokers) unenforceable by the investment adviser unless the telephone
call was
made at the invitation of that investor and the investment adviser
provides the investor with a written disclosure statement.
|
|
8.13
|
It may be that provision for a mandatory initial disclosure statement would
help to deal with this problem in New Zealand as investment
advisers would not
legally be able to give investment advice over the telephone until a written
investment adviser disclosure statement
had been provided to the potential
investor.
|
APPENDIX "A": DISCUSSION QUESTIONS
People responding to the discussion questions via email, may do so from this form.
We would be pleased to receive any views, observations or comments that you may wish to make to us about this paper and would be grateful to have our attention drawn to any important considerations that we may have overlooked. We would be interested to hear about any problems that people have had with the investment adviser legal regime. We would also appreciate it if submissions were to include views in respect of the questions set out below. Reasons and examples would be very helpful. Submissions should reach the Commission by 22 October 2001.
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
APPENDIX "B": AUSTRALIA'S LICENCE REVOCATION AND BANNING ORDER LAWS
APPENDIX "C": INVESTMENT ADVISERS (DISCLOSURE) ACT 1996
ANALYSIS
|
1. |
Short Title and commencement
|
|
2.
|
Interpretation
|
|
Disclosure by Investment Advisers and Investment Brokers
|
|
|
3.
|
Initial disclosure by investment advisers and investment brokers
|
|
4.
|
Request disclosure by investment advisers
|
|
Method of Disclosure
|
|
|
5.
|
Method of disclosure
|
|
Disclosure not to be Misleading
|
|
|
6.
|
Disclosure not to be misleading
|
|
Enforcement
|
|
|
7.
|
Power to order certain persons not to give investment advice or receive
investment money or investment property
|
|
8.
|
Injunctions may be granted by Court for contravention
|
|
9.
|
Order to disclose information
|
|
10.
|
Civil action for failure to disclose
|
|
11.
|
Offences and penalties
|
|
12.
|
Regulations
|
1996, No. 104
An Act to require the disclosure of
certain information by persons who - (a) Give investment advice to the public;
or (b) Receive
money or property for investment from the public as
intermediaries
[2 September 1996
BE IT ENACTED by the Parliament of New Zealand as follows:
|
1 |
Short Title and commencement- (1) This Act may be cited as the
Investment Advisers (Disclosure) Act 1996.
|
|
(2)
|
Subject to subsection (3) of this section, this Act shall come into force
on a date to be appointed by the Governor-General by Order
in Council.
|
|
(3)
|
This Act shall come into force on the 1st day of October 1997 if no Order
in Council is made under subsection (2) of this section
appointing a date that
is earlier than that date as the date for the coming into force of this
Act.
|
|
2
|
Interpretation- (1) In this Act, unless the context otherwise
requires,- "Address" means,-
|
|
|
(a)
|
In the case of an individual, both-
|
|
|
|
(i) |
The address of the individual's principal place of business in New Zealand
(if any) or, if the individual does not have a place of
business in New Zealand,
the address of the individual's principal place of business outside New Zealand;
and
|
|
|
(ii)
|
The city, town, or district (whether in New Zealand or elsewhere) in which
the principal residence of the individual is
situated:
(b) In any other case, the address of the person's principal place of business in New Zealand (if any) or, if the person does not have a place of business in New Zealand, the address of the person's principal place of business outside New Zealand: |
"Business" includes any profession, trade, or undertaking, whether or not
carried on with the intention of making a pecuniary profit:
"Buy" means
purchase, acquire, or subscribe for, or agree to buy, purchase, acquire, or
subscribe for:
"Court" means a District Court:
"Director", in relation to
a body corporate or unincorporate, includes any person who has substantial
control or influence over the
conduct of the affairs of the
body:
"Disclosure" means disclosure under either section 3 or section 4 of
this Act:
"Employment" includes a relationship in the nature of
employment:
"Investment advice" and "advice" mean-
|
|
(a) A recommendation, opinion, or guidance given to a
member of the public in relation to buying or selling (or not buying or selling)
securities; and
|
|
|
(b)
|
Without limiting paragraph (a) of this definition, include any such
recommendation, opinion, or guidance, that is communicated by
letter, newspaper,
periodical, broadcasting, sound recording, television, cinematographic film,
video, or any form of electronic
or other means of communication; but-
|
|
|
(c)
|
Do not include-
|
|
|
|
(i) |
Any such recommendation, opinion, or guidance given by a person whose
principal occupation is that of a journalist and that is given
in that person's
capacity as a journalist; or
|
|
|
(ii)
|
Any such guidance about the procedure for buying or selling
securities:
|
"Investment adviser" and "adviser" mean a person (whether or not the person is also an investment broker) who, in the course of the person's business or employment, gives investment advice; and,-
|
(b) |
Do not include the issuer or a promoter or a trustee (within the meaning of
the Securities Act 1978 or the Unit Trusts Act 1960) or
statutory supervisor
(within the meaning of the Securities Act 1978), of the particular securities to
which the advice relates; and
|
|
(c)
|
Do not include a person who only transmits investment advice relating to
particular securities given by the issuer or a promoter or
a trustee (within the
meaning of the Securities Act 1978 or the Unit Trusts Act 1960) or statutory
supervisor (within the meaning
of the Securities Act 1978), of those
securities:
|
"Investment broker" and "broker" mean a person (whether or not the person is also an investment adviser) who, in the course of the person's business or employment, receives investment money or investment property; and,-
|
|
(a) Where a person is receiving such investment money
or investment property in the course of his or her employment, include both
that
person and his or her employer; but
|
|
|
(b)
|
Do not include-
|
|
|
|
(i) |
The issuer or a trustee (within the meaning of the Securities Act 1978 or
the Unit Trusts Act 1960); or
|
|
|
(ii)
|
A nominated person of a trustee (within the meaning of the Unit Trusts Act
1960); or
|
|
|
(iii)
|
A nominee of a nominated person of a trustee (within the meaning of the
Unit Trusts Act 1960); or
|
|
|
(iv)
|
A statutory supervisor (within the meaning of the Securities Act 1978);
or
|
|
|
(iv)
|
A security registrar appointed by the issuer-
of a security to which the investment money or investment property relate |
|
|
and
|
|
|
(c)
|
Do not include a person who only transmits investment money or investment
property to a person to whom paragraph (b) of this definition
applies, without
being able to apply the money or property for any other purpose:
|
|
"Investment money" and "money", in relation to an investment broker, mean any
money received from, or on account of, a member of the
public in relation to
buying or selling securities:
"Investment property" and "property", in
relation to an investment broker, mean security certificates or other valuable
property received
from, or on account of, a member of the public in relation to
buying or selling securities:
"Investor" means a member of the public to whom
investment advice is given, or on whose behalf investment money or investment
property
is held by an investment adviser or an investment broker:
"Person"
includes an individual, a corporation, an unincorporated body of persons, and an
association or combination of individuals
or corporate or unincorporated
bodies:
"Receive", in relation to a document, information, or other matter,
includes receive by electronic or other means that enables the
recipient to
readily store the matter in a permanent and legible form:
"Remuneration"
means a commission, fee, or other benefit or advantage, whether pecuniary or
not, and whether direct or indirect; but
does not include a salary or wages of a
fixed amount:
"Security" means a security (within the meaning of the
Securities Act 1978) that is being, or has previously been, offered to the
public for subscription; but does not include-
|
|
|
(a) A security exempted from Part II of the Securities
Act 1978 by any of paragraphs (b) to (h) of section 5(1) of that Act;
or
|
|
(b)
|
A call debt security as defined in regulations made under that
Act:
"Sell" includes- |
|
|
|
(a)
|
Allot, transfer, dispose of, withdraw, or terminate; and
|
|
|
(b)
|
Agree to sell, allot, transfer, dispose of, withdraw, or terminate:
|
"Seller" includes an issuer within the meaning of section 2(1) of the
Securities Act 1978:
"Send", in relation to a document, information, or other
matter, includes send by electronic or other means that enables the recipient
to
readily store the matter in a permanent and legible form:
"Voting security"
has the same meaning as in section 2 of the Securities Amendment Act
1988:
"Working day" means a day of the week other than-
|
|
|
(a) Saturday, Sunday, Good Friday, Easter Monday, Anzac
Day, the Sovereign's Birthday, Labour Day, and Waitangi Day; and
|
|
(b)
|
A day in the period commencing with the 25th day of December in any year
and ending with the 2nd day of January in the following year;
and
|
|
|
|
(c)
|
If the 1st day of January in any year falls on a Friday, the following
Monday; and
(d) If the 1st day of January in any year falls on a Saturday or a Sunday, the following Monday and Tuesday: |
"Writing" includes-
|
|
(a) |
The recording of words in a permanent and legible form; and
|
|
|
(b)
|
The display of words by any form of electronic or other means of
communication in a manner that enables the words to be readily stored
in a
permanent form and, with or without the aid of any equipment, to be retrieved
and read;-
and "written" has a corresponding meaning. |
|
(2)
|
For the purposes only of determining whether investment advice is given to
the public or investment money or investment property is
received from the
public, section 3 of the Securities Act 1978 (which relates to the construction
of references to offering securities
to the public) shall apply as if every
reference in that section to an offer of securities were a reference to the
giving of investment
advice or receiving of investment money or investment
property, as the case may be.
|
|
|
(3)
|
For the purposes of this Act, unless the context otherwise requires,
"associated persons" or "persons associated with each other"
are-
|
|
|
|
(a)
|
Persons who are relatives within the meaning of the Income Tax Act 1994;
or
|
|
|
(b)
|
Persons who are partners to whom the Partnership Act 1908 applies; or
|
|
|
(c)
|
Bodies corporate that consist substantially of the same shareholders or are
under the control of the same persons; or
|
|
|
(d)
|
A body corporate and a person who has the power, directly or indirectly, to
exercise, or control the exercise of, the right to vote
attached to 25 percent
or more of the voting securities of the body corporate; or
|
|
|
(e)
|
A body corporate and a person who is a director or principal officer of the
body corporate.
|
Disclosure by Investment Advisers and Investment Brokers
|
3
|
Initial disclosure by investment advisers and investment brokers-
(1) Every investment adviser and investment broker (or, in the case of an
adviser or broker that is a body corporate or unincorporate,
any of whose
directors or secretary) who, during the 5 years preceding the date of giving
investment advice or receiving investment
money or investment property, as the
case may be,-
|
|
|
|
(a)
|
Has been convicted of an offence against this Act, or of a crime involving
dishonesty (as defined in section 2(1) of the Crimes Act
1961); or
|
|
|
(b) |
Was a director or principal officer of a body corporate at the time the
body corporate committed such an offence; or
|
|
|
(c)
|
Has been adjudged bankrupt; or
|
|
|
(d)
|
Has been prohibited by an Act or by a court from taking part in the
management of a company or a business,-
|
|
|
shall, in accordance with section 5 of this Act, disclose that fact to the
investor concerned before giving the investment advice
or receiving the
investment money or the investment property.
|
|
|
(2)
|
Every investment broker who receives investment money or investment
property shall, before receiving the money or property, disclose
to the investor
concerned, in accordance with section 5 of this Act, a brief description of the
procedures of the broker (or, where
the broker is acting in the course of his or
her employment, of the employer) relating to the receipt and disbursement of the
money
or receipt and distribution of the property by the broker,
including-
|
|
|
|
(a) |
How payment or delivery of money or delivery of property should be made to
the broker; and
|
|
|
(b)
|
Whether or not the money or property received by the broker will be held on
trust for the investor, and will be so held until it is
disbursed or distributed
in accordance with the investor's instructions; and
|
|
|
(c)
|
What records will be kept by the broker in relation to the money or
property, whether the investor has access to those records, and
the terms of any
such access; and
|
|
|
(d)
|
Whether or not the receipt, holding, and disbursement of the money and the
receipt, holding, and distribution of the property, by
the broker will be
audited by an auditor and, if so, the name of the auditor; and
|
|
|
(e)
|
The extent, if any, to which the broker can use the money or property for
the benefit of the broker or any other person; and
|
|
|
(f)
|
Such other information as is required to be disclosed under this subsection
by regulations made under this Act.
|
|
|
||
|
(3)
|
For the purposes of subsection (2)(d) of this section, the term "auditor"
means a person who would, if the broker were an issuer of
securities, be a
qualified auditor within the meaning of section 2C of the Securities Act
1978.
|
|
APPENDIX "C": INVESTMENT ADVISERS (DISCLOSURE) ACT 1996 (Cont...)
|
4.
|
Request disclosure by investment advisers- (1) Every investment
adviser shall, on request (whether made orally or in writing) by an investor to
whom that adviser is giving
or, during the preceding month has given, investment
advice, disclose to that investor, as soon as practicable, and in any event
not
later than 5 working days after the request and in accordance with section 5 of
this Act, such of the following information (current
at the date of the request)
as has not already been disclosed to the investor in accordance with that
section:
|
|
|
|
(a) |
The name of any relevant organisation with which the adviser has a
relationship and a description of that relationship:
|
|
|
(b)
|
The types of securities about which the adviser gives advice; and, if the
adviser gives advice only about securities of a particular
issuer or particular
issuers, a statement to this effect and the name of each of the issuers
concerned:
|
|
|
(c)
|
Any qualifications of the adviser that are relevant to the giving of
investment advice, when those qualifications were obtained, and
a brief
description of the extent to which the adviser has kept up to date the knowledge
gained in obtaining those qualifications:
|
|
|
(d)
|
A brief description of the adviser's experience as an investment
adviser:
|
|
|
(e)
|
Whether or not the adviser or an associated person has, or will or may
have, a direct or indirect pecuniary or other interest in giving
investment
advice to the investor (being an interest that is reasonably likely to influence
the adviser in giving the advice) and,
if so, the nature of that interest:
|
|
|
(f)
|
Without limiting paragraph (e) of this subsection, if the adviser or an
associated person has received, or will or may receive,-
(g) Such other information as is required to
be disclosed under this subsection by regulations made under this Act.
|
|
|
||
|
(2)
|
In this section, the term "request" means a request for any or all of the
information referred to in paragraphs (a) to (g) of subsection
(1) of this
section.
|
|
Method of Disclosure
|
5.
|
Method of disclosure- Subject to regulations made under this Act,
disclosure under this Act to an investor must,-
|
|
|
|
(a) |
Unless the disclosure is made by way of broadcasting (within the meaning of
the Broadcasting Act 1989), be made in writing; and
|
|
|
(b)
|
In the case of an investment adviser or investment broker, other than an
employee of an investment adviser or investment broker, state
the name, address,
and business telephone number of the investment adviser or investment broker
concerned; and
|
|
|
(c)
|
In the case of an investment adviser or investment broker who is an
employee of an investment adviser or investment broker, state
the name of that
employee; and
|
|
|
(d)
|
Be either received by the investor or delivered or sent to the investor at
the investor's last known address or an address (including
an electronic
address) specified by the investor for this purpose.
|
Disclosure not to be Misleading
|
6. |
Disclosure not to be misleading- Disclosure under this Act must not
be deceptive, misleading, or confusing in a material respect at the time that it
is made.
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Enforcement
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7.
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Power to order certain persons not to give investment advice or receive
investment money or investment property- (1) Where a person-
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(a) |
Has been convicted of an offence against this Act, or of a crime involving
dishonesty (as defined in section 2(1) of the Crimes Act
1961); or
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(b)
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Has failed, more than once, to comply with this Act; or
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(c)
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Was a director or principal officer of a body corporate at the time the
body corporate committed such an offence or so failed,-
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the Court may make an order prohibiting or restricting the person from
doing all or any of the following things:
(d) Giving investment advice to, or receiving investment money or investment property from, the public: |
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(e)
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Acting as a director, or taking part directly or indirectly in the
management or control, of any company or business that is an investment
adviser
or an investment broker:
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(f)
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Being an employee, or acting as agent, of an investment adviser or an
investment broker in a capacity that allows the person to take
part in the
giving of investment advice to, or receiving investment money or investment
property from, the public.
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(2)
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Any person may, with the leave of the Court, apply to the Court for an
order under this section.
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(3)
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An order under this section-
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(a)
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May be for a specified period of time or without any time limit, and may be
made on such terms and conditions as the Court thinks
fit; and
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(b)
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May be cancelled or varied at any time by the Court.
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(4)
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In proceedings under this section, the Court may make an order for the
payment by a party to the proceedings of the whole or part
of the full costs
(including reasonable costs incurred between solicitor and client, fees, and
other expenses) incurred by any other
party to the proceedings, and, in any such
case, the costs so awarded are recoverable as a debt by the party against whom
they have
been awarded to the party in whose favour they have been
awarded.
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8.
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Injunctions may be granted by court for contravention- (1) The Court
may, on the application of any person made with the leave of the Court, grant an
injunction restraining a person from
engaging in conduct that constitutes or
would constitute a contravention of a provision of this Act or an attempt to
contravene such
a provision.
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(2)
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The Court may, at any time, rescind or vary an injunction granted under
this section.
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(3)
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Where an application is made to the Court under this section for the grant
of an injunction restraining a person from engaging in
conduct of a particular
kind, the Court may,-
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(a) |
If it is satisfied that the person has engaged in conduct of that kind-
whether or not it appears to the Court that the person intends to
engage again, or to continue to engage, in conduct of that kind;
or
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(b)
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If it appears to the Court that, in the event that an injunction is not
granted, it is likely that the person will engage in conduct
of that kind,-
whether or not the person has previously engaged in conduct of
that kind and whether or not there is an imminent danger of substantial
damage
to any person if the first-mentioned person engaged in conduct of that
kind.
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9. |
Order to disclose information- Where, on the application of any
person made with the leave of the Court, the Court is satisfied that a person
has engaged in conduct
constituting a contravention of a provision of this Act,
the Court may (whether or not that person has previously engaged in such
conduct), make an order requiring that person, or any other person involved in
the contravention, to disclose, at that person's own
expense, to the public, or
to a particular person or to persons of a particular class, in such manner as is
specified in the order,
such information, or information of such kind, as is so
specified, being information that is in the possession of the person to whom
the
order is directed or to which that person has access.
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10.
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Civil action for failure to disclose- (1) Where, on the application
(made with the leave of the Court) of any person-
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(a) |
Who has received investment advice from an investment adviser; or
(b) Whose investment money or investment property has been paid or delivered to an investment adviser or an investment broker,- |
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the Court is satisfied that the adviser or broker has engaged in conduct
constituting a significant contravention of a provision of
this Act, the Court
may (whether or not that adviser or broker has previously engaged in such
conduct and whether or not the person
has suffered any loss as a result of the
conduct), make an order requiring that adviser or broker to pay to the person an
amount
determined by the Court not exceeding,-
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(c)
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If the adviser or broker is an individual, $10,000; or
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(d)
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In any other case, $30,000-
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(2)
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Proceedings under this section may be commenced at any time within 3 years
after the contravention occurred.
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11.
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Offences and penalties- (1) Every person who, without reasonable
excuse, contravenes any of the provisions of this Act commits an offence and is
liable
on summary conviction, to a fine not exceeding,-
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(a) |
If the person is an individual, $10,000; or
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(b)
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In any other case, $30,000.
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(2)
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Where a person is convicted, whether in the same or separate proceedings,
of 2 or more offences in respect of contraventions of the
same provisions of
this Act and those contraventions are of the same or a substantially similar
nature and occurred at or about the
same time, the aggregate amount of any fines
imposed on that person in respect of those convictions shall not exceed the
amount of
the maximum fine that may be imposed in respect of a conviction for a
single offence.
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(3)
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(3) Proceedings under this section may be commenced at any time within 3
years after the matter giving rise to the contravention arose.
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12.
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Regulations- (1) The Governor-General may from time to time, by
Order in Council, in accordance with the recommendation of the Securities
Commission,
make regulations for all or any of the following purposes:
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(a) |
Requiring information to be disclosed under section 3 or section 4 of this
Act:
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(b)
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Prescribing the method of disclosure under this Act:
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(c)
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Providing for such other matters, not inconsistent with this Act, as are
contemplated by or necessary for giving full effect to the
provisions of this
Act and for its due administration.
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(2)
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The provisions of section 70(3) of the Securities Act 1978, including the
provisos, shall apply in relation to any recommendation
by the Securities
Commission.
This Act is administered in the Ministry of Commerce |
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APPENDIX "A": DISCUSSION QUESTIONS
We would be pleased to receive any views, observations or comments that you may wish to make to us about this paper and would be grateful to have our attention drawn to any important considerations that we may have overlooked. We would be interested to hear about any problems that people have had with the investment adviser legal regime. We would also appreciate it if submissions were to include views in respect of the questions set out below. Reasons and examples would be very helpful. Submissions should reach the Commission by 22 October 2001.
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
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Organisation:
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Address:
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URL: http://www.nzlii.org/nz/other/NZSecCom/2001/3.html