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Investment Adviser Law Reform: Formal Recommendations of the Securities Commission [2002] NZSecCom 2 (21 February 2002)

Last Updated: 7 November 2014

Investment Adviser Law Reform

21 February 2002

Hon Paul Swain
Minister of Commerce
Parliament Buildings
WELLINGTON

Dear Mr Swain

INVESTMENT ADVISERS (DISCLOSURE) ACT 1996

Introduction

1. I have the honour to present recommendations of the Securities Commission under section 10 of the Securities Act 1978 for reform of the Investment Advisers (Disclosure) Act 1996. These are attached.
2. These recommendations follow a formal review of the Act over several months. We published a discussion paper on important questions relating to investment advisers and invited public comment. We received a significant number of submissions. The Commission has had full regard to these submissions, also the many varied views that it has heard both formally and informally, to local and overseas precedents, and to the experience of individual Members of the Commission, in preparing its recommendations.
3. The current New Zealand investment adviser legal regime emerged as part of the 1993 Accord on Retirement Income Policies entered into by the Alliance, Labour and National Parties. One outcome of the accord was a decision to adopt disclosure as the basis for the New Zealand investment adviser regime rather than move towards other policy models such as licensing.
4. The main legislation implementing the principle of disclosure in regard to investment advisers, the Investment Advisers (Disclosure) Act 1996, aims to ensure that people have access to sufficient information about the advisers they deal with to make an informed decision whether to ask them for investment advice and whether to rely on investment advice received. This law is backed by statutory rules of law about fair trading and consumer guarantees.
5. The Commission considers the law relating to investment advisers to be important. Investment advisers perform an important function in advising the public on investment and in marketing for the raising of capital. We consider that there are a number of shortcomings in the present law. We consider that these shortcomings are likely to disadvantage investors, detrimentally affect peoples' perception of New Zealand as a country to invest in and lead to inefficient allocation of investment funds. We consider that the law relating to investment advisers could be substantially improved within the boundaries of existing policy.

Recommendations

Definitions

6. We recommend that the term "investor" be replaced, whenever it appears in the Act, with the term "member of the public" so as to ensure that the law applies in respect of members of the public generally rather than existing investors only.
7. We also recommend that the Act be amended to clarify the manner in which it applies to employees of the issuer, promoter or trustee of any securities offered to the public who give investment advice.

The Disclosure Regime

8. The Investment Advisers (Disclosure) Act 1996 provides for a two-tier system of disclosure. The first tier consists of matters that it is mandatory to disclose before giving investment advice. This includes matters such as any conviction of a crime involving dishonesty or any adjudication of bankruptcy during the 5 years preceding the date of giving advice. The second tier consists of matters that need only be disclosed on request. This relates to the qualifications and experience of the investment adviser and matters that could indicate conflicts of interest (such as relationships with relevant organisations, commissions and other interests).
9. The request information is important. Prospective investors should be aware of it. We note that there is potential for economic interests (in commissions for example) to conflict directly with a client's interest in making an investment. Information about qualifications and experience is also important. We recommend that investment advisers should be required to disclose both the initial and request information before giving advice.
10. We recommend partial exemptions for persons who give investment advice to members of the public by way of broadcast, newspapers or periodicals. We recommend that the investment adviser should be required to say that disclosure information is available in such situations.
11. We recommend that the Commission have a power of exemption to deal with practical problems for investment advisers in disclosing information. We also recommend that there be provision for dealing with the timing of disclosure in special cases, for example where the advice is given by broadcast, by way of regulation. If the Government agrees to this approach we should be pleased to assist the Government in developing proposals for regulation.

Updated disclosure

12. We recommend that where an investment adviser fails to provide updated information in respect of matters that are not material, it shall be a defence in any proceeding that the investment adviser has previously provided information that complies with the Act to the member of the public.

Reference to investment adviser disclosure in advertisements

13. We recommend that it be mandatory for advertisements that promote the services of an investment adviser to refer to the availability of investment adviser disclosure information.

Content of investment adviser disclosure

14. We recommend a number of matters that would be useful additions to the list of matters that must be disclosed and that we do not think will impose substantial compliance costs. These are:
    • The date on which the disclosure statement was prepared.
    • The nature and level or rate of fees that will be charged for the service.
    • Whether the investment adviser is a member of a professional body.
    • What dispute resolution facilities are available to clients.
15. We also make recommendations to clarify the extent of disclosure in regard to interests and benefits received as a result of giving investment advice.

An offence to recommend or act as an investment broker for illegal offers of securities

16. Generally offers of securities to the public are brought to the attention of the public by either the issuer / promoter or by a person acting as an investment adviser. We consider that the Securities Act and Regulations credibly regulate the role of the issuer and the promoter. However significant questions arise regarding the role of investment advisers as a conduit for illegal offers of securities.
17. We have observed an increasing number of illegal offers of investment products, often sourced from outside of the country, being recommended to people in New Zealand. This has become a significant problem. In some cases the investment products have been promoted through New Zealand based investment advisers. Significant amounts of money are placed with these schemes, often by unsophisticated investors who may not be well placed to cope with losses. The Police submission to us states that they are receiving increasing numbers of public inquiries about investment scams.
18. We recommend that it be an offence for an investment adviser to advise people to accept illegal offers of securities.

Enforcement

Commission standing under the Investment Advisers (Disclosure) Act

19. The Act does not at present designate an enforcement agency. It was anticipated at the time the law was enacted that investors might themselves be willing to enforce the law. We recommend that the Commission have standing to take Court action under the Act as an enforcement body.
20. The current convention in regard to enforcement of securities law more generally is for the Registrar of Companies to be the prosecuting body for securities offences while the Commission has certain administrative powers for the purpose of protecting the position of investors, for example, by suspending offer documents, rather than imposing penalties on those who have not complied with the law. It may be desirable for prosecutions to be taken in conjunction with other administrative type Court actions under the Act, by the Commission rather than the Registrar.

Suspension or prohibition of investment adviser disclosure statements

21. We recommend that the Commission have a power to suspend or prohibit investment adviser disclosure statements and that there be an offence on summary conviction for any person to breach a Commission order. This would be analogous to suspending and prohibiting investment statements or prospectuses under the Securities Act.

Suspension or prohibition of investment adviser advertisements

22. The Commission can prohibit advertisements of issuers that it considers are likely to deceive, mislead or confuse, are inconsistent with any registered prospectus referred to in it or do not comply with the Securities Act or Regulations. There are occasions where it may be appropriate for the Commission to prohibit a deceptive, misleading or confusing advertisement of an investment adviser or an advertisement of an investment adviser that does not comply with securities law. We recommend that there also be an offence on summary conviction to breach a Commission order.

Commission powers to suspend investment advisers and investment brokers

23. The Act at present provides for the Court to have the power to order an investment adviser not to give investment advice or an investment adviser not to receive investment money, in appropriate circumstances. We recommend that the Commission be empowered to suspend persons from giving investment advice or receiving investment money, in appropriate circumstances, for up to 15 working days. We recommend that it be an offence on summary conviction to breach a Commission order
24. We would expect such a power to be used where the Commission is considering preparing to make an application for a Court injunction under the Act. This could provide the Commission with power to make interim prohibitions that could later be made permanent by application to the Court.

Powers to freeze investment broker accounts

25. We recommend that the Commission have powers to freeze investment broker accounts or require investment brokers to place investment money in a trust account for up to 15 working days. This will be where, in the opinion of the Commission, the investment broker has received investment money or investment property to buy securities where the investment broker has not complied with the Act, or the offer of securities does not comply with the Securities Act or Regulations. Again this power might be used where the Commission is considering making an application to the Court.
26. We recommend that the Court have equivalent powers to make orders on suitable terms and conditions. We also recommend that the Court have powers to order the investment money or investment property to be paid to the member of the public who provided it.

Other

27. We consider these measures, if enacted, will strengthen the integrity of the investment process in New Zealand and will strengthen public confidence in the investment advisory industry. These measures would fit into the package of reform of the securities markets that the government has embarked upon. A number of the recommendations that we have made, in particular those in regard to disclosure, would bring New Zealand investment adviser law closer to that of Australia.
28. While our view is that there would be significant benefits outweighing what we believe will be the comparatively minor costs of such reform, we have not undertaken a systematic economic cost-benefit analysis of our recommendations. We think it appropriate that such an analysis be undertaken. We understand that the Ministry of Economic Development will be responsible for conducting a cost benefit analysis. The principal areas of analysis will be the cost to industry of compliance with the law and the cost to the Commission and the Companies Office of monitoring compliance with and enforcing the law as amended.
29. With the Ministry's encouragement, the discussion paper asked whether any further matters that relate to the role of investment advisers, should be addressed. We received numerous submissions on this. We do not comment on all points raised by the submissions here. We have not made formal recommendations on any of these matters but consider it useful to draw some to your attention. These are:

• Should there be licensing or registration of investment advisers or compulsory membership in a professional body?
• Should educational and competency standards be introduced for investment advisers?
• Should the overlap between securities law and fair trading law in regard to securities matters, including the conduct of investment advisers, be addressed?
• Should dispute tribunals have jurisdiction, within a prescribed monetary limit, where the Investment Advisers (Disclosure) Act 1996 applies? Is there any practical possibility of a parallel jurisdiction for the Insurance and Savings Ombudsman or an equivalent body?
• Should there be a general prohibition of unconscionable conduct by investment advisers (to capture churning, for example)?
• Should the licensing procedures within the Sharebrokers Act 1908 be reviewed?
• Should further consideration be given to the role of self-regulatory organisations?
• Should introduction of know your client rules be considered (that the adviser should be obliged to obtain relevant information about the investment needs of the client to ensure that any advice tendered is suitable to the client)? In considering this it should be kept in mind that elements of the know your client rules are addressed by the Consumer Guarantees Act 1993.
• Should the definition of investment adviser be extended to people offering equivalent advice, for example people offering advice on term insurance policies?

30. We have informed officials from the Ministry of Economic Development of the nature of the Commission's recommendations and have passed background information to the Ministry, in particular, the formal submissions we received on the discussion paper and our analysis of the submissions.
31. We look forward to learning the decisions of the Government on our recommendations. We should be pleased to assist in your formal review of these recommendations.

Yours sincerely

Jane Diplock
Chairman

Investment Adviser Law Reform: Formal Recommendations of the Securities Commission
21 February 2002
These recommendations are made available to the public at the request of the Minister of Commerce.

In accordance with section 10(b) of the Securities Act 1978, the Securities Commission makes the following recommendations for reform of the Investment Advisers (Disclosure) Act 1996 ("the Act"):

Definitions

1. We recommend that the term "investor" be deleted from the Act and be replaced, whenever it appears in the Act, with the term "member of the public" and that any necessary consequential change be made to the definition of public in section 2(2) of the Act.
2. We recommend that the definition of "investment adviser" in section 2 be clarified by stating for the avoidance of doubt that the exclusion of the issuer or promoter or trustee in paragraph (b) does not extend to employees, agents and persons otherwise associated with issuers, promoters and trustees who give investment advice. However the exclusion of persons who only transmit advice as is presently provided for in paragraph (c) should continue to apply.
3. We recommend that (if the recommendations made at paragraphs 16 and 29 to 33 are enacted) definitions be provided for advice advertisement, broker advertisement and product advertisement equivalent to the definition of advertisement in section 2A of the Securities Act 1978. We suggest the following drafting of the definitions:

""advice advertisement" for the purposes of this Act means a form of communication-

1. That-
   1. Contains or refers to investment advice; or
   2. is reasonably likely to induce persons to obtain investment advice; and
2. That is authorised or instigated by, or on behalf of, an investment adviser or prepared with the co-operation of, or by arrangement with, an investment adviser; and

100. That is to be, or has been, distributed to a person."

""broker advertisement" for the purposes of this Act means a form of communication-

4. That-
   1. contains or refers to an investment broker; or
   2. is reasonably likely to induce persons to obtain investment broker services; and
5. That is authorised or instigated by, or on behalf of, an investment broker or prepared with the co-operation of, or by arrangement with, an investment broker; and
6. That is to be, or has been, distributed to a person."

""product advertisement" for the purposes of this Act means a form of communication-

7. That-
   1. contains or refers to an offer of securities to the public for subscription; or
   2. Is reasonably likely to induce persons to subscribe for securities of an issuer, being securities to which the communication relates and that have been, or are to be, offered to the public for subscription; and
8. That is authorised or instigated by, or on behalf of, an investment adviser or prepared with the co-operation of, or by arrangement with, an investment adviser; and
9. That is to be, or has been, distributed to a person."

Investment adviser disclosure

4. We recommend that sections 3(1) and 4 be amended to disestablish the distinction between initial disclosure and request disclosure and to require every investment adviser to provide investment adviser disclosure to members of the public before giving them investment advice or, in the case of any particular information prescribed in the Act or in regulations made under the Act, at such other times and on such terms and conditions as may be prescribed by the regulations.
5. We recommend that the content of section 3(2) remain unchanged in regard to investment brokers.
6. We recommend that the Commission have a power to exempt, at its discretion and upon such terms and conditions (if any) as it sees fit, by notice in the Gazette, any person or class of persons from provisions of the Act or any regulations made under the Act.
7. We recommend that section 12 be amended to enable the Governor General from time to time, by Order in Council, to make regulations to prescribe the times within which and the terms and conditions on which any particular information prescribed in the Act or in regulations made under the Act shall be disclosed.
8. We recommend that persons who give investment advice to members of the public by way of broadcast, newspaper or periodical be excluded from the requirement to make investment adviser disclosure in respect of that advice at the time in relation to the matters currently covered as request disclosure in section 4 of the Act and the additions recommended at paragraph 11 subject to Regulations. We recommend that reference should be made at the time to the availability of investment adviser disclosure information about the investment adviser on request. We recommend that definitions be provided for the terms "newspaper" and "periodical".

Defence relating to updated disclosure

9. We recommend that the Act specify that where an investment adviser or investment broker has previously disclosed information to a member of the public in accordance with the Act and the disclosure no longer meets the requirements of the Act as a result of a change in circumstances, then if the non-compliance was in the opinion of the Court dealing with the case not material:
   1. the investment adviser or investment broker shall not be liable under the offence provisions of the Act;
   2. the powers in section 7 shall not available;
   100. the powers in section 8 shall not be available;
   4. the powers in section 9 shall not be available;

in respect of that non-compliance.

Content of investment adviser disclosure

10. We recommend that the Act specify that investment adviser disclosure must include all matters presently listed in both sections 3(1) and 4(1) of the Act.
11. We recommend that the Act also specify that investment adviser disclosure include:
    1. The date on which the disclosure document was prepared.
    2. The nature and level or rate of fees that will be charged for the service.
    100. Whether the investment adviser is a member of a professional body.
    4. What dispute resolution facilities are available to clients.
12. We recommend that the phrase "that is reasonably likely to influence the adviser in giving the advice" be deleted from subsection 4(1)(e).
13. We recommend that the word "material" be inserted in subsection 4(1)(e) to qualify the interests referred to in that section.
14. We recommend that the phrase "that is reasonably likely to influence the adviser in giving the advice" be deleted from subsection 4(1)(f).
15. We recommend that a further subsection be added to 4(1)(f) to require disclosure of any "material benefit" the nature of the benefit and the name of the person from whom the benefit has been, or will, or may be, received.

Reference to investment adviser disclosure statements in advertising

16. We recommend that it be mandatory for an investment adviser to refer to the availability of investment adviser disclosure information in any advice advertisement that is authorised or instigated by or on behalf of the investment adviser or prepared with the co-operation of, or by arrangement with, the investment adviser.

An offence to recommend illegal offers of securities

17. We recommend that it 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 advise a member of the public to acquire securities where the offer of those securities does not comply with the Securities Act or Regulations.
18. We recommend that the following questions be taken into account in deciding whether liability attaches:
    1. has the investment adviser advised a member of the public to buy securities where the offer of those securities does not comply with the Securities Act or Regulations;
    2. did the investment adviser know, or ought reasonably the investment adviser have known that the offer does not comply with the Securities Act or Regulations;
    100. was the non-compliance with the Securities Act or Regulations in respect of matters which were material?

We suggest the following drafting for such an offence:

"

4. Subject to subsection (2) of this section any investment adviser who in the course of business or employment advises a member of the public to buy securities where the offer of those securities does not comply with the Securities Act or Regulations and the investment adviser knew or ought reasonably to have known of this commits an offence.
5. No person shall be liable under subsection (1), if the non-compliance with the Securities Act or Regulations was in the opinion of the Court dealing with the case not material"
19. We recommend that penalties for such an offence track those in section 59 of the Securities Act 1978.

An offence to act as a broker for illegal offers of securities

20. We recommend that it be enacted as an offence, in certain circumstances and subject to certain defences, for an investment broker in the course of business or employment to receive investment money or investment property from or on behalf of a member of the public in relation to the buying of securities where the offer of those securities does not comply with the Securities Act or Regulations.
21. We recommend that the following questions be taken into account in deciding whether liability attaches:
    1. has the investment broker knowingly received investment money or investment property from or on behalf of a member of the public in relation to the buying of securities where the offer of securities does not comply with the Securities Act or Regulations;
    2. did the investment broker know or ought reasonably the investment broker to have known that the offer does not comply with the Securities Act or Regulations;
    100. was the non-compliance with the Securities Act or Regulations in respect of matters that were material?

We suggest the following drafting for such an offence:

"

4. Subject to subsection (2) of this section any investment broker who in the course of business or employment knowingly receives investment money or investment property from or on behalf of a member of the public in relation to the buying of securities where the offer of those securities does not comply with the Securities Act or Regulations and the investment broker knew or ought reasonably to have known of this commits an offence.
5. No person shall be liable under subsection (1), if the non-compliance with the Securities Act or Regulations was in the opinion of the Court dealing with the case not material."
22. We recommend that penalties for such an offence track those in section 59 of the Securities Act 1978.

Saving of liability under other law

23. We recommend that a section be added to the Act equivalent to section 65 of the Securities Act 1978 and section 50 of the Fair Trading Act 1986 to the effect that "nothing in this Act shall diminish any liability that any person may incur under any rule of law or enactment other than this Act."

Commission powers to suspend or prohibit an investment adviser or investment broker disclosure document

24. We recommend that the Commission have power to make an order to suspend for a period not exceeding 15 working days and thereafter to prohibit the distribution of any document containing investment adviser or investment broker disclosure where it is of the opinion that the disclosure does not comply with the Act.
25. We recommend that before making an order to prohibit the distribution of a document containing investment adviser or investment broker disclosure the Commission be required to give the investment adviser or investment broker referred to in the statement appropriate notice and an opportunity:
    1. To appear, or be represented, at a hearing before the Commission; and
    2. To make submissions to the Commission.
26. We recommend that it be enacted as an offence on summary conviction for any person on notice of the order to contravene such a Commission order once notice of the order has been served on the investment adviser or investment broker.
27. We recommend that the penalty for such an offence be equivalent to the penalty in section 38B(5) of the Securities Act 1978 for distributing advertisements in contravention of an order of the Commission.
28. We recommend that the Commission, if it is satisfied that the order should not continue in force, have power to revoke the order.

Commission powers to suspend or prohibit investment adviser or investment broker advertisements

29. We recommend that the Commission have power to make an order to prohibit the distribution of any advice advertisement or broker advertisement (as defined in paragraph 3), or any other advertisement to the same effect, where it is of the opinion that the advertisement is:
    1. likely to deceive, mislead or confuse; or
    2. does not comply with the Act.
30. We recommend that the Commission have power to make an order to prohibit the distribution of any product advertisement (as defined in paragraph 3), or any other advertisement to the same effect, where it is of the opinion that the advertisement is:
    1. likely to deceive, mislead or confuse;
    2. is inconsistent with any registered prospectus or investment statement for any offer of securities referred to in it; or
    100. does not comply with the Act.
31. We recommend that it be enacted as an offence on summary conviction for any person on notice of the order to contravene such a Commission order once notice of the order has been served on the investment adviser or investment broker.
32. We recommend that the penalty for such an offence be equivalent to the penalty in section 38B(5) of the Securities Act 1978 for distributing advertisements in contravention of an order of the Commission.
33. We recommend that the Commission, if it is satisfied that the order should not continue in force, have power to revoke the order.

Commission powers to suspend investment advisers or investment brokers

34. We recommend that the Commission have power to make an order to suspend any person from giving investment advice, or acting as an investment broker, for a period not exceeding 15 working days where:
    1. A person 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
    2. In the opinion of the Commission the person has failed, more than once, to comply with the Act; or
    100. The person was a director or principal officer of a body corporate at the time the body corporate, in the opinion of the Commission, failed to comply with the Act more than once.
35. We recommend that it be enacted as an offence on summary conviction to contravene such a Commission order once the investment adviser or investment broker has been notified of the order.
36. We recommend that the penalty for such an offence be equivalent to the penalty in section 38B(5) of the Securities Act 1978 for distributing advertisements in contravention of an order of the Commission.
37. We recommend that the Commission, if it is satisfied that the order should not continue in force, have power to revoke the order.

Commission powers to freeze investment broker accounts

38. We recommend that where in the opinion of the Commission an investment broker has received investment money or investment property from or on behalf of a member of the public in relation to the buying of securities where the investment broker has not complied with the Act or the offer of securities does not comply with the Securities Act or Regulations, the Commission have the power to give directions in writing to the investment broker and any other person requiring it:
    1. To place the investment money in a trust account;
    2. Except with the prior approval of the Commission:
       1. Not to remove the investment property or investment money from New Zealand;
       2. Not to transfer the investment property or investment money;
       3. Not to charge the investment property or investment money;
       4. Not to otherwise deal with the investment property or investment money-

subject to such terms and conditions as the Commission may specify for a period not exceeding 15 working days.

39. We recommend that it be enacted as an offence on summary conviction for any person to contravene such a direction of the Commission order having been notified of the direction.
40. We recommend that the penalty for such an offence be equivalent to the penalty in section 38B(5) of the Securities Act 1978 for distributing advertisements in contravention of an order of the Commission.
41. We recommend that the Commission, if it is satisfied that the order should not continue in force, have power to revoke the order.

Court power to freeze investment broker accounts

42. We recommend that where a person has received investment money or investment property from or on behalf of a member of the public in relation to the buying of securities where the investment broker has not complied with the Act or the offer of securities does not comply with the Securities Act or Regulations, the Court be empowered to make orders on application if it sees fit:
    1. to prohibit or restrict the person, or any other person, from removing from New Zealand, transferring, charging, or otherwise dealing with any of the investment property or investment money except with the prior approval of the Court and subject to such terms and conditions as the Court may specify;
    2. to place any investment money in a trust account;
    100. for the investment property or investment money to be paid to the member or members of the public who provided it;
    4. to make any other order that is necessary to preserve investors' monies.
43. We recommend that such an order:
    1. 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
    2. may be cancelled or varied at any time by the Court.

Commission standing under the Investment Advisers (Disclosure) Act 1996

44. We recommend that the Commission have standing to apply to the Court without leave for orders under sections 7, 8 and 9 of the Act. We recommend that the Commission have standing to apply to the Court for orders under section 10 without leave and without the need to have received investment advice or to have paid or delivered investment money. We recommend that the Commission have standing to apply to the Court for orders as proposed in paragraphs 42 and 43 above.