Securities Commission recommendations for advisers

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Friday, March 1st 2002, 9:17PM

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

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

   1. That-
      1. contains or refers to an investment broker; or
      2. is reasonably likely to induce persons to obtain investment broker services; and
   2. 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
   3. That is to be, or has been, distributed to a person."

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

   1. 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
   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
   3. 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;

   3. 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.

    3. 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;

    3. 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:

    "

    1. 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.

    2. 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;

    3. 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:

    "

    1. 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.

    2. 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:
    3. likely to deceive, mislead or confuse;

    4. is inconsistent with any registered prospectus or investment statement for any offer of securities referred to in it; or

    5. 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

    3. 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;

    3. 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.

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