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Law Reform: Investment Advisers
A Discussion Paper

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: Any conviction of an offence against the Act, or of a crime involving dishonesty whether individually or as a director or principal officer of a body corporate at the time the body corporate committed such an offence; or Any adjudication of bankruptcy; or Any prohibition from taking part in the management of a company or a business.

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: How payment or delivery of money or delivery of property should be made to the broker; Whether or not money or property received by the broker will be held on trust for the investor, and whether it will be so held until it is disbursed or distributed in accordance with the investor's instructions; 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; Whether or not the receipt, holding, and disbursement of money and property by the broker will be audited by an auditor and, if so, the name of the auditor; The extent, if any, to which the broker can use the money or property for his or her own benefit or for any other person; Such other information as is required to be disclosed under this subsection by regulations made under the Act.

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: The name of any relevant organisation with which the adviser has a relationship and a description of that relationship; 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; 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; A brief description of the adviser's experience as an investment adviser; Whether or not the adviser or an associated person has, or will or may have, a direct or indirect 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; Without limiting the above whether the adviser or an associated person has received, or will or may receive, from a person (other than the investor) in connection with the investment advice remuneration that is reasonably likely to influence the adviser in giving the advice, the nature and (to the extent practicable) the amount or rate of the remuneration, and the name of the person from whom the remuneration has been, or will or may be, received; Any other information that is required to be disclosed under this subsection by regulations made under the Act.

Enforcement

3.8	The Investment Advisers (Disclosure) Act contains a number of measures for enforcement of the law through the Courts including orders: Prohibiting or restricting a person from giving investment advice to the public or receiving investment money or investment property (section 7); Restraining a person from contravening the Act (section 8); Requiring a person to disclose information to the public or to any particular person or class of people (section 9).
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.