The legal approach to investment advisers in different jurisdictions
| DOI | https://doi.org/10.1108/13581980310810499 |
| Date | 01 June 2003 |
| Pages | 169-184 |
| Published date | 01 June 2003 |
| Author | Roman Jordans |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
The legal approach to investment advisers
in different jurisdictions
Roman Jordans
Received (in revised form): 19th August, 2002
E-mail: roman.jordans@web.de
Roman Jordans earned an LLM from Vic-
toria University in Wellington, New Zeal-
and in 2002. As part of his LLM, he was an
intern at the New Zealand Securities Com-
mission, where his main task was to com-
pile a report about the approach of
several jurisdictions to the regulation of
investment advisers, as New Zealand is
considering reforms to its existing law.
ABSTRACT
KEYWORDS: duties of investment advisers,
regulation of investment advisers, interna-
tional comparison
This paper deals with legislation relating to
investment advisers in several jurisdictions. It
scrutinises whether regulation of investment
advisers in Singapore, Hong Kong, Australia
and New Zealand is in accordance with inter-
national standards. The ‘Objectives and Prin-
ciples’ of the International Organization of
Securities Commissions (IOSCO) will be
taken as a starting point. The first three jurisdic-
tions have recently enacted legislation concerning
this matter, whereas New Zealand is currently
discussing a reform of its existing legislation.
The paper will identify potential problems in
relation to investment advisers and show the
approaches of the named jurisdictions to these
issues. Among these potential problems which
have to be dealt with are necessary qualifica-
tions of investment advisers, duties of disclosure,
methods of dealing with eventual recommenda-
tions of illegal securities by investment advisers,
and conflicts of interest for investment advisers,
particularly concerning remuneration they may
receive from eg fund companies.
INTRODUCTION TO THE PROBLEM
Investment advisers act as intermediaries
between issuers of securities and investors.
They perform important functions in
advising the public on investment and in
marketing for the raising of capital. An
investment adviser acting in the interests of
investor clients is expected to advise on
investment in suitable products and warn
investors against investing in unsuitable
products. The important functions of
investment advisers for economies illustrate
that there is a need for regulation of invest-
ment advisers. This is particularly true if
one keeps in mind that clients usually trust
recommendations made by their adviser.
Therefore, the question of how invest-
ment advisers should be regulated is not
only of interest to lawyers,
1
but is also
more and more becoming a topic in the
press,
2
as many people use the services of
investment advisers and also as many
people appear to lose money to fraudulent
investment schemes.
Law reforms in Singapore and Australia
and new legislation in Hong Kong to be
enacted soon emphasise the importance of
this topic. Besides, the New Zealand Secu-
rities Commission has published a discus-
sion paper concerning reform of the
respective Act.
3
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Journal of Financial Regulation and Compliance Volume 11 Number 2
Journal of Financial Regulation
and Compliance, Vol. 11, No. 2,
2003, pp. 169–184
#Henry Stewart Publications,
1358–1988
Of growing importance is the inter-
national approach to the regulation of the
financial services sector. As it is becoming
increasingly difficult for the national states
to regulate the financial services sector on a
national basis, the multinational regulatory
activism of international organisations gets
more attention. Among these is the Inter-
national Organization of Securities Com-
missions (IOSCO).
4
This paper will take the ‘Objectives and
principles of securities regulation’ prepared
by IOSCO
5
as a starting point and will
show how different jurisdictions try to
achieve the goals described in the ‘Objec-
tives and principles’.
The introduction attempts to identify
potential problems related to investment
advisers and potential scope for regulation to
deal with these problems. Then, the interna-
tional approach, the objectives and prin-
ciples of IOSCO will be described briefly.
The paper gives a description of the laws
on investment advisers in Singapore and
Australia. Furthermore, the new legislation
in Hong Kong, which is to be enacted
soon, will be illustrated. In addition, this
paper will mention the discussion in New
Zealand concerning reform of the respec-
tive Act and will conclude with some sum-
marising remarks.
POTENTIAL PROBLEMS RELATING TO
INVESTMENT ADVISERS
As previously pointed out, investment advi-
sers perform important functions. Potential
problems relating to investment advisers
that arise due to their functions might,
however, require certain regulations to pre-
vent harm from the public and the econ-
omy. Among these potential problems are:
— conflicts of interest: the independence
of an investment adviser might be
compromised by remuneration paid to
an adviser by an insurance company or
a managed fund company for selling
their products
— quality of advice: the performance of
an investment adviser relies on the
quality of the advice. It is therefore
important to ensure high standards of
quality of investment adviser advice.
The quality of advice an investment
adviser is able to perform depends on
the adviser’s abilities. Thus, it is
important to ensure the highest
possible abilities among investment
advisers
— recommending illegal offers: the impor-
tance of investment advisers for the
public and for the economy show the
need for confidence in investment advi-
sers. Therefore, scams and fraudulent
behaviour should be prevented as much
as possible. The potential for invest-
ment advisers to act as a conduit for
illegal offers of securities, or investor
scams should be addressed.
POTENTIAL LEGAL SOLUTIONS
Any legal approach to investment advisers
should include provisions to deal with
these potential problems.
Administrative issues, which include the
option of licensing of investment advisers,
could be used to impose conditions on the
conduct of investment adviser business.
The conditions could include some form of
supervision (by a self-regulatory organisa-
tion for example).
The importance of quality of advice
leads to the question whether there is a
necessity for certain qualifications and edu-
cation for investment advisers. Mainte-
nance of a high standard of quality of
advice might be assisted by imposing cer-
tain duties on investment advisers, for
example, educational rules, qualifications
or ‘know your client’ rules.
Clients may be better able to assess the
quality of the investment adviser’s advice if
certain disclosures must be made about the
investment adviser and the investment pro-
duct.
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The legal approach to investment advisers in different jurisdictions
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