Finance-advertising legislation urged

Press, 2 June 1977, Page 9

Finance-advertising legislation urged

PA Wellington The Justice Department believes the Government should introduce a comprehensive act to give greater protection to investors and to remove opportunities for disreputable promoters in financial advertising. In a circular being sent to interested parties the department says that the financial collapses involving the loss of large sums of the public’s money in recent years point to the necessity of protective legislation for the investor.

Many of the collapses involved concerns on which the law imposed no clear duty on issuing a prospectus, while disclosure and accounting practice were often less than satisfactory, the document said.

“The right to seek funds from the public should carry with it a concomitant obligation for full and continuing disclosure.” The document says that in recent years there have been increasing ways in which fund-raisers have sought funds. These include unit trusts, syndicates, contributory morgages, bills of exchange and hire-purchase paper. It says that while risk is an inseparable element of investment, it can be reduced by a judicious extension of the Companies Act and by taking powers to protect investors when the situation warrants. All the law could do would be to ensure the investor was supplied with proper and factual information at appropriate intervals and to see. as far as possible, that his investment was managed responsibly. The department says

that statute law' on advertising is contained in a series of acts limited to particular types of fundraisers: the Companies Act, 1955, the Units Trusts Act, 1960, the Protection of Depositors Act, 1968, and the Syndicates Act, 1973. However, there is much in common in the acts, and the department says that a comprehensive act would remove the opportunity for disreputable promoters to work in less well-regulated areas. Such an act, the department says, should bind the Crown.

The most effective and economic way of controlling fund-raisers would be to license them, similar to the practice in Australia and Canada.

“The advantage is that licensing would provide a much needed check on the honesty and past management record on those investors are being asked to entrust their savings," it says.

Grounds for refusing a licence would include cases where the applicant was an undischarged bankrupt, where he had been convicted of offence in the management of a company, where he had been guilty of dishonesty, or had been involved in a specified number of commercial failures.

The department says that all offerings to the public should be made via a registered prospectus, and that the complex requirements of an existing prospectus should be modernised and simplified. There is a need for a review' of the format and content of financial advertisements, the department said.

“The use of certain ex-

pressions without further explanation can give a misleading impression on the safety of an investment.

“Similarly the names of prominent shareholders, unless they are guaran teeing the security, can

suggest greater protection than exists.”

The Justice Department says the appointment of trustees for debentureholders under the Companies Act has proved a useful safeguard. It also says the act’s demand that companies make proper financial records freelv available to the public should apply to all fundraisers. These accounts should he audited.

The Companies Act also gave the registrar power to make a confidential examination of a company’s records: and to petition the court that it b« wound up on certain spec, ified grounds. "However, this power may be inappropriate in certain cases where the management of a scheme is not acting honestly and responsibly, but the company is still solvent and viable.

"A more appropriate remedy in such cases might be to replace the management.”

The department notes that the Government, in the Speech from the

Throne, announced its intention to legislate to control financial advertising. It says that the state-

ments and opinions expressed by the department in its circular are not to be taken as being decided Government policy, nor are they the concluded views of the department.