Finance companies have been in the news recently, particularly since receivers were appointed to National Finance 2000 Limited and Provincial Finance Limited.

Kathryn Rogers
Director, Primary Markets

“Some commentators say there is a lack of publicly available information to enable investors and financial advisers to choose suitable investments in the finance company sector,” said Kathryn Rogers, the Commission’s Director, Primary Markets.

“However, finance company prospectuses like those of other issuers, are required by law to provide investors with all information that is material to the securities being offered, including financial information. This is so whether or not they are a listed company.”

Investors should make sure they are given the information they are entitled to by law. They should read the investment statement (at least) so that they understand the investment and the risks associated with it. A finance company’s investment statement should provide clear and comprehensive information so that the investor can understand the risks involved and the returns offered, and then decide whether the investment is suitable for them.

Despite the statutory requirements the quality of information varies among finance companies. “If there is anything investors don’t understand they should ask the issuer or their investment adviser,” Kathryn Rogers said. “If they are not prepared to take the risks, or

are still not clear about the risks, they should not invest in that company.”

“Investment advisers need to read and understand the investment statement, the prospectus, and the key terms of the trust deed, so they can properly advise their clients.”

Under securities regulations the disclosure required of finance companies is similar to that required for other investments. As well as specific detailed disclosure requirements, there are two overarching principles:

• the registered prospectus must contain all material matters relating to the offer of securities; and

• the offer documents must not be false or misleading in any material way.

Listed companies are also subject to further disclosure requirements under the listing rules.

The investment statement must be given to every investor before they subscribe. The investment statement provides certain key information to assist a prudent but non-expert person to decide whether or not to subscribe for securities, and to alert them to other documents with further important information about the securities. The investment statement is in a prescribed form so investors can readily compare key information about different investments on offer.

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The enactment of the Securities Legislation Bill currently before Parliament will make it a criminal offence to recommend an illegal offer of securities to a member of the public if the adviser knew or ought to have known that the offer was illegal.

The Bill also introduces additional disclosure requirements for investment advisers and investment brokers. The new disclosure obligations will include providing investors with a written disclosure statement which states the adviser’s:

• experience and qualifications;
• criminal convictions;
• fees and commissions;
• other interests and relationships; and
• the investments that the adviser gives advice on.

Investment brokers will also be required to disclose their procedures for dealing with investment money and investment

property. The legislation will introduce rules about advertising which cover a range of communications made by advisers and brokers.

The Bill also incorporates changes to the rules relating to insider trading and market manipulation. These will affect brokers and the directors and officers of listed companies.

The Commission is preparing a handbook to assist people who will be affected by the passing of these aspects of the Bill. The handbook will be available when the law comes into force.