Divisions 2 and 3 of Part III of the Capital Market Act 2015 impose a code of conduct on every “licensed person”, a term section 2 defines to include both firms and their licensed representatives; section 52(6) extends the main rules to registered persons such as banks. See who needs a licence.
The register of securities interests: sections 58 to 64
Every licensed dealer, fund manager, corporate finance adviser, investment adviser and financial planner, together with financial journalists, must keep a register of the securities in which they have an interest (section 59(1)). Acquisitions and every change of interest must be entered within seven days (section 59(3)–(5)). The register is kept in Papua New Guinea at a place notified to the Commission, which may inspect and copy it (sections 59(2), 62). A “financial journalist” under section 58(2) is an unlicensed person who, in the course of business or employment, prepares advice, analyses or reports about securities for a newspaper, information service or recording; section 63 lets the Commission require a publisher to name them. The register reveals whether a person recommending a share is quietly trading it.
No implied approval by the Commission
Section 65 forbids a licensed person representing or implying that its “abilities or qualifications” have been approved by the Commission. Stating that one holds a licence is permitted; printing “approved by the Securities Commission” on a brochure is not. The general penalty in section 461 applies: up to K10,000,000 or ten years, or both.
Disclosure of interests in recommended securities
Where a licensed person sends circulars or other written communications recommending securities, the person “shall cause to be included … in type not less legible than that used in the remainder” a concise statement of “any relevant interest in, or any interest in the acquisition or disposal of those securities” that the licensed person or an associated person has at the date of sending.
An underwriter is deemed to have an interest in the securities it underwrites (section 67(3)(b)). A person who bought securities to resell them must say so before recommending them (section 67(4)), and an underwriter left holding unsold securities must disclose that for 90 days after the offer closes (section 67(5)). Copies of circulars must be kept for seven years (section 67(8)). Contravention carries up to K10,000,000 or ten years, or both (section 67(12)).
Recommendations must have a reasonable basis
A licensed person “shall not make a recommendation with respect to any securities to a person who may reasonably be expected to rely on the recommendation without having a reasonable basis”. There is no reasonable basis unless the adviser has taken all practicable measures to ensure that its information about the client’s “investment objectives, financial situation and particular needs” is accurate and complete, has investigated the subject matter as is reasonable in the circumstances, and bases the recommendation on that consideration and investigation.
This is the “know your client” rule. An adviser who tells a retiree to put her superannuation payout into one speculative fund without asking about her needs has no reasonable basis. Breach is an offence under section 68(3), and section 68(4) gives the client a civil remedy: where a person reasonably relies on a recommendation made in breach of section 67 or 68 and suffers loss, “the licensed person shall be liable to pay damages”. The adviser escapes only by proving that a reasonable person would have acted the same way anyway, or that the recommendation was in fact appropriate (section 68(5)–(6)). See recovering losses.
Client priority and employees’ dealings
Section 70 forbids a dealer or fund manager acting as principal, or a representative acting for his own account, from buying or selling exchange-traded securities while a client’s unfilled instruction for securities of the same class is outstanding, unless the client’s price conditions could not be met. Front-running carries up to K10,000,000 or ten years, or both. Section 71 prohibits a firm and its employee jointly buying securities as principal, forbids the firm lending an employee money to buy securities, and requires an employee of a participating organisation to buy only through the firm, with the same penalty.
Dealing as principal and short selling
Under section 74 a licensed dealer who deals with a non-licensee as principal, rather than as agent, must first tell the client so and state it in the contract note. If the dealer fails to disclose, the client may rescind the contract by written notice within 14 days of receiving the contract note or discovering the breach (section 74(5)), and the dealer commits an offence carrying up to K10,000,000 or ten years, or both. Section 75 states that “short selling shall not be allowed to be practiced in the capital markets in Papua New Guinea”, with the same penalty.
Contract notes, information, returns and directions
- Contract notes. Section 66 empowers regulations on contract notes; breach carries up to K5,000,000 or five years.
- Information to investors. Under section 69 the Commission may specify the information to be given to anyone investing in a capital market product, including its risks and essential terms. Giving an investor false or misleading information carries up to K10,000,000 or ten years, or both.
- Returns and directions. Section 72 requires a firm to furnish whatever returns the Commission requires, and section 73 lets the Commission impose further requirements on licensed persons generally or on an individual firm by written direction; non-compliance carries up to K10,000,000 or ten years, or both.
Section 456(2) and (3) deem a licensed firm to have contravened any provision its employee or representative contravenes. A fund manager cannot disown a representative who sells an unsuitable product. See representatives’ licences.
Sources
- Capital Market Act 2015 — ss 2(1) (“licensed person”), 52(6), 58–75, 456, 461
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.