This is the second in a series reviewing the Bermuda Investment Business Act with a wish list of four suggested changes to the Act that will benefit the investing public. The first part of this article appeared November 10; copies may be obtained by calling The Royal Gazette.

Soon, if not already, proposed amendments to the Bermuda Investment Business Act 1998 will be debated in Parliament.

Note in the Act, investment provider implies investment firm and advisors working therein.

Wish List Item One

Investment Contracts

Last week we discussed, Article 7.1, General Need for a Client Agreement at some length.

For those who did not read last week's article, a client agreement is the contract between the investment provider (the Investment Company) and you. There needs to be a uniform investment contract written in clear and unambiguous language spelling out all terms and conditions so that the client can comfortably compare firms and products. Currently, every investment firm uses different contracts for investment products and services.

Some contracts have been formulated by the firm's Investment Policy Committee. Other firms use standard NASD member contracts (or adaptations thereof) that may be derived from their US custodian or a third-party intermediary. NASD contracts, if unaltered, actually contain clauses of arbitration rights for the client, which may not be present in another domestic contract, nor may be applicable here. Some firms using NASD member custodians also advertise that the client's assets are protected under SIPC (Securities Investment Protection Corporation) up to X-millions of dollars in the event of firm defalcation - that's a polite word for broker/brokerage fraud. What the client may not realise is that this coverage may only be applicable if the account is registered in his/her own name; if held under a nominee name, that protection may not be valid, as often nominee names may have thousands of individual segregated sub-accounts.

Other offshore investing sales processes may include the use of direct accounts set up in the client's name with a mutual fund firm domiciled elsewhere. Once the advisor makes the sale, the local investment firm may be completely out of the information loop, until and unless the client opts to sell the fund. Taken all together, the small investor is faced with a bewildering array of contracts making it quite difficult to compare products and services firm to firm.

Wish List Item Two

Adequate Disclosure to the Client, both in investing education, risks of investing and investment advertising.

The second item on the Act Amendment wish list comes under the Client understanding area. Specifically: Integrity and Fair Dealing are dealt with by the following sections:

Section 4.3 Informed investment decisions: ...investment provider shall take all reasonable steps to enable the private investor to take informed investment decisions and shall avoid misleading or deceptive representations or practices. Section 6.1 Disclosure and information: The provider shall take all reasonable steps to ensure that a private investor is given sufficient information, easy to understand, to enable the making of balanced and informed investment decisions.

These two walk in step; any investor needs to receive all information relating to investment choices that is stated impartially, adequately and is not misleading. For instance, all relevant mutual fund information should be released with fact sheets and prospectuses, and enough additional information, such as listing symbols, so that the investor can verify the choices independently. It is not enough to provide an informal list of recommendations or a fact sheet that is too old, or does not list the worst years performances as well as the best years. Ambiguous advertising and statements that espouse to getting "great returns" or a "guaranteed 15 percent rate of return" do a real disservice to the public. Investors are exposed daily to relentless barrages of misleading information, particularly in the global media and the Internet. Informed objective decision making also relates to advisors not using catastrophic events and emotional times to "help" clients change their investment strategy. As reported last week, there are firsthand tales of brokers calling within two hours of WTC 9-11 urging investors to "sell now" before the stock markets collapse. Our clean jurisdiction should always be alert to this by advocating the high road, the professional and ethical positions.

Section 4.6 Unreasonable recommendations: No recommendations shall be made that are motivated largely by the benefits derived to the provider... 6.7 Understanding of risk: Provider has taken reasonable steps to enable the investor to understand the nature of the risks involved.

What is an unreasonable recommendation? The client sure knows, after the fact, that one size does not fit all. In one experience, the identical investment product allocations were sold to a son, in his late 40s, and to his mother, in her early 70s. The portfolio selections were too aggressive for their net worth, lifestyle, tolerance and entire investment profile. In the mother's case, her entire modest retirement savings were fully invested, dropping more than 40 percent in value in the last year. The son's investments did not fare much better and while he, at least, has time to recoup damages on his side, he is also faced with supporting his mother in the future. These investment tragedies may not always be avoided, but a clear set of uniform investment standards regarding fiduciary responsibility is needed. Every investment advisor walks a fine line between client choice and fiduciary responsibility. Nevertheless, as the investment world continues to produce new and complex investment vehicles, professional standards, even if imposed voluntarily, will ultimately raise the professional level of the whole field of participants.

Such a quest for a due diligence process was implemented last year in the United States as the Foundation for Fiduciary Studies began the process of developing and advancing the industry's first practice standards. Aided by Roger Gibson, CFA, author and a financial planning practitioner, the Foundation has agreed to follow the standard setting procedures established by the International Standards Organisation (ISO). Managing other people's money is a serious responsibility. Now, more than ever, there is a need for a decision making framework that allows the advisor to consider developing trends, get help in navigating alternatives and learn the ability to communicate the decisions effectively to the client. For years, articles have been written about the legal requirements for establishing formal investment practices. Recent events raise troubling concerns bring troubling concerns to the fore again. During a time of crisis, no investment product is really safe.

Next week: Wishes three and four - the need for investment personnel to be suitably qualified and for a proper client process for complaints, arbitration and redress.

Martha Harris Myron CPA CFP is a Bermudian Certified Financial Planner (US) practitioner, with an NASD Series 7 licence, and United States tax practitioner. She is the winner of the 2001 Bermudian Magazine Bermuda Gold Award for Best In Bermuda Investing Advice.

Opinions, concepts, and ideas are those of the columnist alone. The Editor of the Royal Gazette reserves the final right to edit content or consolidate where appropriate in any circumstances. Under no circumstances are the comments in this column to be taken as specific recommendations on the purchase or sale of securities or any other investment, nor as specific financial planning advice and recommendations.