Some Regulatory Implications for Investment Websites and a Suggested Codeof Conduct

By J E Halsey.

19 May, 1996


Many countries in the developed world and an increasing number in thedeveloping world have enacted laws governing the conduct of investment businessand financial services. These laws are designed for a number of reasonsincluding the protection of investors from unscrupulous practises in themarketing of investment products.

In response to this, regulatory organisations have evolved whose purpose itis to uphold the integrity of the investment industry. These organisationspromulgate codes of conduct and specific rules that must be followed by firms inthe industry within the context of their own specific jurisdictions.

Outside the United Kingdom it is of course necessary forthose involved in investment business to observe whatever local relevantregulations apply. These vary considerably from place to place. The intention ofsuch regulations is to uphold the reputation of the investment industry in eachcountry by providing protection for investors, consistency of practice and bydiscouraging unscrupulous activities. This should have the effect of raisingstandards of service and attracting good business to those places that regulateeffectively and efficiently. Investment companies need to be sensitive to localcultural and regulatory constraints in the jurisdictions in which they operate.

Companies conducting investment business, wherever they may be locatedphysically, will be aware that the new technology of the internet holds greatopportunities for presenting themselves and their products to existing andpotential customers. There is, however, uncertainty about the regulatoryimplications of presenting investment advertisements and advice on the internet.Much will depend upon the content and purpose of the material being presented.Is the purpose to invite individuals to invest in a specific collectiveinvestment scheme? Or is the purpose simply to present the image of thepromoting company in general terms, comprising perhaps a mission statement andcontact details with only passing reference to the services and products thatmight be available?

The new communications technology raises many questions at a high levelabout legal jurisdiction and territoriality which remain unresolved at present.Because the web is global it seems unlikely that any particular regional ornational legal system will be able to prevail in relation to any thing,including the regulation of investment business. Rules will always beunenforceable somewhere.

Nevertheless there are well-established global investment firms, regulatedin the territories where they carry on business, which do sincerely wish to putup a billboard on the web to sell their image and promote their products, butwho may be reluctant to do so because they do not want to risk infringing anyregulatory system anywhere.

In the absence of enforceability of specific rules it is suggested that theonly realistic way forward is for all those involved to agree to a code or setof standards to be observed by investment firms' websites wherever in the worldthey might be uploaded, stored or accessed. Regulators of investment business inany jurisdiction could require their constituents to observe this code.

Exemptions would be appropriate in respect of "short form" or "corporateimage" pages but those with specific product information or which are adirect or indirect invitation to buy any investment or to give money to someoneelse to manage could be asked to observe the code, where relevant, by theirlocal regulator. Here is a suggestion for what the code could look like, basedon my thoughts and discussions with various individuals:

Code of Conduct for Investment Websites

If an internet site or any page features material containing specificinvestment product information or which is a direct or indirect invitation topersons to effect a transaction in any investment, entrust money or securitiesto someone else to manage or to take investment advice, the person promoting itshould ensure that there is displayed at that site, in a reasonably prominentand accessible manner:-

A statement (if it is so) that the material presented is not to beconsidered as a solicitation to any person to enter into an investment agreementin any jurisdiction where this would be unlawful. (Specific reference could bemade especially to the USA, UK and the European Economic Area, where stringentregulations apply to solicitation of investors);

If the material is intended to solicit investors, the site should statewhich classes of investors in which countries it is directed to, and which not;

A statement that any personal investor should seek independent advice as tothe suitability of any particular investment;

Identification of all the risks associated with investing in any particularinvestment that attention is drawn to;

Identification of the product company and the entity presenting anypromotional material, together with email and physical postal addresses wherethey can be contacted;

Identification of the body or bodies that regulate them (if any) in theconduct of their investment business, together with information as to whichjurisdictions any regulatory protection regimes for investors will extend to,and which not. If the entity is unauthorised or unregulated this should bestated.

In addition, any research or periodical content should make clear the dateas to which it is made up and the frequency with which it is normally updated.If archived editions are available they should be labelled with the relevantdates.

A general disclaimer regarding the content of the site and that of anyrelated links may be desirable. A copyright statement may also be appropriate.