THE issue of a restriction notice on investment adviser Pan Pacific Securities Management has highlighted a loophole in the regulations governing this type of company. Under the regulations, a broker handling client money and securities on behalf of clients needs to be authorised as a securities dealer. A securities dealer which is also a member of the stock exchange must make monthly financial reports to the exchange. This enables the front-line regulator on securities and listed companies to monitor closely the affairs of its members. Securities dealers which are not members of the stock exchange are technically obliged to file financial statements on an annual basis. But the common practice now is quarterly reporting, as required by the Securities and Futures Commission (SFC). Pan Pacific is not a securities dealer. It is an investment adviser, and should purely give advice to individuals in return for service fees or commissions. The spirit of the arrangement does not allow this type of adviser to deal. However, Pan Pacific was able to get around this by running discretionary portfolio accounts on behalf of clients. The actual dealing in client securities and assets was undertaken on an execution basis by securities dealers, which for the most part were stock exchange members. In this way, Pan Pacific could evade the more rigorous reporting demand of securities dealership. There is a similar loophole that exists between the securities dealer and the investment adviser which is an insurance agent, which nevertheless is advising on investment products which are effectively securities dealing products. Insurance agents cannot deal directly in securities, but under discretionary arrangements in some circumstances they can get away with not applying to be a securities dealer by arranging clients' affairs through securities dealer proxies. In any case, the loophole for investment advisers is pretty bad and the SFC says something is now being done about it. The first thing that will result is the introduction of financial resources reporting requirements for investment advisers. This rule, which is expected to be imposed later this year, will demand that the investment adviser show solvency, audited accounts and an indication of its operation liabilities. The financial reports will have to be filed on an annual basis. This rule will alert the regulators to the problem companies and those firms which are probably operating in the twilight zone between securities dealing and offering investment advice. However, this will not solve the problem completely. What will, the SFC says, will be the issue of a white paper on the issue. This super regulation bill will bring together under a single piece of legislation about 13 different ordinances. The bill will take many of the non-statutory, apparently voluntary rules now in place, into the statutory arena ahead of the handover of sovereignty in 1997. Among other things, this bill will contain a section which redefines what constitutes an investment adviser. What it is likely to say is that an investment adviser is someone who offers advice only, in return for service fees. Anyone who handles client money will therefore be a securities dealer. The ''super bill'' is expected to be published later this year. This means we cannot expect anything to come into law until well into next year, and enactment is unlikely to occur until 1995. Until then, the regulatory regime will have to go along tripping over, now and then, intermediary misdemeanour only when the clients start to complain. By then, of course, it is probably too late and in the worst cases, the client money being investigated will have long gone. Given the strong stock market and cash-rich nature of Hongkong's consumers over the past two years, it is quite likely that there are cases out there just waiting to be discovered. This is because the regulators do not have a clue what these advisers are doing, nor do they have the right to know until a client complains, or they have reason to believe any action by them is in the public interest.