Secondary

FSB Responds to Allegations

Last week we reported on media articles relating to the FSB’s involvement in the prevention of dubious investment schemes. The Regulator saw fit to publish a media release explaining its position in terms of what it is legally expected to do, and where arrangements do not form part of their jurisdiction.

The following excerpts touch on key matters, but we urge readers to read the full media release. (Please look under the Compliance section on our website, following this link)

“…the FSB finds it necessary to actively engage on this issue to, among other things, explain how, in certain circumstances, investment relationships exclude the regulator’s power. It is emphasized that the FSB’s engagement and extent of disclosure in this regard is, as set out above, motivated by the need to do so in the public interest as envisaged in the provisions of Section 22 (1)(b) (iv) of the Financial Services Board Act of 1990 (“the FSB Act”).

As a starting point, the manner in which members of the public may invest their savings may or may not, depending on the nature and structure of a particular investment vehicle, be subject to FSB regulation. For instance, the following types of investment vehicles would NOT be subject to FSB regulation:

  • A partnership where individuals invest their monies in a partnership and utilise the capital to produce positive returns.
  • An investment club where persons with a commonality of interest pool their monies to make an investment.
  • A company formed for investment purposes in which investors obtain equity.
  • A trust in which beneficiaries’ monies would be pooled, but which would fall outside the ambit of the Collective Investment Schemes Control Act, due to the nature of the underlying investments or because it is a private arrangement between persons involved in a private business arrangement.

Certain investments may also not involve a “financial product” as contemplated by the Financial Advisory and Intermediary Services Act (FAIS Act). Becoming a member of an investment club or a beneficiary of a trust is not an acquisition of a financial product by the investor, even though the monies invested may be used by the investment vehicle to acquire a financial product, for example a share or derivate instrument (the latter being typically the types of products in which hedge funds invest).

Secondly, apart from having to scrutinise the type of investment vehicles which may be utilised to attract investors, it is also necessary to consider the manner in which investors are attracted. The ambit of the FAIS Act is focused on the rendering of financial services which typically involve three parties, namely a product supplier, an intermediary and a client. Unless a financial product is involved, the FAIS Act does not apply. Whilst product suppliers may be required to be authorised under the FAIS Act when giving advice relating to their products, the selling of such products by a product supplier directly to the public may not amount to an intermediary service, such as a company doing a private placement of equity. “

An interesting point, raised in the media release, is contained in the following excerpt concerning product distribution:

“…apart from having to scrutinise the type of investment vehicles which may be utilised to attract investors, it is also necessary to consider the manner in which investors are attracted. The ambit of the FAIS Act is focused on the rendering of financial services which typically involve three parties, namely a product supplier, an intermediary and a client. Unless a financial product is involved, the FAIS Act does not apply. Whilst product suppliers may be required to be authorised under the FAIS Act when giving advice relating to their products, the selling of such products by a product supplier directly to the public may not amount to an intermediary service, such as a company doing a private placement of equity.”

The Regulator then proceeds to explain its actions, specifically in regards to complaints received concerning the Herman Pretorius scheme.

We share the concerns of some readers regarding over-regulation to the extent that it threatens entrepreneurship and a free economy. That there is a need to ferret out schemes of which the only intention is to enrich the initiators, cannot be gainsaid either.

Perhaps the answer lies in the Government’s proposed “twin-peaks” approach to regulation, which aims to separate prudential and market conduct regulators. The latest potential loss for investors makes the introduction of these measures a priority.

Comments are closed.