Secondary

Key Individual Liability

A recent order by the FSB’s Appeal Board highlighted the importance of applying the prescribed methodology where representatives under supervision are concerned.

A representative under supervision, Moore, claimed that the directors of Blue Zone be held accountable for the client’s loss due to their negligent and fraudulent actions. He also maintained that, as he was working under supervision, the syndication’s key individual should be held liable for his non-compliance with the regulations.

At the time, according to the original determination, Blue Zone had about 482 representatives with Mr. JJ van Zyl as its only key individual. Van Zyl was also a director of Blue Zone.

Moore’s council contended that the exemption, provided under Board Notice 95 of 2003, “…placed sole responsibility on the part of the supervisor and not the supervisee.”

The Appeal Board disagreed with this, as it only referred to the minimum experience requirement under the Fit and proper obligations, and not to other legal obligations under the FAIS Act:

By virtue of the exemption status, a representative is not expected to have the same level of experience and expertise as the financial services provider. The Registrar, by virtue of the exemption, allows him to render his services with the required minimum experience, provided he does so under supervision.

However it could therefore not have been the legislature’s intention that the exemption applies to section 8(1)(a) of the FAIS Act as well. At all relevant times, Moore as a supervised representative was obliged to comply with personal character qualifications of honesty and integrity as well.

The appellant correctly pointed out that Blue Zone should have been a party to this matter at the outset of this complaint and investigation by the office of the FAIS Ombud, in that:

  • Blue Zone was the financial service provider and the individuals who masterminded the scheme were directors and key individuals of the FSP;
  • Moore was their mandated representative;
  • Van Zyl was the key individual who accepted responsibility as supervisor for the activities performed and services rendered on behalf of Blue Zone;
  • Van Zyl performed all management and overseeing functions of the activities performed on behalf of Blue Zone.

As aforesaid by virtue of the supervisory mandate agreement, both the supervisor and the supervisee were required to comply with the provisions of the FAIS Act and the Code of Conduct. There was non¬compliance on the part of both Van Zyl and Moore.

Van Zyl cannot hide behind the façade of a corporate entity which has long been liquidated. As one of the directors of Blue Zone and supervisor to Moore, he had an obligation towards the complainant as well as ensuring that Moore was supervised at all times. Van Zyl with the other directors, (had) every intention to defraud the investors.

This finding by the Appeal Board will have serious ramifications for all FSPs with representatives working under supervision.

We recommend that all such FSPs read the finding of the appeal case discussed above to make sure their actions are in line with what is required.

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