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The other kind of illegal solicitation

36One’s case highlights the broadness of the law.
Some wonder if the applicable section of law is still relevant, but it does still stand and the asset manager was fined for transgressing it. Image: Shutterstock

Under the law that governs the local unit trust industry, it is illegal for anyone to solicit an investment into a fund that is not approved by the South African regulator. The intention is to protect investors from potentially risky products.

This section of the law has however been controversial for a number of years for two reasons.

The first is that the Financial Sector Conduct Authority (FSCA) only considers funds for approval if it is asked to do so. Given that there are around 120 000 regulated funds worldwide, the FSCA cannot, and doesn’t pretend to, cover all of them.

Just because a fund is not approved by the FSCA therefore doesn’t mean that there is necessarily anything risky about it. It may just be that approval has never been sought.

Secondly, as Moonstone Compliance Chief Operating Officer Billy Seyffert points out, it’s not clear how necessary this section of the Collective Investment Schemes Control Act (Cisca) still is. In the years when it was almost impossible for someone to manage their own offshore investments, it gave the regulator control over what was available within the country. These days, however, anybody can invest just about anywhere.

“If you consider that an investor can search the internet and, subject to a direct dealing option being available, invest into unapproved funds anywhere in the world without it being a problem, I sometimes wonder about its relevance in modern times,” Seyffert notes.

The 36One case

Nevertheless, the law still stands and earlier this month 36One Asset Management found itself on the wrong side of it. Last week the Financial Sector Tribunal upheld a decision by the FSCA to fine the firm R350 000 for soliciting investments into two of its hedge funds in the Cayman Islands through presentations to clients, in its newsletter and on its website.

This finding was made despite 36One’s contention that it did not intend to promote investments into these funds, and that in fact there was never any request made to clients to do so.

Details of the funds, the asset manager argued, were only made available for informative purposes.

In addition, it pointed out that it wasn’t possible for anybody to invest into these two funds directly through its website. This was only possible for 36One’s approved South African funds.

Interested investors were only able to submit their details for 36One to get in touch with them. They could also only do so after accepting a disclaimer that noted that the information provided on these funds did not constitute solicitation.

The decision

The Act however states that ‘any act’ to promote a collective investment scheme is considered solicitation. The regulator found that in publishing the information that it did, 36One met that standard.

Sisanda Harban, specialist in the FSCA’s complex enforcement department, told Moneyweb that: “In assessing evidence to determine whether solicitation has taken place, the FSCA applies the civil law standard of proof and determines whether the weight of the probabilities on the available evidence shows that what occurred was promotion of investment in an unapproved scheme.

“In this regard, context including the wording used in the medium of communication, the potential recipients of the material [is the material directed to potential investors] and whether what is disclosed is relevant information to influence investment decisions, are some of the key factors that are considered.”

On this basis, the tribunal agreed that there had been a contravention of the Act:

“The purpose of publication of investment funds in its portfolio by a company, whose business entails administration of those investment funds, can hardly exclude the marketing of those funds,” its decision noted.

“It may not be the sole purpose for publication, but marketing or soliciting investment in those funds would definitely be among the purposes.”

It also didn’t matter that 36One had provided the disclaimer, or that it showed that no South African investor had put money into these funds after seeing the information in question.

“The fact that a promotion was ineffective does not mean that the act was not one of promotion,” the tribunal noted. “It is the act which is prohibited, irrespective of success.”

Important considerations

There are a number of noteworthy features to this finding.

The first is that ‘solicitation’ must be understood very broadly. As Harban indicated, this doesn’t mean that any mention of an unapproved fund is problematic, but financial services providers must be careful.

“The real question would be whether such disclosure is likely to result in promoting investment in that unapproved scheme,” she told Moneyweb.

Secondly, the tribunal’s ruling makes it clear that ‘reverse solicitation’, which is acceptable in many other countries, will still be seen as a contravention of the Act in South Africa.

“The tribunal, without explicitly stating it, is implying that 36One was looking to invoke a type of reverse solicitation, whereby the client makes a query and they merely respond,” Seyffert notes. “The issue here is that by creating the portal to make the query they were in fact soliciting.”

Finally, it is significant that for something to be considered solicitation, the entity involved doesn’t actually have to see any kind of benefit. As the tribunal made clear, it is that act that matters, not the result.

“Although,” added Harban, “if such solicitation results in commercial benefit, this factor may be taken into account when determining the quantum of the administrative penalty.”

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COMMENTS   15

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I don’t think that company should have been punished. By being approved does not mean a fund is risk free. Limiting clients access to information on alternative products seems very overprotective. Forces clients to use overseas advisers which is a risky undertaking.

The minutiae of a socialist state has a lot of unintended consequences…

Would the more constructive approach not be to have the law amended to reflect the intention of the law.
My suggestion would be the collective members of the financial advisors look carefully at the many laws regulating them, like this one, to see if there are changes that should be made. Suggest the appropriate changes, make these suggestions publicly available, and lobby for them to be put forward to parliament.
Is this not what is expected?

One person gets a fine and we rush to amend the law… No! Please let’s just be honest. Big firm/small firm, no fear/no favor.

This BN92 has been around since 2014 with no problems… Yes, a bit of a push back from portfolio managers here and there, with compliance holding hands with the FSCA and portfolio manager, we always managed to find the sweet spot.

Any grey areas or ambiguity can be explained through guidance notes – none of this is meant to be obstructive.

Board Notice 92 is clear in this regard that one may not even make reference to any such CIS.. Prior to publication and distribution, all communications must be checked (stenciled) for compliance.

See below the definition of advertisement as per BN92 of 2014:

“advertisement” means any. communication… or reference written, by any means of which a
person seeks to-
(a) bring to the attention of all or part of the members of the public-

(ii) the existence,…, availability, of any collective investment
scheme that is available for investment…

It is hard to comment on the exact facts of this case where we have no insight into the documents however it seems to me like the law is unclear. Every year we read of investment schemes that were/are being investigated and or closed down, many of them complete scams. In all cases at the point of shutting these schemes down there is usually millions and millions of rands that have already flowed into them. It raises the question, why are these doors closed after the horse has bolted so to speak, could the watchdogs be looking at “low hanging fruit” to fund their existence.

We are indeed a land of conflicting ironies. In law 101 we are taught to understand “what is the intention” of the law as pertains to the circumstances. In this case the law is there to “protect investors from unapproved funds” yet it is not illegal to have unapproved funds. In my humble opinion the law fails right at this point. A tribunal should not be allowed to interpret one word, namely ‘solicitation” as pertains to their interpretation of marketing, advertising, informing etc. Solicitation should not be allowed to mean one thing under one law and another under another law. While I fully support the concept of having investment watch dogs I do believe they should have a clearer definition of solicitation to work with in their application. I cant agree completely with the comment that this law should be revoked given the propensity in SA for dishonest dealings in every facet of business.

The act of referring to such unapproved CIS [at a(ii)] is prohibited and therefore punishable. The mention of these funds in the communication should have been questioned/raised by compliance. If a portfolio has not been through FSCA approval, we know that we don’t make mention of it, because, legally it doesn’t not exist prior to FSCA approval. That is clear.

The intent to solicit is a further point [at b]; and a(ii) is not conditional upon (b) in order to constitute a contravention of the Board Notice.

Admittedly there is every kind of mischief in every industry, however, when each cases is heard it will be argued on its merits and it shall be irrelevant whoelse is doing what out there – the focus is on the matter at hand.

Legislation (as opposed to law) in South Africa long ago stopped being for the good of society. Legislation only exists to enable additional forms of ad hoc taxation – better known as “shaking down” of the subjects, …er, sorry I meant citizens. There are too many of these Acts to even list. And you as victim, …er, sorry I meant citizen, are constantly at the mercy of a myriad of Boards, Authorities, Commissions, Tribunals, the list goes on and on and gets longer by the day. Bureaucrats – i.e servants of the Executive arm of government – have draconian powers that they exercise haphazardly, incompetently, or even with malice. The opportunity for bribery and corruption is unlimited. Legal certainty and the rule of law are nowhere to be found. Is anybody still surprised that investment, local as well as foreign, into SA seems to have dried up?

What should be added is that the arrogant ruling elite are above the laws of the country which apply to the rest of the “subjects”.

I reported CapitalFinanceSA who was sending people smses to lend them money at low interest rates but that you just had to pay an admin fee first. They would then disappear with the person’s admin fee.

I gave the FSCA evidence that CapitalFinanceSA is just a shell company with no employees and gave CapitalFinanceSA e-mail address, PO Box Address(which is registered in Australia) and they just told me they are not allowed to investigate a private company. CapitalFinanceSA is operating in Australia, Africa, Europe and North America that I am aware of. The FSCA should of reported them to FBI and Interpol which I don’t think they have done.

We comply because it’s a business imperative and it’s in line with how we conduct our dealings; not because the OTHER guys are doing so or not…

Legislation reads… If we catch YOU in the wrong, YOU will have to answer YOUR case. It’s irrelevant to recall instances where X did this and Y did that… You can never argue that the other guys are doing it too.

As for ambiguous or unclear provisions, we vigorous discussions are encouraged and one should be proactive and pick up the phone and request guidance from the regulator. Where any interpretation is absurd, industry is welcome to raise an objection/comment and the FSCA looks into it.

Where you proceed in what could be viewed as contravening a provision, do proceed with caution – keep in file your discussions, your correspondence to FSCA and whatever other opinion and have it ready to explain your non-compliance.

It doesn’t serve any purpose to argue that others are committing a mischief or FSCA is applying a double standard – that’s irrelevant. You stick to the matter at hand.

Mfundo Ntlombe

I tend to see the madness of this country in stuff like this. A taxi driver can kill 15 people with reckless, negligent driving and nothing happens yet companies and professionals are held to these standards. When thugs get preferential treatment in full view of the public then things are seriously warped.

The FCSA are a bunch of female cats!

For the deployed state payroll cadres at Financial Sector Conduct Authority, one should not invest funds after doing due diligence if the unit trust has not tithed them.

Reckless gambling with pensioners’ captive funds by the PIC in the likes of IOL, SAA & other ANC donors is legit.

Lunatics. Asylum.

End of comments.

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