Financial advisors and asset managers must proceed with caution when offering, promoting or marketing offshore Collective Investment Schemes to their clients as the Collective Investment Schemes Control Act (CISCA) criminalises soliciting of investments in unapproved offshore investment funds. A person found guilty of this offence is liable on conviction to a fine not exceeding R10 million or to imprisonment for a period not exceeding 10 years, or to both.
In April 2019 the FSCA reported that they had fined an asset management company (36One Asset Management Pty Ltd) R350,000 for contravening section 65(3) of the Collective Investment Schemes Control Act (CISCA). The asset manager was found to have solicited investments in unapproved funds since they had published information about these funds on their website, through periodic newsletters sent to clients and in presentations made to clients. The FSCA’s view was that the publications in question constituted ‘soliciting’ even though there were no actual investments by South African investors as a result of the contravention.
The asset manager approached the Financial Services Tribunal to reconsider the decision made by the FSCA, particularly having regard to the meaning of ‘solicit’ as the only issue in dispute was whether the publication of information of the unapproved offshore funds on the website, in periodic newsletters to clients and in presentations to clients constituted ‘soliciting’. CISCA defines “solicit” as meaning, “any act to promote investment by members of the public in a collective investment scheme;”. The asset manager contended that the word “solicit” means “an intentional and earnest request to the public to invest” and was of the view that their publications amounted to mere publication rather than soliciting, borne out by the fact that there were disclaimers on the website and that investment into the unapproved funds could not be done via the website. The Tribunal disagreed and was of the view that even though investment into the unapproved funds could not be done via the website, the person was invited to explore such an investment. The Tribunal also stated that it is the act of promotion that is prohibited, irrespective of whether it was successful in garnering investment into such funds, and furthermore that the point of solicitation is before the decision to enquire further about the funds or the process to actually invest. The Tribunal was of the view that if published information has the effect of promoting or sparking interest in investing in the product, it is solicitation. The Tribunal also took into consideration that the asset manager’s business entails administration of the funds and, therefore, that the purpose of publication of investment funds in its portfolio, could not exclude the marketing of those funds.
A list of all the approved CIS Management Companies and portfolios is available on the FSCA’s website which includes both local and foreign schemes. FSPs should conduct a thorough investigation into the company and any financial product/s which it wishes to make use of in providing financial services to clients to ensure that it is authorised and allowed to do so and that it does not fall foul of any other legislation, such as section 65(3) of CISCA. A Joint Circular published by the FSB in 2003 which deals specifically with section 65(3) of CISCA may also be helpful in providing guidance. Before making use of a foreign collective investment scheme portfolio, financial advisors and asset managers should check this against the list published on the FSCA’s website and give consideration to whether or not its intended actions could constitute solicitation, as the consequences of not doing your homework beforehand, could be steep.
To download and read related documents, click on the links below:
- FSCA Press Release – 11 April 2019 – FSCA fines 36ONE Asset Management (Pty) Ltd R350 000
- Financial Sector Tribunal’s Decision of January 2020
- FSCA Press Release – 23 January 2020 – 36ONE Asset Management’s application against FSCA dismissed by Financial Services Tribunal
- Joint Circular from the Registrars of Collective Investment Schemes, Stock Exchanges and Financial Markets published by the FSB in 2003