Why 36One lost its appeal over offshore funds
The asset manager has been fined R350,000 for soliciting investment into unapproved funds
The Financial Services Tribunal has upheld a ruling against asset manager 36One Asset Management that it solicited investments into unapproved offshore funds in contravention of the law.
The tribunal also upheld the fine of R350,000 imposed on the manager for the contravention.
Investing offshore gives you a chance to diversify your portfolio to include investments in different economies, geographic regions and a wider selection of companies. It also increases your potential to earn returns under different conditions.
However, to help you invest in safe, familiar, offshore investments with providers that are easy to contact, the Financial Sector Conduct Authority (FSCA) only allows offshore funds that are registered with it to be marketed to you.
To register, funds must comply with certain requirements such as having a local representative and conform to similar regulation to that which governs South African funds in order to protect investors. Funds may choose not to register with the local regulator and this does not prevent you from investing in them if you want to, but providers cannot actively market them to you.
36One had two offshore hedge funds based in the Cayman Islands that it did not register with the FSCA and between August 2015 and March 2018 it included details about these funds on its website, in newsletters sent to clients, and presentations made to clients.
In April last year, the FSCA said that by publishing and marketing the funds, 36One effectively solicited investment into the unapproved funds in contravention of the Collective Investment Schemes Control Act (CISCA).
In terms of the CISCA, managers may only solicit investment into offshore funds that have been approved by the FSCA. The act criminalises soliciting of investment in unapproved offshore funds.
Hedge funds were required to register as collective investment schemes with effect from April 2015.
36One appealed to the tribunal to have the FSCA’s ruling set aside, arguing in its defence that the word solicit in CISCA means an “intentional and earnest request to the public to invest”, and the inclusion of the unapproved funds in its publications did not mean there was intent to promote investment into the funds.
The tribunal rejected this argument as improbable and agreed with the FSCA that promoting the unapproved funds in its publications amounted to soliciting investments.
The tribunal’s judgment was also clear that by including the unregistered funds in the company’s portfolio on its website the company was marketing those funds.
The asset manager had included a disclaimer on its website noting that the funds were not registered with the FSCA, but the tribunal labeled the disclaimer disingenuous and noted that the asset manager’s website included a button that invited the user to contact 36One in connection with the product.
36One also challenged the amount the FSCA levied as the administrative penalty, indicating that no investment in the unregistered funds actually materialised from the publication of the funds’ details and therefore no penalty should have been imposed. The FSCA said an appropriate administrative penalty had to strike a balance between effective deterrence from contravention of financial sector laws and being unreasonably harsh.
The tribunal said that as 36One manages assets worth more than R14bn, the administrative penalty was not inappropriate, with the FSCA saying, “The significance of the risk posed by soliciting investment in unapproved or unregulated funds cannot be over-emphasised in a society like ours, this is why this ruling is so important.”