The Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law stipulates that providing investment advice, investment marketing, and investment portfolio management services is contingent upon obtaining an appropriate license from the Israel Securities Authority.
The law, however, provides for several exceptions to the licensing requirement. One of the most important and widely used exemptions applies to providing services to “qualified clients.”
It is important to emphasize at the outset: an exemption from a license is not an exemption from the law. Even a service provider lawfully relying on the qualified-client exemption is subject to most of the law’s provisions.
Who Are “Qualified Clients”?
The First Addendum to the Advice Law contains a closed list of entities classified as qualified clients, including banks, insurance companies, mutual funds, TASE members, and corporations with equity exceeding ILS 50 million.
For individuals, the Advice Law requires satisfaction of two out of three qualification tests: a liquidity test (holding assets valued at more than ILS 12 million), an expertise test (possessing expertise and qualifications in the capital markets or having worked in a relevant professional role for at least one year), and a transaction-volume test (executing an average of 30 transactions per quarter).
The rationale underlying this exemption is the legislature’s belief that qualified clients are sophisticated investors whose financial resilience or expertise makes it unnecessary to afford them the full range of protections provided to ordinary investors.
Verifying Qualified-Client Status – The Risk Lies in the Details
The most common mistake is not reliance on the exemption itself, but rather inadequate verification of a client’s status. A qualified-client declaration alone is insufficient. Service providers must take reasonable measures to verify that a client satisfies the relevant qualification criteria and must properly document these measures. For the liquidity test, service providers may rely on confirmation from a bank, a TASE member, or a lawyer or accountant. For the expertise test, service providers should obtain external supporting evidence of the client’s professional background. For the transaction-volume test, service providers should obtain confirmations from the entities through which the relevant transactions were executed. Service providers must also maintain orderly and retrievable records demonstrating compliance with the statutory requirements and evidencing that they took the requisite reasonable measures.
What Obligations Continue to Apply?
Even when unlicensed service providers provide services lawfully to qualified clients, a number of statutory provisions continue to apply. These include the duty of trust, the duty of care and the obligation to take reasonable measures to safeguard clients’ best interests, disclosure and consent requirements relating to conflicts of interest, the duty of confidentiality, and the prohibition on receiving benefits from parties other than clients. In addition, service providers must disclose to clients, before providing any service, that they do not hold a license under the Advice Law.
Furthermore, beyond the statutory provisions, the Israel Securities Authority has published various staff positions and directives over the years. Unlicensed service providers should assess whether those positions and directives apply to their specific operating models.
At the same time, the law does provide meaningful relief from certain obligations primarily intended to protect ordinary investors. These include the statutory requirement to enter into a written agreement, disclosure obligations relating to proposed transactions, the obligation to provide warnings about particularly high-risk transactions, and the requirement to maintain records of investment advice provided. The law also permits service providers to charge qualified clients a success fee.
Practical Implications
The distinction between an exemption from a license and an exemption from the law is critical. Investment service providers that mistakenly assume the exemption relieves them of all statutory obligations expose themselves to significant regulatory risks, particularly with respect to client classification and documentation of qualified-client status. By contrast, service providers that properly structure their engagement agreements, obtain qualified-client declarations, and implement robust verification and documentation procedures can substantially reduce their regulatory exposure.
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Our firm advises financial entities, investment houses, family offices, companies, and funds on the applicability of the Advice Law to their activities. We also assist clients in designing appropriate operating structures and preparing for compliance with the applicable statutory requirements.