ISA: New Guidelines on Offering and Intermediating Joint Investment Arrangements
The Israel Securities Authority published a position statement recently addressing various issues pertaining to brokerage activities and offerings of joint investment arrangements, including the applicability of the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law and the Joint Investment Trust Law to these activities. The position statement also addresses the question of whether these activities constitute an “offering to the public” pursuant to the Securities Law. The position statement’s use of the term “joint investment arrangements” should be construed in the broadest sense, to include mutual funds, investment funds and other arrangements involving several investors.
The purpose of the ISA’s position statement is to clarify previously published statements concerning the applicability of these laws, including a 2019 circular addressing the applicability of the Joint Investment Trust Law and the Securities Law and a 2015 circular concerning investment marketing and portfolio management activities involving foreign funds. Following is a summary of the ISA’s main clarifications by topic.
Restriction on offerings to the public pursuant to the Joint Investment Trust Law
In its current position statement, the ISA reiterates its 2019 determination and states that, in order for a joint investment arrangement not to be deemed an investment in a mutual fund, and in order to avoid the application of the stringent regulatory provisions of the Joint Investment Trust Law to this arrangement, the total number of investors in the arrangement must not exceed 50, excluding classified investors. Classified investors are investors with liquid assets exceeding ILS 8.3 million or that fulfill particular income and liquidity criteria pursuant to the First Addendum to the Securities Law.
The ISA in addition clarifies that not only will these joint investment arrangements be subject to the restrictions by virtue of the Securities Law, but it will also not authorize an offering of a one-year joint investment arrangement of up to a maximum of 35 investors (other than classified investors), apart from a general offering that fulfills particular criteria stipulated in the Securities Law.
The ISA emphasizes that the restriction on offerings to the public applies cumulatively to all parties involved in the investment offering and not only to one particular arrangement or to its managers. Therefore, the managers of any joint investment arrangement and any party acting on their behalf in brokering the arrangement are responsible for designing and implementing appropriate mechanisms and for ensuring that the number of investors to whom the investment is offered does not exceed 50, and that no offering is made to more than 35 unclassified investors in any 12-month period. This position has implications, considering the widespread use of agents, marketers, distributors and other intermediaries.
The ISA also stresses that it will not allow investments to be artificially split into different entities so as to circumvent the restrictions on offerings to unqualified investors. Within this context, the ISA stated that, in the instance whereby a joint investment arrangement is “packaged” inside several different investment entities (which also include other investments), the investor limit must be counted cumulatively in relation to all of the relevant investment entities. Nevertheless, we believe that this position does not exclude possible overlaps between investments, but requires an in-depth analysis of the circumstances of the investment, particularly if at issue are investments entailing different risks and opportunities. In any case, we recommend that you obtain appropriate legal advice in order to analyze any concrete investment.
Referrals for investment advice, investment marketing or portfolio management
The ISA emphasizes that, in addition to the licensing obligation imposed on those engaging in investment advice, investment marketing and portfolio management, the Advice Law also imposes a limit on the number of referrals receiving these services. In other words, if a party refers a person for investment services from another party not authorized to provide them (either because that party does not hold a license or because it fails to fulfill the criteria enabling these services to be provided without a license), then the former party is in itself committing a violation of the provisions of the law.
Furthermore, if the referral or the offer to provide such services includes participation in the investment advice or marketing process itself, then that referring party may be deemed one of the service-providers who is therefore obligated to hold a license (or fulfill the license exemption criteria).
Investing in notes and certificates as a “financial asset” or a “structured product”
Pursuant to the Advice Law, the obligation to obtain a license to provide investment advice, investment marketing and portfolio management applies to the provision of these services in relation to investments in “securities” and in “financial assets,” as such terms are defined in the Advice Law.
While the Advice Law refers to securities as “securities traded on a stock exchange in Israel or abroad,” it defines “financial assets” as “units of mutual funds or of funds registered outside of Israel, options, futures contracts, structured products, index products and continuing education funds.”
“Structured products” are also included in the definition of “financial assets” in the Advice Law. Structured products are products enabling returns deriving from changes in the price of a particular underlying asset or of several underlying assets, such as an index, the price of a commodity, security, currency, etcetera, in a variety of ways.
The ISA also relates to assets, such as various types of structured notes and certificates, and to actively-managed certificate products, which are “packaged” and offered to investors through intermediary financial entities. The ISA emphasizes that these products could fall under the definition of “financial assets” and could even be deemed a “structured product” and that therefore, the Advice Law applies to brokerage of these products.
The ISA clarifies that its position relates only to these terms as defined in the Advice Law, such that no inferences may be drawn from similar terms in other laws, since the definitions in other laws serve different purposes. In addition, brokers, whether licensed or not, must refrain from activities constituting an offering of a joint investment arrangement or of securities to the public without a prospectus in relation to these products.
Investment marketing and portfolio management activities involving foreign funds
Amendment 23 to the Joint Investment Trust Law enables licensees to offer and market units of foreign funds that are supervised in Israel after such funds obtain a permit in Israel and fulfill the criteria stipulated in the regulations. These funds may be distributed to the public in Israel without any restriction on the number or type of investors.
However, the ISA refers to its 2015 circular addressing foreign funds that are not registered in Israel and clarifies that foreign funds that are supervised in the European Union or in the United States, which can be offered to the general public in those territories, are funds that are accessible via the TASE trading system, which enables the Israeli public to invest in them even without brokerage services. Therefore, when a licensee provides investment advisory services in relation to supervised foreign funds, it is essentially adding the possibility of professional brokerage and thus, these are not deemed an “offering to the public” pursuant to the Securities Law, provided that the licensee has not engaged in a commercial agreement with the manager of the supervised foreign fund and does not receive any consideration from the manager.
A licensee who has engaged in a business agreement with a foreign fund manager is allowed to market foreign funds – even if they are supervised in Europe or in the United States – solely to classified investors, while in relation to non-classified investors, the licensee (and any other party marketing the fund) must operate under the public offering restrictions imposed by the Securities Law and the Joint Investment Trust Law.
Since the offering of foreign funds (whether or not they are registered in Europe and in the United States) constitutes “investment advice,” any party not holding a license is only allowed to distribute these funds to “qualified investors” pursuant to the Advice Law (investors holding liquid assets exceeding ILS 12 million and possessing knowledge and experience in the capital markets). Furthermore, if at issue are foreign funds not supervised in the European Union or in the United States, or if that party receives a commission for distributing the funds (whether or not they are supervised), it will also be required to comply with the “offering to the public” restrictions pursuant to the Joint Investment Trust Law and the Securities Law.
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The Regulation Department is at your disposal for any questions regarding the implementation of the Authority’s position.