Israel’s Money Market Reform Is Underway

Increasing Competition in the Money Market

The Knesset approved a series of legislative amendments this past July designed to promote competition in the money market—money market mutual funds, deposits, and government bonds (short-term loans maturing in less than one year)—and enable the general public to achieve higher returns on its short-term savings.

The Knesset amended, inter alia, the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law (the “Advice Law”) with the goal of increasing competition over interest rates offered on bank deposits and current accounts. Currently, investment advice about mutual funds, including money market mutual funds, provided by banks must be given solely by investment advisers holding an appropriate license under the Advice Law, while any bank clerk may provide advice about bank deposits. The purpose of the amendment is to bridge this gap by enabling persons other than licensed investment advisers to provide advice about money market mutual funds with redemption dates of up to one year.

The amendment provides for the following three alternatives for engaging in investment advice or marketing in relation to money market mutual funds:

1. Without a license, by one of the following: fund managers, financial information service providers, basic payment initiators and payment companies, TASE members, banking corporations and auxiliary corporations, or other entities engaging in a financial field whose activities in that field are supervised by law (the “Supervised Entities”).
2. Without a license, by a person employed by an entity engaging in investment advice or marketing in relation to money market mutual funds (such persons and the Supervised Entities are jointly referred to as “Unlicensed Dealers”).
3. By a licensee whose license is limited to engaging in investment advice or marketing solely in relation to money market mutual funds (a “Limited Licensee”; Limited Licensees and  Unlicensed Dealers are referred to jointly as “Money Market Mutual Fund Service Providers”).

The amendment applies certain provisions of the Advice Law to Money Market Mutual Fund Service Providers, including fiduciary duties, the obligation to provide appropriate disclosure to customers, the prohibition on prioritizing the dealer’s financial assets or those of a related corporation, the prohibition on providing incentives in relation to investment advice or marketing, apart from a salary and reimbursement of expenses from the customer, and a duty of care.

The amendment also requires Money Market Mutual Fund Service Providers to disclose certain minimum information when providing advice or marketing in relation to money market mutual funds or executing transactions. This information includes the fund’s identifying details, the characteristics of the assets held in the fund, the offering and redemption dates of fund units, the fund manager’s remuneration and the trustee’s fee, and the fund’s yield. The amendment exempts Limited Licensees from certain provisions of the Advice Law that apply to “regular” licensees, including tailoring the service to the customer’s needs, entering into a written agreement, disclosing special risks to customers, maintaining confidentiality, and keeping records and minutes.

Obligation to Notify the Israel Securities Authority of the Intention to Engage in Investment Advice or Marketing 

The Israel Securities Authority’s (ISA) draft rules regulating  investment advice or investment marketing provide that any Supervised Entity intending to engage in investment advice or marketing in relation to money market mutual funds under a license exemption must notify the ISA before commencing this activity.

Obligation to Disclose Conflicts of Interest

The draft rules on conflicts of interest propose requiring Money Market Mutual Fund Service Providers that market investments in money market mutual funds in which they have an interest to  implement procedures, conduct periodic controls, and disclose to customers the consideration they receive from third parties.

Draft Directive on Investment Advice or Marketing for Money Market Mutual Funds

Disclosure of the Characteristics of Money Market Mutual funds and the Money Market

• Money Market Mutual Fund Service Providers must provide customers with information about money market mutual funds and explain that these funds are one of the products available in the money market.
• Order and redemption dates – Money Market Mutual Fund Service Providers must inform customers of the available dates for submitting orders for fund units and redemption instructions, as well as when those instructions will be executed. Service providers must also explain that customers’ holdings of fund units are automatically renewed until they issue redemption instructions.
• Banking corporations (as Supervised Entities) that announce their intention to engage in investment advice in relation to money market mutual funds may do so through unlicensed employees. When providing customers with information about bank deposits, these employees must also inform them of the option of investing in money market mutual funds as an alternative to a deposit of up to one year. At a minimum, they must refer customers to the list of money market mutual funds on the bank’s website or app.

Reporting Obligations – Immediate and Quarterly Reports to the ISA

The draft directive also proposes imposing reporting obligations on Limited Licensees similar to certain obligations imposed on licensees under the Advice Law and its regulations.

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Barnea Jaffa Lande’s financial regulation team advises Israeli and global banks, insurance companies, investment firms, and many other clients on all regulations applicable to their financial operations in Israel and overseas.