New Court Ruling Clarifies Legal Boundaries for Offering Foreign Investments in Israel
The Tel Aviv District Court recently handed down an important ruling on the activities of entities distributing alternative investments in Israel. In many instances, distribution activities involve conversations and correspondence with potential investors that may constitute investment advice, which is where matters become complicated. Matters become even more complex when foreign distributors seek Israeli investors for foreign funds and financial instruments.
In the case discussed below, the Tel Aviv District Court (Economic Department) ruled that investment advice had been provided in Israel and therefore required a license from the Israel Securities Authority under Israeli law. It also held that the foreign distributor’s visits to Israel subjected its activities to Israeli law, despite the foreign jurisdiction clause in its agreement with its Israeli clients. The court further ruled that when a distributor receives a commission from the issuer of a fund or financial instrument, it must fully disclose that commission to potential investors.
The case involved an Israeli investor who lost his investment in American real estate investment trusts (REITs). The investor sued the Israeli family office Olympus Economic Solutions, which had referred him to an American investment advisory firm that recommended investing in the REITs. The advisory firm acted as a distributor and received commissions from the American broker for the REIT investments made through the investor’s account with that broker. The family office also received a share of those commissions for referring the investor to the advisory firm.
In the first part of its ruling, the court examined the territorial scope of Israeli law. In our view, this issue is particularly important given its significant impact on the case. The foreign investment advisory firm, which is supervised by the relevant US regulatory authorities, had signed an agreement with its clients expressly providing that disputes arising from the agreement would be resolved in the United States under US law. The investments in US REITs were also made through an American broker.
Nevertheless, the Israeli court gave greater weight to the investor’s residence in Israel and the fact that meetings were held in Israel, with the Israeli family office acting as an intermediary between the investor and the advisory firm. It therefore ruled that Israeli law applied in these circumstances. Had the case been heard by a US court, the outcome might have been entirely different.
In the second part of its ruling, the court analyzed the specific circumstances of the case and their legal implications. It held that the advisory firm and the advisor acting on its behalf had provided “investment advice” within the meaning of the Israeli Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 1995 (the “Advice Law”). Such advice requires a license from the Israel Securities Authority unless it is provided in accordance with one of the licensing exemptions set out in the Advice Law.
The court further ruled that the family office and its owners had violated the Advice Law by referring clients to an unlicensed advisory firm.
Conflicts of Interest
The court also addressed potential conflicts of interest between distributors and advisors and their clients. This is a central concern in financial regulation in Israel and abroad. Such conflicts may arise when, as in this case, distributors and advisors receive commissions from issuers or entities connected to the financial instrument in which the client invests. Under the Advice Law, for example, a service provider with an interest in a financial asset is classified as a “marketer” rather than an “advisor.” This distinction alerts the client that the service provider may receive financial incentives beyond the management fee paid by the client. Marketers must still prioritize their clients’ best interests and provide professional services tailored to their needs. They may, however, recommend financial assets in which they have an interest, provided they meet those obligations and make the required disclosures to the client.
The court found that the client had not received adequate disclosure of the commissions to which the distributor was entitled. Although receiving a commission is not in itself improper, the court emphasized the importance of adequate disclosure to the client. It relied, among other things, on those commissions in determining the liability of the family office and the advisory firm.
We believe this ruling should be viewed as part of a broader trend encompassing investor lawsuits against advisors and distributors, regulatory enforcement proceedings, and increased efforts by courts and regulators to protect the public in financial matters. This trend extends even to ostensibly free-market arrangements governed by contracts between the parties.
Without expressing a view on the outcome of this ruling, we believe that not all distribution and marketing of alternative investment products requires an investment advice or marketing license. The licensing requirements depend on the specific circumstances of each case.
We recommend seeking legal advice to determine whether your activities are subject to regulatory obligations of which you may be unaware. We would be pleased to assist you in this regard.
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Barnea Jaffa Lande is at your service for legal advice on regulation in Israel and abroad, as well as any other legal matters.