An employee who’s not “fit and proper” is not a proper fit

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An employee who’s not “fit and proper” is not a proper fit

By Thabang Rapuleng and Gopolang Kgaile

In First National Bank, A Division of First Rand Bank Ltd V CCMA and Others, the employee was employed as a FAIS representative and was required to satisfy the requirement to be “fit and proper” in terms of the FAIS Act. To this end, the employee had to complete the regulatory examination level 1 (RE1) within the stipulated timeframe. The employee failed to successfully complete the RE1 and was subsequently dismissed on grounds of incapacity.

The Labour Court held that the employee’s dismissal for continued failure to comply with the requirements for continued employment may amount to incapacity.

Subsequent to the Discovery Health Limited v CCMA & Others case, there had been confusion as to how employers should deal with an employee whose continued employment is prohibited by the FAIS Act or any other statutory provision.

Employers, employees and CCMA commissioners are frequently misguided to believe that where there is insufficient evidence to substantiate charges of misconduct, an employee must be retrenched as it is a “no fault dismissal”.

In the First National Bank case, the Commissioner found that an employee’s failure to attain a standard imposed by law in respect of his continued employment ought to have been dealt with as a dismissal for operational reasons and not as one for incapacity.

The Labour Court set aside the Commissioner’s award and referred, with approval, to the Armaments Corporation of South Africa v CCMA & Others, which held that dismissal conceives of incapacity as ill health or injury but it can take other forms, such as imprisonment and military call-ups, which incapacitate the employee from performing his obligations under the contract.

Even if it is a “no fault dismissal” the difference between operational requirements and incapacity should be drawn – where the employer determines or acknowledges the needs to restructure its business and where the employer cannot employ an employee because of a statutory provision prohibiting such employment.

In order to ensure that dismissal is fair, the employer must conduct an incapacity hearing and do all that is necessary to prevent the dismissal.

FCA launches investment platforms market study

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FCA launches investment platforms market study

By Graeme Young and Satyen Dhana

In July 2017 the FCA published the Terms of Reference (ToR) for its Investment Platforms Market Study. The ToR set out the specific areas the FCA is interested in exploring, including:

  • the impact platforms have on overall charges for investment products;
  • whether investors and advisers can assess the value for money of investment propositions, including investment products and platform services, from the information platforms make available;
  • barriers to entry and expansion faced by platforms, including access to technology providers and the importance of scale;
  • the impact of vertically integrated platforms, and specifically commercial relationships between platforms, asset managers, discretionary investment managers and financial advisers; and
  • the different platform business models and profitability.

The Market Study follows the Asset Management Market Final Report issued in June 2017, which highlighted a number of potential competition concerns with the increasing significance of platforms in the distribution chain.

The FCA is not consulting on the ToR but is interested in feedback on the specific topics it has identified. It requested feedback by 8 September 2017. The FCA aims to publish an interim report by summer 2018, which will set out preliminary conclusions and any potential remedies to address concerns.

Comment

This Market Study has been widely trailed by the FCA. Online platforms are a key feature of financial services markets. They are increasingly integral to companies’ business strategies and distribution models. They are also increasingly of interest to regulators and competition authorities, whose interest extends well beyond financial services markets.

The UK’s principal competition authority, the CMA and its predecessor bodies, have considered the impact of platforms in a wide range of markets, including insurance services. Whilst there is a general acceptance that platforms help to improve competition, there are also concerns that potential concentrations of online distribution channels and the emergence of vertically integrated business models and commercial relationships through the supply chain may reduce consumer choice and risk distorting competition.

Proposed FCA Rules Extend Warmer Welcome to Sovereign-Controlled Companies

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By James Inness and Sean Meehan

 

On 13 July 2017, the Financial Conduct Authority (FCA) proposed a relaxation of certain aspects of the premium listing segment for sovereign-controlled companies.

The proposed new rules will create a new premium listing category pursuant to which:

  • Related party rules will be modified so that the sovereign controlling shareholder will not be considered a related party. Transactions between the sovereign controlling shareholder and the issuer will not require shareholder consent.
  • Controlling shareholder rules will not apply to issuers in respect of the sovereign controlling shareholder. Such shareholders will not be required to enter into a relationship agreement.

The related party rules and controlling shareholder rules for all shareholders other than the sovereign controlling shareholder will continue to apply. The FCA will also retain its power to refuse an application for listing if the FCA considers that granting the application would be detrimental to the interests of investors.

In addition, the FCA proposes that the new premium listing segment will be extended to sovereign-controlled issuers of depositary receipts (DRs), allowing previously ineligible sovereign-controlled issuers to access the prestigious premium listing segment. As the 25% free-float requirement is calculated by reference to the total number of DRs in issue, not the total number of shares, the proposed rule changes may also allow issuers greater flexibility to meet this requirement. Issuers with a premium DR listing will be required to afford DR holders the same level of rights, e.g. voting rights, enjoyed by shareholders of premium listed companies. The ability of issuers and depositaries to effect this will be subject to analysis in the appropriate jurisdictions.

A company with a premium listing will be able to transfer to the new category under the FCA’s proposal with the approval of the independent shareholders of the company.

The FCA notes that sovereign-controlled companies are unlikely to meet the eligibility requirements to be included in the FTSE indices. While this is unlikely to be a concern for the largest issuers, smaller issuers will need to balance this disadvantage with the more attractive aspects of a premium listing tailored to their needs.

Responses to the FCA’s consultation paper (CP17/21) were due on 13 October 2017.

 

This article is made available by Latham & Watkins for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. Your receipt of this communication alone creates no attorney client relationship between you and Latham & Watkins. Any content of this article should not be used as a substitute for competent legal advice from a licensed professional attorney in your jurisdiction.

Protection for those taking a stand against wrongdoing in the workplace

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Protection for those taking a stand against wrongdoing in the workplace

By Johan Botes, Partner and Head of the Employment & Compensation Practice at Baker McKenzie in Johannesburg

 

The world needs employees who are willing to stand up and raise alarms about wrongdoing in the workplace, whether it is in providing proof of financial irregularity, bribery or corruption, theft or other illegal or wrongful conduct plaguing our society. While no piece of legislation will ever provide absolute protection and no-one can earnestly guarantee whistle-blowers that their lives will not be affected in some way once they point out wrongdoing, workplace whistle-blowers can rely on the protection afforded by the South African Protected Disclosures Act (PDA) provided that they made a protected disclosure.

In order to be protected the disclosure must meet the requirements of the Act and must comply with one of the applicable procedures prescribed by the Act. The Act encourages employees to raise alarm where they are aware of criminal or other irregular conduct in the workplace, whether this is in the public or private sector. It seeks to create a culture of disclosure of information on unlawful or wrongful conduct by providing protection against reprisals. The aim is to eradicate criminal and irregular conduct by organs of the state and private bodies.

However, not every disclosure will be protected by the provisions of the PDA. It must meet the statutory requirements relating to disclosures set out in section 1 of the PDA. Employees blowing the whistle must also follow the prescribed procedure applicable to them in raising alarm over such irregularities. Employees who do not follow the prescribed procedures or whose disclosures do not meet the requirements for a protected disclosure may not receive the protection against reprisals the PDA affords.

The first requirement for a protection disclosure is that a disclosure is only protected where it meets the definition of a disclosure in Section 1:

Disclosure means any disclosure of information regarding any conduct of an employer, or an employee of that employer, made by any employee who has reason to believe that the information concerned shows or tends to show one or more of the following:

    • that a criminal offence has been committed, is being committed or is likely to be committed;
    • that a person has failed, is failing or is likely to fail to comply with any legal obligation to which that person is subject;
    • that a miscarriage of justice has occurred, is occurring or is likely to occur;
    • that the health or safety of an individual has been, is being or is likely to be endangered;
    • that the environment has been, is being or is likely to be damaged;
    • unfair discrimination as contemplated in the Promotion of Equality and Prevention of Unfair Discrimination Act; or
    • that any matter referred to above has been, is being or is likely to be deliberately concealed.  

The second requirement is that the employee must make the disclosure in good faith. The employee may not be motivated by improper or bad motives such as personal gain.

The third requirement is that the employee must follow the correct procedure in making the disclosure. There are various requirements in the PDA for disclosures made to a legal advisor, employer, member of Parliament or the Executive Council, the Public Protector, Auditor-General or other prescribed bodies.

The PDA also allows employees to make a general protected disclosure where they are unable to comply with the process followed, the body to whom the disclosure must be made is the subject of the complaint or the employee has previously made the disclosure to the employer but the employer failed to take action after a reasonable period. In the case of a general protected disclosure, the employee must not only make the disclosure in good faith but must also substantially believe the disclosure to be true. The disclosure need not be proven to be true, but the employee must have reason to believe the facts are true.

Employees who claim that they suffer occupational detriment after making a protected disclosure may refer a dispute to the Commission of Conciliation, Mediation and Arbitration (CCMA). The Labour Relations Act makes specific provision for an enquiry by an arbitrator where the employee alleges the employer retaliated after the employee made a protected disclosure.  The CCMA can then determine whether (1) the employee made a disclosure, and (2) whether the disclosure is protected in terms of the PDA, and (3) if the employee suffered occupational detriment as a result of the disclosure.

Making a protected disclosure does not grant an employee immunity against action by an employer. The PDA aims to protect whistle-blowers against reprisals. The employee is protected against unwarranted action where such employer action against the employee relates to the disclosure. An employer may thus not discipline, demote, transfer, harass or dismiss an employee without cause where the employee has made a protected disclosure as the action is likely to relate to the protected disclosure. However, this does not mean that an employee may commit fraud, sexually harass a colleague or assault a manager after making a protected disclosure without the employer being able to legitimately take action against the employee.

There appears to be a willingness and understanding at both the CCMA and Labour Court that we should protect these courageous people who are willing to take heat for doing the right thing. Employees should anticipate that they may lose some friends and become unpopular in certain circles when they blow the whistle on corruption or other impropriety. However, if they are motivated by the right reasons and are willing to make genuine protected disclosures they may find that there are various civil society groups willing to assist them during troubled times. Employees seeking to escape liability for their own wrongdoing who improperly want to use the Protected Disclosure Act as a get-out-of-jail card may find the system less welcoming and protective.

Further clarity on Venture Capital Companies

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Further clarity on Venture Capital Companies

By Gigi Nyanin, Associate in our Tax and Exchange Control practice at CDH

On 24 July 2017, the South African Revenue Service (SARS) released binding class ruling 057 (BCR 057) which deals with, inter alia, the eligibility of a partner in an en commandite partnership to claim a deduction in respect of venture capital shares acquired by the partnership.

In order to place BCR 057 into context, it is imperative that a brief background of the Venture Capital Company (VCC) tax regime be provided. The VCC tax regime, which was introduced into the Income Tax Act, No 58 of 1962 (Act) in 2009, is aimed at encouraging investment into small and medium-sized enterprises and junior mining companies. Section 12J of the Act encompasses the relevant legislation governing VCCs and provides for the formation of an investment holding company, described as a VCC. Investors subscribe for shares in the VCC and claim an income tax deduction for the subscription price incurred. The VCC, in turn, invests in “qualifying companies” (ie investee companies).

The deductibility of expenditure incurred by an investor in acquiring shares in an approved VCC is subject to anti-avoidance provisions. Firstly, where an investor has used any loan or credit to finance the expenditure incurred to acquire shares in the VCC, the amount of the deduction is limited to the amount for which the investor is deemed to be at risk on the last day of the year of assessment (s12J(3)(a)). The investor is deemed to be so at risk to the extent that (having regard to any transaction, agreement, arrangement, understanding or scheme in this regard) the incurral of expenditure or the repayment of the loan or credit would result in economic loss to the investor, where no income is received by or accrued to the investor in future years from the disposal of any venture capital share issued to such investor as a result of that expenditure (s12J(3)(b)). However, a proviso to s12J(3)(b) provides that an investor will not be at risk if the loan or credit is not repayable within five years or if such loan or credit is granted to the investor by the approved VCC itself.

Secondly, s12J(3A) of the Act provides that if, at the end of any year of assessment, after the expiry of a period of 36 months commencing on the first date of the issue of the venture capital shares, an investor has incurred expenditure in acquiring any venture capital share issued to such investor by a VCC and, as a result of such acquisition, that investor is a connected person in relation to that VCC:

no deduction will be allowed in respect of such expenditure; the Commissioner for SARS (Commissioner) must, after due notice to the VCC, withdraw the approval of the company as a VCC; and

an amount equal to 125% of the expenditure incurred in the acquisition of the company’s shares by any person must be included in the income of the company, in the year of assessment in which the approval is withdrawn, if corrective steps, acceptable to the Commissioner, are not taken by the company within a period stated in the notice given by the Commissioner.

In accordance with s12J(4) of the Act, a claim for a deduction by an investor must be supported by a certificate issued by the VCC stating (i) the amounts that were invested and (ii) confirming that the relevant company was approved as a VCC.

Section 12J(5) sets out the requirements that must be met before a company can be approved as a VCC. More specifically, a company will acquire VCC status if the Commissioner is satisfied that the sole object company, which must be a resident of South Africa, is the management of investments in qualifying companies. In addition, the company, which must be licensed in terms of s7 of the Financial Advisory and Intermediary Services Act, No 37 of 2002, must have complied with all the relevant laws administered by the Commissioner and must have its tax affairs in order.

Recent legislative amendments to s12J have given rise to an increased participation in the asset class and use of the investment vehicle, evidenced by the increasing number of rulings that have been issued by SARS in relation thereto. BCR 057, which is discussed in more detail below, is the latest of these rulings.

Description of the proposed transaction

The applicant, a company incorporated in and resident of South Africa (Applicant) is “engaged in the provision of trust services”. An en commandite partnership (Partnership) is formed amongst the Applicant (as the general partner) and between ten and twenty commanditarian or limited partners (Class members).

The Partnership is formed to invest exclusively in approved VCCs. The Partnership will not borrow from third parties, but will obtain cash contributions from the Class Members. A Class Member’s share in the income and capital of the Partnership will be in proportion to that Class Member’s contribution to the capital of the Partnership.

It is proposed that the Partnership will, at the outset, invest in two approved VCCs which will be managed by a company incorporated in and a resident of South Africa (ManCo). Notwithstanding that the investments in each of the VCCs will be made by the Partnership, the Applicant and ManCo will arrange that each individual Class Member be entered into the register of investors in the books of the relevant VCC. Furthermore, each individual Class Member will be issued a certificate contemplated in s12J(4) of the Act (Investor Certificate) in accordance with that Class Member’s proportionate investment in the Partnership.

Applicable law in relation to partnerships

En commandite partnerships are fiscally transparent vehicles for South African tax purposes. Each partner must account for its undivided share of the tax effects of a partnership’s income statement and assets. In particular, s24H provides the following in regard to the South African tax treatment of a partnership:

  1. In terms of s24H(2) read with s24H(5) of the Act, each partner is deemed to carry on the trade or business of the partnership. Any income received by or accrued to the partnership is deemed to have been directly received by or accrued to the partners, in accordance with the participation rights set out in the partnership agreement, and on the same date as the income was received by or accrued to the partnership. Any deductions or allowances that can be claimed against such income for expenditure incurred by the partnership, can be claimed by the partners in their own hands (in the same ratio as their participation rights).
  2. In terms of s24H(3) read with s24H(4) of the Act, the tax deductions for a limited partner are in aggregate limited to the sum of that partner’s capital contributions plus its share of the partnership income. Any excess tax deductions can be carried forward to subsequent years of assessment.

Ruling

SARS ruled that subject to sections 12J(3) and (3A), each Class Member will be entitled to claim the deduction under s12J(2) read with s24H, pro rata to that Class Member’s proportionate share of the investment in the Partnership.

In addition, the proposed Investor Certificates to be issued to the Class Members will be acceptable for purposes of s12J(4).

Conclusion

It is important to note that rulings are issued to taxpayers to provide guidance on how SARS interprets and applies the tax law to specific transactions. It is therefore important for taxpayers to be cautious when relying on rulings issued by SARS as persons not party to the ruling cannot bind SARS thereto.

BCR 057 is valid for a period of five years from 30 June 2017.

Rolling in the Regulations for Robo-Advisers

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Rolling in the Regulations for Robo-Advisers

By Kristi Swartz

 

 

Robo-advisers have surged in popularity as people seek low-cost, automated investment opportunities. In a worldwide forecast, the number of people to use robo-advisory services is estimated to reach 95.4M by 2021 compared to 5.7M estimated users in 20161. The millennial generation is an early adopter of robo-advisory services making up the largest client base in the US with 80 million investors2. The wealth industry is set to see trillions of dollars of wealth transfer from baby boomers to a new generation of digital natives, with a readiness to adopt new technologies through online channels. The use of messenger and video-calling applications such as FaceTime, WhatsApp and WeChat demonstrate the preference for more action to be taken online and the fading out of face-to-face meetings, paving the way forward for robo-advisers.

Across the APAC region digital growth has accelerated. The amount of people using the Internet is increasing 15% year-on-year, and has now passed the 1.9 billion mark. More than 1.5 billion people across APAC now use social media on a monthly basis, with 95% accessing their accounts via a mobile device3. This is the highest ratio in the world. Financial wealth management firms have tapped into this trend, and demographic niche markets are a key driving force behind the interest in robo-advisory services.

The Burnmark Digital Wealth Report issued in April 2017 compares the millennial population of various countries against an “investor’s digital readiness score”. It should be noted that Hong Kong has one of the smallest millennial populations (under 10 million), however obtained the highest digital readiness score. Baskar Prabhakara, co-founder and CEO of WeInvest expects robo-advisers to take at least 15% market share of APAC’s wealth management industry by 2025, while KMPG’s whitepaper “Robo Advising: Catching Up and Getting Ahead” published in 2015 projected a US$2.2 trillion value for robo advice – a growth rate of 68%.

With this in mind, the Securities and Futures Commission (“SFC”) issued a consultation paper “Proposed Guidelines on Online Distribution and Advisory Platforms” in May 2017, which sought the opinion and comments from members of the public with an interest and key market players on new guidelines aimed at investments undertaken online. Comments on the consultation paper were due back on 4 August 2017. The SFC is now reviewing comments and will introduce new guidelines under s399 of the Securities and Futures Ordinance (“SFO”).

While the SFC currently regulates and oversees offline investment transactions, there are limited regulations for online platforms offering a wide range of investment services. The consultation paper proposes guidelines for SFC-licensed or registered persons who conduct their regulated activities in providing order execution, distribution and advisory services in respect of investment products via online platforms (“Platform Operator”). Traditional offline sale processes typically see clients being guided through their investment options, with product features and associated risks explained by the intermediaries’ representative. One of the key aspects the SFC addresses in the consultation paper is for online investors to be given clear, easy to understand and unbiased literature regarding the product’s features, risks and potential returns.

The proposed guidelines will be in addition to the existing conduct requirements set out under the SFO and other ordinances in effect, the SFC proposes the following core principles:-

  • Core Principle 1 – Proper design : a Platform Operator should ensure that its online platform is properly designed;
  • Core Principle 2 – Information for clients : a Platform Operator should make clear and adequate disclosure of relevant material information on its online platform;
  • Core Principle 3 – Risk management : a Platform Operator should ensure the reliability and security (including data protection and cyber security) of the online platform;
  • Core Principle 4 – Governance, capabilities and resources : a Platform Operator should ensure there are robust governance arrangements for overseeing the operation of its online platform as well as adequate human, technology and financial resources to ensure that all operations are carried out properly;
  • Core Principle 5 – Review and monitoring : appropriate reviews of all activities conducted on the Online Platform should be performed by a Platform Operator as part of its ongoing supervision and monitoring obligation; and
  • Core Principle 6 – Record keeping : a Platform Operator should maintain proper records in respect of its Online Platform.

Clarification of whether the Suitability Requirement will be triggered is also set out in the consultation paper, with examples provided for various situations. The Suitability Requirement is stated under paragraph 5.2 of the Code of Conduct for Persons Licensed or Registered with the Securities and Futures Commission (“Code of Conduct”) as follows:-

“Having regard to information about the client of which the licensed or registered person is or should be aware through the exercise of due diligence, the licensed or registered person should, when making a recommendation or solicitation, ensure the suitability of the recommendation or solicitation for that client is reasonable in all the circumstances.”

The consultation paper notes that the posting of factual, fair and balanced product-specific materials would not in itself amount to a solicitation or recommendation and the Suitability Requirement would therefore not be triggered. However, it should be noted that the manner of presentation and content of product-specific materials posted via the online platform must be considered as to whether a solicitation or recommendation has taken place. For example, if the platform emphasises one investment product over another, or the platform publishes product-specific “Act Now!” or “Don’t Miss Out!” banners, the Suitability Requirement would be triggered. The consultation paper concludes that the provision of investment advice via an online platform will trigger the Suitability Requirement, which will also apply to any form of robo-advice.

Robo-advice is commonly investment advice provided by Platform Operators using automated portfolio construction or model portfolios based on a client’s personal preference, attitude to investment and circumstance. This type of Platform Operator is defined in the consultation paper as a “robo-adviser”. A typical robo-adviser collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice and/or automatically invests client assets.

The SFC notes that there are a wide range of approaches when it comes to robo-advice, from goal-based advice (such as financial planning to purchase a property) to predefined model portfolios calibrated to a client’s risk category. The consultation paper outlines six area guidelines for robo-advisers, namely:-

  • Information for clients : Robo-advisers will be required to provide sufficient information on its online platform and services to allow investors to make an informed decision, as well as ensuring clear and adequate disclosures are made on an ongoing basis. This includes how the algorithms operate, any limitations or changes to such algorithms, information on portfolio rebalancing mechanisms and any associated risk, along with the degree of human involvement provided by the robo-adviser;
  • Client profiling : When client profiling tools or questionnaires are used to obtain information about clients as part of the know-your-client process, assurances must be made that the tools and/or questions are properly designed to obtain sufficient information on a client’s personal circumstance. Additionally, the robo-adviser must have in place proper mechanisms to identify and reconcile any inconsistencies in the information provided by the client. Finally, if a risk-scoring questionnaire is used to assess the client’s attitude to risk, the robo-adviser should pay particular attention to the design of the questions and underlying scoring mechanism to ensure it accurately reflects the client’s personal circumstances;
  • System design and development : Algorithms must be in compliance with relevant conduct requirements including, where applicable, paragraph 18 (Electronic Trading) of and Schedule 7 of the Code of Conduct and any relevant guidelines. Additionally the algorithms must use objective criteria to generate investment recommendations and/or advice that matches the client’s personal circumstances against suitable investment products in a non-biased manner. Platform Operators must also maintain appropriate documentation on the design, development and any modifications made with regards to the algorithms;
  • Supervision and testing of algorithms : Algorithms should be tested before initial deployment and any subsequent changes to the algorithms should be tested before implementation. They should be reviewed by a qualified person who understands the technology, operations and the algorithm itself to generate the advice. Platform operators are required to maintain proper records, documentation and manuals concerning the scope and strategy for testing algorithms, as well as have adequate resources and measures in place to rectify any problems as well the ability to suspend the provision of advice and services as and when necessary. If a third party is used to develop or implement algorithms, the robo-adviser is required to exercise due skill, care and diligence to monitor and select a service provider;
  • Adequate resources : robo-advisers must ensure they have adequate staff who have sufficient expertise and understanding of the technology, operations and algorithms, who are closely involved in the design, deployment and ongoing supervision of the operation of such algorithms. Additionally, training or testing should be provided to all staff use the robo-advisory tools available on the platform; and
  • Rebalancing : robo-advisers should make clear to clients how the rebalancing process operates including the frequency of such rebalancing, any additional costs and any risks associated with automatic rebalancing. When any changes are made to the existing algorithm that may materially affect a client’s portfolio, the robo-adviser must inform the client clearly and promptly of such a change. In addition, policies and procedures are to be put in place that defines how the algorithm would handle a major market event.

More and more robo-advisers are looking to launch mobile applications to meet the demands of the millennial investor, whereby investors can manage their portfolios literally with the touch of a fingertip. The SFC’s consultation paper clearly outlines the need for robo-advisers to provide accurate, easily comprehensible information to investors. One of the SFC’s fundamental concerns seems to be the provision of information to an investor, going so far as giving examples of the use of a chatbox or pop-ups to highlight key information or warnings if, for instance, a change is made to the investor’s portfolio. It will be interesting to see how robo-advisers translate their comprehensive online platforms to mobile applications taking into consideration the requirements stipulated by the SFC.

Investors are demanding more from their financial advisers, expecting easy-to-use, technology-driven apps and platforms to manage their portfolios. As such, there is an opportunity for savvy robo-advisers to capture a large market share as millennials look to invest. The upcoming issuance of the Guidelines on Online Distribution and Advisory Platforms by the SFC will certainly shape how robo-advisers can expand their business operations, whilst taking into consideration the existing legislation, with particular reference to s103, s109 and s113, set out the SFO.

  1. Source: www.statista.com/outlook/337/100/robo-advisors/worldwide#market-revenue
  2. Source: Digital Wealth, Burnmark, April 2017
  3. Source: Digital in 2017: Global Overview, we are social, 24 January 2017

U.S. SEC issues report on digital currencies and related autonomous organizations

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U.S. SEC issues report on digital currencies and related autonomous organizations

 

      By C. Todd Gibson and Evan Glover

On July 25th the United States Securities and Exchange Commission (“SEC”) released a report to put the market on notice that offers and sales of digital assets are subject to the requirements of the federal securities laws.

The report is a result of an investigation of a German created entity called The DAO (Decentralized Automated Organization), which is a virtual organization that exists within computer code and is executed on a blockchain or decentralized ledger. The DAO sold DAO Tokens, which had characteristics similar to stock (e.g. certain ownership and voting rights), with the intent to raise funds to finance various projects. The DAO Tokens were purchased using a digital currency and could be monetized by re-selling the token on a web-based platform that supported a secondary market. The DAO engaged in these offers and sales in the U.S. despite not registering with the SEC.

The SEC decided to issue a report to warn the industry and the market instead of recommending enforcement or making a finding of a violation of the federal securities laws against The DAO. The SEC made the following findings:

  • the description of The DAO as a “crowdfunding contract” does not satisfy the requirements of Regulation Crowdfunding because, among other reasons, it was not a registered broker-dealer or funding portal (as that term is defined in Regulation Crowdfunding);
  • regardless of whether the issuing entity is a traditional company or a decentralized autonomous organization, the federal securities laws apply to those who offer and sell securities in the United States;
  • the investment of money in an investment contract does not need to be cash, the rules apply regardless whether those securities are purchased using U.S. dollars or virtual currencies;
  • the federal securities laws apply to virtual organizations or other capital raising entities that use distributed ledger technologies; and
  • any web-based platform must register as a National Securities Exchange or operate under an exemption from registration if the organization or association brings together orders of multiple buyers and sellers of securities and uses established, non-discretionary methods under which buyers and sellers interact with each other.

In short, the report voices the SEC’s position that “the automation of certain functions… does not remove conduct from the purview of the U.S. federal securities laws.”

The full SEC report can be found here.

FCA Publishes MiFID II Passporting Forms

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FCA Publishes MiFID II Passporting Forms

       By Neil Robson

On July 17, the UK Financial Conduct Authority (FCA) published a new webpage on passporting under the revised Markets in Financial Instruments Directive (MiFID II). Firms are required to make a passporting application under MiFID II if they intend to be conducting European Economic Area (EEA) activities that have been implemented as new MiFID II activities (such as operating an organized trading facility (OTF)), or if they will become newly authorized under MiFID II and need to passport after January 3, 2018.

The FCA recommends that firms should:

  • submit branch passport notifications as soon as possible after the MiFID II passporting gateway opens on July 31; and
  • submit services passport notifications by December 2 to help the FCA to assess notifications and send them to relevant EEA regulators before MiFID II goes into effect on January 3, 2018.

The webpage contains links to the forms for the different types of notice:

  • branch passport—notice of intention to establish a branch or change branch particulars in another EEA state;
  • service passport—notice of intention to provide cross-border services and activities in another EEA state;
  • multilateral trading facility (MTF)/OTF—notice of intention to provide arrangements to facilitate the access to an MTF or OTF from another EEA state; and
  • tied agent—notice of intention to use a tied agent established in another EEA state or to amend the details of a tied agent established in another EEA state.

The webpage is available here.

Increased access to the Bank of England’s payment systems

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      By  Jonathan Lawrence

 

The Bank of England has widened access to the United Kingdom’s interbank payments system to increase competition by FinTech providers. The Bank announced on 19 July that a new generation of non-bank payment service providers (PSPs) is now eligible to apply for a settlement account in the Bank’s Real-Time Gross Settlement (RTGS) system. The RTGS system has traditionally held the accounts of financial institutions in order to promote inter-bank settlement. Holding their own settlement account at the Bank will enable these non-bank PSPs to apply, for the first time, for direct access to the UK’s sterling payment systems that settle in sterling central bank money, including Faster Payments, Bacs, CHAPS, LINK, Visa, and, once live, the new digital cheque imaging system.

These changes will enable non-bank PSPs to compete on a more level playing field with the traditional banks. In turn, it is hoped that reduced dependence on bank competitors for access to payment systems will allow non-bank PSPs to offer a wider range of payment services. These factors are aimed to help to increase competition and innovation in the provision of payments services.

The Bank has been working since mid-2016 with the Financial Conduct Authority (FCA), HM Treasury, HM Revenue & Customs, the Payment Systems Regulator (PSR) and the payment system operators to develop a comprehensive risk management framework to ensure the continued resilience of the Bank’s RTGS service. Before non-bank PSPs can open a settlement account, they will need to demonstrate compliance with the new risk management framework. A number of legislative changes also need to be made. As a consequence, the Bank’s expectation is that the first non-bank PSPs will join RTGS during 2018. To assist firms interested in exploring direct access to UK payment systems and RTGS, the Bank, FCA and the major payment systems operators also published a separate guide on 19 July providing more detail on the requirements and application process.

Africa Legal News

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By Javade Chaudhri and Rémy Fekete

 

It seems that news and legal developments on the African continent are often seen through the prism of pessimism, even during times of robust economic growth and encouraging signs of adherence to the rule of law in ways large and small. We think that this is a time for investors and institutions to look on the bright side and with measured optimism and goodwill.

At a time when goodwill, praised by Kant, has benefited from the enthusiasm that Macronism has generated far beyond French borders, let us pause for a moment to seek this “calm desire for the happiness of others” (David Hume, Essays Moral and Political, Edinburgh, 1742) and apply it to current affairs on the African continent. While the situation is more clouded on other political fronts, we see a lot of good news.

In Angola, President dos Santos, in power since 1979, seems ready to peacefully hand over power to João Lourenço. In the Democratic Republic of Congo, we are hoping that the gradual withdrawal of President Kabila (expected to occur at the end of this year) will prevent further violence. In Nigeria, during the illness of the Muslim President Buhari, the Christian Vice President Osinbajo is carrying out his duties and preparing for the possibility of a smooth succession. In Kenya, the elections were largely peaceful and deemed fair by international observers, and although a legal claim has been filed by the losing political party, it is encouraging that it is a legal process that is being pursued instead of the violence of the last elections. In South Africa, although political turbulence continues, the process of selecting a new leader for the ruling party (and eventually a new President) appears to be proceeding in an orderly manner.

The health sector is developing at a fast pace, with the possibility of establishing research centers in West Africa being studied, pharmaceutical production centers being developed in Southern Africa, and polyclinics multiplying or being renewed as recently as those in Bamako, Mali. Middle Eastern capital is quickly moving toward the African continent, most notably in the production of electricity, and during the past five years, American investors have pulled out all the stops to push their interests through and have remained the main source of direct foreign investment in Africa.

Even the most skeptical acknowledge that “the violence of facts have at least the advantage of bringing us back down to Earth” (Yves Michaud, “Contre la bienveillance,” Editions Stock, 2016). The legal and economic news reported in Jones Day’s new Africa Legal News shows that beyond goodwill, Africa is accelerating its accomplishments through major projects and, at the same time, myriad new initiatives in a swift, sustainable, cost-effective, and inclusive way.

We must note, however, that not all signs are positive, and doing business in any part of Africa will continue to require careful planning, risk mitigation and management, and creative strategies and structures. In the mining sector, there have been a number of actions by various African states that have dampened investor enthusiasm, from Tanzania and Zambia to Mali and the Democratic Republic of Congo.

We hope you had a good summer in the Northern Hemisphere. Best wishes!

FINANCING/BANKING

Egypt

Several Egyptian banks, such as the Misr Bank, the Egyptian National Bank, and the Commercial International Bank, have decided to end restrictions on the use of bank cards abroad. These restrictions, adopted in 2016, were designed to fight the black-market currency exchange. The Misr bank removed the restrictions imposed last year on purchases, while maintaining the limits on withdrawals of cash in foreign currency.

Gambia

The World Bank will provide Gambia with budget support of approximately $56 million to help the new government satisfy its deficit and provide basic public services.

Nigeria

In July, the Kano regional parliament passed a law creating a fund (Kheftfund) to ensure sustainable financing of the health sector in Nigeria. The law is expected to mobilize $7 million a year according to Aminu Garba, the founder of the ONH Africa Health Network.

DIGITAL CODE

Benin

On June 13, 2017, the deputies of the National Assembly of the Republic of Benin adopted law No. 2017-20, establishing the Digital Code for the Republic of Benin (“Code”). The law will be promulgated after its validation by the Constitutional Court of Benin. It will bring together all the legal provisions applicable to all legal aspects of digital activities in the Republic of Benin. The Code is the result of a collaborative effort between all the players in the digital sector (especially the Ministry of the Digital Economy and Communication, the Ministry of Justice, the Ministry of the Interior and Public Safety, the Regulatory Authority of Electronic and Postal Communications, and the National Commission on Computer Technology and Freedom). Benin is the first Member State of the Community of West African States (ECOWAS) to undertake codification of texts relating to all digital activities.

Ethiopia

On June 12, 2017, Ethiopia finalized the implementation of an electronic visa service for international visitors to Ethiopia. The e-visa is valid for a period of 30 or 90 days after the date of its approval.

South Africa

Microsoft has announced the opening of new data centers in Johannesburg and Cape Town for the year 2018.

ENERGY/MINING

South Africa

The South African government is planning to grant the first shale gas licenses in its territory beginning in September 2017. The Minister of Mineral Resources is currently reviewing five applications for licensing. The identities of three of these five companies are Royal Dutch Shell, Falcon Oil and Gas, and Bundu Gas & Oil. The licenses granted will be valid for a period of three years.

On June 15, 2017, South Africa adopted a new mining code requiring 30 percent “black” shareholders in mining companies and 50 percent “black” South Africans for new prospecting licenses.

Gabon

On May 8, 2017, the Gabonese Head of State announced the revision of the Gabonese oil code.

Equatorial Guinea

On May 25, 2017, Equatorial Guinea became the sixth African country to become a member of the Organization of Petroleum Exporting Countries (“OPEC”). As a consequence, it must comply with OPEC’s policy of reducing oil production and must reduce their production by around 5 percent. (Its GDP has already declined by almost 6 percent since 2016).

Uganda

The Ugandan judiciary has set up a court specializing in the recognition of fraud cases in the national power grid. The authority will mainly deal with cases of illegal connections to the power grid.

Ethiopia

Sekota Mining a company formed by Luciano Frattolin and Being CBRF Technology Group have entered into a 20-year concession to extract iron ore in the Amhara region of Ethiopia. The project is anticipated to cost half a billion dollars.

INFRASTRUCTURE

Burkina Faso

On May 16, 2017, Orange began to deploy 580 km of optical fiber from the capital Ouagadougou to the border with the Ivory Coast. This roll-out complements the deployments being made by the state, in particular towards the border with Ghana, and the planned installation of a virtual fiber optic landing point to Ouaga 2000 before the end of the year.

Ivory Coast

Chinese Foreign Minister Wang Yi announced that about $2.5 billion has already been committed for some 10 projects in cooperation between China and the Ivory Coast, with more than $7 billion for projects presently under negotiation. The projects include infrastructure for roads, railways, land, marine, and agricultural needs. Long term, the two countries are looking at a final cooperation portfolio of $9.5 billion.

Djibouti

Law No. 2017-186, on Public-Private Partnerships (“PPP”), was adopted on May 29, 2017, in Djibouti. This law targets the determination of the scope, rules, and basic principles applicable to PPPs. It introduces provisions on governance, contracting arrangements, and dispute settlement procedures. This legal framework also provides for the creation of entities essential to the control and supervision of PPPs.

MEDIA

Senegal

On June 20, 2017, Senegalese deputies unanimously adopted a new press code. The new code replaces the 1996 law on social communication media and the journalism and technical professions. One of the project’s measures is the decriminalization of press offenses, hitherto punishable by imprisonment.

POLITICS/DIPLOMACY/JUSTICE

ECOWAS

Togolese President Faure Gnassingbe was elected to head ECOWAS on Sunday, June 5, 2017. He replaces Liberian President Ellen Johnson Sirleaf.

Gabon

With an eye to revising the Gabonese Nationality Code, the Gabonese Head of State has taken it upon himself to introduce a specific provision facilitating access to Gabonese nationality to those Afro-descendants who express a need for the Gabonese nationality. In this way, the Gabonese Republic has positioned itself as the first African state to recognize the right of return for the descendants of Africans deported during the period of slave trade.

Kenya

The African Court on Human and Peoples’ Rights (“ACHPR”) found Kenya guilty of violating the rights and freedoms of the Ogiek by driving them out of their ancestral lands. Having won their case, the complainants now have a two-month deadline to submit their claims to the ACHPR for reparations.

WHO

On May 24, 2017, the Ethiopian Tedros Adhanom Ghebreyesus was elected as the new Director-General of the World Health Organization (WHO), becoming the first African to head the UN agency.

CEMAC

As part of the initiatives implemented to guarantee the free movement of persons and goods within the Economic and Monetary Community of Africa (“CEMAC”), financial experts invited Member States to set up CEMAC passports by December 31, 2017.

ICT/TELECOMMUNICATIONS

Kenya

Vodafone has just transferred to Vodacom, its South African subsidiary, 35 percent of its shares in the Kenyan telephone operator Safaricom. This operation has an estimated value of $2.6 billion and makes it possible for the British operator to increase its stake to 70 percent of the capital.

Liberia

Orange has launched its brand in Liberia after completing in April, through its subsidiary Orange Côte d’Ivoire, the 100 percent acquisition of Cellcom, the leading mobile operator in the country.

Tanzania

The general director of Viettel, and seven foreign nationals, were convicted for fraud (misappropriation of the receipt and transmission of incoming international traffic) and were fined 689 million shillings ($309,289).

Tanzania has recently enacted some significant restrictions on mining operations in the country and has assessed a US$190 billion penalty on a foreign investor.

Ivory Coast

Last June, Orange Ivory Coast launched its new “Orange TV” service for customers with a subscription to the fixed internet and 3G or 4G mobile internet via the “Orange TV” application.

Senegal

Last June, the Senegal Regulatory Authority for Telecommunications and Posts (ARTP) awarded three MVNO (Virtual Mobile Operator) licenses: Future Media Group (Gfm, created by singer Youssou Ndour), Origines SA (El Hadj Ndiaye), and Sirius Telecom Africa (Mbackiyou Faye).

Zambia

In June, the Government of the Republic of Zambia adopted a new telecommunications licensing regime. The new licensing regime now allows any operator, including internet service providers (ISPs) or even fiber optic infrastructures, to provide “converged services.” It is understandable that, through global licenses, competition will be accelerated, especially on broadband internet.

INVESTMENTS

Egypt

On May 7, 2017, the House of Representatives voted into effect a new law on investment. This law replaces the existing Investment Law of 1997 and seeks to promote investment by providing for nondiscrimination based on the nationality of investors and by limiting the possibility of suspension or termination of licenses or investors. The new law also introduces reductions in and exemptions from customs duties, as well as tax reductions and the facilitation of financial transfers.

AUDIO-VISUAL

Algeria

The Ministry of Communication has sent a final warning to private television stations operating in Algeria without approval or accreditation. This warning was issued after the establishment of the Audiovisual Regulatory Authority (ARAV) and legislation regulating the audio-visual sector, in particular the process of obtaining approval. This legislation raises several conditions, including the exclusive right of Algerian nationals to act as shareholders and managers. Authorization would not be granted by the Ministry of Communication but by the government itself. The ministry has announced that only 10 channels will obtain approval. After the formal notice and the launch of a call for applications, many private television stations may be closed by the police while others might be accredited as foreign media.

Burkina Faso

Eutelsat Communications formalized the signing of a multiyear contract with the Burkinabe Broadcasting Corporation (SBT), a public broadcasting operator for Digital Terrestrial Television (DTT) in Burkina Faso.

This contract is part of the transition from analogue to all-digital television, currently in full acceleration phase in Burkina Faso.

Egypt

An Egyptian-Saudi chain was launched in June to compete with Qatar’s BeIN sports group. The program “PBS Sports” will be available on Nilesat as a free service.

Senegal

Senegal adopted a bill authorizing the creation of the Société de Télédiffusion as part of the migration to DTT.

 

Disclaimer: The views and opinions set forth herein are the personal views or opinions of the author; they do not necessarily reflect views or opinions of the law firm with which [he/she] is associated.

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