George Roper, Contributor

Roper

The Financial Services Commission (FSC) would like to address, for the benefit of your readers, a few issues that were presented in an article entitled, 'Rethinking Alternative Investment Schemes', written by Robert C. Wynter. This article appeared in the February 3, 2008 edition of The Sunday Gleaner.

The main issues from the article we wish to address are (a) the author's view that there is a loophole in the current regulations in the respect to investment clubs and (b) his opinion of the actions the FSC took in response to the growth of these schemes, which we prefer to call unregulated financial organisations (i.e., UFOs for short rather than alternative investment schemes).

Contrary to the view of the article's author, there is no loophole in the current regulations addressing investment clubs. By the current regulations, we assume that he refers to the Securities Act ("the Act") which requires that issuers of securities are to apply to the FSC to be registered in respect of their securities before offering them to the public (c.f. section 26 of the Securities Act), whilst persons carrying on the business of a securities dealer or investment adviser must obtain from the FSC the relevant licence in order to conduct this activity legally (c.f, sections 7 and 8 of the act). The act also required the registration of the representatives of licensed dealers and advisors (c.f. section 10).

Many of the unregistered investment schemes claim to be investment clubs and have tried to use this as a basis for arguing that since they are private clubs they should not be regulated. This is a flawed argument since Jamaica does not exempt investment clubs the remit of the regulators. As long as these 'investment clubs' (a) issue securities to the public without applying to the FSC to be registered or (b) carry on securities business without the requisite licence, they are in fact breaking Jamaica's securities laws.

Admittedly, in other jurisdictions, exemptions are available for investment clubs who observe clearly defined rules. For example in the United States, some of the criteria that must be met to qualify for exemptions from registration/licensing are:

(a) the club must have no more than 100 members; and

(b) all the members must participate in the process by which the club decides what investment to make.

It should be noted that if the exemption criteria in the US were included in Jamaica's securities laws most, if not all, of the 'investment clubs' currently operating in Jamaica would not be eligible for exemption from registration, licensing and regulation by the FSC.

CONSIDERATION

The FSC accepts that it is appropriate for consideration to be given to the question as to whether Jamaica should include in its legislative framework provisions which directly address the subject of investment clubs. However, such consideration will not stop the authorities, in the interim, from taking action against existing unregistered investment schemes for breaches of the current statutory provisions.

ACTIONS OF THE FSC

Wynter in his article makes clear allusions to the fact that he is not aware of the FSC's aggressive mass media campaign which has been conducted under the slogan 'Think and Check before you invest'. We have arrived at this conclusion since Wynter suggests that the FSC has been aggressively doing nothing to warn investors. This is an unfortunate statement since the FSC has been aggressively warning the public about the dangers associated with investing in UFOs by way of public forums, television and radio advertisements and public notices placed in the print media and on our website.

Wynter may be interested to hear that several of the investors in the UFOs have either indicated that they are quite aware of the risks they have taken in investing in a particular UFO or that they heard the warnings, but decided to invest nonetheless.

The FSC agrees with Wynter's position that 'responsibility must rest squarely on the shoulders of the investors'. The FSC will continue to remind the public that those investors who choose to ignore the advice to 'think and check' before they invest, run the very serious risk of losing their hard-earned money.

In closing, we would like to state clearly that unregulated entities present a threat to their customers, potential customers and the general public because their existence undermines the rule of law by encouraging other persons to disregard statutory requirements. In addition, as they are not subject to the oversight of a regulator there is no means to ensure that they adhere to appropriate standards of operational conduct.

UNREGULATED ENTITIES

Consequently, unregulated entities could also undermine the integrity of financial markets, negatively impact the credibility of the country's financial standing in the international community, impact the overall economy adversely and increase the potential for money laundering due to the absence of regulatory oversight.

The FSC is reminding the operators of unregistered investment schemes that the FSC will consider any application for registration and/or licensing submitted by an unregistered investment scheme in accordance with the FSC's established procedures including ensuring that the applicant meets relevant minimum capital requirements and fit and proper criteria.

George Roper is the acting executive director of the FSC