09 Oct Sophisticated investors want to have their cake and eat it too
by Matodzi Ratshimbilani
The world over the concept of sophisticated investors is acknowledged in different forms. By way of example, in the United Kingdom sophisticated investors include retail clients, professional clients and eligible counterparties.
The crux of this categorisation of investors is that there are certain investors who are sophisticated enough to know what they are getting themselves involved in and do not require extraordinary measures of protection in their investment endeavours.
In South Africa the concept of sophisticated investors is rarely used if at all. This notwithstanding, those who invest in the securities exchange such as the JSE are self-evidently sophisticated investors because in order for any person to successfully delve in the stock market one needs to fully understand its rules, intricacies and vagaries.
By its nature and the extent of sophistication and knowledge required to invest in the stock exchange, the stock exchange is as Professor Piet Delport, professor of Mercantile Law at the University of Pretoria reflected when commenting on the recent JSE Consultation Paper on possible regulatory responses to recent events surrounding listed issuers and trading in their shares stated, is “run like a club”.
“If a company doesn’t comply with its rules, the worst the JSE can do (apart from fines) is suspend its listing, which will hurt the shareholders. This reality has grim implications for shareholders seeking retribution for the loss of value of their investments,” he writes further.
The knowledge of the workings of the stock exchange is an exclusive tool of trade to those who have made trading shares in a stock exchange a vocation. Those who are knowledgeable enough to do it without the assistance of professionals are equally privileged.
The professionals who make a living out of the activities of the exchange, the institutional investors who have the means to buy the best advice money can buy and individuals who know their way around the exchange should accept in as much as they benefit from these exclusive clubs that they are willing and sophisticated participants who should stand and fall by their understanding and acumen or lack thereof, in this exclusive and sophisticated market.
Following the advent the Steinhoff fiasco, the listing and near listing of companies like Ayo and Sagarmatha, many a sophisticated investor have decried the role of the exchanges and the JSE in particular. Calls have been made for the JSE to essentially protect investors from what they perceive as undesirable investments. This is not the role of the JSE or any regulator for that matter. The roles of exchanges are clearly provided for in the applicable legislation such as the Financial Markets Act.
As the JSE pertinently reminded all concerned in its consultation paper, its role is to provide for regulations which are appropriately pitched and equitably enforced, to provide robust technology systems which allow investors to execute their trades, to provide disclosure standards which require relevant information to be published publicly and at regular intervals and to enable the creation of governance structures which will allow entrepreneurs to build their businesses with appropriate checks and balances to protect investors.
The role of the exchanges regarding disclosure of information by securities issuers need not go beyond providing adequate information to enable the investors to make informed investment decisions. One hopes that the JSE is not balking under pressure of the sophisticated investors in considering possible regulatory changes.
The detractors of the exchanges and the JSE in particular, such as the billionaire CEO of asset management firm Sygnia Magda Wierzycka are barking up the wrong tree when they pressurise the exchanges to change their rules in order to protect investors. These calls appear more insincere when they come from those whose business it is to assist investors to navigate the murky waters of investments.
Although one would wish to believe that these criticisms arise out of concern for the investors and pension fund members, it is unclear how in the face of experts in the market, good advice and limitless resources why these sophisticated investors require the protection of the regulators to make investment decisions.
It is also noteworthy that some of the self-proclaimed critics of the JSE have a bone to pick with them for what appears to be unrelated matters to the subject at hand. In her latest column, Wierzycka admits that she feels hard done by the JSE for refusing her company permission to list a cryptocurrency stock at the eleventh hour. These kind of sentiments should not be allowed to cloud a debate about the role of regulators and be used as an excuse to apportion responsibilities unduly on regulators.
The exchanges are subject to the rule of law and the principle of legality. To the extent that any person is aggrieved by their action or inaction they are within their rights to seek legal recourse.
The sophisticated investors need to accept that in as much as they benefit from the various exchanges, they should equally accept that where their knowledge and instincts fail them they must accept the accompanying losses.