Scope investor protection rules extended to include alternative investment products
The prospectus rules in Belgium now apply not only to securities offered to the public and securities admitted to trading, but also to certain other alternative categories of investment products.1
The entry into force of this new legislation (altering the scope of investor protection rules) on 1 November 2014, prompted the Belgian Financial Services and Markets Authority, the FSMA, to publish a “Communication to companies that distribute investments in movable or immovable goods” (the Communication).
The Communication clarifies the concept of an alternative investment instrument and explains to the providers of such products (and their intermediaries) their legal obligations under the various applicable laws and the possible enforcement measures and sanctions that apply should they fail to comply.
This contribution highlights the main elements of the Communication.
Concept of an alternative investment product
The scope of the Communication is limited to alternative investment products, ie products that do not take the form of classical investments which are clearly defined in the financial legislation. Therefore, real estate certificates and units in real estate investment trusts fall outside the scope of the Communication, as do those products governed by specific separate regulations, such as the moratorium on the distribution of particularly complex structured products to retail clients or the FSMA Regulation of 3 April 2014 on product banning.
In order to qualify as one of the two categories of alternative investment instruments under the Prospectus Law, the alternative investment instrument must contain all of the following constitutive elements, namely:
- a right directly or indirectly associated with one or more movable or immovable goods (category 1) or associated with one or more movable goods or a farm (category 2);2
- held in a de jure or de facto association, joint ownership or group;managed collectively by a professional; and
- the rightholders have no “personal enjoyment” of the goods (category 1), or the rights make it possible to carry out a financial investment, except where those rights provide for an unconditional, irrevocable and complete transfer of the goods in kind (category 2).
The Investors in alternative investment products of the first category, must renounce both forms of “personal enjoyment”, even if partial/temporary personal enjoyment (physical form) of the good is permitted, provided that such enjoyment is not “effective”.
As regards alternative investments of the second category, the investor must not retain the full physical enjoyment of the goods through a transfer in kind. By contrast, the economic enjoyment of the goods (ie the return) does not need to be pooled.
Alternative investment instruments under other legislation
The Belgian legislator has used a variety of concepts and definitions for investment products in its financial legal framework, which results in the need to carefully examine each type of investment product to establish which rules apply.
As set out above, alternative investment products may qualify as “investment instruments” under the Prospectus Law. This means that where a public offer is made in Belgium, the issuer or provider is required to publish a prospectus that has been approved by the FSMA in advance of the offer. Both the prospectus and all advertisements and other documents or notices must contain appropriate and comprehensive information.
Only regulated financial institutions listed in the Prospectus Law may provide intermediation services in the context of the offer of investment instruments, the so-called “intermediation monopoly”.
Insurance intermediaries may, therefore, not distribute alternative investment instruments. In addition, alternative investment products may not be distributed by insurance intermediaries in the form of Class 23 insurance contracts, due to the FSMA Regulation on product banning.
Financial Supervision Law and Transversal Royal Decree
Alternative investment products are “financial products” within the meaning of article 2 (1) 39° of the Financial Supervision Law,3 and thus also fall within the scope of the so-called Transversal Royal Decree (the Royal Decree).4
The Royal Decree regulates the content of advertisements and other documents and notices disseminated when distributing financial products to retail clients. By way of example, its rules provide that one may not emphasise the potential benefits of a product without also giving a fair, prominent and balanced indication of the associated risk, limitations and conditions. Risks must be stated legibly and at least in an equally large font size as that used for stating the benefits. The name of the issuer must either be contained in the product or displayed prominently alongside it.
As stated in the Royal Decree, this will come into force on 25 April 2015 and these rules will supplement the advertising rules in the Prospectus Law. They will also apply to alternative investment products that are distributed to retail clients outside of a public offer (for example, within a circle of fewer than 150 retail clients).
Book VI of the Economic Law Code
When distributed to consumers, alternative financial instruments qualify as “financial services” within the meaning of book VI of the Economic Law Code, which contains consumer protection rules, such as the ban on unfair contractual terms, comparative advertisements, or contracts concluded at a distance or entered into outside of points of sale.
Given the definitions used, certain legal entities (or even some persons acting in a professional context) may qualify as customers.
The FSMA may impose administrative fines on providers of investment products (or their intermediaries) that do not comply with the abovementioned financial legislation. For the rules applicable under the Economic Law Code, the FSMA can be assisted by the Belgian Federal Public Service Economy, which also has inspection and sanctioning powers.
In addition, certain breaches of rules under the Prospectus Law, like the prospectus obligation, the pre-approval requirement of advertisements or the so-called “intermediation monopoly” under the Transversal Royal Decree or under the Economic Law Code, are subject to criminal sanctions.
Finally, in the Communication the FSMA reminds investors of the civil liabilities sanction regime. An investor may seek the nullity of an investment transaction if the required licence for the service provider or pre-approved prospectus authorisation or other required documentation is lacking.
1. Prospectus Law) Article 4 (1) 3° and Article 4 (1) 3°bis.
2. Alternative investment products invest in a wide variety of movable and immovable goods, such as artworks, collector's items, old manuscripts, alcoholic drinks, old coins, commodities, plantations and real estate.
3. Law of 2 August 2002 on the supervision of the financial sector and the financial services.
4. Royal Decree of 25 April 2014 imposing certain information obligations when distributing financial products to retail clients.