[Draft #3] Sophisticated Investors Protocol

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This is the first (in probably two or three) resolutions designed to protect cross-border investments and to rein in the investment banks, and protect investors investing overseas, based roughly on IOSCO (International Organization of Securities Commissions) criteria. The main purpose of this resolution is to define what constitutes an "accredited investor" (or sophisticated investor, professional investor etc., terms slightly differ between countries) so that retail investors are not sold inappropriate products.

The definition here is roughly off the US one:

SEC.gov | Accredited Investors

www.sec.gov www.sec.gov

Each country has slightly different requirements in terms of the wealth of the investor to be considered "accredited" - Australia is A$2,500,000, Singapore is S$1,000,000 excluding primary residence, the US is US$1,000,000 excluding primary residence.

[box]The World Assembly,

Acknowledges previous resolutions to protect the interest of investors (GAR#474) and in free trade;

Recognizing the wide range of investment products available but that potential investors have widely differing levels of knowledge, expertise, risk appetite, targeted returns and individual circumstances;

Believing that distinguishing between accredited and other investors is necessary to ensure that ordinary investors are protected from purchasing high risk products that may result in substantial losses but also that knowledged investors with sufficient expertise can presumably assume risks that they are perceived to be aware of;

Hereby defines:

"Institution" to mean a financial institution with qualified staff and regulated by at least one member state;

"Instruments" to include all securities, currencies, futures, options and all their respective derivatives traded in any member state;

"Products" to include all funds, securities, certificates, notes, units, shares, interests and all other products investing in instruments and managed by an institution operating in and regulated by at least one member state;

Hereby further defines:

"Individual investor" to mean an individual, a sole proprietorship or the partners of an unlimited partnership;

"Corporate investor" to mean an incorporated entity owned by multiple individuals or other corporate entities with limited liability, or limited liability partnerships;

"Institutional investor" to mean an incorporated financial institution with specialist functions in investment and regulated by a competent authority of at least one member state;


Hereby requires that:

  1. A competent authority of a member state must define, if desired in writing by the said investor, to be "accredited" if that investor can present evidence to meet the requirements below at the time of accreditation and repeating at all times thereafter:
    • An individual investor meets all requirements on personal and household wealth (including wealth with or without the primary residence of the investor), income, education, experience and knowledge of financial instruments and products sufficient to invest in complex financial instruments and/or products;
    • A corporate investor has a majority of its board of directors and has in its employment senior employee(s) delegated with all responsibilities on investments to meet all education, experience and knowledge of instruments and products deemed necessary by the member state, and for the corporate itself to have such sufficient wealth and income as deemed necessary;
    • An institutional investor is required to meet all regulated requirements imposed on it by the said competent authority at all times;
  2. Unless classified as an accredited investor, a member state may not make available instruments and/or products to an investor if the said instrument and/or products:
    • Has embedded features that may potentially result in a loss greater than the original investment amount;
    • Invests in non-WA member states that the member state deems to offer insufficient protection to investors;
    • Any other features deemed relevant by the competent authority of a member state with jurisdiction on the said instrument and/or product.
  3. Hereby further notes that:
    • If an investor chooses to no longer be accredited or loses accreditation for any reason, the said investor must, subject to the regulations of the member state, cease investments not available to non accredited investors.
    • A competent authority of a member state with jurisdiction is responsible for the implementation and interpretation of Clauses 1 and 2, and for any penalties that may be imposed on any violations;
    • A member state cannot prohibit an accredited investor under its own jurisdiction to purchase an instrument or product from another member state, so long as it meets the accredited investor requirements of that member state.
 
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Hi, this is a great proposal! I want to point out that as defined in 2a., no accredited investor will be able to make investments involving any kind of leverage such as options or derivative securities since these are inherently things that can lose more than the original account. Example: 1 million invested in a leverage stock buy with a leverage ratio of 1:1 can lose 2x the original amount. Not only this locks accredited investors from valuable investment products, this might disrupt the operations of multinational market maker firms (such as Jane Street in IRL) since they rely on short term leverage. Please reconsider this clause
 
norvoz:
Hi, this is a great proposal! I want to point out that as defined in 2a., no accredited investor will be able to make investments involving any kind of leverage such as options or derivative securities since these are inherently things that can lose more than the original account. Example: 1 million invested in a leverage stock buy with a leverage ratio of 1:1 can lose 2x the original amount. Not only this locks accredited investors from valuable investment products, this might disrupt the operations of multinational market maker firms (such as Jane Street in IRL) since they rely on short term leverage. Please reconsider this clause
Click to expand...

Sorry I meant "unless an accredited investor" they cannot invest in instruments with embedded features

For draft 2 (on the NS gameside forums now) I renamed it "sophisticated investors" rather than "accredited investor" due to Tin's concerns over the terminology
 
This is the second of a likely long list of resolutions designed to protect cross-border investments and to rein in the investment banks, and protect investors investing overseas, based roughly on IOSCO (International Organization of Securities Commissions) criteria. The main purpose of this resolution is to define what constitutes an "sophisticated investor" (or accredited/accreditated investor, professional investor etc., terms slightly differ between countries) so that retail investors are not sold inappropriate products.

One line summary: this regulation basically says that "retail investors cannot be sold complex financial products, unless you can prove that you have the money and the knowledge to buy these products". The rest are all more technical criteria to make the WA rules closer to real life rules.

This is mostly aimed at protecting smaller investors - large investors (say if you have US$1,000,000 in cash) are deemed to be sophisticated enough to handle sophisticated products sold by investment banks, assuming that the said investor has sufficient knowledge.

The definition here is roughly based off the US one:
https://www.sec.gov/education/capitalra ... d-investor

The global regulation is (again) through IOSCO (International Organization of Securities Commissions) criteria known as the Suitability Requirements With Respect To the Distribution of Complex Financial Products:
https://www.iosco.org/library/pubdocs/p ... OPD400.pdf

And the 2019 review on the said regulation:
https://www.iosco.org/library/pubdocs/p ... OPD638.pdf

Each jurisdiction has slightly different requirements in terms of the wealth of the investor to be considered "accredited" - Australia is A$2,500,000, Singapore is S$1,000,000 excluding primary residence, the US is US$1,000,000 excluding primary residence.

Category: Regulation / Consumer Protection

Draft 3

I simplified some wording and substituted “instrument(s) and/or product(s)” with just instruments (I re-defined “instruments” in the definitions section) and started to refer to “resources” rather than “wealth and income”. I also simplified the definition of “corporate investor” slightly to come in below 4,000 characters.

I’ve also inserted a requirement on understanding customer needs (clause 3, sub clause c) for an institution selling instruments to an individual or corporate investor must understand the investment objectives and risk appetite of the said investor and not to sell instruments not otherwise suitable to that investor. IAis credited as a co-author accordingly with his approval.

The World Assembly,

Acknowledges previous resolutions to protect investors (GAR#474, #633);

Recognizing the wide range of investment options but that investors have varying of knowledge, expertise, risk appetite, and circumstances;

Believing that distinguishing between sophisticated and other investors is necessary to protect consumers lacking sufficient knowledge from being disadvantaged in purchasing high risk products but also allow those with sufficient resources and expertise to assume higher risks;

Hereby defines:

"Institution" to mean a financial institution with qualified staff and regulated by a competent authority in at least one member state;

"Instruments" to include all securities, currencies, futures and all related derivatives traded in any member state, and, for the purpose of clauses 2 and 3 of this resolution, includes all funds, certificates, notes, units, shares, interests and all other products investing in instruments and managed by an institution regulated by at least one member state;

Hereby further defines:

"Individual investor" to mean an individual, the partners of an unlimited partnership or any entit(ies) solely beneficially owned by a single individual;

"Corporate investor" to mean a body corporate or legal person, not including any entit(ies) substantially beneficially owned by a single individual;

"Institutional investor" to mean an institution (as defined herein) with specialist functions in investment;

Hereby requires that:

1. A competent authority of a member state must classify, if an investor desires to be so classified, to be "sophisticated" if that investor can present reasonable evidence to meet the requirements below at the time of classification and repeating at all times thereafter until the said investor rescinds such evidence:
a. An individual investor meets all requirements imposed by the said authority on (1) personal and household resources and (2) sufficient education, experience and knowledge to invest in complex instruments;
b. A corporate investor meets all requirements imposed by the said authority in (1) resources available, and (2) the appointment of board directors and/or officers with sufficient education, experience and knowledge to invest in complex instruments;
c. An institutional investor is required to meet all regulated requirements imposed on it by the said competent authority at all times;

2. Unless classified as a sophisticated investor based on clause 1, a member state may not make available instrument(s) to an investor if the said instrument(s):
a. Have features that may potentially result in a loss greater than the original investment amount;
b. Invests in non-WA member states that the member state deems to offer insufficient protection to investors;
c. Includes any other features deemed relevant by the competent authority of a member state with jurisdiction on the said instrument and/or product;

3. Hereby further requires that:
a. All sales documentation on the said instrument(s)/products must include appropriate disclosures concerning the risks of the said instrument(s) and any potential or actual material conflict(s) of interest between the institution and the investor;
b. An institution selling instruments to an individual or corporate investor must understand the investment objectives and risk appetite of the said investor and not to sell instruments not otherwise suitable to that investor;
c. A member state may not prohibit the sophisticated investors of its state from purchasing products from an institution in another member state, provided that the said investor also meets the requirements to be deemed a sophisticated investor in the other member state.

Co-author: Imperium Anglorum
 
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