[GA, defeated] - repeal "sophisticated investors protocol"

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Repeal "Sophisticated Investors Protocol"
Category: Repeal | GA #642
Proposed by: Wallenburg | Onsite Topic
Replacement: < None >​

Recognizing the complicated and volatile nature of several investor instruments and products,

Concerned that existing legislation intended to reserve high-risk investments to those qualified to competently act in response to their risk factors makes several fatal errors that render it unable to actually effect its intended mandates,

Disappointed by the unnecessary denigration of non-expert investors in the terminology chosen in GAR #642,

The World Assembly hereby repeals GAR #642, "Sophisticated Investors Protocol", for these several faults:

  1. Section 1, presumably intended to define "sophisticated investor", fails to do so. Instead of establishing rules for identifying an investor as "sophisticated", it merely requires member states to supply their chosen definition of "sophisticated" to certain classes of investors upon written request. Consequently, member states are left total authority to determine which entities are "sophisticated investors".
    1. Were this issue not present and were member states actually required to designate sophisticated investors according to the details of section 1, member states would still have near-unrestricted latitude in practice. Section 1 describes standards for each class of investor that depend entirely on what each individual member state considers "necessary" or "sufficient", or on what laws already exist in member states. Therefore, even if these subsections were relevant to the target's mandates they would merely mandate member states adhere to the national standards they choose to set.
  2. Section 2 is rendered twice toothless, once by the equal toothlessness of section 1's failure to establish a standard for "sophisticated" investors, and once more by the structure of its text, which merely requires that member states classify themselves as sophisticated investors in order to permit or make available specified high-risk investment instruments or products.
  3. As a consequence of the target's combined lexical failures, member states are encouraged to identify themselves and no other entities as "sophisticated investors" to the end that the mandates of section 2 and 3 have very little effect on any member state.
  4. By the failure of sections 1 and 2 to achieve anything of consequence, the target is reduced to a requirement that investees and other entities selling investment instruments or products disclose risks of investment, a meek requirement not worthy of such bloated international legislation.
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Note: Only votes from TNP WA nations, NPA personnel, and those on NPA deployments will be counted. If you do not meet these requirements, please add (non-WA) or something of that effect to your vote. If you are on an NPA deployment without being formally registered as an NPA member, name your deployed nation in your vote.
Voting Instructions:
  • Vote For if you want the Delegate to vote For the resolution.
  • Vote Against if you want the Delegate to vote Against the resolution.
  • Vote Abstain if you want the Delegate to abstain from voting on this resolution.
  • Vote Present if you are personally abstaining from this vote.
Detailed opinions with your vote are appreciated and encouraged!

ForAgainstAbstainPresent
0900
 
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Overview
The proposal at hand repeals "Sophisticated Investors Protocol", citing as its main arguments a grammatically dubious definition of the paragraph intended to define "sophisticated investor, and standards for each class of investor that, to quote, "depend entirely on what each individual member state considers "necessary" or "sufficient, or on what laws already exist in member states". The toothlessness of the resolution itself is cited as the main reason for the repeal.

Recommendation
The MoWAA believes that the repeal fails to fully comprehend the resolution, and complaints about "lexical failures" are very colourable. We believe the complaint that the definition of a "sophisticated investor" is too vague is a deliberate feature, not a flaw, as each WA state having discretion in this area is useful depending on the circumstances of the said state. We further believe the complaint that the target is toothless in terms of regulation misunderstands that the target’s role is not to have particularly many teeth but to ensure certain procedural requirements for investing.

For the above reasons, the Ministry of World Assembly Affairs recommends a vote Against the at-vote GA resolution, "Repeal Sophisticated Investors Protocol".
 
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I would be curious to hear the rationale for the unexplained opposition. While I cannot vote as my WA is not currently in TNP, I find myself increasingly agreeing with every one of these arguments each time I read the target. The target is indeed toothless apart from a singular provision which is not sufficient to merit keeping the rest of the resolution.

Strongly for (non-WA), and I encourage others to also vote for.
 
Against. I believe the lexicology arguments over clause 1 of the resolution (the first part, not the sub-clauses) is incorrect.

Edit: The definition of an investor was (between draft 3 and draft 4) moved to the definition section - the sentence which seems to be in dispute here, "if desired in writing by the said investor" is referring to the three different types of investors (individual, corporate, institutional) in the "hereby further defines" section before clause 1 - the preamble comes much earlier in the text. Nowdays I number the definition section as well whereas back in 2022. That error was mine.

On the other hand, this resolution was deliberately written to give as much leeway to individual states as possible in terms of defining what constitutes a "sophisticated investor" based on differing circumstances, which is kind of a reflection of IRL. So a repeal on the grounds that "it's toothless" is a plausible argument.

On the original thread, there was an example given by IA that what this resolution essentially says is "if I want to sell you tranche 8 of a CDO and you don't understand what tranche 8 of a CDO is, then I can't sell it to you". To buy tranche 8 of a CDO from say Citibank would require a minimum of US$30m of wealth, so in practical terms, the hurdle is pretty high although it's not specified in the resolution.

The original debate is here:
 
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Against

This looks like a miscomprehension of its target, and is certainly of little authority in regard to "lexical failures".
 
Against.

Section 1 of the target resolution appears to list a set of classifications that must be met in order for different types of investors (individuals, corporations, or institutions) to be classified as "Sophisticated." I don't see it as letting member states make their own definition of what "sophisticated" is.

Section 2 appears to list the types of investment products which only "sophisticated" investors may invest in.

I don't see that the issues raised in this resolution actually exist, as the target seems to be internally consistent and enforceable, not toothless as this proposal claims.

I agree with @nvxl that this appears to be a miscomprehension of the target resolution.
 
Gymna:
Section 1 of the target resolution appears to list a set of classifications that must be met in order for different types of investors (individuals, corporations, or institutions) to be classified as "Sophisticated." I don't see it as letting member states make their own definition of what "sophisticated" is.
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I don't think this is what the text of the target says, even if the author's intent is indeed this. The resolution says "A competent authority of a member state must define, if desired in writing by the said investor, to be [']sophisticated['] if that investor...". This does not require that the investor themselves be defined as such, merely that a member nation define to be sophisticated. The critieria themselves also seem quite exploitable; for example "An individual investor meets all requirements on personal and household wealth, income, education, experience and knowledge of financial instruments and products sufficient to invest in complex financial instruments and/or products" -- this is circular, a member nation can simply say "We have no requirements on these and therefore 'all requirements' means 'no requirements'." "satisfying all education, experience and knowledge of instruments and products deemed necessary by the member state" -- one year of mandatory education is all that we consider necessary.
Gymna:
Section 2 appears to list the types of investment products which only "sophisticated" investors may invest in.
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The issue here with the clause is that "Unless classified as a sophisticated investor based on the aforesaid criteria, a member state may not make available instrument(s) and/or product(s) to an investor if the said instrument(s) and/or products" is unclear as to what "unless classified as a sophisticated investor,," applies to, ie whether it is "a member state" or "an investor". If anything, the nearest-referent canon (eg [1]) would specify that "classified as a sophisticated investor..." applies to "a member state". Therefore, as stated in the repeal, the target clause merely requires that the member nation be a sophisticated investor to make available these instruments/products, even if this is not the author's intent.
 
I have been considering this repeal at some length. I have decided that I must vote against it. The repeal does present an excellent format, with numbered clauses, allowing for easy reference. I commend that.

The first argument of the repeal is that the definition of a “sophisticated investigator” is too vague. I believe that the repeal’s interpretation of the target which regards to a sophisticated investigator, though not the optimal interpretation, is a colourable one. However, this is a deliberate feature of the target, rather than a flaw. Granting discretion is helpful in this area.

The second argument, which is that a certain clause of the target is toothless, comes from a misunderstanding of the target. The target’s role is not to have particularly many teeth. Rather, it is to ensure certain procedural requirements for investing. Thus, the fact that the targeted clause imposes merely a procedural burden is not a flaw in the target.

The fourth argument (I omit the third because it merely summates the first and second) is that there is no room for a requirement that certain financial risks are disclosed. I do not understand this argument. That is a very reasonable mandate, and the criticism that the target is “bloated” has no impact on the desirability of a mandate as to openness with regards to risk.
 
Magecastle:
I don't think this is what the text of the target says, even if the author's intent is indeed this. The resolution says "A competent authority of a member state must define, if desired in writing by the said investor, to be [']sophisticated['] if that investor...".
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The definition of an investor was (between draft 3 and draft 4) moved to the definition section - "if desired in writing by the said investor" is referring to the three different types of investors (individual, corporate, institutional) in the "hereby further defines" section before clause 1 - the preamble comes much earlier in the text.
 
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