Regulators must rethink the definition of sophisticated
investor. The major stock exchanges have become increasingly
focused on protecting the minority and retail investor base
But lawyers on yesterdays Corporate governance
standards: differences between stock exchanges and consequence
for disclosure panel argued the financial crisis had
proved sophisticated investors were equally capable of
misunderstanding the risks of certain investments.
Wong Partnerships Singapore partner and panel
co-chair, Rachel Eng, said the time had come to reconsider how
the term sophisticated investor is applied.
Under the majority of regimes, a retiree who had invested
all his savings into structured products would be considered a
sophisticated investor but a 23-year old economics graduate
with no practical investment experience would not. The
retiree has the money to invest, but possibly not the
understanding, said Eng, who is also co-chair of the IBA
Capital Markets Forum.
An audience member agreed, but said the problem went much
further than that. Think of all the subprime-related
structured products sold to the various banking institutions in
the years pre-crisis, he said. They were as
sophisticated as you can get and its since become known
that they didnt understand a word of what they invested
Debevoise & Plimpton partner and panel co-chair, Kate
Ashton, said there was tension in this area for governments and
exchanges. Why only let the big institutions make more
money on these good investments? she asked.
Its not fair to prevent people from investing in
something which could be very profitable.
Why prevent the young finance graduate who thinks
hes so brilliant from investing? If he's going to lose
all his money then thats a good learning
experience, added Ashton, who is also the IBA Capital
Markets Forum website officer.
Gavin Nesbitt, from Deacons in Hong Kong, said the issue
there was that every citizen considered themselves to be a
sophisticated investor, until something went wrong at which
point they instantly metamorphosed into a victim.
Perhaps as a result of this, the citys Securities and
Futures Commission (SFC) had adopted a slightly cautious
approach to protecting retail investors, he said.
This prompted criticism in 2010 when the regulator allowed
only sophisticated investors, or those willing to invest HKD1
million ($130,000), to subscribe to the Hong Kong listing of
Rusal, a Russian aluminium firm, in a bid to protect retail and
minority investors from various risk factors associated with
Hong Kong shareholder activist, David Webb, argued at the
time the SFC had been wrong to assume the man on the street
would not fully fathom what the real risks associated with the
transaction. The poor do not have a monopoly on
ignorance, he wrote in a 2009 commentary on the move.
Eng said in Singapores disclosure- based regime, there
was also a feeling that minority investors could not take care
of themselves. The onus is therefore on potential ListCos
to disclose as much as possible, she said. Even so,
the regulator will still read through the possible risk factors
during the prospectus process to make sure that these are made
clear and disclosure is sufficient.
But McCann Fitzgeralds David Byers believed the
regulatory focus on less sophisticated investors was changing.
Recent European legislation, such as the Alternative Investment
Management Directive (AIFMD) clearly recognised the need to
protect everybody within the financial system, he said.
The AIFMD targets those typically viewed as
sophisticated investors, such as private equity firms, he
said. The exchanges are also growing increasingly aware
of the need to protect as many investors as possible, he
For more of IFLR's coverage of the IBA Annnual
Conference in Dublin:
Former World Bank chief economist Joseph Stiglitz
on why austerity measures will not solve the global
financial crisis http://www.iflr.com/Conference-newspapers.html
'How market rumours shape global M&A'