INVESTMENT PRACTICES AND FAIS
Section 78(2A) of the Attorneys Act 53 of 1979 and section 86(4) of the Legal Practice Act 28 of 2014 allow attorneys to invest client monies in a separate trust savings account or other interest bearing account where there is an underlying transaction with an explicit mandate from the client to do so. These investments are referred to as investments in terms of the Act.
Attorneys regularly open investment accounts in terms of the Act for their clients. These investments remain part of entrusted monies and are recorded as such in the accounting records of the attorneys’ practice and enjoy protection by the Attorneys Fidelity Fund (the Fund).
With effect from 1 March 2016 attorneys are regulated in terms of the Rules for the Attorneys Profession (GenN 2 GG39740/26-02-2016) (the rules). The rules (rule 36) permit attorneys to invest on behalf of individuals without there being an underlying transaction. Monies invested in terms of rules that have no underlying transaction and are not earmarked for any purpose other than to invest, do not form part of general trust monies and should not be accounted for as part of general trust monies/balances, and DO NOT enjoy the protection of the Fund.
Attorneys may invest in terms of the Act and the Rules. Rule 36 states as follows:
- Rule 36.1 A firm shall for the purpose of this rule be deemed to be carrying on the business of an investment practice if it invests funds on behalf of a client or clients and it controls or manages, whether directly or indirectly, such investments
- Rule 36.2 A client shall for the purpose of this rule include any person on whose behalf a firm invest funds or manages or controls investments, whether or not such person is otherwise a client of the firm concerned
- Rule 36.4 A firm carrying on an investment practice shall obtain an investment mandate from each client before or as soon as possible after investing funds for the client. The form of the investment mandate shall be substantially in the form of the Fifth Schedule to these rules and shall contain a statement that the client acknowledges that monies so invested DO NOT enjoy the protection of the Fund
Practitioners are urged to read rule 36 in full to get more information on Investment Practice Rules. Refer to the URL below:
Following on an opinion sought the Law Society of South Africa (LSSA) sought clarity from the Financial Services Board (FSB) and were advised in July 2015 by the Deputy Registrar of the FSB that investments in terms of the Act would not fall within the ambit of the FAIS Act while investments in terms of the Rules would require compliance with the FAIS Act. As such attorneys that run investment practices are required to be licensed with the FSB as a Financial Service Provider (FSP).
Proper and accurate distinctions of investments should be made by attorneys when investing client funds in terms of the Act or the Rules so as to ensure compliance with relevant legislation and/or regulations.
Attorneys who invest monies in terms of the rules are running an investment practice and must ensure that they:
- Are licensed to do so by the FSB
- Obtain a mandate from their client to invest his or her money
- Make an accurate classification of an investment at all times
- Explicitly disclose to the client that the investment is NOT protected by the Fund and
- Fully comply with the requirements of the FAIS Act
Extracts from an article that was authored by the financial forensic unit of the Attorneys Fidelity Fund that was first published in De Rebus in 2016 (April) DR 13.