FSB’s edict that OTC trading of BEE shares is illegal: don’t panic – yet

Last week, senior investigator at the Financial Services Board, Erris van Kerken, told us all existing OTC market operators are trading illegally. That came as a surprise to Anthony Wilmot, founder of the country's leading OTC platform Equity Express, so he accepted out invitation to visit the Biznews studio to provide some background. With more than half a million BEE shareholders owning shares that can be traded through Equity Express – and another 100 000 or so in the separate MTN Zakhele platform – there's a great deal at stake. In this frank discussion, Wilmot reflects on the FSB's edict and outlines the options – concluding that sensible discussions are sure to lead to an amicable solution. – AH

ALEC HOGG: How many listings do you have on Equity Express?

ANTHONY WILMOT: We have 15 in total that trade on our platform.

ALEC HOGG: Why would they trade with you rather than say, the JSE?

ANTHONY WILMOT: They trade with us primarily, because of the fact that they'll have listing rules that preclude them from trading on the JSE. The BEE schemes have rules that only allow certain South Africans to participate in the market, and the JSE is a public exchange, which obviously prevents them from participating. In addition, many of our BEE clients insist that only a certain section of the shares can be owned by any one shareholder, and those rules can't easily be enforced on the JSE.

ALEC HOGG: So all kinds of little rules are required that the JSE cannot apply, but you can because it's specialised?

ANTHONY WILMOT: Well, because all the software sits in one place and the entire register in fact, exists on the exchange so for every order that's placed on the exchange as a buy order, is backed by cash and ever sell order is backed by the shareholder having the shares and having passed our security tests. It means that the entire market is effectively pre-validated, which means it's difficult to have any manipulation of share prices etcetera, and it also means that because we have the entire register sitting behind the software, we can do those types of tests. If you therefore want to buy more than one percent of one of those listing's number of shares, the system will prevent you at that point, from doing it.

ALEC HOGG: The Financial Services Board's Erris van Kerken spoke to us last week, and he was saying that operations like yours are trading illegally. What's going on there? You don't seem to be a criminal-type?

ANTHONY WILMOT: It's very interesting. Before we put our very first share onto this exchange, which was actually the ABIL shares, we were approached by the FSB and we said there are regulatory problems based on our reading of what was then the SSA Act.

ALEC HOGG: What's that?

ANTHONY WILMOT: The SSA was the Security Services Act, which has now been replaced by the FMA in June of last year.

ALEC HOGG: And that is?

ANTHONY WILMOT: That is the Act that regulates the trading in securities. The definition of an exchange has not changed. The definition of an exchange broadly says if you set up infrastructure where buyers and sellers meet and a match constitutes a trade, then you're running an exchange. That word 'infrastructure' is very wide. It could mean a spreadsheet. It could mean anything, really. We went to the FSB and said 'what's your understanding of this', and they said 'as long as the issuer (the person whose shares are being traded) are only trading their shares and nobody else's, it's not an exchange. In fact, they gave our biggest clients written approval to do this because obviously, the legislation wasn't that clear.

ALEC HOGG: When you say your 'biggest client', you started with ABIL. Who else?

ANTHONY WILMOT: ABIL got permission. MultiChoice got permission. Vodacom got permission. All well respected, Blue Chip South African companies…we went to the FSB and in their names, got the authority. We always maintained (and still do) that we're an agent acting on behalf of them and effectively, all Singular does is provide all the software, the infrastructure, and the administration to run it on their behalf. That really is the background, so Mr van Kerken and the FSB… When the new Act came out, they took that very same definition which, by the way as I said hasn't changed by one letter or comma, re-evaluated with their lawyers, and now they're of the opinion that if there is only one counter involved, you still are an exchange. That's why they're now maintaining that our issuers are in fact, acting illegally.

ALEC HOGG: So it's not you acting illegally. It's Vodacom, Imperial, Naspers etcetera.

ANTHONY WILMOT: Correct. That's exactly right. Well, they throw us into the same boat because they know we're doing it. In fact, when we went to them right at the beginning, they looked at our operation and they initially felt that we didn't need to get a licence to be an FSB. On subsequent re-evaluation of our procedures and practices, they said 'you're acting as a financial intermediary' because our share dealers who answer the telephone on behalf of the shareholders, take their instructions to sell shares. They don't give advice, but they do take an instruction. They felt that that was a financial service and we must be FSB-registered and get our FSB approval, and that's what we did. We are FSB-registered as financial intermediaries, but that's the extent to which we're currently regulated.

ALEC HOGG: So where does the 'illegal' side/'operating illegally' actually come into it?

ANTHONY WILMOT: The 'illegal' side is we are an exchange and we don't have a license. That's what they're arguing.

ALEC HOGG: So you weren't an exchange before. Now, you are an exchange.

ANTHONY WILMOT: Correct.

ALEC HOGG: How many shareholders are there, who operate?

ANTHONY WILMOT: In total, the number that can trade on our platform…there's one client who uses our software and somebody else does the administration for us, but if you include that client (that's actually the biggest one in South African terms of numbers of shareholders), we have a total of five-hundred-thousand shareholders who can trade on this market.

ALEC HOGG: So there are five-hundred-thousand black shareholders who own shares in BEE schemes, who theoretically, are now going to be trading illegally if you don't comply with certain regulations that the FSB has put down.

ANTHONY WILMOT: What they've done is they've issued a number of directives where they've asked us to respond to the position they now say that we're in. We've been engaging with the FSB and so have our clients, and in a recent meeting with our clients, our clients have said to us that they support us wholeheartedly. All we've said to the FSB is 'you need to inform us exactly what we need to do to comply', and they said 'very simply, you need to apply for an exchange license'. Now, our clients have indicated that they really don't have the intention or want to apply for their own exchange license.

ALEC HOGG: In other words, the FSB is saying Naspers must become a stock exchange?

ANTHONY WILMOT: Yes, and so must Vodacom, and so must everybody. That is obviously not practical because one of the finer requirements that most people don't know, is that if an exchange lists its own shares in its exchange, those shares actually need to be administered and looked after by the FSB. The JSE's own listing is not regulated by themselves. That is the only one that is actually regulated by the FSB, whereas the JSE regulates all the other listings. Now, this becomes very impractical for the FSB because if Vodacom gets their own license and everybody gets their own license, they're effectively going to have to regulate all these things independently. They are therefore quite keen and they've indicated to us that they're quite keen for somebody to take this onerous burden away from them, and they're encouraging us to just sit down and apply for a license.

ALEC HOGG: So are you going to?

ANTHONY WILMOT: We're looking at it. It's a very onerous process. We're certainly in discussions with them and all I can tell you, in complying with the legislation, the last thing you want to do is be acting illegally.

ALEC HOGG: Anthony, this is interesting because if you apply for a stock exchange license, then potentially, you could compete with the Johannesburg Stock Exchange, which is currently the only registered exchange in the country.

ANTHONY WILMOT: That's always been the case. It's nothing new. In discussions with the FSB, they've told us on many occasions that they would welcome another applicant. I don't know if you've ever looked at the application process. It's quite arduous and there's an enormous amount of information, so it's not something that one embarks on lightly. All I can say is we have been in discussions with FSB and we've indicated to them that we have no intention of applying for a license if we cannot be licensed under the current conditions that we operate, so if the fact that only black shareholders can trade on our exchange and it has to be a public exchange… For example, the JSE can't allow that because the JSE is a public exchange, then it precludes us from getting our license and there's no point in applying for a license. As I said, there's a process where we need to go through the FSB to get their sanction that they are happy to consider our license application if we were to put one in, on the basis of meeting the service levels that we currently provide to our clients with our current solution.

ALEC HOGG: What happens if that is not possible?

ANTHONY WILMOT: Well, if that's not possible, it really leaves some of our clients with a situation where they'll just say 'we would never have gone into this Act illegally'. They'll have to go back to their shareholders and say 'guys, we're going to have to shut up shop'. Some of our biggest clients are in a fighting mood and I have no desire to do that.

ALEC HOGG: How can they? Half-a-million people have shares. Sasol Inzalo was another one of your clients. There are many people who own shares – many previously disadvantaged people – who clearly, are not going to be happy because they can't trade.

ANTHONY WILMOT: One of our clients is under a court order. They have to provide an OTC trading platform, so it's very interesting. I like to think we live in the same country and I like to think that common sense will prevail, but with bureaucracy, you just never really know.

ALEC HOGG: What have the engagements been like with the FSB, since this announcement by Erris van Kerken?

ANTHONY WILMOT: We had a meeting with them before this latest directive. Since the directive, there was a date last Friday where people had to respond and our clients responded. We have to formally respond ourselves as the intermediary, by the end of June, which we will. Before the end of June, we have a meeting with them – our first workshop – to discuss the process of preparing for a license application if that's where we end up having to go.

ALEC HOGG: As things stand at the moment, you're continuing to trade.

ANTHONY WILMOT: Correct.

ALEC HOGG: So the Sasol Inzalo shareholders can buy and sell.

ANTHONY WILMOT: Yes, everybody can trade. They haven't shut anybody down. Just reading what the latest directive said: the latest directive said you have to indicate by the end of June, an intention to apply for a license, and there they're being very broad. It's not just us, it's [Senvest? unclear 0:09:39.3], every OTC platform, IT markets, [unclear 0:09:42.6] players, so I'm not sure who's behind it. Anybody who allows people to trade securities – that they're aware of – has been sent this directive, so all those participants have to indicate an intention to apply. If you indicate an intention to apply, they will allow you to keep going until the end of January, as long as you've put in an application by the end of January. What happens after the end of January, nobody knows.

ALEC HOGG: So the application… As far as you're concerned, you're going to tell them by the end of June that you intend applying. You're putting in an application by the end of January, and if you are then granted a license – fine. If you're granted a license on the basis that you can't fulfil the obligations you have to your existing clients i.e. not everybody can buy and sell Sasol Inzalo shares or the Phuthuma Nathi shares, which are only for black shareholders, then what?

ANTHONY WILMOT: Then I absolutely don't know. All I can tell you is in the dealings we've had, including Mr van Kerken, they've been very reasonable and they understand where they are. My understanding – and this is purely a personal view – is the FSB is of the opinion that they have to regulate this market. They want to regulate this market, and the only Act in which they can regulate us is the current SRO model, which is the self-regulatory model that the JSE follows. There is no ability to apply for a stock exchange light, because when they issued their first directive back in December, they asked us to motivate what we thought the right solution was. We said 'guys, we honestly believe we should apply for a stock exchange light. We don't want to compete with the JSE. We're not trying to compete with them. We're just trying to regulate the OTC market. There's a need for that market. There's a space' and as was mentioned in a number of articles, there hasn't been much scandal around OTC. It's well looked after and our clients have put us under enormous pressure in terms of internal auditing and all sorts of processes to ensure that our systems are robust, fair, the matching engine works properly, and having written financial software for the last 20 years of my life, I understand the seriousness of this process. We've certainly been diligent in how we've gone about it and I'm delighted to say there has been virtually no scandal, most of our clients are certainly very happy, and the shareholders are very happy.

ALEC HOGG: Erris van Kerken used the example of saying that with the current ways that the OTC's are operating – yourselves and others – there is a potential for insider trading.

ANTHONY WILMOT: Yes, the formal surveillance processes that exist in the JSE do not exist in our market. Our clients didn't ask us for that. If you remember, we've argued that we're not an exchange. We're doing whatever you want us to do. Our clients are [inaudible 0:12:25.3]. If you take MultiChoice for example, they follow the same close period rules for their directors in MultiChoice who might be black and own Phuthuma shares as what they do for their unlisted Naspers shares. They're not allowed to trade. They enforce all those rules and we have to report to them on who's traded what over periods, but it's based on what they ask us for rather than us telling them what they need, or having an independent body of rules that everybody must comply with. Up until now, every client sets their own rules, so Mr van Kerken is right. For example, we don't report any trade information through to the FSB. We're not required to. Obviously, if we get a license that's one of the things we'll have to do, and the whole FSB regulations around surveillance…we understand quite well now. We spent quite some time studying it, we certainly will be putting it in, and we're indicating that we want to put that in earlier rather than later, just to try to make the FSB comfortable that there mandate, which is investor protection, is being looked after by putting in the surveillance measures.