All that glistens isn't Goldsky – key learnings from the ASIC v Goldsky decision

In brief

The recent case of ASIC v Goldsky Global Access Fund raises a number of compelling questions (some of which we explore below), and fund managers would do well not to place too much stock in the judgment in support of arguments that a trustee of a wholesale fund may act as trustee with the benefit of an authorised representative appointment.

So many questions, and two key (yet scarcely discussed) takeaways

There are many questions surrounding the recent case of ASIC v Goldsky Global Access Fund¹. How, for example, did Kenneth Grace persuade members of his Kingscliff community and a number of well-known athletes to invest with him, and be named among the top hedge fund managers in the Asia region? How, too, did he avoid scrutiny as he frittered away investors' money on personal expenses? You will not find the answers to those questions here. Instead, we will touch on two aspects of the judgment that are arguably even more interesting (at least for us!):

• First, whether it may be necessary in some circumstances to hold an Australian financial services licence (AFSL) to provide a custodial or depositary service in respect of a basic deposit product, notwithstanding the blanket exemption provided in Corporations Regulation 7.1.40(1)(a); and
• Second, whether – as the judgment perhaps inadvertently suggests – it may be possible to provide a custodial or depositary service as an authorised representative of a person who holds (or is exempt from holding) an AFSL.

Neither aspect appears to have been considered in detail (or indeed at all) in the submissions to the court or in the court's judgment itself. On the second aspect, in particular, we would caution fund managers against placing too much stock in the judgment in support of arguments that a trustee of a wholesale fund may act as trustee with the benefit of an authorised representative appointment.

Goldsky Asset Management - the facts

• In April 2017 a US registered investment adviser, Goldsky Asset Management LLC (Goldsky LLC), obtained relief from ASIC to provide financial services to wholesale clients in Australia without an AFSL.
• In July 2017, Goldsky LLC began operating an unregistered managed investment scheme in Australia, called the 'Goldsky Global Access Fund', of which Goldsky LLC was the trustee. The judgment does not expand on the nature of this fund.
• Australian affiliates of Goldsky LLC, being Goldsky Global Access Fund Pty Ltd, Goldsky Asset Management Australia Pty Ltd and Goldsky Investments Pty Ltd (the Australian Goldsky Entities), held bank accounts into which investors' money was paid or transferred. Transactions on these accounts included:
  • personal purchases for Mr Grace and his family (over $58,000 for cosmetic procedures, $47,000 for beauty treatments, $92,000 for groceries and $62,000 for restaurants and clothes over an 18-month period); and
  • payments to investors, of whom 56 (including retail investors) have been identified.
• In August 2018, the SEC cancelled Goldsky LLC's investment adviser's licence and, in September 2018, the SEC filed proceedings against Goldsky LLC and Kenneth Grace, alleging both had made false and misleading statements when applying for its registration as an investment adviser.
• In October 2018, Goldsky's Australian assets were frozen and ASIC sought declarations that each of the Australian Goldsky Entities contravened section 911A of the Corporations Act by carrying on a financial services business without holding an AFSL (which seems to have been the least of their misdemeanours).
• In April 2019, the Supreme Court of Queensland commenced trial, with judgment delivered on 9 May 2019.

Custody services over a bank account?

The court agreed with ASIC, finding that the Australian Goldsky Entities carried on a financial services business without an AFSL by holding the bank accounts (being financial products) in trust for, or on behalf of, clients (being Goldsky's investors) – this 'custodial or depositary service' is a financial service under the Corporations Act 2001 (Cth). However, Corporations Regulation 7.1.40(1)(a) provides that holding money in a basic deposit product does not constitute a 'custodial or depositary service'. As each of the Australian Goldsky Entities merely held client money in a bank account – and there was no suggestion that these were anything but basic deposit products – they should not have required an AFSL on that basis.

The court appears to have come to its view without any consideration of Corporations Regulation 7.1.40(1)(a), which was not mentioned in the judgment. Rather, the court reached its view on the basis that each bank account was a 'facility through which a person makes a financial investment'. While correct, this reasoning should not have circumvented the exemption – the exemption is clear and unqualified, and has no exclusion for basic deposit products through which a person makes a financial investment.

Although ASIC was ultimately successful, given the complexity of the exemption, it is intriguing that the regulator decided to frame its submissions around a 'custodial or depositary service', when it could have simply argued that the Australian Goldsky Entities were carrying on a financial services business by 'dealing in a financial product' (with that product being 'a facility through which a person makes a financial investment').

More intriguing still is the fact that the court accepted – and made passing reference to – evidence that the Australian Goldsky Entities allowed multiple retail investors to participate in the fund. If ASIC's objective was to establish breaches of the Corporations Act by the Australian Goldsky Entities, it is puzzling that the court did not pursue Kenneth Grace or the Australian Goldsky Entities for operating an unregistered managed investment scheme without an AFSL.

Postscript: can a trustee be an authorised representative?

The Goldsky case also touched on the thorny issue of whether a trustee can act as an authorised representative (or agent) of another entity under Australian law.

In his judgment, Justice Flanagan examined whether the Australian Goldsky Entities were 'authorised representatives' of Goldsky LLC, which (supposedly) would have allowed the former to take advantage of the latter's exemption from holding an AFSL. It appears as if both ASIC and the court simply assumed that if the Australian Goldsky Entities were validly appointed as representatives of Goldsky LLC, they would not have been in breach of s911A.

Ultimately the court held that none of the Australian Goldsky Entities had, in fact, been appointed as representatives of Goldsky LLC, so the issue was not considered in any depth (or even argued before the court). We would therefore caution against fund managers assuming that this case supports a conclusion that a trustee of a fund may act as trustee with the benefit of an authorised representative appointment from an AFSL holder (or a person exempt from the requirement to hold an AFSL).