the fsb team

PRESENTATION BY THE FINANCIAL SERVICES

BOARD TO THEPORTFOLIO COMMITTEE

ON FINANCEON THE

COLLECTIVE INVESTMENT SCHEMES CONTROL BILL

THE FSB TEAM ROB BARROW

DEPUTY EXECUTIVE OFFICER / DEPUTY REGISTRAR

JURGEN BOYD HEAD CIS DEPARTMENT

STIAAN HYMAN SPECIALIST TECHNICAL AND RESEARCH

KLAAS BADENHORST LEGAL ADVISOR

SCOPE OF THE CISC BILL

THE BILL COVERS 4 TYPES OF INSTITUTIONAL SCHEMES:– SCHEMES IN SECURITIES – CURRENTLY

KNOWN AS “EQUITY UNIT TRUSTS” (PART IV)

– FOREIGN SCHEMES (PART VIII)

– SCHEMES IN PROPERTY – COMMONLY KNOWN AS “PUTS” (PART V)

– SCHEMES IN PARTICIPATION BONDS (PART VI)

PART VII OF THE BILL ENABLES THE MINISTER TO DECLARE CERTAIN OTHER TYPES OF BUSINESS COLLECTIVE INVESTMENT SCHEMES THEREBY BRINGING THEM INTO THE REGULATORY NET (SECTIONS 62 – 64)

MINISTER CAN DEFINE THE ACTIVITY AND MAY SET REGULATIONS


A SCHEME MUST FALL WITHIN THE DEFINITION OF A CIS: (DEFINITION SECTION 1)

““Collective Investment Scheme” means a scheme, in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which-

(a) two or more investors contribute money or other assets to and hold a participatory interest in a portfolio of the scheme through shares, units or any other form of participatory interest; and(b) the investors share the risk and the benefit of investment in proportion to their participatory interest in a portfolio of a scheme or on any other basis determined in the deed,

but not a collective investment scheme authorised by any other Act;”


THE REGISTRAR MAY ALSO EXEMPT A SCHEME FROM THE ACT WHEN IT IS IN THE PUBLIC INTEREST (SECTION 22)

THE REGISTRAR MAY REFUSE TO REGISTER A SCHEME


HISTORY OF THE SA CIS LEGISLATION

1947: ORIGINAL UNIT TRUST AND PARTICIPATION BOND LEGISLATION

1965: FIRST UNIT TRUST REGISTERED

1981: LEGISLATION CONSOLIDATED (DATE OF CURRENT ACT)

THERE HAVE BEEN A NUMBER OF AMENDMENTS SINCE THEN, THE MORE SIGNIFICANT OF WHICH ARE:

INCLUSION OF DERIVATIVE INSTRUMENTS (1993)

HISTORY OF THE SA CIS LEGISLATION

INTRODUCTION OF MONEY MARKET FUNDS (1998)

INTRODUCTION OF “FUND OF FUNDS” (1998)

DEREGULATION OF FEES AND CHARGES (1998)

APPROVAL OF FOREIGN CIS (1998)

BACKGROUND TO THE NEED FOR REVISED LEGISLATION

1997: NEED RECOGNISED BY THE FSB, THE ASSOCIATION OF UNIT TRUSTS (AUT) AND THE PARTICIPATION BOND INDUSTRY THAT A MAJOR UPDATE WAS NECESSARY TO BRING THE LEGAL ENVIRONMENT INTO LINE WITH INTERNATIONAL BEST PRACTICE.

MAJOR ISSUES WERE:– LOCAL INDUSTRY WAS AT A

DISADVANTAGE TO FOREIGN COMPETITION– POLICY BOARD DECISION THAT ALL FORMS

OF CIS SHOULD BE INCLUDED IN ONE PIECE OF LEGISLATION

– NEED TO ENHANCE DISCLOSURE REQUIREMENTS TO INVESTORS

– TO GIVE REGISTRAR GREATER POWERS TO ACT AGAINST NON COMPLIANCE


1997 – 1998: THE AUT EMPLOYED DELOITTE & TOUCHE TO CONDUCT A SURVEY INTO THE NEEDS OF THE SECURITIES UNIT TRUST INDUSTRY. THE SERVICES OF AN INTERNATIONAL EXPERT WERE EMPLOYED

1997: A WORKSHOP WAS HELD BETWEEN THE AUT AND FSB TO CONSIDER THE RESULTS OF THE SURVEY. A COMPREHENSIVE SCHEDULE OF REQUIREMENTS AND ISSUES FOR CONSIDERATION WAS PRODUCED


AT ABOUT THE SAME TIME THE PARTICIPATION BOND INDUSTRY MADE STRONG REPRESENTATIONS FOR THE PARTBOND LEGISLATION TO BE AMENDED TO ALLOW POOLING OF BONDS


1998: A STEERING COMMITTEE WAS ESTABLISHED BETWEEN THE FSB AND THE AUT TO DRAFT THE REVISED LEGISLATION. THE FSB ALSO WORKED WITH THE PROPERTY UNIT TRUST AND PARTICIPATION BOND INDUSTRY ASSOCIATIONS. THE SERVICES OF A DRAFTSMAN WERE EMPLOYED BY THE AUT. THE MAIN PARTICIPANTS IN THE STEERING COMMITTEE WHICH MET ON NUMEROUS OCCASIONS WERE:– MARTUS CLAASEN (PSG)– JACOB MAHLANGU (BOE)– PROF HUGO LAMBRECHTS (UNIVERSITY OF

PRETORIA)– MARIUS DE JONG (AUT)– JANINE DESCOINS/JANE DIACK (RMB)– THREE FSB REPRESENTATIVES


APRIL 1999 TO JUNE 1999 CONSULTATION

– DEADLINE FOR COMMENT 21 MAY 1999– REMINDER SENT 20 MAY 1999– PUBLIC WORKSHOPS HELD IN CAPE TOWN

AND PRETORIA 7TH AND 10TH MAY 1999


FEBRUARY 2000 SUBMITTED TO CABINET – WITHDRAWN AT DEPARTMENT OF TRADE AND INDUSTRY’S REQUEST FOR FURTHER CONSULTATION

AT THE SAME TIME INDUSTRY SOUGHT FURTHER CONSULTATION ON PROPOSED MANAGEMENT COMPANY LIQUIDITY RISK CAPITAL REQUIREMENT


APRIL2000 TO JUNE 2000 FURTHER CONSULTATION AND AMENDMENTS

CABINET APPROVED FEBRUARY 2002


MAJOR CHANGES TO EXISTING LEGISLATION:

SECURITIES UNIT TRUSTS

NAME CHANGED TO CIS IN SECURITIES INTRODUCTION OF SECTION 2 WHICH

SETS THE GROUND RULES FOR A MANAGER TO ACT HONESTLY AND FAIRLY, WITH SKILL, CARE AND DILIGENCE IN THE INTEREST OF INVESTORS AND THE INDUSTRY. MUST SEGREGATE ASSETS OF INVESTORS

INTRODUCTION OF SECTION 3 ON DISCLOSURE OF INFORMATION:

“Before entering into a transaction with an investor-(a) information about the investment objectives of the collective investment scheme, the calculation of the nett asset value and dealing prices, charges, risk factors and distribution of income accruals must be disclosed to the investor; and



(b) information that the manager considers necessary to enable the investor to make an informed decision must be given to the investor timeously and in a comprehensible manner.”

INTRODUCTION OF SECTION 4 ON THE DUTIES OF MANAGERS:

“4(1) The manager must avoid conflict between the interests of the manager and the interests of an investor.



(2) The manager must disclose the interests of its directors and management to the investors.

(3) A manager must maintain adequate financial resources to meet its commitments and to manage the risks to which

its collective investment scheme is exposed.

INTRODUCTION OF SECTION 4 ON THE DUTIES OF MANAGERS: (4) A manager must-

(a) organise and control the collective investment scheme in a responsible manner;



(b) keep proper records; (c) employ adequately trained staff and ensure that

they are properly supervised; (d) have well defined compliance procedures; (e) maintain an open and co-operative relationship

with the office of the registrar and must promptly inform that office about anything that might reasonably be expected to be disclosed, to such office; and

(f) promote investor education, either directly or through initiatives undertaken by an association.”

THE MINISTER MAY SET REGULATIONS ON ANY MATTER REQUIRED OR PERMITTED IN THE ACT INCLUDING SECTIONS 2 – 4 (SECTION 114)



INTRODUCTION OF OTHER LEGAL STRUCTURES – OPEN-ENDED INVESTMENT COMPANIES AND “IN WHATEVER FORM” – SEE DEFINITION OF CIS IN SECTION 1



ENHANCEMENT OF TRUSTEE / CUSTODIAN DUTIES– PREVIOUS ACT ONLY REQUIRED THE

TRUSTEE TO ENSURE COMPLIANCE WITH THE INVESTMENT POLICY. THERE WERE CERTAIN OTHER REFERENCES TO THE ROLE OF THE TRUSTEE BUT THESE WERE NOT EXPLICIT AND RESULTED IN MISUNDERSTANDING

– SECTION 70 HAS BEEN INTRODUCED TO SET OUT THE EXACT DUTIES OF TRUSTEES/CUSTODIANS



REVISION OF CAPITAL REQUIREMENTS [SECTION 88(1)]

– NEW REQUIREMENTS BASED ON RISK ASSESSMENT DETERMINED BY THE REGISTRAR – DRAFT CONDITIONS CIRCULATED



– MANAGEMENT COMPANY BASE REQUIREMENT CHANGED FROM R2 MILLION TO 3 MONTHS OPERATING EXPENDITURE

– REQUIREMENT FOR THE MANAGEMENT COMPANY TO INVEST 10% (LIMITED BY REGISTRAR TO R1 MILLION) IN A PORTFOLIO CHANGED TO “SEED CAPITAL” CONCEPT OF R1 MILLION AT START REDUCING TO NIL WHEN FUND REACHES R10 MILLION

REVISION OF CAPITAL REQUIREMENTS [SECTION 88(1)]

– POSITION RISK CAPITAL REQUIRED AT RATES FROM 10% TO 25% AGAINST DIFFERENT TYPES OF SECURITIES AND THREE TIMES THE MARGIN FOR ANY DERIVATIVE INSTRUMENTS



– CAPITAL INVESTED IN ASSETS THAT CANNOT BE CONVERTED INTO CASH WITHIN 2 WEEKS EXCLUDED

– RESTRICTIONS PLACED ON ELIGIBLE CAPITAL – E.G. PREFERENCE SHARES, UNAUDITED RETAINED INCOME, LOANS AND GUARANTEES

– 5% LIQUIDITY REQUIREMENT IN A FUND DONE AWAY WITH

INTRODUCTION OF ABILITY TO LEND SCRIP – SECTION 85 – PROVIDED THEDEED ENTITLES THIS AND SUBJECT TOREGISTRARS CONDITIONS



INTRODUCTION OF ABILITY FOR A FUND TO BORROW MONEY TO BRIDGE LIQUIDITY SQUEEZE:

– SECTION 96 – LIMITED TO 10% OF THE VALUE OF THE PORTFOLIO

INTRODUCTION OF THE ABILITY FOR THE MANAGEMENT COMPANY TO SUSPENDREPURCHASES WHERE THERE IS AREDEMPTION DEMAND GREATER THAN 5% OFTHE VALUE OF THE PORTFOLIO:– SECTION 114(3)(f) EMPOWERS THE REGISTRAR TO

SET CONDITIONS– DRAFT CONDITIONS CIRCULATED – WILL NOT APPLY TO INVESTORS WITH LESS THAN

R50 000 IN THE PORTFOLIO



– SHALL NOT APPLY IF 2 WEEKS NOTICE GIVEN– MAXIMUM PERIOD OF SUSPENSION IS 20 BUSINESS DAYS

ENHANCEMENT OF REGISTRARS ABILITY TO IMPOSE PENALTIES (SECTION 18):– FAILURE TO COMPLY WITH CAPITAL

REQUIREMENT – 3% OF SHORTFALL PER DAY



– FAILURE TO COMPLY WITH OTHER PRUDENTIAL REQUIREMENTS – 1% PER DAY OR R1 MILLION– FAILURE TO SUBMIT ANY RETURN – UP TO R1 000 PER DAY– THESE ARE OVER AND ABOVE CRIMINAL SANCTION

INTRODUCTION OF REGISTRARS ABILITY TO DECLARE CERTAIN PRACTICES OR MANNER OF ADMINISTRATION UNDESIRABLE:– WITH THE APPROVAL OF THE MINISTER

– 30 DAYS NOTICE IN THE GAZETTE– NON COMPLIANCE IS AN OFFENCE –

2 YEARS PLUS FINE



INTRODUCTION OF SECTIONS 106 AND 107 PROHIBITING FALSE OR MISLEADING STATEMENTS OR FRAUDULENTLY INDUCING A PERSON TO INVEST



INTRODUCTION OF CIVIL LIABILITY FOR CONTRAVENTIONS (SECTION 109):

– DAMAGES LIMITED TO TWICE THE PROFIT GAINED OR LOSS AVOIDED

– REGISTRAR MAY ACT ON BEHALF OF AN INVESTOR OR GROUP OF INVESTORS

– IN ADDITION TO CRIMINAL SANCTION

POWERS OF DELEGATION SPECIFIED IN SECTION 112

INTRODUCTION OF SINGLE PRICING (SECTION 94):– EFFECTIVELY DOES AWAY WITH

“BUY/SELL PRICING”. NET ASSET VALUE WILL BE GIVEN AND MAXIMUM ADDITIONAL COSTS WILL BE SHOWN SEPARATELY

– “COMPULSORY CHARGE” DONE AWAY WITH AS IT WAS CONFUSING




PROPERTY UNIT TRUSTS

NAME CHANGED TO COLLECTIVE INVESTMENT SCHEME IN PROPERTY

INVESTABLE ASSETS EXPANDED:

– SECTION 47(1) DIRECT HOLDING OF PROPERTY NOW INCLUDED

– SECTION 47(2) REGISTRAR CAN DETERMINE OTHER ASSETS

– SECTION 49 NON SOUTH AFRICAN PROPERTY CAN BE INCLUDED SUBJECT TO SOVEREIGN RATING DETERMINED BY THE REGISTRAR

ABILITY TO BORROW FUNDS NOW INCLUDED:

– SECTION 95 – SUBJECT TO LIMITS AND CONDITIONS IN THE DEED


PARTICIPATION BONDS

NAME CHANGED TO COLLECTIVE INVESTMENT SCHEME IN PARTICIPATION BONDS

POOLING CONCEPT NOW INTRODUCED – DEFINITION IN SECTION 52(1):– PREVIOUSLY INVESTORS PARTICIPATED IN

SPECIFIC BONDS AND THEREFORE WERE EXPOSED TO SPECIFIC RISK IN A PARTICULAR PROPERTY. POOLING WILL AFFORD BETTER INVESTOR PROTECTION THROUGH SPREADING OF RISK

MAJOR CHANGES TO EXISTING LEGISLATION:FOREIGN CIS

SECTION 66 INTRODUCED ON RECIPROCITY. IF SOUTH AFRICAN CIS’S ARE PRECLUDED FROM OPERATING IN ANOTHER COUNTRY THEN THE MINISTER MAY SUSPEND, DISQUALIFY OR RESTRICT ANY SCHEMES REGISTERED IN THAT COUNTRY FROM OPERATING IN SOUTH AFRICA


GENERAL

RECOGNITION OF INDUSTRY ASSOCIATIONS AS SELF REGULATORY BODIES (SRO’S) PART III AND SCHEDULE 4:– THIS CONCEPT WAS INCLUDED IN THE

LEGISLATION THROUGH STRONG REPRESENTATIONS FROM THE AUT

– AN ASSOCIATION CAN BE LICENSED ON CONDITIONS THE REGISTRAR MAY DETERMINE (SECTION 26). THE RULES OF THE ASSOCIATION MUST COMPLY WITH THE ACT – REFER SCHEDULE 4 – AND MUST BE APPROVED BY THE REGISTRAR 26(c). THE REGISTRAR MUST BE SATISFIED THAT THE INTERESTS OF THE PUBLIC WILL BE SERVED BY THE ISSUE OR RENEWAL OF A LICENSE [26(D)]


GENERAL

RECOGNITION OF INDUSTRY ASSOCIATIONS AS SELF REGULATORY BODIES (SRO’S) PART III AND SCHEDULE 4:

– THE LICENSE MUST BE RENEWED EACH YEAR (SECTION 27). THE LICENSE CAN BE CANCELLED OR SUSPENDED (SECTION 28)

– EFFECTIVELY THE REGISTRAR RETAINS “OVERSIGHT” OVER THE SRO AND HAS STRONG POWERS TO INTERVENE IF THE SRO DOES NOT EFFECTIVELY SUPERVISE COMPLIANCE


INTRODUCTION OF REQUIREMENT FOR AUDITOR TO REPORT IRREGULARITIES OR UNDESIRABLE PRACTICES TO THE REGISTRAR (SECTION 75)


INTRODUCTION OF ABILITY FOR THE REGISTRAR TO APPROVE THE WINDING-UP OF A PORTFOLIO (SECTION 102)

CONCLUSION

WE WOULD BE PLEASED TO ATTEMPT TO ANSWER ANY

QUESTIONS

THANK YOU

the fsb team

Documents

sa cis legislation

foreign schemes

piece of legislation

participation bond legislation

v schemes

cisc billa scheme

forms of cis

benefit of investment