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THE FSB TEAM

PRESENTATION BY THE FINANCIAL SERVICES BOARD TO THE PORTFOLIO COMMITTEE ON FINANCE ON 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

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THE FSB TEAM

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  1. PRESENTATION BY THE FINANCIAL SERVICES BOARD TO THEPORTFOLIO COMMITTEEON FINANCEON THECOLLECTIVE INVESTMENT SCHEMES CONTROL BILL

  2. THE FSB TEAM • ROB BARROWDEPUTY EXECUTIVE OFFICER / DEPUTY REGISTRAR • JURGEN BOYDHEAD CIS DEPARTMENT • STIAAN HYMANSPECIALIST TECHNICAL AND RESEARCH • KLAAS BADENHORSTLEGAL ADVISOR

  3. 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)

  4. SCOPE OF THE CISC BILL • 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

  5. SCOPE OF THE CISC BILL • 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;”

  6. SCOPE OF THE CISC BILL • 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

  7. 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)

  8. HISTORY OF THE SA CIS LEGISLATION THERE HAVE BEEN A NUMBER OF AMENDMENTS SINCE THEN, THE MORE SIGNIFICANT OF WHICH ARE: • INCLUSION OF DERIVATIVE INSTRUMENTS (1993) • INTRODUCTION OF MONEY MARKET FUNDS(1998) • INTRODUCTION OF “FUND OF FUNDS” (1998) • DEREGULATION OF FEES AND CHARGES (1998) • APPROVAL OF FOREIGN CIS (1998)

  9. 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.

  10. BACKGROUND TO THE NEED FOR REVISED LEGISLATION • 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

  11. BACKGROUND TO THE NEED FOR REVISED LEGISLATION • 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

  12. BACKGROUND TO THE NEED FOR REVISED LEGISLATION • AT ABOUT THE SAME TIME THE PARTICIPATION BOND INDUSTRY MADE STRONG REPRESENTATIONS FOR THE PARTBOND LEGISLATION TO BE AMENDED TO ALLOW POOLING OF BONDS

  13. BACKGROUND TO THE NEED FOR REVISED LEGISLATION • 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

  14. BACKGROUND TO THE NEED FOR REVISED LEGISLATION • 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

  15. BACKGROUND TO THE NEED FOR REVISED LEGISLATION • 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

  16. BACKGROUND TO THE NEED FOR REVISED LEGISLATION • APRIL2000 TO JUNE 2000 FURTHER CONSULTATION AND AMENDMENTS • CABINET APPROVED FEBRUARY 2002

  17. 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

  18. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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.”

  19. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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.

  20. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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.”

  21. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • THE MINISTER MAY SET REGULATIONS ON ANY MATTER REQUIRED OR PERMITTED IN THE ACT INCLUDING SECTIONS 2 – 4 (SECTION 114)

  22. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • INTRODUCTION OF OTHER LEGAL STRUCTURES – OPEN-ENDED INVESTMENT COMPANIES AND “IN WHATEVER FORM” – SEE DEFINITION OF CIS IN SECTION 1

  23. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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

  24. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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

  25. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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

  26. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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

  27. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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 TOSET CONDITIONS • DRAFT CONDITIONS CIRCULATED • WILL NOT APPLY TO INVESTORS WITH LESS THANR50 000 IN THE PORTFOLIO • SHALL NOT APPLY IF 2 WEEKS NOTICE GIVEN • MAXIMUM PERIOD OF SUSPENSION IS 20 BUSINESS DAYS

  28. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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

  29. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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

  30. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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

  31. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • 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

  32. MAJOR CHANGES TO EXISTING LEGISLATION: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

  33. MAJOR CHANGES TO EXISTING LEGISLATION: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

  34. 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

  35. MAJOR CHANGES TO EXISTING LEGISLATION: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)]

  36. MAJOR CHANGES TO EXISTING LEGISLATION: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

  37. MAJOR CHANGES TO EXISTING LEGISLATION:FOREIGN CIS • INTRODUCTION OF REQUIREMENT FOR AUDITOR TO REPORT IRREGULARITIES OR UNDESIRABLE PRACTICES TO THE REGISTRAR (SECTION 75)

  38. MAJOR CHANGES TO EXISTING LEGISLATION:FOREIGN CIS • INTRODUCTION OF ABILITY FOR THE REGISTRAR TO APPROVE THE WINDING-UP OF A PORTFOLIO (SECTION 102)

  39. CONCLUSION WE WOULD BE PLEASED TO ATTEMPT TO ANSWER ANY QUESTIONS THANK YOU

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