Collective Investment Schemes Control Bill: Scope and Changes

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

2. 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)

3. 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

4. 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

5. HISTORY OF THE SA CIS LEGISLATION • 1947: ORIGINAL UNIT TRUST AND PARTICIPATION BOND LEGISLATION • AMENDMENTS: • INCLUSION OF DERIVATIVE INSTRUMENTS(1993) • INTRODUCTION OF MONEY MARKET FUNDS(1997) • INTRODUCTION OF “FUND OF FUNDS”(1998) • DEREGULATION OF FEES AND CHARGES(1998) • APPROVAL OF FOREIGN CIS (1998)

6. 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.

7. 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

8. PROCESS • 1997 – 1998DELOITTE & TOUCHE SURVEY • 1997AUT/FSB WORKSHOP • 1998REPRESENTATIONS FORM PART BOND INDUSTRY • 1998 – 1999STEERING COMMITTEE DRAFTED • APRIL 1999 – JUNE 1999CONSULTATION • MAY 1999TWO PUBLIC WORKSHOPS • FEB 2000SUBMITTED TO CABINET • APRIL 2000 TO JUNE 2000FURTHER CONSULTATION

9. 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 • INTRODUCTION OF SECTION 3 ON DISCLOSURE OF INFORMATION TO INVESTORS

10. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • INTRODUCTION OF SECTION 4 ON THE DUTIES OF MANAGERS • 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

11. MAJOR CHANGES TO EXISTING LEGISLATION:SECURITIES UNIT TRUSTS • ENHANCEMENT OF TRUSTEE / CUSTODIAN DUTIES (SECTION 70) • REVISION OF CAPITAL REQUIREMENTS [SECTION 88(1)] • INTRODUCTION OF ABILITY TO LEND SCRIP – SECTION 85 – PROVIDED THE DEED ENTITLES THIS • INTRODUCTION OF ABILITY FOR A FUND TO BORROW MONEY TO BRIDGE LIQUIDITY SQUEEZE: • SECTION 96 – LIMITED TO 10% OF THE VALUE OF THE PORTFOLIO

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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)]

21. 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

22. MAJOR CHANGES TO EXISTING LEGISLATION:FOREIGN CIS • 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)

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