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8/17/2019 INSETA Learning Material RE 3

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FSB REGULATORY EXAMINATION PREPARATION

Section 2:First Level Regulatory Examination:

FSPs (sole proprietors) and Key

Individuals in Categories II and IIA


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2 © INSETA– Section 2 10b


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© INSETA– Section 2 10b 3

© INSETA


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Table of contents

Heading Page number

Task list 5

Glossary 6

CHAPTER 1:

CATEGORY II AND IIA BUSINESS MODEL

1.1 Introduction 7

1.2 Characteristics of Category II and IIA FSP 8

1.3 Separation of Client Assets 18

1.4 Roles and responsibilities of various parties 19

1.5 Need for Relevant Contracts 27

Self-Assessment Questions 29

Self-Assessment Answers 31

CHAPTER 2:

ROLE OF THE INDEPENDENT NOMINEE 33

2.1 Purpose of Independent Nominee 34

2.2 Duties of Independent Nominee 38



CHAPTER 3:

MANAGE AND OVERSEE CLIENT MANDATES 45

3.1 Use of client mandates 46

3.2 Client mandates 46



CHAPTER 4:

DISCLOSURES 55

4.1 Minimum disclosures 56



CHAPTER 5:

CONFLICTS OF INTEREST 71

5.1 Conflicts of Interest 72




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CHAPTER 6:

MANAGE AND OVERSEE TYPICAL DAILY TRANSACTIONS 85

6.1 Different product turnaround times 86



CHAPTER 7:

LEGAL ENVIRONMENT 95

7.1 Financial soundness 96

7.2 Fidelity cover 97

7.3 Netting of transactions 99

7.4 Conducting business with other authorised FSP‘s 100

7.6 Continual compliance 101

7.7 Civil remedies available to the Registrar 101Self-Assessment Questions 104


CHAPTER 8:

RECORD-KEEPING 109

8.1 Requirements for record-keeping 110



CHAPTER 9:

CLIENT REPORTING 123

9.1 Requirements relating to client reporting 124



CHAPTER 10:

PROHIBITIONS IN TERMS OF DISCRETIONARY CODE OF

CONDUCT 129

10.1 Personal account trading 13010.2 Prohibitions in terms of the Discretionary Code 134




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Tasks

The material provided in this guide is based on the following tasks, as

published in Board Notice 105 of 2008 as amended by BN60 of 2010.

1 Apply the Category II and/or IIA FSP business model.

2 Manage the role of the independent nominee.

3 Manage and oversee client mandates.

4 Manage and oversee typical daily transactions.

5 Manage and oversee disclosures.

6 Understand the legal environment of Category II and/or IIA FSP.

7 Apply the record-keeping requirements.

8 Comply with requirements when reporting to clients.9 Institute a personal account of trading policy.

10 Apply prohibitions in terms of the Discretionary Code of

Conduct.

11 Deal with Nominee Regulations.

Please note that any reference to:

masculine gender implies also the feminine

singular indicates also the plural, and vice-versa.


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Glossary

BN: a Board Notice issued by the Registrar, each Board Notice having

an issue number and year of issue.

Codes of Conduct: the Codes of Conduct for Administrative and

Discretionary FSP‘s of 2003 (Board Notice 79 of 2003) and General

Codes of Conduct for Authorised Financial Services Providers and

Representatives of 2003 (Board Notice 80 of 2003) as amended.

CISCA: the Collective Investment Schemes Control Act of 2002 (―Act

45 of 2002).

Discretionary Code: The Code of Conduct for Discretionary Financial

Services Providers of 2003, (issued as Chapter II of Board Notice 79

of 2003).

FAIS: the Financial Advisory and Intermediary Services Act of 2002

(Act 37 of 2002).

FICA: the Financial Intelligence Centre Act of 2001 (Act 38 of 2001).

Financial Product: a financial product as defined in section 1 of FAIS.

FSP: an Authorised Financial Services Provider as defined in section 1

of FAIS.

General Code: General Code of Conduct for Authorised Financial

Services Providers and Representatives of 2003 (Board Notice 80 of

2003).

Long-term Insurance Act: the Long-term Insurance Act of 1998 (Act

52 of 1998).

Long-term Insurer: a registered Long-term Insurance Company as

defined in section 1 of the Long-term Insurance Act.

Registrar: unless otherwise indicated, means the Registrar of

Financial Services Providers as defined in section 1 of FAIS.

Short-term Insurance Act: the Short-term Insurance Act of 1998 (Act

53 of 1998).

Short-term Insurer: a registered Short-term Insurance Company as

defined in Section 1 of the Short-term Insurance Act.


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Chapter

1Category II and IIA Business Model

This chapter covers the following criteria:

KNOWLEDGE CRITERIA

Describe the characteristics of a Category II and/or Category IIA FSP and

how that differentiates it from other FSP‘s in Category I or III.

Discuss the separation of client assets from Category II and/or IIA FSP‘s

assets.

Explain the role of various parties.

Describe the need for relevant contractual agreements to be in place with the

relevant other party.

SKILLS CRITERIA

Take the difference between Category II and IIA FSP‘s into account when

making business-related decisions.

Perform the fiduciary duty of the Category II and/or IIA FSP.

Identify which assets belong to the client and which belong to the Category II

and/or IIA FSP.

Interpret basic financial systems.

Implement systems and processes to separate client and Category II and/or

IIA FSP assets.

Verify that the relevant contractual agreements are in place with the relevant

other party.

Business is conducted in accordance with the contractual agreements.


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1.1 INTRODUCTION

When considering the nature of a Category II or IIA Financial ServicesProvider (―FSP‖), the starting point is to consult the source giving birth to the

animal we are about to consider. Section 1 of the Financial Advisory and

Intermediary Services Act 37 of 2002 (―FAIS‖), defines a financial service

as:‖

―any service contemplated in paragraph (a), (b) or (c) of the definition of

‗financial services provider‘ , including any c tegory of such services‖

Further references to categories of financial services can be found throughoutFAIS. In Section 8(4)(a)(ii) FAIS goes further to authorise the Registrar of

FSP‘s (―the Registrar‖) to approve a license and to impose conditions and

restrictions on the exercise of authority in respect of that license based on,

inter alia , the ―c tegory of financial services which the applicant could

appropriately render or wishes to render‖, and ―the c tegory of financial

services providers in which the applicant will be classified in relation to the fit

and proper requirements…‖.

It is sufficient for the purpose of our introduction to emphasise that FAISdistinguishes between various categories of financial services. Little clarity is,

however, provided in FAIS as to what these categories mean. Further

information and parameters are provided in several pieces of subordinate

legislation, i.e. regulations, Codes of Conduct, etc. In distinguishing between

Category II and IIA FSP‘s, one immediately experiences a complication.

Category II FSP‘s are commonly referred to as Discretionary FSP‘s whereas

Category IIA FSP‘s are commonly referred to as Hedge Fund FSP‘s. Whilst

these names are used to distinguish these two categories of FSP‘s, they are,

in fact, both Discretionary FSP‘s and are dealt with by the same Code ofConduct.

The focus of this book is to concentrate on Category II and IIA FSP‘s with a

view to providing a framework in terms of which preparation for the

Regulatory Exams 2, Level 1 can be explored. In order to avoid confusion we

shall refer to these FSP‘s jointly as Discretionary FSP‘s. We shall emphasise

Category IIA or Hedge Fund FSP‘s, where appropriate. Whilst exceptions may

exist, the general principle is that the provisions and obligations are

applicable to both FSP‘s with the Hedge Fund FSP having additional


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obligations. This terminology will be used inter-changeably throughout this

book, particularly where applicable legislation and or references are quoted.

1.2 CHARACTERISTICS OF CATEGORY II AND/OR IIA FSP‘S

1.2.1 Advice versus intermediary services

As stated above, FSP‘s may, in terms of FAIS, render different categories of

financial services. Whilst the Regulations to FAIS (―the Regulations‖)

promulgated on 13 June 2003 provide us with a slightly better context

relating to FSP‘s, we are still none the wiser as to the post-FAIS nature of

these FSP‘s. In order to better understand the nature of the entities we are

dealing with, it is necessary to work through some definitions. These

definitions collectively provide us with the characteristics of these FSP‘s.

Section 1 of FAIS defines a ―financial services provider‖ as any person who,

as a regular feature of their business:

1. furnishes advice; or

2. furnishes advice and renders intermediary services; or

3. renders an intermediary service.

Advice is defined in FAIS as any recommendation, guidance or proposal of a

financial nature furnished, by any means or medium, to any client or group of

clients-

a) in respect of the purchase of any financial product; or

b)

in respect of the investment in any financial product; or

c) on the conclusion of any other transaction, including a loan or cession

, aimed at the incurring of any liability or the acquisition of any right

or benefit in respect of any financial product; or

d) on the variation of any term or condition applying to a financial

product, on the replacement of any such product, or on the

termination of any purchase of or investment in any such product,


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and irrespective of whether or not such advice –

i. is furnished in the course of or incidental to financial planning in

connection with the affairs of the client; or

ii. results in any such purchase, investment, transaction, variation,

replacement or termination, as the case may be, being effected.

It is clear from the definition together with the specific exclusions that

―advice‖ refers to any influence exerted by an FSP or representative over a

client in relation to that client‘s financial situation.

In contradistinction to providing advice is the rendering of intermediary

services by an FSP to a client in respect of a financial product. In this

instance the FSP does not render advice but performs a function without

providing the client with advice. Section 1 of FAIS defines intermediary

services as any act, other than the furnishing of advice, performed by an FSP

for or on behalf of the client or the product supplier –

a) the result of which is that the client offers to enter into or enters into

any transaction in respect of a financial product with a product

supplier; or

b) with a view to –

i. buying, selling or otherwise dealing in (whether on a

discretionary or non-discretionary basis), managing,

administering, keeping in safe custody, maintaining or

servicing a financial product purchased by a client from a

product supplier or in which the client has invested;

ii. collecting or accounting for premiums or other moneys

payable by the client to a product supplier in respect of a

financial product; or

iii. receiving, submitting or processing the claims of a client

against a product supplier.


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Intermediary services does not include –

i. the rendering by a bank or mutual bank of a service contemplated in

paragraph (b)(ii) of the definition of "intermediary service" where the

bank or mutual bank acts merely as a conduit between a client and

another product supplier;

ii. an intermediary service rendered by a product supplier –

a) who is authorised under a particular law to conduct business

as a financial institution; and

b) where the rendering of such service is regulated by or under

such law;

iii. any other service exempted from the provisions of this Act by the

Registrar, after consultation with the Advisory Committee, by notice

in the Gazette.

In practice it is often challenging to assess whether one is providing advice or

rendering intermediary services. This distinction, however, informs the

category of licence an FSP has to hold and the concomitant competency,

operational ability and solvency requirements. It is therefore important for

the FSP to properly identify its functions to ensure that it does not render

financial services for which it is not licensed thereby incurring liability.

1.2.2 Discretionary FSP

Section 1 of the Codes of Conduct for Discretionary and Administrative FSP‘s

promulgated on 8 August 2003 defines a Discretionary FSP as an FSP –

a) that renders intermediary services of a discretionary nature as

regards the choice of a particular financial product referred to in

paragraph (a), (b), (c) (excluding any short-term insurance contract

or policy referred to therein), (d) and (e), read with paragraphs (h),

(i) and (j) of the definition of ―financial product‖ contained in section

1 of FAIS, without implementing bulking; and

b) acting for that purpose specifically in accordance with the provisions

of Chapter II of the Codes of Conduct for Discretionary and

Administrative FSP‘s, read together with the General Code of Conduct

(where applicable) and any other applicable law.


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The exercise of authority by a Discretionary FSP constitutes the rendering of

intermediary services. Here the FSP acts in terms of a pre-determined

mandate granted by a client to the FSP to administer the client‘s

investments, without having to seek the client‘s approval to implement

specific investments and investment strategies, which the FSP believes to be

in the best interest of the client. In comparing discretionary financial services

to advice and other intermediary services, it is evident that the client is

required to specifically/individually consent prior to each transaction in these

instances, whilst in the case of a Discretionary FSP, the FSP exercises its

authority without the client‘ s specific/individual consent to each transaction

and exercises a greater ―discretion‖ over the client‘s investments.

The financial products in respect of which a Discretionary FSP may render

financial services as listed in the definition (and Section 1 of FAIS) are:

a) securities and instruments, including –

i. shares in a company other than a "share block company" as

defined in the Share Blocks Control Act, 1980 (Act No. 59 of

1980);

ii. debentures and securitised debt;

iii. any money-market instrument;

iv. any warrant, certificate, and other instrument acknowledging,

conferring or creating rights to subscribe to, acquire, dispose

of, or convert securities and instruments referred to in

subparagraphs (i), (ii) and (iii);

v. any "securities" as defined in Section 1 of the Securities

Services Act, 2002;

b) a participatory interest in one or more collective investment

schemes;

c) a long-term or a short-term insurance contract or policy, referred to

in the Long-term Insurance Act, 1998 (Act No. 52 of 1998), and the

Short-term Insurance Act, 1998 (Act No. 53 of 1998), respectively;


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d) a benefit provided by –

i. a pension fund organisation as defined in Section 1(1) of the

Pension Funds Act, 1956 (Act No. 24 of 1956), to the members

of the organisation by virtue of membership; or

ii. a friendly society referred to in the Friendly Societies Act, 1956

(Act No. 25 of 1956), to the members of the society by virtue of

membership;

e) a foreign currency denominated investment instrument, including a

foreign currency deposit;

f) a deposit as defined in Section 1(1) of the Banks Act, 1990 (Act No.

94 of 1990);

g) a health service benefit provided by a medical scheme as defined in

Section 1(1) of the Medical Schemes Act, 1998 (Act No. 131 of 1998)

Read with:

h) any other product similar in nature to any financial product referred

to in paragraphs (a) to (g), inclusive, declared by the Registrar, after

consultation with the Advisory Committee, by notice in the Gazette to

be a financial product for the purposes of this Act;

i) any combined product containing one or more of the financial

products referred to in paragraphs (a) to (h), inclusive;

j) any financial product issued by any foreign product supplier and

marketed in the Republic and which in nature and character is

essentially similar or corresponding to a financial product referred to

in paragraphs (a) to (1), inclusive.

1.2.3 Hedge Fund FSP

As stated above, on 8 August 2003 the Codes of Conduct for Discretionary

and Administrative FSP‘s were promulgated. Of particular relevance to

Category II and IIA FSP‘s is the Code of Conduct of Discretionary FSP‘s (―the

Discretionary Code‖). The Discretionary Code defines a Hedge Fund FSP to be

an FSP –


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a) that renders intermediary services of a discretionary nature in

relation to a particular hedge fund or fund of hedge funds in

connection with a particular financial product listed above (applicable

to Discretionary FSP‘s); and

b) acting for that purpose specifically in accordance with the provisions

of the respective codes set out in this Chapter and Chapter III of the

Discretionary Code, read with FAIS, the General Code of Conduct for

Authorised Financial Services Providers, 2002 (where applicable), and

any other applicable law.

The above definition does, in itself, not provide the necessary guidance to

understand the characteristics of hedge funds. In order to better understand

these characteristics, it is necessary to consider some of the other definitions

contained in the Discretionary Code. These definitions relate to the ―hedge

fund‖ and the ―fund of hedge funds‖ reference contained in the Hedge Fund

FSP definition as well as the definitions of:

1. ―hedge‖

2. ―leverage‖

3. ―net short position‖ and

4. ―short position‖

A ―hedge fund‖ means a portfolio that uses any strategy or takes any position

which could result in the portfolio incurring losses greater than its aggregate

market value at any point in time, and in which strategies or positions include

but are not limited to –

a) leverage; or

b) net short positions;

―Leverage‖ means –

a) any position in which the delta factor would be less than -1 or greater

than 1; or


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b) a position in which the nominal exposures to assets in the portfolio

are less than nil or more than 100% of the market value of the

portfolio;

―Net short position‖ , means a condition in which a portfolio has a greater

nominal exposure to short positions than long positions in any asset class or

in aggregate across the portfolio, meaning that more capital (including

collateral) supports short positions than is invested in long positions and

which may in certain cases require additional capital to be invested in the

portfolio over and above the initial capital investment;

―Short position‖ , means –

a) a position where an asset is sold by a seller for delivery at a future

date or time, and the seller does not own such asset at the time of

the sale; or

b) in the case of a derivative instrument, a position where –

i. a decrease in the price of the underlying asset has a positive

impact on the value of the derivative instrument; or

ii. an increase in the price of the underlying asset has a negative

impact on the value of the derivative instrument.

The reference to a ―portfolio‖ in the definition of ―hedge funds‖ above

indicates that a Hedge Fund FSP may elect to conduct its business in the form

or a collective investment scheme portfolio. This provision is not regarded in

the financial services industry as being exclusive and it is therefore possible

for a Hedge Fund FSP to elect another structure in which to conduct its

business. It is therefore important to understand what it means to ―hedge‖,

in relation to a Hedge Fund FSP as these categories of FSP‘s may, in future,

elect alternative structures in which to conduct their business.

A ―fund of hedge funds‖ is defined as a portfolio that, apart from assets in

liquid form, consists of an interest, holding or investment in one or more

other hedge funds. Assets in liquid form, as the name so rightly indicates,

refer to those assets such as cash or near cash in nature, i.e. the latter class

being capable of being liquidated in a relatively short period of time. Notice

1503 of 2005 issued in terms of the Collective Investment Schemes Control

Act of 2002, (Act 45 of 2002) (―CISCA‖), defines ―assets in liquid form‖ as –

a) any amount of cash consisting of Reserve Bank notes and coins


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b) any instrument determined in Chapters III and IV of Notice 1503,

being Money Market Portfolios and Money Market Portfolios in Foreign

Currencies, respectively; or

c) participatory interests in money market portfolios referred to in

Chapters III and IV, which are capable of being converted into cash

within seven days, provided that any exposure to an entity created

through the inclusion of assets in liquid form must be added to any

other exposure to the same entity for purposes of calculating any

limit prescribed in this notice.

The similarities between the definitions of Discretionary FSP‘s and Hedge

Fund FSP‘s are inescapable. In both instances the FSP exercises discretion in

terms of a ―blanket‖ mandate (most often with broad over-riding restrictions)

provided by the client to the FSP. The difference between the Category II and

IIA FSP‘s relate to the respective investment strategies that they employ as

opposed to the nature of the discretion they exercise on behalf of their

clients. The key differentiating factor between these two categories of FSP is

that the Category IIA FSP is allowed to manage a portfolio on a discretionary

basis via the use of a strategy which may result in leveraging or net short

positions. Once again, this discretion granted by the client to the Category II

and IIA FSP‘s is the distinguishing factor between the Discretionary and

Hedge Fund FSP on the one hand, and other FSP‘s authorised in terms of

FAIS and subordinate legislation thereto.

1.2.4 Duties of a Discretionary FSP

Section 4 of the Discretionary Code prescribes that the duties of a

Discretionary FSP are to provide the client, on request, in a comprehensive

and timely manner, with any reasonable information regarding the financial

products of a client, market practices and the risks inherent in the different

market products.

Prior to entering into a written or electronic mandate with the client, the

Discretionary FSP must –

1. obtain information with regard to the client‘s financial circumstances,

needs and objectives and such information that is necessary to

enable the FSP to render suitable intermediary services to the client;


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2. identify the financial products that best suit the client‘s objectives,

risk profile and needs, subject to limitations and restrictions imposed

on the FSP by its license issued under FAIS.

1.2.5 Duties of a Hedge Fund FSP

Section 8A of the Discretionary Code stipulates that the duties applicable to a

Discretionary FSP are also applicable to Hedge Fund FSP‘s and their clients,

subject to –

a) the necessary changes;

b) the provisions of Section 8A of the Discretionary Code and provisions

of the Act or any other law which may render a particular provision

applying to Discretionary FSPs clearly inapplicable to a Hedge Fund

FSP and its clients, in general or in a particular case.

A Hedge Fund FSP must, before rendering any intermediary services to a

client, in respect of a financial product governed by FAIS, provide a written

disclosure to the client:

a) of the applicability to the relationship between the client and the

Hedge Fund FSP of the requirements for Discretionary FSP‘s; and

b) in the format from time to time determined by the Registrar, on the

risks involved in investing through hedge funds.

The Hedge Fund FSP must obtain written confirmation of receipt of these

written disclosures from the client. In practice these written confirmations

can be obtained from the client by either requesting the client to sign for

receipt of the disclosures or through electronic confirmation sent by the

client, e.g. email.

The format of the risk disclosure referred to above was gazetted via Board

Notice 571 of 2008.

Hedge Fund FSP‘s must, after having made the above written disclosures to the

client and before rendering any intermediary services to the client, obtain a

signed mandate from the client that complies with Subsections 5.1 and

subsection 5.2 (with the necessary changes) of the Discretionary Code. Other

than this mandate the Hedge Fund FSP must also obtain an additional written


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mandate from the client, which deals specifically with the utilisation of a hedge

fund portfolio as required.

1.3 SEPARATION OF CLIENT ASSETS

Section 15 of FAIS prescribes that the Registrar must publish a Code of

Conduct applicable to all categories of FSP‘s. In addition to this Code of

Conduct Section 15 further authorises the Registrar to publish different Codes

of Conduct for the various Categories of FSP‘s. Section 16 of FAIS requires

the Registrar, when publishing these Codes of Conduct to ensure that these

codes contain, inter alia , a provision relating to the ―proper saf e-keeping,

separation and protection of funds and transaction documentation of clients‖.

Pursuant to the above sections, the Registrar published the General Code of

Conduct that is applicable to all FSP‘s and representatives on 8 August 2003.

Section 10 of the General Code prescribes that an FSP, other than a FSP who

receives, holds or in any other manner deals with premiums payable under a

short-term reinsurance policy or who is subject to Section 45 of the Short-

term Insurance Act (Act 53 of 1998), who holds financial products or funds

on behalf of a client must account for such products and funds properly and

promptly. According to this section of the General Code, the FSP must, when

it receives funds from a client without the intervention of a bank, issue a

receipt to the client. The FSP or its duly appointed third party agent must

take all reasonable steps to ensure that the funds are adequately protected.

In addition to the aforesaid, the FSP or its duly appointed agent must open a

bank account with a bank designated solely to hold clients‘ funds. The FSP or

agent, as the case may be, must within one business day of receipt of the

funds deposit all funds held on behalf of the client(s) into this bank account.

The FSP must pay all bank charges in relation to the bank account except

those associated with the deposit and withdrawal of the funds from the bankaccount. The FSP must also ensure that all interest is paid to the client or the

owner of the funds.

The FSP must ensure that:

the funds are dealt with strictly according to the mandate provided by

the client to the FSP;

the FSP must ensure that all client funds are readily discernable or

identifiable from the FSP‘s private assets; and


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subject to any statutory or contractual provisions that the client has ready

access to the funds, less any allowable deductions, i.e. agreed to by the client

and/or imposed by law.

Where the client has instructed the Discretionary FSP to use the client‘s own

bank account, the Discretionary FSP must adhere to the instruction. Where the

Discretionary FSP uses its own bank account, it must ensure that it has

adequate systems and processes in place to administer the client‘s funds.

1.4 ROLES AND RESPONSIBILITIES OF VARIOUS PARTIES

It is important, when considering the context of Discretionary FSP‘s, to briefly

consider the different parties and / or legal entities that interact or potentially

interact with the Discretionary FSP‘s. These parties and / or legal entities

include the following:

1.4.1 The Registrars

Different pieces of legislation create the various Registrars that regulate

FSP‘s, representatives and the respective product suppliers with whom a

Discretionary FSP could interact. These Registrars are:

i. The Registrar of Financial Services Providers. This Registrar is created

by Section 2 of FAIS. Its function is to regulate the conduct of FSP‘s

and representatives in the provision of advice and the rendering of

intermediary services.

ii. The Registrar of Long-term Insurers. This Registrar is created by

Section 2 of the Long-term Insurance Act of 1998, (Act 52 of 1998).

Its function is to regulate the conduct of Long-term Insurers in the

provision of long-term insurance policies to members of the public.

iii. The Registrar of Short-term Insurers. This Registrar is created by

Section 2 of the Short-term Insurance Act of 1998, (Act 53 of 1998).

Its function is to regulate the conduct of Short-term Insurers in the

provision of short-term insurance policies to members of the public.

iv. The Registrar of Pension Funds. This Registrar is created by Section 3

of the Pension Funds Act of 1956 (Act 24 of 1956). Its function is to


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regulate the conduct of pension fund organisations in their provision

of benefits to members of the public.

v. The Registrar for Collective Investment Schemes. This Registrar is

created by Section 7 of the CISCA. Its function is to regulate

collective investment schemes in the provision of investment vehicles

to members of the public.

It is important to note that the above legislation appoints the executive officer

and deputy executive officers of the Financial Services Board (―FSB‖) to be

Registrars and deputy Registrars of the respective areas detailed above.

1.4.2 The Independent Nominee

The Independent nominee‘s function is to hold assets on behalf of clients of

long-term insurers, short-term insurers or pension funds, or, Administrative

and/or Discretionary FSP‘s who wish to hold assets on behalf of long -term

insurers, short-term insurers, pension funds or hold clients‘ securities in the

strate environment, or any other independent nominee that wishes to hold

securities in terms of Section 36(2) of the Securities Services Act, 2004 (Act No

36 of 2004) in order to ring-fence these assets against potential claims against

these product suppliers.

1.4.3 The Management Company

The term ―Management Company‖ is prevalent in the CISCA environment.

CISCA does not however define a management company. CISCA defines a

―Manager‖ as a person authorised by the Registrar to administer a collective

investment scheme. When one considers the definition of a ―deed‖ (also

contained in CISCA) the picture becomes a bit clearer.

A deed is defined as:

―the agreement between a manager and a trustee or custodian, or the

document of incorporation whereby a collective investment scheme is

established and in terms of which it is administered, and includes the deed of

m n gement comp ny which immediately prior to the commencement of

this Act was a management company in terms of any law repealed by this

Act.‖

It is therefore clear that reference to ―Management Company‖ or ―Manco‖ is

historic terminology and refers to a Manager as defined in CISCA. In essence


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the Manager is responsible for the administration of the collective investment

scheme as more fully detailed in Section 4 of CISCA.

In essence the manager must:

avoid any conflict between the interests of the manager and the

interests of an investor;

disclose the interests of its directors and management to the

investors;

maintain adequate financial resources to meet its commitments and

to manage the risks to which its collective investment scheme is

exposed;

organise and control the collective investment scheme in a

responsible manner;

keep proper records;

employ adequately trained staff and ensure that they are properly

supervised;

have well-defined compliance procedures;

maintain an open and cooperative 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

promote investor education, either directly or through initiatives

undertaken by an association.

1.4.4 Trustee or Custodian

Trustee or Custodian is once again a reference prevalent in the CISCA

environment. Section 68 of CISCA prescribes the criteria in terms of which

trustees or custodians are appointed and the termination of such

appointment. A manager must appoint either a trustee or a custodian for its

collective investment scheme depending on the structure of the collective

investment scheme, e.g. whether it is a unit trust or a management

company.


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Section 70 of CISCA prescribes that a trustee or custodian must –

a) ensure that the basis on which the sale, issue, repurchase or

cancellation, as the case may be, of participatory interests effected

by or on behalf of a collective investment scheme is carried out is in

accordance with this Act and the deed

b) ensure that the selling or repurchase price of participatory interests is

calculated in accordance with this Act and the deed

c) carry out the instructions of the manager unless they are inconsistent

with this Act or the deed

d) verify that in transactions involving the assets of a collective

investment scheme any consideration is remitted to it within time

limits which are acceptable market practice in the context of a

particular transaction

e) verify that the income accruals of a portfolio are applied in

accordance with this Act and the deed

f) enquire into and prepare a report on the administration of the

collective investment scheme by the manager during each annual

accounting period, in which it must be stated whether the collective

investment scheme has been administered in accordance with:

i. the limitations imposed on the investment and borrowing

powers of the manager by this Act; and

ii. the provisions of this Act and the deed

g) if the manager does not comply with the limitations and provisions

referred to in paragraph (f)(i) or (ii), state the reason for the non-

compliance and outline the steps taken by the manager to rectify the

situation

h) send the report referred to in paragraph (f) to the Registrar and to

the manager in good time to enable the manager to include a copy of

the report in its annual report


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i) ensure that –

i. there is a legal separation of assets held under custody and

that the legal entitlement of investors to such assets is

assured

ii. appropriate internal control systems are maintained and that

records clearly identify the nature and value of all assets

under custody, the ownership of each asset and the place

where documents of title pertaining to each asset are kept

A trustee or custodian must report to the manager any irregularity or

undesirable practice of which it is aware, whether declared in terms of

Section 21 or not, concerning the collective investment scheme and if steps

to rectify the irregularity or practice in question are not taken to the

satisfaction of the trustee or custodian, it must report such irregularity or

undesirable practice to the Registrar as soon as possible.

The trustee or custodian must satisfy itself that every income statement,

balance sheet or other return prepared by the manager in terms of Section

90 fairly represents the assets and liabilities, as well as the income and

distribution of income, of every portfolio of the collective investment scheme

administered by the manager.

At the request of the trustee or custodian, every director or employee of the

manager must submit to the trustee or custodian any book or document or

information relating to the administration by the manager of its collective

investment scheme which is in his or her possession or at his or her disposal,

and which the trustee or custodian may consider necessary to perform its

functions. A person may not interfere with the performance by a trustee or

custodian of its functions. (6) A trustee or custodian of a collective

investment scheme, which fails to perform any of its duties referred to in this

section, is guilty of an offence.

Finally, section 72 of CISCA prescribes that the trustee or custodian must

indemnify the manager and investors against any loss or damage suffered in

respect of money or other assets in the custody of the trustee or custodian and

of which loss or damage is caused by a wilful or negligent act or omission by

the trustee or custodian.


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1.4.5 The Asset Manager

In searching the relevant legislation such as CISCA and the Security Services

Act, one does not detect a formal definition of the ―Asset Manager‖ or ―Asset

Managing‖.

Wikipedia defines an investment management as follows:

―Investment management is the professional management of various

securities (shares, bonds and other securities) and assets (e.g. real estate),

to meet specified investment goals for the benefit of the investors. Investors

may be institutions (insurance companies, pension funds, corporations, etc.)

or private investors (both directly via investment contracts and more

commonly via collective investment schemes, e.g. mutual funds or exchange-

traded funds).

―The term asset management is often used to refer to the investment

management of collective investments, (not necessarily) whilst the more

generic fund management may refer to all forms of institutional investment

as well as investment management for private investors. Investment

managers who specialise in advisory or discretionary management on behalf

of (normally wealthy) private investors may often refer to their services as

wealth management or portfolio management often within the context of so-

called ‗private banking‘ ".

―The provision of 'investment management services' includes elements of

financial statement analysis, asset selection, stock selection, plan

implementation and ongoing monitoring of investments. Investment

management is a large and important global industry in its own right

responsible for care-taking of trillions of dollars, euros, pounds and yen.

Coming under the remit of financial services many of the world's largest

companies are at least in part investment managers and employ millions of

staff and create billions in revenue.‖

(http://en.wikipedia.org/wiki/Investment_manager)

In essence the manager may elect to outsource the investment or asset

management function to an external asset or investment manager. The trustee

or custodian would still be responsible for ensuring that the manager and asset

manager remains within the parameters of the Investment Policy contained

supplemental deed

http://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Collective_investment_schemehttp://en.wikipedia.org/wiki/Collective_investment_schemehttp://en.wikipedia.org/wiki/Mutual_fundshttp://en.wikipedia.org/wiki/Exchange-traded_fundhttp://en.wikipedia.org/wiki/Exchange-traded_fundhttp://en.wikipedia.org/wiki/Collective_investmenthttp://en.wikipedia.org/wiki/Financial_statement_analysishttp://en.wikipedia.org/wiki/1000000000000_(number)http://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Investment_managerhttp://en.wikipedia.org/wiki/Investment_managerhttp://en.wikipedia.org/wiki/Investment_managerhttp://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/1000000000000_(number)http://en.wikipedia.org/wiki/Financial_statement_analysishttp://en.wikipedia.org/wiki/Collective_investmenthttp://en.wikipedia.org/wiki/Exchange-traded_fundhttp://en.wikipedia.org/wiki/Exchange-traded_fundhttp://en.wikipedia.org/wiki/Mutual_fundshttp://en.wikipedia.org/wiki/Collective_investment_schemehttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Securities


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1.4.6 Long and Short-term Insurance Companies

These entities perform a same function to a collective investment scheme in

that they supply the financial product so that the FSP or representatives (on

behalf of the FSP), as the case may be, may make it available to members of

the public or other investors. Long-term insurance Companies are governed by

the Long-term Insurance Act 52 of 1998 and the short-term insurance

companies are governed by the Short-term Insurance Act 53 of 1998, together

with various subordinate legislation. These entities may themselves appoint a

Discretionary FSP to manage their assets in terms of a mandate.

1.4.7 Retirement funds

Contrary to popular opinion, pension funds, provident funds and retirement

annuity funds are established in terms of the Income Tax Act of 1962, (Act 58

of 1962), instead of the Pension Funds Act. These entities also play a similar

role to long and short-term insurers in that they supply retirement financial

products so that FSP‘s and representatives may (subject to the rules of the

fund) make them available to members of the public.

1.4.8 Third party FSP‘s

The identification of third party FSP‘s have become more important since the

addition of subsection (3) to Section 7 of FAIS. Subsection 7(3) reads as

follows:

―(3) An authorised financial services provider or representative may only

conduct financial services related business with a person rendering financial

services if that person has, where lawfully required, been issued with a

license for the rendering of such financial services and the conditions and

restrictions of that license authorises the rendering of those financial

services, or is a representative as contemplated in this Act.‖

As a Category II and IIA FSP‘s will conduct business with other persons who

render financial services, it is important to ensure that those third Party FSP‘s

possess the necessary licenses, failing which the Category II and IIA FSP‘s

will attract liability. The key issue in 7(3) is to understand what it means to

render financial services.


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Section 1 of FAIS states that:

―‘ financial service‘ means any service contemplated in paragraph (a), (b) or

(c) of the definition of ‗financial services provider‘ , including any category of

such services‖

The definition of financial services provider is also defined in Section 1 of

FAIS as follows:

―‘ financial services provider‘ means any person, other than a representative,

who s regul r fe ture of the business of such person –

a) furnishes advice; or

b) furnishes advice and renders any intermediary service; or

c) renders an intermediary service;‖

The enquiry into whether the person is rendering financial services as a

regular feature of that person‘s business is a factual one, and all FSP‘s should

be wary of conducting business with any person who renders financial

services without the relevant licenses.

1.4.9 Financial Advisers vs. Brokers

FAIS does not contain formal definitions of financial advisors or brokers. In

essence, a broker performs an integral role in bringing the product from to the

supplier to the market. In essence, a broker is a distribution agent or channel.

The same theory holds true in the financial services industry. With the advent

of FAIS, the industry experienced a fundamental reconstruction. FAIS requires

that appropriate advice be provided by a representative or independent

intermediary when providing a financial product to client(s). This requirement

has resulted in many brokers (who were primarily focussed on selling a

financial product to a client) shifting their roles to that of financial planners.

These financial planners are now required to hold the minimum fit and proper

requirements (honesty, integrity, competency and operational ability). Once

again Section 7(3) plays an important role when FSP‘s deal with independent

intermediaries as the FSP‘s now have to ensure that these independent

intermediaries possess their own FSP licenses for the category of financial

products that they seek to provide to the market.


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1.4.10 Clients

Clients can be broadly categorised into institutional and retail clients. Whilst

many layers may exist in an investment context, these persons are typically

the ―end-user(s)‖ of the financial product or service. Section 1 of FAIS

defines client as follows:

―‘Client‘ means a specific person or group of persons, excluding the general

public, who is or may become the subject to whom a financial service is

rendered intentionally, or is the successor in title of such person or the

beneficiary of such service;‖

1.5 RELEVANT CONTRACTS

Part III of the General Code requires an FSP, other than a direct marketer, to

at the earliest reasonable opportunity, and only where appropriate, furnish the

client with full particulars of the following information about the relevant

product supplier;

a) ―Name, physical location, and postal and telephone contact details of

the product supplier;

b) the contractual relationship with the product supplier (if any), and

whether the provider has contractual relationships with other product

suppliers;...

c) the existence of any conditions or restrictions imposed by the product

supplier with regard to the types of financial products or services that

may be provided or rendered by the provider;...‖

Where such information is provided verbally, the FSP must confirm the

information in writing within 30 days.

It is therefore clear that the FSP is required to contract with relevant product

suppliers when distributing that product supplier‘s financial product. In addition

to the aforesaid, Section 13(1)(b)(ii) stipulates that the FSP who appoints a

representative must appoint such representative in terms of an employment

contract or other mandatory agreement.

In terms of Section 5 of the Discretionary Code the Discretionary FSP is also

required to have a signed mandate with each client prior to providing the

financial services. This mandate is a contract.


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Other contracts with third party services provider such as IT Services are

required to be in place to ensure that these systems are adequately supported,

thereby managing the risk for the Discretionary FSP.

Summary

In this chapter you should have gained a better understanding of the nature of

a Discretionary FSP and Hedge Fund FSP. In so doing we considered the

following:

1. The distinction between advice and intermediary services;

2. Clarification that the Discretionary FSP and Hedge Fund FSP renders

intermediary services and not advice;

3. The duties of a Discretionary FSP and how it exercises the discretion

granted to it by the client;

4. The duties of a Hedge Fund FSP and how it exercises the discretion

granted to it by the client. In particular how the Hedge Fund FSP uses

a combination of transactions resulting in leveraging or net short

positions;

5. The different role-players in the context of the Discretionary FSP and

Hedge Fund FSP;

6. The need for relevant contracts.


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Self-Assessment Questions

1. Section 1 of FAIS defines financial services as:

a) rendering intermediary services

b) providing advice

c) rendering intermediary services and providing advice

d) rendering intermediary services or providing advice OR

rendering intermediary services and providing advice

2. A discretionary FSP renders:

a) intermediary services

b) advice

c) advice and intermediary services

d) advice or intermediary services

3. Intermediary services include:

a) an act, the result of which is that the client may enter into

any transaction in respect of a financial product

b) an act, the result of which is that the client offers to enter

into any transaction in respect of a financial product

c) an act, the result of which is that the client enters into any

transaction in respect of a financial product

d) all of the above

4. A Discretionary FSP is defined as:

a) an FSP that renders intermediary services

b) an FSP that renders intermediary services of a discretionary

nature

c) an FSP that renders intermediary services of a discretionary

nature in respect of financial products referred to inparagraphs a, b, c (excluding any short-term insurance

contract or policy), d and e of the definition of financial

product

d) an FSP that renders intermediary services of a discretionary

nature in respect of financial products referred to in

paragraphs a, b, c (excluding any short-term insurance

contract or policy), h and i of the definition of financial

product


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5. A hedge fund means:

a) a portfolio that uses a strategy to hedge against potential

losses

b) a portfolio that uses a strategy to take any position that could

result in losses greater than its aggregate market value

c) a portfolio that uses leverage to hedge against market losses

d) a portfolio that uses a short position to hedge against market

losses

6. Prior to rendering intermediary services the Hedge Fund FSP must:

a) make relevant disclosures

b) obtain a written receipt from the client of the disclosure(s)

made by the Hedge Fund FSP

c)

obtain a signed mandate from the clientd) all of the above

7. Relevant contracts required by a Discretionary FSP include, but are

not limited to:

a) mandates from clients

b) contracts with other FSPs

c) contracts with third party service providers

d) all of the above

8. A short position means:

a) selling an asset that one does not own

b) buying an asset with the intention of re-selling it

c) selling an asset that has been held for a short period of time

d) buying an asset directly off the JSE as opposed to buying an

asset through a third party provider such as a Collective

Investment Scheme Portfolio

9. A manager must have:

a) well defined compliance procedures

b) disclose all conflicts of interest

c) maintain adequate financial resources to meet commitments

d) all of the above

10. A CISCA deed means:

a) an agreement between two parties

b) an agreement in terms whereof a collective investment

scheme is established

c) an agreement to transfer immovable property


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d) an agreement in terms whereof a trust is established

Self-Assessment Answers

1. Section 1 of FAIS defines financial services as:

a) rendering intermediary services

b) providing advice

c) rendering intermediary services and providing advice

d)

rendering intermediary services or providing advice OR

rendering intermediary services and providing advice

2. A discretionary FSP renders:

a) intermediary services

b) advice

c) advice and intermediary services

d) advice or intermediary services

3. Intermediary services include:

a) an act, the result of which is that the client may enter into

any transaction in respect of a financial product

b) an act, the result of which is that the client offers to enter

into any transaction in respect of a financial product

c) an act, the result of which is that the client enters into any

transaction in respect of a financial product

d) all of the above

4. A Discretionary FSP is defined as:

a) an FSP that renders intermediary services

b) an FSP that renders intermediary services of a discretionary

nature

c) an FSP that renders intermediary services of a discretionary



contract or policy), d and e of the definition of financial

product

d) an FSP that renders intermediary services of a discretionary



contract or policy), h and i of the definition of financial

product


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5. A hedge fund means:

a) a portfolio that uses a strategy to hedge against potential

losses

b)

a portfolio that uses a strategy to take any position that

could result in losses greater than its aggregate market value

c) a portfolio that uses leverage to hedge against market losses

d) a portfolio that uses a short position to hedge against market

losses

6. Prior to rendering intermediary services the Hedge Fund FSP must:

a) make relevant disclosures

b) obtain a written receipt from the client of the disclosure(s)

made by the Hedge Fund FSP

c)

obtain a signed mandate from the clientd)

all of the above

7. Relevant contracts required by a Discretionary FSP include, but are

not limited to:

a) mandates from clients

b) contracts with other FSPs

c) contracts with third party service providers

d)

all of the above

8. A short position means:

a)

selling an asset that one does not own

b) buying an asset with the intention of re-selling it

c) selling an asset that has been held for a short period of time

d) buying an asset directly off the JSE as opposed to buying an

asset through a third party provider such as a Collective

Investment Scheme Portfolio

9. A manager must have:

a) well defined compliance procedures

b) disclose all conflicts of interest

c) maintain adequate financial resources to meet commitments

d)

all of the above

10. A CISCA deed means:

a) an agreement between two parties

b)

an agreement in terms whereof a collective investment

scheme is established

c) an agreement to transfer immovable property


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d) an agreement in terms whereof a trust is established


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Chapter

2The role of the independent nominee


KNOWLEDGE CRITERIA

Describe the obligations and requirements regarding the use of nominee

companies.

Explain the purpose of the Nominee Company.

Describe the duties the Nominee Company is responsible for.

SKILLS CRITERIA

Verify that there are processes in place to check that the Independent

Nominee Company executes its responsibilities towards the Category II and

IIA FSP‘s.

Confirm that the Independent Nominee complies with its duties.

Check that any nominee companies used have been approved by the FSP in

terms of the nominee policy.

Confirm that the reports concerning the nominee company are provided

timeously to the FSB.


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In terms of FAIS and subordinate legislation thereto, a Discretionary and/or

Hedge Fund FSP may only act in that capacity if approved by the Registrar. The

subordinate legislation goes further to prescribe that approval can only be

granted by the Registrar if the applicant (being the proposed FSP) has a

nominee. The purpose of this section is to look at the qualifying criteria that have

to be satisfied in order for an FSP to have its Nominee approved.

2.1 PURPOSE OF INDEPENDENT NOMINEE

2.1.1

Nature and function

In terms of Chapter V of the Regulations to FAIS (―the Regulations‖) the

concept of the post-FAIS Independent Nominee Company (―the Nominee‖)

was introduced for Discretionary FSP‘s. Section 6 of the Regulations

prescribes that:

1) The functions of the nominee of a Discretionary FSP must be limited

to its object and to such other functions as may be necessary to

achieve the said object. The object of a nominee is to hold assets on

behalf of investors so that any risks associated with the Discretionary

FSP are withheld from those assets. In essence, it is a ring-fencing

mechanism that allows for the protection of investor‘s assets in the

event of the Discretionary FSP falling into financial difficulties.

2) A Discretionary FSP must, prior to obtaining authorisation, apply to

the Registrar for approval of its nominee. Hence the Discretionary

FSP may not exist without its duly approved nominee.

3) The memorandum and articles of association of the nominee

company must preclude it from incurring any liabilities other than

those to persons on whose behalf it holds assets and, if any other

liabilities are incurred in the name of the nominee company, the

Discretionary FSP shall be liable to meet them.

The nominee must enter into an agreement with the Discretionary FSP in

terms of which the provider must pay all expenses for and incidental to its

formation, activities, management and liquidation, unless the memorandum


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and articles of association of the nominee already provide for such an

obligation.

The Registrar published Board Notice 63 of 2007 (―BN63‖) on 25 May 2007.

BN63 prescribes the requirements imposed by the FSB for nominees to

operate in South Africa in respect of:

1. the Registrar of Pension Funds;

2. the Registrar of Long-term Insurance;

3. the Registrar of Short-term Insurance;

4. the Registrar of Security Services Act; and

5. the Registrar of Financial Services Providers.

Section 1 of BN63 reiterates the principles laid down in the Regulations in

that nominees who wish to register or hold any assets of long-term insurers,

short-term insurers or pension funds, the independent nominee of an

administrative and discretionary financial services provider who wishes to

hold assets on behalf of long-term insurers, short-term insurers, pension

funds or hold clients‘ securities in the Strate environment, or any other

independent nominee that wishes to hold securities in terms of Section 36(2)

of the Securities Services Act, 2004 (Act No 36 of 2004) require the prior

written approval of the Registrar of Long-term insurance, the Registrar of

Short-term Insurance, the Registrar of Pension Funds, the Registrar of

Financial Services Providers or the Registrar of Securities Services, as the

case may be.

As stated above the executive officer and deputy executive officer of the FSB

are appointed as these Registrars and therefore any approval will be

administered by the FSB. It is important to note that BN63 prescribes specific

requirements for those Nominees wanting to hold assets on behalf of investors

in the Strate environment. BN 63 prescribes further requirements that

independent nominees have to satisfy in order to operate in the capacity as

independent nominees in South Africa.

2.1.2 Independent Nominee Requirements (BN63)

A nominee must –


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1. be a registered company under the Companies Act, 1973 (Act No 61

of 1973);

2. be wholly-owned by a holding company. In practice this holding

company is most often the Discretionary FSP although the

requirements are not prescriptive in this regard provided that the

holding company qualifies with the criteria stipulated in BN63 (as

detailed in 1-8 below). What is required is that it be wholly-owned by

a holding company and not have natural persons as shareholders;

3. have adequate insurance against loss through fire, theft and other

disasters in place for trust assets held by the independent nominee

as well as fidelity guarantee cover. (It is the responsibility of the

holding company to put this in place); and

conclude a written agreement with each pension fund, short-term insurer, and

long-term insurer whose assets it will hold and the agreement should comply

with the minimum requirements as required by the Registrar concerned.

2.1.3 Holding Company Requirements

As stated above, the independent nominee may not have a natural person as

a shareholder. The Nominee must be wholly-owned by –

1. a long-term or short-term insurer as defined in Section 1 of the Long-

term Insurance Act, 1998 (Act No 52 of 1998) and Section 1 of the

Short-term Insurance Act, 1998 (Act No 53 of 1998) respectively; or

2. an authorised user in terms of the Securities Services Act, 2004 (Act

No 36 of 2004) ; or

3. a bank or a bank controlling company as defined in Section 1 of the

Banks Act, 1990 (Act No 94 of 1990); or

4. a Discretionary or Administrative FSP as approved in terms of Section

7 of FAIS; or

5. an administrator registered in terms of Section 13B of the Pension

Funds Act, 1956 (Act No 24 of 1956) where the exclusive object of its

Nominee is the holding of pension fund assets; or


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6. a participant of a Central Securities Depository licensed in terms of

the Securities Services Act, 2004 (Act No 36 of 2004); or

7. a central securities depository licensed in terms of the Securities

Services Act, 2004 (Act No 36 of 2004) ; or

8. an exchange licensed in terms of the Securities Services Act, 2004

(Act No 36 of 2004).

The holding company must also, to the satisfaction of the Registrar

concerned, demonstrate that it –

a) is fit and proper to own an independent nominee for purposes of

taking title of assets on behalf of long-term insurers, short-term

insurers, pension funds or others and hold such assets in trust and in

safe custody on their behalf;

b) has a culture and operational structure which evidence a commitment

to effective control by executive management and the board of

directors over all aspects of the business of the independent nominee

and that demonstrates a zero tolerance to management override of

controls;

c) has evidence of a commitment to the employment and retention of

adequate numbers of suitably qualified personnel of integrity and the

ongoing education of staff in relevant disciplines;

d) has evidence of a documented system of internal controls which

ensures that its independent nominee is effectively run, that the

assets of clients are safeguarded and segregated and the records of

the independent nominee accurately reflect the information which

they purport to present;

e) has evidence of appropriately documented procedures to exclude

unauthorised access to critical systems, the thorough testing of all

new proprietary systems and the continuity of operations of all critical

applications of its independent nominee, including disaster recovery

and a business continuity plan;

f) has adequate and prospective financial resources represented by a

minimum of R3 million equity capital which shall be maintained at all

times; and


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g) has an appropriate documented system of risk management to

provide substantial assurance of continuity of the business of its

independent nominee for the foreseeable future.

Where the holding company has outsourced the control over the operation of

the Nominee register to another company, that outsourced company must, to

the satisfaction of the Registrar, demonstrate that it has met the

requirements listed in (a) to (g) above. Where the maintenance of the

register has been outsourced, the Independent Nominee has the obligation to

advise the clients of the outsourcing arrangement.

2.2 DUTIES OF INDEPENDENT NOMINEE

2.2.1 Independent Nominee Definition (BN63)

The Securities Services Act, 2004 (Act No 36 of 2004), defines a nominee to

mean ―a person that acts as the registered holder of securities or an interest

in securities on behalf of other persons‖.

In all instances detailed in this publication, a nominee refers to any entity that

holds assets in its own name on behalf of the beneficial owner (i.e. thenominee is not the beneficial owner of these assets). The main duties of the

independent nominee are therefore to hold the assets on behalf of the

beneficial owners and to protect the assets from claims by creditors of the FSP.

2.2.2 Ongoing obligations

Approved independent nominees shall annually submit to the FSB:

i.

audited financial statements; and

ii. an audit report, within six months of the financial year-end of the

company to the FSB, setting forth whether any assets held on behalf

of any other person in safe custody are in possession of the nominee

and properly accounted for.

Should the nominee fail to submit the above and, before the expiry of that

period, also not apply in writing for an extension of time within which to


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submit the statements, the FSB may withdraw its approval with immediate

effect on the conditions as prescribed by the Registrar concerned.

A declaration by the holding company of the independent nominee in the

format as prescribed in Clause 12 of BB 63 must accompany the annual

financial statements of the independent nominee.

The FSB retains the right to withdraw an approval at any time should the

independent nominee, its holding company or the company to which the

control over the nominee register has been outsourced fail to comply with the

FSB and Strate requirements.

Members of the JSE, BESA, participants and their independent nominees

need only to comply with clause 7 of the requirements imposed by the FSB

for independent nominees to operate in South Africa if they hold securities on

behalf of either pension funds or long and short-term insurers.

Summary

In this chapter we dealt with the relevance and importance of the nominee in

the FSP‘s context.

In this and the previous chapter we explained that the FSP could not act in the

capacity as FSP unless prior approval is granted by the Registrar.

We considered the definition and requirements of nominees as contained in

BN63 and the Regulations to FAIS.

We also considered the duties and obligations of the nominee.


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Self-Assessment Questions

1. The following Registrars published the Board Notice 63 of 2007.

Select the incorrect answer:

a) Registrar of Financial Services Providers

b) Registrar of Long-term Insurers

c) Registrar of Collective Investment Schemes

d) Registrar of Pension Funds

2. Independent nominees must obtain the Registrar‘s prior written

approval when they want to hold:

a) long-term insurance assets

b) short-term insurance assets

c) assets on behalf of an Administrative or Discretionary FSP

who holds assets on behalf of a Long-term or Short-term

Insurer or Collective Investment Schemes

d) assets on behalf of an Administrative or Discretionary FSP


Insurer or Pension Funds

3. A prescribed condition for independent nominees is:

a) they may not have natural persons as shareholders

b) they may not dispose of shares without the prior written

approval of the Registrar

c) their Articles and Memorandum of Association must stipulate

that their sole object is to hold assets on behalf of investors

of the Administrative FSP, Discretionary FSP, Long-term

Insurer, Short-term Insurer, Central Securities Depository or

exchange, as the case may be

d) they must be owned by one or more Long-term Insurers,

Short-term Insurers, Administrative or Discretionary FSPs,

Central Securities Depository or exchange

4. The holding company of an independent nominee must demonstrate

that it:

a) is fit and proper to own an independent nominee

b) has the culture and operational ability to own an independent

nominee

c) has evidence of documented internal control ensuring that

the Independent Nominee is effectively run


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d) has an independent bank account for institutional investors

5. An approved independent nominee must annually submit to the

Registrar:

a) audited financial statements

b) an audit report within 3 months of the financial year-end

setting out whether any assets were held on behalf of other

person(s) in safe custody

c) an audit report within 6 months of the financial year-end



d) a declaration by the holding company in the prescribed

format

6. An independent nominee company function is to:

a) hold assets on behalf of beneficial owners

b) hold investments on behalf of beneficial owners

c) hold investments in the names of the beneficial owners on

behalf of those beneficial owners

d) hold investments in its own name on behalf of the beneficial

owners of those investments

7. Independent nominees may:

a) offer to pay certain expenses for its holding company

b) provide a surety for its holding company or any of its

subsidiary companies

c) not incur any expenses or liabilities

d) not pay for any of its expenses or liabilities

8. The holding company of the independent nominee must:

a) enter into a contract in terms whereof the holding company

agrees to pay all expenses and liabilities for the independent

nominee

b) ensure that the independent nominee obtains the necessary

overdraft facilities to pay its own liabilities and expenses

c) provide the independent nominee with a loan so that the

independent nominee may pay its expenses and liabilities

d) ensure that the independent nominee prices the investments

in such a manner that it can pay its own liabilities and

expenses


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9. The holding company of the independent nominee may outsource the

control and operation of the Nominee Register to another company

where:

a) the outsource company has a minimum of 5 million equity

capital

b) the outsource company has sufficient contracts with

outsourced administrators to ensure sufficient delivery of

administration services

c) the outsource company complies with section 11 of the

Regulations to FAIS

d) the outsource company satisfies the requirements prescribed

in Section 5.2.2 of Board Notice 63 of 2007

10. Independent nominee companies may:

a) own assets and make investments for their own benefit

b) not have natural persons as shareholders

c) at any time dispose of shares to members of the public

d) be listed on the JSE

Self-Assessment Answers

1. The following Registrars published the Board Notice 63 of 2007.

Select the incorrect answer:

a) Registrar of Financial Services Providers

b) Registrar of Long-term Insurers

c)

Registrar of Collective Investment Schemes

d) Registrar of Pension Funds

2. Independent nominees must obtain the Registrar‘s prior written

approval when they want to hold:

a)

long-term insurance assetsb) short-term insurance assets

c)

assets on behalf of an Administrative or Discretionary FSP


Insurer or Collective Investment Schemes

d) assets on behalf of an Administrative or Discretionary FSP


Insurer or Pension Funds


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3. A prescribed condition for independent nominees is:

a) they may not have natural persons as shareholders

b) they may not dispose of shares without the prior written

approval of the Registrar

c) their Articles and Memorandum of Association must stipulate

that their sole object is to hold assets on behalf of investors

of the Administrative FSP, Discretionary FSP, Long-term

Insurer, Short-term Insurer, Central Securities Depository or

exchange, as the case may be

d)

they must be owned by one or more Long-term Insurers,

Short-term Insurers, Administrative or Discretionary FSPs,

Central Securities Depository or exchange

4. The holding company of an independent nominee must demonstrate

that it:

a) is fit and proper to own an independent nominee

b) has the culture and operational ability to own an independent

nominee

c) has evidence of documented internal control ensuring that

the Independent Nominee is effectively run

d)

has an independent bank account for institutional investors

5. An approved independent nominee must annually submit to the

Registrar:

a) audited financial statements

b)

an audit report within 3 months of the financial year-end



c) an audit report within 6 months of the financial year-end



d) a declaration by the holding company in the prescribed

format

6. An independent nominee company function is to:

a) hold assets on behalf of beneficial owners

b) hold investments on behalf of beneficial owners

c) hold investments in the names of the beneficial owners on

behalf of those beneficial owners

d)

hold investments in its own name on behalf of the beneficial

owners of those investments


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7. Independent nominees may:

a) offer to pay certain expenses for its holding company

b) provide a surety for its holding company or any of its

subsidiary companies

c) not incur any expenses or liabilities

d)

not pay for any of its expenses or liabilities

8. The holding company of the independent nominee must:

a)

enter into a contract in terms whereof the holding company

agrees to pay all expenses and liabilities for the independent

nominee

b) ensure that the independent nominee obtains the necessary

overdraft facilities to pay its own liabilities and expenses

c) provide the independent nominee with a loan so that the

independent nominee may pay its expenses and liabilities

d) ensure that the independent nominee prices the investments

in such a manner that it can pay its own liabilities and

expenses

9. The holding company of the independent nominee may outsource the

control and operation of the Nominee Register to another company

where:

a) the outsource company has a minimum of 5 million equity

capital

b) the outsource company has sufficient contracts with

outsourced administrators to ensure sufficient delivery of

administration services

c) the outsource company complies with section 11 of the

Regulations to FAIS

d)

the outsource company satisfies the requirements prescribed

in Section 5.2.2 of Board Notice 63 of 2007

10. Independent nominee companies may:

a) own assets and make investments for their own benefit

b)

not have natural persons as shareholders

c) at any time dispose of shares to members of the public

d) be listed on the JSE


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Chapter

3Manage and oversee client mandates


KNOWLEDGE CRITERIA

Explain why the Category II and/or IIA FSP must use mandates that have

been approved by the FSP.

Describe the requirements regarding the development, amendments,

approval and use of specimen mandates.

Explain why a mandate cannot be used if it is not approved by the FSB.

Explain why a mandate cannot be used if it is not signed by the client or his

duly authorised representative.Explain why such a mandate must adhere to the requirements in the

Discretionary Code of Conduct.

SKILLS CRITERIA

Manage client‘s mandates in accordance with mandatory requirements.


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Purpose

The client mandate is of fundamental importance to the Discretionary and Hedge

Fund FSP. In terms of prevailing legislation the FSP may not render intermediary

services without obtaining a client mandate in the manner and form as

prescribed by these pieces of legislation.

This chapter will focus on these aspects.

3.1 USE OF CLIENT MANDATES

3.1.1 Introduction

Section 5.1 of Chapter II of the Discretionary Code prescribes that the

Discretionary FSP (Category II and IIA FSP‘s) must obtain a signed mandate

from the client prior to rendering any financial services. The Discretionary FSP

must at all times adhere to the client‘s mandate and it is therefore important

that the FSP manages compliance with the mandate through the use of

compliance resources, adequately trained employees and systems. It is

therefore important to consider this mandate in greater detail.

3.2 CLIENT MANDATES

3.2.1 Specimen Mandate Discretionary FSP‘s including Hedge Fund FSP‘s)

Section 5(2) of the Discretionary Code stipulates that the Discretionary FSP‘s

mandate must be approved by the Registrar prior to being put into use. Afterapproval for the mandate (―specimen mandate‖) has been obtained from the

Registrar, Section 5(3) of the Discretionary Code prohibits the Discretionary

FSP, from substantially amending and using the specimen mandate, unless it

has once again submitted the specimen mandate to the Registrar for approval

and obtain the aforesaid approval. A specimen mandate is substantially

amended where any of the prescribed content previously approved by the

Registrar is changed.


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Section 5(2) prescribes the following minimum criteria for the specimen

mandate:

i. Authorisation for the Discretionary FSP to act on behalf of the client

and further indicating whether the authorisation is full or limited;

ii. State the investment objectives of the client and whether there are

any investment jurisdiction restrictions that apply to the rendering of

financial services in relation to the financial product(s) involved;

iii. Contain a general statement pertaining to the risks associated with

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