Global

Details

  • Service: Tax
  • Type: Regulatory update, Survey report
  • Date: 1/1/2014

South Africa - Regulation 

International funds and fund management survey
1.1 Type of funds
1.2 Laws Equity funds
1.3 Managers, trustees, and custodians
1.4 Investment restrictions
1.5 Borrowing
1.6 Accounts and prospectus
1.7 Supervision
1.8 Fund ownership
1.9 Fund structure
1.10 Stock exchange
1.11 Bank secrecy
1.12 Fund set-up
1.13 Foreign funds
1.14 Bearer shares
1.15 Use of the internet


1.1 Type of funds

Experienced investment managers invest a pool of money invested in a wide range of local shares quoted on the Johannesburg Stock Exchange (JSE), international equities, bonds and other financial instruments such as derivatives, with the aim of generating a capital and income return. All collective investment schemes are governed by the Collective Investment Schemes Control Act No. 45 of 2002 (CISCA).


The CISCA has brought the South African industry in line with International Standards and best practice. The CISCA provides for the establishment of new structures which were previously not possible. The legislation also ensures enhanced disclosure, increased unitholder protection, greater investment flexibility and improved transparency in respect of costs. There are four main classifications of collective investment scheme funds, namely:


  • Equity funds
  • Asset allocation funds
  • Real estate funds
  • Fixed interest funds.

These can either be classified as domestic or foreign.


Equity funds


The investment objective of general equity funds is to achieve medium- to long-term capital growth through investment in various sectors of the equity market. Exposure to equities typically exceeds 75% of the market value of the fund.


Asset allocation funds


A mutual fund that provides investors with a portfolio of a fixed or variable mix of the three main asset classes (equities, bonds and cash equivalent) in a variety of securities. Some asset allocation funds maintain a specific proportion of asset classes over time, while others vary the proportional composition in response to changes in the economy and investment markets.


Fixed interest funds


These funds only invest in interest-bearing assets. The investment fees of fixed interest funds are generally much lower than the fees of equity funds.


General


On 18 September 2012, ASISA released a new fund Classification Standard whereby the aim is to have fund classifications that are a true reflection of what the fund is about. All collective schemes must comply with this standard by January 2013.


Fund Classes


Funds may have more than one type of unit class, charged different annual fees. The different classes are sold to different types of investors, namely retail and institutional, and usually have different minimum investment amounts.


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1.2 Laws Equity funds

The investment objective of general equity funds is to achieve medium- to long-term capital growth through investment in various sectors of the equity market. Exposure to equities typically exceeds 75% of the market value of the fund.


Asset allocation funds


A mutual fund that provides investors with a portfolio of a fixed or variable mix of the three main asset classes (equities, bonds and cash equivalent) in a variety of securities. Some asset allocation funds maintain a specific proportion of asset classes over time, while others vary the proportional composition in response to changes in the economy and investment markets.


Fixed interest funds


These funds only invest in interest-bearing assets. The investment fees of fixed interest funds are generally much lower than the fees of equity funds.


General


On 18 September 2012, ASISA released a new fund Classification Standard whereby the aim is to have fund classifications that are a true reflection of what the fund is about. All collective schemes must comply with this standard by January 2013.


Fund Classes


Funds may have more than one type of unit class, charged different annual fees. The different classes are sold to different types of investors, namely retail and institutional, and usually have different minimum investment amounts.


The collective investment scheme industry in South Africa is strictly regulated by the Financial Services Board, the CISCA and each management company’s trustees. The Association for Savings and Investment South Africa (ASISA) has an oversight role and the majority of management companies are represented by ASISA and must adhere to their code of conduct. This offers increased protection for unitholders. In addition, the Financial Intelligence Centre Act No. of 2002 applies to the CIS manager. It imposes an obligation to report any unusual transactions that may represent money laundering activities.


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1.3 Managers, trustees, and custodians

Trustees/Custodians


Each collective investment scheme is legally obliged to appoint trustees to exercise fiduciary control. The trustees have two main functions:


  • The trustees act as custodians of the cash and securities in the fund. All the assets of the fund are held in the trustees’ name for the benefit of the fund.
  • The trustees also have to ensure that the fund is managed within the scope of mandate set out in the trust deed. The trustees must be independent and therefore cannot be a subsidiary or holding company of the CIS Manager.

Management Company


The management company is responsible for the administration of the fund. The general administration of the fund involves the creation and cancellation of units with the funds and the selling to and repurchasing from the unitholders. The management company will market the unit trust funds to investors. Investors will deposit cash into a trust account and the management company will create units with the cash being transferred to the unit trust fund invested in. Likewise, the management company will repurchase units when an investor disinvests. The management company is also responsible for monitoring compliance with the CISCA and various regulations. The investment decision is usually outsourced to an external asset management company. The management company charges a fee based on the value of the fund’s assets. This fee is reflected as income in the accounting records of the management company and as an expense in the fund’s accounting records.


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1.4 Investment restrictions

Notice 80 of 2012 (with effect from 1 July 2012, previously notice 1503) of the CISCA places onerous restrictions on the underlying investments of the collective investment scheme.


Assets to be included in a portfolio


At least 90% of the market value of a collective investment scheme portfolio must consist of any of the following:


  • securities traded on an exchange
  • financial instruments
  • non-equity securities, or
  • any securities obtained by exercising rights attached to other securities held in the portfolio. If a security does not meet the definition of one of the above within 12 months of inclusion in the portfolio, the manager must substitute the security for a qualifying security.

Investment limits


Investments in a security issued by one concern are limited to the greater of:


  • 5% of the market value of the fund, or
  • 10% of the market value of the fund, if the abovementioned concern has a market capitalisation of at least R2 billion, and
  • 120% of that security’s free float weighting in the relevant Headline, Economic Group or Specialist Index, as published by the JSE Securities Exchange.

5%/10% of underlying market capitalisation


A collective investment scheme portfolios holding of a security issued by any one concern is limited to a maximum of 5% of the market capitalisation of that security. If the market capitalisation of the security is greater than R2 billion, the limit is extended to a maximum of 10%.


Holdings in other unit trusts


A fund may invest up to 20% of its market value in another collective investment scheme. An investment may only be made into a foreign collective scheme and must be approved in terms of section 65 of the Act. A fund of funds must invest in more than two underlying funds, provided that the investment in any underlying fund does not exceed more than 75% of the fund market value.


Cross-holdings, holdings in funds of funds


A collective investment scheme may only hold interests in a fund of funds or feeder fund if at least 85% of the fund of funds’/feeder fund’s portfolio is foreign and provided that the fund of funds does not hold an interest in the fund.



Index tracking funds


Gold Index: A gold portfolio may include securities issued by one concern to an amount equal to the concern’s weighting in the FTSE/JSE Gold Index, plus 5%, subject to a maximum of 60% of the market value of the fund’s portfolio.


Other indices: An index fund other than a gold index fund may include securities issued by one concern to an amount equal to that security’s percentage weighting in the relevant index, subject to a maximum of 35% of the market value of the fund’s portfolio.


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1.5 Borrowing

A CIS manager may borrow money for the purposes of paying investors on liquidation of their units. However, the amount borrowed may not exceed 10% of the market value of the fund at the time of borrowing. Assets must be realised as soon as possible to settle the loan.


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1.6 Accounts and prospectus

Accounting records and audit


In terms of the CISCA, a manager must, in respect of itself and every collective investment scheme administered by it, maintain the accounting records and prepare annual financial statements in conformity with generally-accepted accounting practice (IFRS for periods commencing on or after 1 December 2012). These records must be preserved in a safe place for a period of at least 5 years and must be audited, not later than 3 months after the financial year-end of the manager or collective investment scheme.


Contents of price list, advertisement, brochure and similar document


The CISCA prescribes the minimum content of a price list, advertisement, brochure or similar document that is published by a manager or by any of its authorised agents for the purpose of soliciting the sale of participatory interests in a collective investment scheme.


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1.7 Supervision

The regulation and supervision of fund managers in South Africa depends on a variety of factors, including the nature of the services they provide, the type of fund structure they manage and the target investors.


In general, the provision of fund management services is subject to regulation in terms of the Financial Advisory and Intermediary Services Act (FAIS Act). However, if the manager manages a collective investment scheme, the provision of that service is exempted from regulation in terms of the FAIS Act as it is subject to regulation in terms of CISCA.


Managers of private equity funds and hedge funds must meet additional requirements if their funds are to qualify as ‘private equity funds’ or ‘hedge funds’ as defined in the investment regulations to which most pension funds are subject to.


Circulars


CISCA update circulars are published from time to time.


These circulars are available on the FSB website.


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1.8 Fund ownership

When an investor invests in a collective investment portfolio, the investor buys units of a fund, which in turn use the money to invest in assets which may include shares, bonds and cash. The investor owns the units or a portion of the collective investment portfolio relative to the number of units bought. However, it must be noted that it depends on the type of fund invested. For example, if an investor invests in a fund of funds, the investor only owns the units in the fund of funds and not in the units of the underlying collective investment portfolios which make up the fund of funds. These units in the fund of funds are subject to the same legislation as the underlying funds.


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1.9 Fund structure

Each collective investment scheme comprises of at least two separate legal entities - the fund, and the management company and asset manager.


Fund


The fund comprises all the cash contributions received from investors. This pool of funds is invested in shares, capital, money market instruments, property and derivatives in accordance with the fund’s investment mandate. The fund is not a company and therefore cannot become insolvent. The supplemental trust deed for each collective investment scheme indicates the broad asset class categorisation of the fund (equity, asset allocation or fixed interest). This broad categorisation is expanded in the investment mandate where benchmark asset allocation decisions are made. The composition of the fund is thus governed by these classifications, which stipulate the quantities which may be invested in the respective asset classes.


The investment mandate is a definitive document with the signed commitment of both the management company and asset manager.


Management company and asset manager


The management company will either utilise asset managers from within the organisation, or it will employ an external asset management company. Responsibilities of the asset manager include:


  • managing the investments of the fund in accordance with the investment mandate of the fund
  • making investment decisions on behalf of the unitholders, and
  • keeping the management companies abreast of industry developments and trends.

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1.10 Stock exchange

A stock exchange quotation is available for South African funds. The shares are listed on the Johannesburg Stock Exchange, and are regulated by the Stock Exchange Control Act No. 1 of 1985.


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1.11 Bank secrecy

Banks are governed by the South African Reserve Bank Act No. 90 of 1989, FAIS Act as well as anti-money laundering laws.


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1.12 Fund set-up

The set-up costs of a fund can vary, depending on the type of fund.


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1.13 Foreign funds

Investors have the option to invest in a locally-registered collective investment portfolio fund with international exposure, or they can invest in foreign markets using their foreign investment allowance. In order for the foreign investment allowance to be utilised the following requirements must be fulfilled:


  1. You must be a natural person of at least 18 years of age. This means that you cannot make the investment through a trust, close corporation or company.
  2. An application must be made at your designated South African Revenue Service (SARS) branch, where you are registered for income tax purposes, to obtain a tax clearance certificate.
  3. SARS will send the tax clearance certificate directly to the authorised dealer handling the actual transfer/investment of the funds.

If you have decided to invest in a foreign fund, there a number of organisations you can approach. The offshore divisions of South African CIS management companies and banks offer funds and there are also a number of foreign companies who have been approved by the Financial Services board (FSB) to sell their products in South Africa. This enables easier access into foreign investment for South African individuals.


In terms of Section 37A of the Collective Investment Scheme Control Act, no 54 of 1981, no foreign CIS may be marketed in South Africa unless they are approved by the FSB. This regulation does not prevent an investor from taking the decision to invest in an offshore collective investment portfolio or any other foreign investment that is not approved by the FSB, but it does prohibit anyone from advising investors to invest in any unregistered collective investment portfolio funds.


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1.14 Bearer shares

Units are not issued in bearer form in South Africa


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1.15 Use of the internet

CISs usually publish fund information, fact sheets and other performance-related information on the internet to provide potential investors with information about the fund. Application forms can usually be obtained from the management company’s website.




© 2014 KPMG Services Proprietary Limited, a South African company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

 

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Gary Pickering

KPMG in South Africa

+27 83 454 3870


Gustaaf Kruger

KPMG in South Africa

+27 82 719 1730

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