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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

2 © INSETA– Section 2 10b

© INSETA

© INSETA– Section 2 10b 3

Table of contentsHeading Page number

Task list 5Glossary 6

CHAPTER 1:CATEGORY II AND IIA BUSINESS MODEL1.1 Introduction 71.2 Characteristics of Category II and IIA FSP 81.3 Separation of Client Assets 181.4 Roles and responsibilities of various parties 191.5 Need for Relevant Contracts 27Self-Assessment Questions 29Self-Assessment Answers 31

CHAPTER 2:ROLE OF THE INDEPENDENT NOMINEE 332.1 Purpose of Independent Nominee 342.2 Duties of Independent Nominee 38Self-Assessment Questions 41Self-Assessment Answers 42

CHAPTER 3:MANAGE AND OVERSEE CLIENT MANDATES 453.1 Use of client mandates 463.2 Client mandates 46Self-Assessment Questions 50Self-Assessment Answers 52

CHAPTER 4:DISCLOSURES 554.1 Minimum disclosures 56Self-Assessment Questions 65Self-Assessment Answers 68

CHAPTER 5:CONFLICTS OF INTEREST 715.1 Conflicts of Interest 72Self-Assessment Questions 80Self-Assessment Answers 83


CHAPTER 6:MANAGE AND OVERSEE TYPICAL DAILY TRANSACTIONS 856.1 Different product turnaround times 86Self-Assessment Questions 90Self-Assessment Answers 92

CHAPTER 7:LEGAL ENVIRONMENT 957.1 Financial soundness 967.2 Fidelity cover 977.3 Netting of transactions 997.4 Conducting business with other authorised FSP’s 1007.6 Continual compliance 1017.7 Civil remedies available to the Registrar 101Self-Assessment Questions 104Self-Assessment Answers 106

CHAPTER 8:RECORD-KEEPING 1098.1 Requirements for record-keeping 110Self-Assessment Answers 117Self-Assessment Questions 120

CHAPTER 9:CLIENT REPORTING 1239.1 Requirements relating to client reporting 124Self-Assessment Questions 126Self-Assessment Answers 128

CHAPTER 10:PROHIBITIONS IN TERMS OF DISCRETIONARY CODE OF CONDUCT 12910.1 Personal account trading 13010.2 Prohibitions in terms of the Discretionary Code 134Self-Assessment Questions 125Self-Assessment Answers 138


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.


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.


Chapter

1Category II and IIA Business Model

This chapter covers the following criteria:

KNOWLEDGE CRITERIADescribe 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 CRITERIATake 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.


1.1 INTRODUCTION

When considering the nature of a Category II or IIA Financial Services Provider (“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 category of such services”

Further references to categories of financial services can be found throughout FAIS. 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 “category of financial services which the applicant could appropriately render or wishes to render”, and “the category 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 FAIS distinguishes 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 of Conduct.

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 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,

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.

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.

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;

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 –

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

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; orii. 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

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;

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 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 safe-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 bank account. 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

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 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 a management company 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 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.

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

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.

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


http://en.wikipedia.org/wiki/Securities

http://en.wikipedia.org/wiki/Financial_statement_analysis

http://en.wikipedia.org/wiki/Collective_investment

http://en.wikipedia.org/wiki/Exchange-traded_fund

http://en.wikipedia.org/wiki/Exchange-traded_fund

http://en.wikipedia.org/wiki/Mutual_funds

http://en.wikipedia.org/wiki/Collective_investment_scheme

http://en.wikipedia.org/wiki/Real_estate

http://en.wikipedia.org/wiki/Asset

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

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


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

http://en.wikipedia.org/wiki/Financial_services

http://en.wikipedia.org/wiki/1000000000000_(number)

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.

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 as a regular feature 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.

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.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.


Self-Assessment Questions

1. Section 1 of FAIS defines financial services as:a) rendering intermediary servicesb) providing advicec) rendering intermediary services and providing adviced) rendering intermediary services or providing advice OR

rendering intermediary services and providing advice

2. A discretionary FSP renders:a) intermediary servicesb) advicec) advice and intermediary servicesd) 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 productb) an act, the result of which is that the client offers to enter

into any transaction in respect of a financial productc) an act, the result of which is that the client enters into any

transaction in respect of a financial productd) all of the above

4. A Discretionary FSP is defined as:a) an FSP that renders intermediary servicesb) an FSP that renders intermediary services of a discretionary

naturec) 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), 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

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

made by the Hedge Fund FSPc) 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 clientsb) contracts with other FSPsc) contracts with third party service providersd) all of the above

8. A short position means:a) selling an asset that one does not ownb) buying an asset with the intention of re-selling itc) selling an asset that has been held for a short period of timed) 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 proceduresb) disclose all conflicts of interestc) maintain adequate financial resources to meet commitmentsd) all of the above

10. A CISCA deed means:a) an agreement between two partiesb) an agreement in terms whereof a collective investment

scheme is establishedc) an agreement to transfer immovable propertyd) an agreement in terms whereof a trust is established

Self-Assessment Answers


1. Section 1 of FAIS defines financial services as:a) rendering intermediary servicesb) providing advicec) rendering intermediary services and providing adviced) rendering intermediary services or providing advice

OR rendering intermediary services and providing advice

2. A discretionary FSP renders:a) intermediary servicesb) advicec) advice and intermediary servicesd) 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 productb) an act, the result of which is that the client offers to enter

into any transaction in respect of a financial productc) an act, the result of which is that the client enters into any

transaction in respect of a financial productd) all of the above

4. A Discretionary FSP is defined as:a) an FSP that renders intermediary servicesb) an FSP that renders intermediary services of a discretionary

naturec) 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), 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

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

made by the Hedge Fund FSPc) 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 clientsb) contracts with other FSPsc) contracts with third party service providersd) all of the above

8. A short position means:a) selling an asset that one does not ownb) buying an asset with the intention of re-selling itc) selling an asset that has been held for a short period of timed) 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 proceduresb) disclose all conflicts of interestc) maintain adequate financial resources to meet commitmentsd) all of the above

10. A CISCA deed means:a) an agreement between two partiesb) an agreement in terms whereof a collective

investment scheme is establishedc) an agreement to transfer immovable propertyd) an agreement in terms whereof a trust is established


Chapter

2The role of the independent nominee


KNOWLEDGE CRITERIADescribe 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 CRITERIAVerify 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.


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 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 –

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

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

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. the nominee 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 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.



1. The following Registrars published the Board Notice 63 of 2007. Select the incorrect answer:a) Registrar of Financial Services Providersb) Registrar of Long-term Insurersc) Registrar of Collective Investment Schemesd) 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 assetsc) 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 who holds assets on behalf of a Long-term or Short-term Insurer or Pension Funds

3. A prescribed condition for independent nominees is:a) they may not have natural persons as shareholdersb) they may not dispose of shares without the prior written

approval of the Registrarc) 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 nomineeb) has the culture and operational ability to own an independent

nomineec) has evidence of documented internal control ensuring that

the Independent Nominee is effectively rund) has an independent bank account for institutional investors


5. An approved independent nominee must annually submit to the Registrar:a) audited financial statementsb) 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 setting out whether any assets were held on behalf of other person(s) in safe custody

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 ownersb) hold investments on behalf of beneficial ownersc) hold investments in the names of the beneficial owners on

behalf of those beneficial ownersd) 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 companyb) provide a surety for its holding company or any of its

subsidiary companiesc) not incur any expenses or liabilitiesd) 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 benefitb) not have natural persons as shareholdersc) at any time dispose of shares to members of the publicd) be listed on the JSE


1. The following Registrars published the Board Notice 63 of 2007. Select the incorrect answer:a) Registrar of Financial Services Providersb) Registrar of Long-term Insurersc) Registrar of Collective Investment Schemesd) 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 assetsc) 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 who holds assets on behalf of a Long-term or Short-term Insurer or Pension Funds

3. A prescribed condition for independent nominees is:a) they may not have natural persons as shareholdersb) 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 nomineeb) has the culture and operational ability to own an independent

nomineec) has evidence of documented internal control ensuring that

the Independent Nominee is effectively rund) has an independent bank account for institutional

investors

5. An approved independent nominee must annually submit to the Registrar:a) audited financial statementsb) 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 setting out whether any assets were held on behalf of other person(s) in safe custody

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 ownersb) hold investments on behalf of beneficial ownersc) hold investments in the names of the beneficial owners on

behalf of those beneficial ownersd) 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 companyb) provide a surety for its holding company or any of its

subsidiary companies


c) not incur any expenses or liabilitiesd) 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

capitalb) 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 benefitb) not have natural persons as shareholdersc) at any time dispose of shares to members of the publicd) be listed on the JSE


Chapter

3Manage and oversee client mandates


KNOWLEDGE CRITERIAExplain 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 CRITERIAManage client’s mandates in accordance with mandatory requirements.


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. After approval 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.


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 investing in local and foreign financial products, with particular reference to any currency risk;

iv. Stipulate in whose name the financial product(s) are to be registered and whether they are, for example, to be registered in the name of:

a) the client or a nominee company nominated by the client;

b) the nominee company of the Discretionary FSP or a nominee within the group of companies of which the Discretionary FSP forms a part;

c) the nominee company of the product supplier (as defined in section 1 of FAIS);

d) a nominee company of any depositary institution or central securities depositary registered or licensed in terms of the Custody and Administration of Securities Act of 1992 (Act No. 85 of 1992), or of any bank registered or licensed in terms of the Banks Act, 1990 (Act No. 94 of 1990); or

e) a Category III FSP’s (Administrative FSP) independent nominee, in the case of an FSP who deals through a Category III FSP.

v. Stipulate the bank account details of the trust account opened at a bank or other bank account opened in the name of the client in which the Discretionary FSP must deposit and, where applicable, from where the Discretionary FSP must withdraw monies received in connection with the rendering of financial services;


vi. Stipulate, where applicable, at which intervals any cash accruals (including dividends and interest) which the Discretionary FSP receives on behalf of a client, must be paid to the client;

vii. Stipulate the basis on which, the manner in which and the intervals at which the client will remunerate the Discretionary FSP for the rendering of intermediary services on the client’s behalf: Provided that for the purposes of this paragraph it shall be deemed that the basis of the remuneration has not been stipulated if the remuneration must be calculated with reference to a source outside the mandate or if it is placed within the discretion of any person;

viii. State whether any person receives commission, incentives, fee reductions or rebates from a Category III FSP or product supplier for placing a client’s funds with them;

ix. If the Discretionary FSP is capable of doing so, provide a client with the option to receive reports and statements in electronic or printed format;

x. Empower either party to the mandate to terminate the mandate after notice in writing of not more than 60 calendar days;

xi. Stipulate whether the Discretionary FSP may vote on behalf of its clients in respect of their financial products;

xii. Obtain and transmit to a client any information which a relevant product supplier must disclose in terms of any law, unless the client specifically requested the Discretionary FSP not to provide such information, in writing;

Where applicable, obtain a statement to the effect that the Discretionary FSP may, in order to render an intermediary service to the client, utilise the services of its own staff or that of another approved FSP.

Upon termination by the client of the mandate with the Discretionary FSP, the Discretionary FSP must immediately return to the client all cash, financial products and documents of title. Where the funds and/or financial products are held by an independent nominee, then the Discretionary FSP must immediately instruct the nominee to return such financial products or documents to the client. The Discretionary FSP must also provide the client with a detailed statement of account


3.2.2 Additional Mandate (Applicable to Hedge Fund FSP’s only)

As stated above, the Hedge Fund FSP is required to obtain an additional mandate from the client. This written mandate must confirm the existence and contents of the first mandate and in particular the utilisation of a hedge fund portfolio for purposes of executing the intermediary services required by the client, and must contain express confirmation by the client that the client:

a) approves of—

i. the clients investment objectives, guidelines and trading philosophy of the Hedge Fund FSP, as disclosed and stated in the mandate;

ii. utilisation by the Hedge Fund FSP of the process to be implemented in the form of strategies or positions (including leverage and/or net short positions, borrowing limits and risk management principles to be applied to mitigate interest rate, liquidity, and credit and derivative risk), risk profile and risk management (for instance a sensitivity analysis), as disclosed and stated in the mandate; and

takes note of the Hedge Fund FSP's affirmation, as stated in the mandate, that the establishment of the relevant portfolio does not conflict with any law, and that the operation and management thereof continuously comply with any law that may be applicable thereto.

These mandates include a mandatory risk disclosure, the content of which is prescribed in BN571 of 2008.

Summary

In this chapter we considered the relevant legislation compelling the Discretionary and Hedge Fund FSP to obtain a mandate from the client, prior to rendering any intermediary services.

We noted that the client mandate has to be signed by the client and we noted the source legislation for that requirement.


We considered the criteria that the specimen mandate has to contain and the source legislation of these requirements.

We noted that the Hedge Fund mandate required an “additional mandate” in respect of prescribed criteria and further noted the source legislation for this requirement.


1. Prior to rendering intermediary services, the Category II or IIA FSP must obtain:a) a copy of the client’s identity documentb) a signed mandate from the clientc) proof that the client is insuredd) a mandate that has been approved by the Registrar that is

signed by the client

2. The Specimen Mandate signed by the client must specify whether:a) the mandate for the Discretionary FSP to act on behalf of the

client is a full mandate or a limited mandateb) whether the nominee earns any fees for holding investments

for clientsc) how many clients the nominee holds investment on behalf ofd) the maximum duration that the nominee will hold the

investments for the client

3. The specimen mandate must prior to use by the Discretionary FSP be approved by: a) The South African Revenue Servicesb) The Registrar for Collective Investment Schemesc) The Registrar for Financial Services Providers and

Representativesd) The Registrar for Long-term and Short-term Insurance

Companies

4. Discretionary FSP’s may:a) only take interest after the first dayb) only take interest after the second dayc) not take interest on monies deposited into its bank accountd) use interest to defray its expenses


5. Specimen Mandates approved by the Registrar must specify in whose name the financial product(s) is/are to be registered. Select the incorrect entity from the list below:a) The clientb) An independent nominee nominated by the clientc) The Long-term insurance company nominated by the clientd) An independent nominee nominated by the product supplier

6. Hedge Fund FSP’s must obtain an additional mandate from their clients in which the client:a) approves of the underlying asset managersb) approves of the stated investment objectives, guidelines and

trading philosophy of the Hedge Fund FSPc) approves of the investment products that the Hedge Fund

invests ind) approves of the foreign jurisdictions that the Hedge Fund FSP

invests in, if any



1. Prior to rendering intermediary services, the Category II or IIA FSP must obtain:a) a copy of the client’s identity documentb) a signed mandate from the clientc) proof that the client is insuredd) a mandate that has been approved by the Registrar

that is signed by the client

2. The Specimen Mandate signed by the client must specify whether:a) the mandate for the Discretionary FSP to act on behalf

of the client is a full mandate or a limited mandateb) whether the nominee earns any fees for holding investments

for clientsc) how many clients the nominee holds investment on behalf ofd) the maximum duration that the nominee will hold the

investments for the client

3. The specimen mandate must prior to use by the Discretionary FSP be approved by: a) The South African Revenue Servicesb) The Registrar for Collective Investment Schemesc) The Registrar for Financial Services Providers and

Representativesd) The Registrar for Long-term and Short-term Insurance

Companies

4. Discretionary FSP’s may:a) only take interest after the first dayb) only take interest after the second dayc) not take interest on monies deposited into its bank accountd) use interest to defray its expenses

5. Specimen Mandates approved by the Registrar must specify in whose name the financial product(s) is/are to be registered. Select the incorrect entity from the list below:a) The clientb) An independent nominee nominated by the client


c) The Long-term insurance company nominated by the clientd) An independent nominee nominated by the product supplier

6. Hedge Fund FSP’s must obtain an additional mandate from their clients in which the client:a) approves of the underlying asset managersb) approves of the stated investment objectives,

guidelines and trading philosophy of the Hedge Fund FSP

c) approves of the investment products that the Hedge Fund invests in

d) approves of the foreign jurisdictions that the Hedge Fund FSP invests in, if any



Chapter

4Disclosures


KNOWLEDGE CRITERIAExplain how to ensure transparency.

SKILLS CRITERIAConfirm that disclosures are adequate to enable the client to make an informed decision.


PurposeThis chapter covers the minimum disclosures required by FAIS and subordinate legislation thereto. This chapter deals with the minimum content, timing, manner and frequency of the disclosures that are required to be made by the Discretionary and/or Hedge Fund FSP’s.

4.1 MINIMUM DISCLOSURES

4.1.1 The importance of Disclosures

The intent behind these disclosures is to put the client in a position to be able to make an informed decision relating to a financial product. It also provides the client with valuable information that enables the client to communicate effectively with the product supplier, the FSP or representative. While recent conflicts of interest amendments require certain disclosures to be made, these disclosures are dealt with in the next chapter. The mandatory disclosures specified in the General Code of Conduct for FSP’s and representatives (“the General Code”) broadly touch on three key areas in the rendering of financial services to the client.

These key areas are:

The product supplier

The product provider

Information about financial services

4.1.2 Requirements Regarding the Disclosures and Impact on FSP’s

As stated above, the Registrar has, through the General Code, instituted several standard disclosures that provide the client with a measure of transparency. Some of these disclosures have been extremely successful whilst others have to a larger extent not provided the desired results. The basic principles that underpin these disclosures made by the FSP to the client are that it:


1. is factually correct;

2. is made in plain language so as to avoid uncertainty or confusion and not be misleading;

3. is adequate and appropriate in the circumstances of the particular financial service being rendered taking into account the client’s factually-established or reasonably-assumed level of knowledge;

4. is provided timeously so as to afford the client reasonably sufficient time to make a decision about the proposed transaction;

5. may, subject to further provisions, be made orally, and at the client’s request, be confirmed in writing within a reasonable time after the request;

6. must, where provided in writing or by means of standard forms or format, be in clear and readable print size, spacing and format;

7. must, as regards all amounts, sums, values, charges, fees, remuneration or monetary obligations payable to the product supplier or the FSP, be reflected in specific monetary terms: Provided that where such amount, sum, value, charge, fee, remuneration or monetary obligation is not reasonably pre-determinable, its basis of calculation must be adequately described; and

8. need not be duplicated or repeated to the same client unless material or significant changes affecting that client occurs, or the relevant financial service renders it necessary, in which case a disclosure of changes to the client must be made without delay;

In addition to the above principles, the General Code (Chapters III and IV) also contains specific disclosures pertaining to the product suppliers and the FSP. These disclosures are designed to provide the client relevant information relating, inter alia, to the identity, physical location and contact details of the compliance department and complaints departments of the product supplier and FSP. It further requires the FSP to disclose its contractual relationship with the product supplier(s), restrictions that the FSP may have in respect of any financial products, whether the FSP holds more than 10% of the Product Supplier’s shares, whether during the preceding 12 month period the FSP received more than 30% of its total remuneration from one product supplier. The FSP must also advise the client should any of the above information change. Additional information that the FSP must disclose about itself are the concise details of the contractual status of the FSP.


Applying these broad principles, the FSP has to disclose information about itself, the product supplier and the financial service being rendered.

4.1.3 Disclosures relating to the Product Supplier

A FSP, other than a direct marketer, must make the following disclosures about the product supplier:

a) The name, physical location, 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) Names and contact details of the relevant compliance and complaints departments of the product supplier;

d) 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; and

e) Where applicable, the fact that the provider –

i. directly or indirectly holds more than 10% of the relevant product supplier’s shares, or has any equivalent substantial financial interest in the product supplier;

ii. during the preceding 12-month period received more than 30% of total remuneration, including commission, from the product supplier;

The FSP must convey any changes thereafter regarding such information at the earliest opportunity.

4.1.4 Disclosures relating to the FSP

An FSP who is not a direct marketer and who renders financial services to a client must at the earliest reasonable opportunity disclose to that client the full particulars of the following:

a) Full business and trade names, registration number (if any), postal and physical addresses, telephone and, where applicable, cellular phone


number, and internet and e-mail addresses, in respect of the relevant business carried on, as well as the names and contact details of appropriate contact persons or offices;

b) Concise details of the legal and contractual status of the provider, including details as regards the relevant product supplier (or, in the case of a representative, as regards the relevant provider and product supplier), to be provided in a manner which can reasonably be expected to make it clear to the client which entity accepts responsibility for the actions of the FSP or representative in the rendering of the financial service involved and the extent to which the client will have to accept such responsibility;

c) Names and contact details of the relevant compliance department or, in the case of a representative, such detail concerning the FSP to which the representative is contracted;

d) Details of the financial services which the FSP is authorised to provide in terms of the relevant licence and of any conditions or restrictions applicable thereto;

e) Whether the FSP holds guarantee or professional indemnity or fidelity insurance cover or not;

f) Whether a representative of a provider is rendering services under supervision as defined in the Determination of Fit and Proper Requirements; and

g) The existence of a specific exemption that the Registrar may have granted to the FSP with regard to any matter covered by FAIS.

Where these disclosures are made verbally to the client, they must be confirmed in writing within 30 days. Once again we encounter rules intended to create a measure of transparency so that the client is made aware of the FSP with whom s/he/it is contracting. The client can therefore make an informed decision prior to entering into a contract with the FSP.

4.1.5 Disclosure requirements relating to the Financial Service being rendered

The General Code requires the FSP to disclose an “appropriate general explanation of the nature and material terms of the relevant contract or


transaction” in order to enable the client to make an informed decision. The General Code further requires the FSP, whenever reasonable and appropriate, to provide the client with material illustrations, projections or forecasts in the FSP’s possession.

Specific disclosures to be made at earliest reasonable opportunity are:

ii. name, class or type of financial product concerned;

iii. nature and extent of benefits to be provided, including details of the manner in which such benefits are derived or calculated and the manner in which they will accrue or be paid;

iv. where the financial product is marketed or positioned as an investment or as having an investment component –

a) concise details of the manner in which the value of the investment is determined, including concise details of any underlying assets or other financial instruments;

b) separate disclosure (and not mere disclosure of an all inclusive fee or charge) or any charges and fees to be levied against the product, including –

A. the amount and frequency thereof;

B. the identity of the recipient;

C. the services or other purpose for which each fee or charge is levied;

D. where any charges or fees are to be levied in respect of investment performance, details of the frequency, performance measurement period (including any part of the period prior to the client’s particular investment) and performance benchmarks or other criteria applicable to such charges or fees; and

E. where the specific structure of the product entails other underlying financial products, disclosure must be made in such a manner as to enable the client to determine the net investment amount ultimately invested for the benefit of the client; and


c) on request, information concerning the past investment performance of the product over periods and at intervals which are reasonable with regard to the type of product involved including a warning that past performances are not necessarily indicative of future performances;

d) any rebate arrangements and thereafter on a regular basis (but not less frequently than annually): Provided that where the rebate arrangement is initially disclosed in percentage terms, an example using actual monetary amounts must be given and disclosure in specific monetary terms must be made at the earliest reasonable opportunity thereafter: Provided further that for the purposes of this subparagraph, “rebate” means a discount on the administration, management or any other fee that is passed through to the client, whether by reduced fees, the purchase of additional investments or direct payment, and that the term “rebate” must be used in the disclosure concerned, to describe any arrangement complying with this definition, and disclosure must include an explanation of the arrangement in line with this definition.

e) any platform fee arrangements, which may be disclosed by informing the client that a platform fee of up to a stated percentage may be paid by the product supplier to the administrative FSP concerned, rather than disclosing the actual monetary amount: Provided that for the purposes of this subparagraph “platform fee” means a payment by a product supplier to an administrative FSP for the administration and/or distribution and/or marketing cost savings represented by the distribution opportunity presented by the administrative platform, and may be structured as a stipulated monetary amount or a volume-based percentage of assets held on the platform, and that the term “platform fee” must be used in the disclosure concerned, to describe any arrangement complying with this definition, and the disclosure must include an explanation of the arrangement in line with this definition.

v. the nature and extent of monetary obligations assumed by the client, directly or indirectly, in favour of the product supplier, including the manner of payment or discharge thereof, the frequency thereof, the consequences of non-compliance and, subject to


paragraph (xiv), any anticipated or contractual escalations, increases or additions;

vi. the nature and extent of monetary obligations assumed by the client, directly or indirectly, in favour of the FSP, including the manner of payment or discharge thereof, the frequency thereof, and consequences of non-compliance;

vii. the nature, extent and frequency of any incentive, remuneration, consideration, commission, fee or brokerages (“valuable consideration”), which will become payable to the FSP, directly or indirectly, by any product supplier or any person other than the client, or for which the FSP may become eligible, as a result of rendering the financial service, as well as the identity of the product supplier or other person providing or offering the valuable consideration: Provided that where the maximum amount or rate of such valuable consideration is prescribed by any law the FSP may (subject to clause 3(1)(a)(vii) of the General Code) elect to disclose either the actual amount applicable or such prescribed maximum amount or rate;

viii. concise details of any special terms or conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided;

ix. any guaranteed minimum benefits or other guarantees;

x. to what extent the product is readily realisable or the funds concerned are accessible;

xi. any restrictions on or the penalties for early termination of or withdrawal from the product, or other effects, if any, of such termination or withdrawal;

xii. material tax considerations;

xiii. whether cooling off rights are offered and, if so, procedures for the exercise of such rights;


xiv. any material investment or other risks associated with the product, including any risk of loss of any capital amount(s) invested due to market fluctuations; and

xv. in the case of an insurance product in respect of which provision is made for increase of premiums, the amount of the increase premium for the first five years and thereafter on a five-year basis but not exceeding twenty years;

The FSP must also fully inform the client regarding the completion or submission of any transaction requirement –

i. that all material facts must be accurately and properly disclosed, and that the accuracy and completeness of all answers, statements or other information provided by or on behalf of the client, are the client’s own responsibility;

ii. that if the FSP completes or submits any transaction requirement on behalf of the client, the client should be satisfied as to the accuracy and completeness of the details;

iii. of the possible consequences of the misrepresentation or non-disclosure of a material fact or the inclusion of incorrect information; and

iv. that the client must on request be supplied with a copy, written or printed record of any transaction requirement within a reasonable time.

The FSP must at the request of the client provide the client with a statement of account in respect of the financial services rendered by the FSP to the client. Where an FSP advises the client or is rendering ongoing financial services to the client, that FSP must on a regular basis (but not less frequently than annually) provide the client with a written statement identifying such products where they are still in existence, and providing brief current details (where applicable), of –

a) any ongoing monetary obligations of the client in respect of such products;

b) the main benefits provided by the products;


c) where any product was marketed or positioned as an investment or as having an investment component, the value of the investment and the amount of such value which is accessible to the client; and

d) any ongoing incentives, consideration, commission, fee or brokerage payable to the provider in respect of such products;

Provided that such a statement need not be provided where the client is aware, or ought reasonably to be aware, that the FSP concerned does not render or has ceased rendering ongoing financial services in respect of the client or the products concerned.

You will note that the criteria of this disclosure are geared towards transparency to enable the client to make as informed a decision as possible. Prior to the promulgation of FAIS few clients understood the nature of the financial product they were purchasing.

Summary

In this chapter we looked at the minimum disclosures that must be made by the Discretionary and Hedge Fund FSP in terms of the General Code and the Discretionary Code.

These disclosures may be made verbally but must then be followed up with confirmatory correspondence within 30 days.

The principles underpinning these disclosures are that the client can make informed decisions, can communicate with the product supplier, the FSP and also know what intermediary services are being contracted for.


1. In terms of the General Code an FSP is compelled to make disclosure to the client on: a) the product supplierb) the product providerc) the financial services to be providedd) all of the above


2. The General Code stipulates underlying principles that must be embodied in the disclosures made by the FSP. One of these principles is that:a) it must (regarding all amounts, sums, values, charges, fees,

remuneration or monetary obligations payable to the product supplier or the FSP) be reflected in specific monetary terms: provided that where such amount, sum, value, charge fee, remuneration or monetary obligation is not reasonably pre-determinable, its basis of calculation must be adequately described

b) it must be provided timeously, but at least 30 days prior to the inception of the investment, so as to afford the client a reasonable opportunity to make informed decisions

c) it must be adequate and appropriate in relation to the particular financial product being provided

d) none of the above

3. The General Code requires the FSP to disclose whether:a) the product supplier holds more than 5% of the FSPs sharesb) the product supplier holds more than 10% of the FSPs sharesc) the product supplier holds more than 15% of the FSPs sharesd) the product supplier holds more than 30% of the FSPs shares

4. The product supplier must disclose the following to the client at the earliest possible opportunity:a) the name, physical location, postal and telephone contact

details of the product supplierb) the contractual relationship with the FSPc) names and contact details of relevant compliance and

complaints departments of the product supplierd) none of the above

5. The FSP must disclose to the client the fact that it received more than:a) 30% from the product supplierb) 25% from the product supplierc) 20% from the product supplierd) None of the above

6. The representative of an FSP must, at the earliest reasonable opportunity, disclose to the client whether the FSP has:a) professional indemnity insurance coverb) guaranteesc) fidelity insurance coverd) none of the above


7. The FSP may make the required disclosures orally, provided that it confirms these disclosures in writing within:a) 15 daysb) 25 daysc) 30 daysd) 45 days

8. Specific disclosures that the FSP must make at the earliest reasonable opportunity are:a) the name, class or type of financial product concernedb) the nature and extent of the monetary obligations assumed

by the client, directly or indirectly, in favour of the product supplier (including the manner of payment or discharge thereof, the frequency thereof, the consequences of non-compliance and any anticipated or contractual escalations, increases or additions)

c) the nature and extent of the monetary obligations assumed by the client, directly or indirectly, in favour of the FSP (including the manner of payment or discharge thereof, the frequency thereof and the consequences of non-compliance)

d) all of the above

9. The FSP is required to separately disclose any charges and fees levied against the product, including:a) the recipient thereofb) the currency in which it will be leviedc) how the fees will be leviedd) all of the above

10. The FSP must, where it provides the client with ongoing financial services, provide the client with a written statement identifying the financial products and such other details as required by the General Code:a) at least quarterlyb) at least half-yearlyc) at least annuallyd) none of the above



1. In terms of the General Code an FSP is compelled to make disclosure to the client on: a) the product supplierb) the product providerc) the financial services to be providedd) all of the above

2. The General Code stipulates underlying principles that must be embodied in the disclosures made by the FSP. One of these principles is that:a) it must (regarding all amounts, sums, values, charges,

fees, remuneration or monetary obligations payable to the product supplier or the FSP) be reflected in specific monetary terms: provided that where such amount, sum, value, charge fee, remuneration or monetary obligation is not reasonably pre-determinable, its basis of calculation must be adequately described

b) it must be provided timeously, but at least 30 days prior to the inception of the investment, so as to afford the client a reasonable opportunity to make informed decisions

c) it must be adequate and appropriate in relation to the particular financial product being provided


3. The General Code requires the FSP to disclose whether:a) the product supplier holds more than 5% of the FSPs sharesb) the product supplier holds more than 10% of the FSPs

sharesc) the product supplier holds more than 15% of the FSPs sharesd) the product supplier holds more than 30% of the FSPs shares

4. The product supplier must disclose the following to the client at the earliest possible opportunity:a) the name, physical location, postal and telephone contact

details of the product supplierb) the contractual relationship with the FSP


c) names and contact details of relevant compliance and complaints departments of the product supplier

d) none of the above5. The FSP must disclose to the client the fact that it received more

than:a) 30% from the product supplierb) 25% from the product supplierc) 20% from the product supplierd) None of the above

6. The representative of an FSP must, at the earliest reasonable opportunity, disclose to the client whether the FSP has:a) professional indemnity insurance coverb) guaranteesc) fidelity insurance coverd) none of the above

7. The FSP may make the required disclosures orally, provided that it confirms these disclosures in writing within:a) 15 daysb) 25 daysc) 30 daysd) 45 days

8. Specific disclosures that the FSP must make at the earliest reasonable opportunity are:a) the name, class or type of financial product concernedb) the nature and extent of the monetary obligations assumed

by the client, directly or indirectly, in favour of the product supplier (including the manner of payment or discharge thereof, the frequency thereof, the consequences of non-compliance and any anticipated or contractual escalations, increases or additions)

c) the nature and extent of the monetary obligations assumed by the client, directly or indirectly, in favour of the FSP (including the manner of payment or discharge thereof, the frequency thereof and the consequences of non-compliance)

d) all of the above

9. The FSP is required to separately disclose any charges and fees levied against the product, including:a) the recipient thereofb) the currency in which it will be leviedc) how the fees will be levied


d) all of the above10. The FSP must, where it provides the client with ongoing financial

services, provide the client with a written statement identifying the financial products and such other details as required by the General Code:a) at least quarterlyb) at least half-yearlyc) at least annuallyd) none of the above


Chapter

5Conflict of interest


KNOWLEDGE CRITERIAExplain how to manage conflicts of interest.

SKILLS CRITERIAConfirm that adequate avoidance, mitigation and disclosures are made in order for the client to make an informed decision.


Purpose

FSP’s interact with various parties on a daily basis. These parties include the relevant parties described in Chapter 1 above. In an attempt to ensure that the client’s best interests are always advanced, above that of the FSP and/or Product Supplier, the Registrar has now published an amendment to the General Code, placing the responsibility on the FSP to avoid, and where avoidance is not possible, mitigate, and where mitigation is not possible, disclose any interest that conflicts with the client’s interests and that potentially detracts from the FSP or representative providing the best and impartial advice.

5.1 CONFLICTS OF INTEREST

5.1.1 Conflicts of Interest

The Registrar recently published amendments to the General Code in Board Notice 58 of 2010 (“BN58”) introducing stricter regulation in respect of conflicts of interest. Whilst these amendments have received considerable attention from the financial services industry, conflicts of interest is not a new concept.

In 2001 The Financial Institutions (Protection of Funds) Act (Act 28 of 2001) was promulgated and prescribes that where individuals who are employed with financial institutions deal or hold financial institution’s or trust property, then they act in a fiduciary capacity in relation to those assets. In essence the Financial Institutions Act requires those individuals to declare their personal interests and to ensure that they do not directly or indirectly benefit at the expense of the other financial institution or principal.

Similarly, in the retirement fund environment, Pension Fund Circular 130 incorporated many of these principles. PF 130 was not, however, couched in peremptory (obligatory) language and merely made recommendations relating to good governance, the disclosure and avoidance of conflicts of interest. PF 130 has now been repealed and its principles have been incorporated into a Pension Fund Directive compelling retirement fund trustees to disclose and avoid, where possible, any conflicts of interest.

BN58 further advances these conflicts of interest principles. The difference between the amendments to the General Code brought about by BN58 and the Financial Institutions (Protection of Funds) Act is that the latter Act laid down


general principles to which the affected individuals were compelled to comply. This type of regulation is commonly referred to as “principles-based” regulation. Contrary to principled-based regulation, the General Code (introduced by BN58) now contains specific rules that affected individuals must comply with.

A conflict of interest is now defined in the General Code as any situation in which an FSP or a representative has an actual or potential interest that may, in the rendering of a financial service to a client –

a) influence the objective performance of his, her or its obligations to that client, or

b) prevent a provider or representative from rendering an unbiased and fair financial service to that client, or from acting in the interest of that client,

c) including but not limited to –

i. a financial interest;

ii. an ownership interest;

iii. any relationship with a third party.

The recent conflict of interest amendments have a wide range of implications for FSP’s and representatives. The core conflict of interest principles introduced into the General Code compels the FSP to by 19 July 2010:

1. avoid any possible conflicts of interests;

2. where it is not possible to avoid the conflicts of interest, mitigate the negative effects of the conflict of interest on the client;

3. at the earliest possible opportunity, disclose any conflicts of interest to the client, including –

i. the measures taken by the FSP in accordance with the FSP’s Conflicts of Interest Management Policy to avoid or mitigate the conflict;


ii. any ownership interest or financial interest, other than an immaterial financial interest, that the FSP or representative may be or become eligible for;

iii. the nature of the relationship or arrangement with a third party that gives rise to a conflict of interest, in sufficient detail to a client to enable that client to understand the exact nature of the relationship or arrangement and the conflict of interest;

4. inform the client of the conflict of interest management policy and how it may be accessed.

With effect from 19 October 2010 FSP’s and representatives may only receive or offer from or to a third party the following:

1. Commission in terms of the Long-term Insurance Act (Act 58 of 1998) or the Short-term Insurance Act of 1998 (Act 53 of 1998);

2. Commission in terms of the Medical Schemes Act (Act 53 of 1998);

3. Fees in terms of the Long-term Insurance Act, Short-term Insurance Act or the Medical Schemes Act, provided that those fees are reasonably commensurate to the service being rendered;

4. Fees for rendering financial services in respect of which commission or fees referred to in 1, 2 and 3 above are not paid and:

a) are specifically agreed to by the client in writing; andb) may be stopped at the discretion of that client;

5. Fees or remuneration for the rendering of a service to a third party, which are reasonably commensurate to the service being rendered;

6. Subject to any other law, an immaterial financial interest; and

7. A financial interest, not referred to under 1 to 6 above, for which a consideration, fair value or remuneration that is reasonably commensurate to the value of the financial interest, is paid by that FSP or representative, i.e. paying or receiving a market-related price for the financial interest received or provided.

Where the FSP is also the product supplier of the financial product, the points 1 to 7 do not apply to that FSP. In this instance the amendment states that, with


effect from 19 April 2011, an FSP may not offer a financial interest to a representative of that FSP for –

1. giving preference to the quantity of business secured by a representative for that FSP, to the exclusion of the quality of service rendered to clients;

2. giving preference to a specific product supplier, where a representative may recommend more than one product supplier to a client; or

3. giving preference to a specific product supplier, where a representative may recommend more than one product of that product supplier to a client.

In essence, the FSP’s who are also product suppliers, have twelve (12) months in which to amend their remuneration systems and benefits in respect of their representatives. This is does not mean that a FSP who is also a product provider is totally untouched by the amendment for the next twelve months. It still has to ensure, when dealing with third parties, such as independent FSP’s, that it complies with the other provisions of the amendment.

Considering that these provisions in isolation create the impression that a FSP can easily comply with it. When considering the definitions relevant to this provision, a totally different scenario becomes evident. The FSP and representative will experience a substantial amount of difficulty in complying with these new requirements. It is therefore necessary to consider some of the relevant definitions that are key to unlocking the true implications of these amendments.

Section 1 of the General Code defines the following:

“Associate”

a) in relation to a natural person means –

i. a person who is recognised in law or the tents of religion as a spouse, life partner or civil union partner of that person;

ii. a child of that person, including a stepchild, adopted child and a child born out of wedlock;

iii. a parent or stepparent of that person;


iv. a person in respect of which that person is recognised in law or appointed by a court as the person legally responsible for managing the affairs of or meeting the daily care needs of the first mentioned person;

v. a person who is the spouse, life partner or civil union partner of a person referred to in subparagraphs (ii) to (iv);

vi. a person who is in a commercial partnership with that person;

b) in relation to a juristic person:

i. which is a company, means any subsidiary or holding company of that company, or other subsidiary of that holding company and any other company of which that holding company is a subsidiary;

ii. which is a close corporation registered under the Close Corporations Act of 1984 (Act 69 of 1984), means any member thereof as defined in Section 1;

iii. which is not a company or a close corporation as referred to in (b)(i) or (ii), means another juristic person which would have been a subsidiary or holding company of the first mentioned juristic person –

a) had such first-mentioned juristic person been a company; or

b) in the case where that other juristic person, too, is not a company, had both the first-mentioned juristic person and that other juristic person be a company;

iv. means any person in accordance with whose directions or instructions the board of directors of or, in the case where such juristic person is not a company, the governing body of such juristic person is accustomed to act;

c) in relation to any person –

i. means any juristic person of which the board of directors or, in the case where such juristic person is not a company, of which the governing body is accustomed to act in accordance with the directions or instructions of the person first-mentioned in this paragraph;


ii. includes any trust controlled or administered by that person.

Section 3(A)(3) of the General Code prohibits a FSP or a representative from circumventing the conflict of interest provisions through the use of an associate. You will note from the above definition that “associate” is intended to be a “catch all” definition attempting to cover all types of legal entities and all permutations of relationships.

“Financial interest” means any cash, cash equivalent, voucher, gift, service, advantage, benefit, discount, domestic or foreign travel, hospitality, accommodation, sponsorship, other incentive or valuable consideration, other than –

a) an ownership interest;

b) training, that is not exclusively available to a selected group of providers or representatives, on –

c)i. products and legal matters relating to those products;

ii. general financial and industry information;

iii. specialised technological systems of a third party necessary for the rendering of financial service; but excluding travel and accommodation associated with that training;”

Once again the Registrar’s intention to create a “catch all” situation is evident in this definition. In essence, the receipt or offer by a FSP or representative to a third party of the above financial interests is prohibited unless it falls within the categories listed in (i), (ii) and (iii) above, i.e. product-related training, general financial information, etc.

“immaterial financial interest” means any financial interest with a determinable monetary value, the aggregate of which does not exceed R1 000 in any calendar year from the same third party in that calendar year received by –

a) an FSP who is a sole proprietor;

b) a representative for that representative’s direct benefit;


c) a FSP, who for its benefit or that of some or all of its representatives, aggregates the immaterial financial interest paid to its representatives.”

In essence, an FSP (who is a sole proprietor) and a representative (for his/her own benefit) may only in one calendar year receive an immaterial financial interest from a third party. An immaterial financial interest’s value is limited to R1 000. A FSP (whether or not a sole proprietor) may elect to aggregate the immaterial financial interests paid in one year to its representatives by a third party but then the total value (being all the amounts added together) may not exceed R1 000. The latter rule means that a FSP who employs twenty (20) representatives may receive R1 000 instead of R20 000 in one calendar year from a third party.

“Third party” means –

a) a product supplier;

b) another FSP;

c) an associate of a product supplier or a provider;

d) a distribution channel;

e) any person who in terms of an agreement or arrangement with a person referred to in (a) to (d) provides a financial interest to a provider or its representatives.”

The amendments promulgated by BN58 create an unequivocal and intricate set of rules that FSP’s and representatives are compelled to comply with. Unfortunately they also bring with them a host of unintended consequences that will, in time, be tested against the Registrar’s intent.

Finally, on this score, the amendments require that an FSP must, by no later than 19 April 2011 adopt, maintain and implement a Conflicts of Interest Management Policy (“Policy”). This Policy must contain the following:

i. Provide for the management of conflicts of interest, and provide:

a) mechanisms for the identification of conflicts of interest;


b) measures for the avoidance of conflicts of interest, and where avoidance is not possible, the reasons therefore and the measures for the mitigation of such conflicts of interest;

c) measures for the disclosure of conflicts of interest;

d) processes, procedures and internal controls to facilitate compliance with the policy; and

e) consequences of non-compliance with the policy by the FSP’s employees and representatives; and

ii. Specify the type of and basis on which representative will qualify for a financial interest that the FSP will offer a representative and motivate how that financial interest complies with section 3A(1)(b) of BN58;

iii. Include a list of all the FSP’s associates;

iv. Include the names of any third parties in which the FSP holds an ownership interest;

v. Include the names of any third parties that holds an ownership interest in the FSP; and

vi. Include the nature and extent of the ownership interest referred to in (iv) and (v) above.

The Policy must be adopted by the FSP who is sole proprietor, the Board of Directors of an FSP where the FSP is a company or close corporation, and, where not an incorporated entity, the governing body of the FSP (e.g. a trust).

The FSP must ensure that all employees, representatives and associates are made aware of the contents of the Conflicts of Interest Policy. Compliance with the Policy must be included in the compliance monitoring process. The Policy must be reviewed on an annual basis. The compliance officer is also compelled to include it in his/her/its Compliance Report that must include the following:

1) implementation of the Policy;

2) monitoring and compliance with the Policy; and

3) accessibility to the Policy.


Students are urged to read the entire Board Notice to gain a comprehensive understanding of these requirements.

Summary

The purpose of the Conflicts of Interests amendments to the General Code is to prevent the FSP or representative from putting client’s interests second to their own.

A perception exists that the Conflicts of Interests was only introduced with these recent amendments. This perception is incorrect. The General Code has had Conflict of Interest provisions for quite some time. These provisions have now been amended to provide wider application and more harsh penalties.


1. The principles relating to conflicts of interest were first introduced into the General Code:a) through BN58b) with the promulgation of the General Codec) with the promulgation of FAISd) none of the above

2. BN58, in relation to conflicts of interest, introduced: a) more rules based regulationb) more principles based regulationc) a combination of the twod) none of the above

3. A conflict of interest includes in its definition any situation in which a FSP or representative has an actual or potential conflict of interest that: a) influences the objective performance of the product supplierb) influences the objective performance of the underlying

investmentsc) influences the objective performance of the FSP or

representative


d) influences the objective performance of the Registrar

4. The provisions of BN58 become effective on: a) 19 April 2010b) 19 July 2010c) 19 October 2010d) 19 January 2011

5. In essence the new provisions relating to conflicts of interest require the FSP or representative to:a) avoidb) mitigatec) disclosed) all of the above

6. An FSP must, by 19 July, disclose all conflicts of interest:a) as soon as reasonably possibleb) within 30 days of inception of the policyc) at quotation staged) none of the above

7. An FSP must publish a conflicts of interest management policy for: a) all clientsb) members of the publicc) prospective clientsd) none of the above

8. An immaterial financial interest has a value of less than:a) R500b) R1000c) R10 000d) R30 000

9. A FSP may only give or receive:a) commission in terms of the Long-term and Short-term

Insurance Actb) immaterial financial interestc) fees in respect of Long-term and Short-term Insurance

policiesd) all of the above


10. FSPs, who are also product suppliers, have to comply with conflict of interest provisions by:a) 19 July 2010b) 19 October 2010c) 19 April 2011d) none of the above



1. The principles relating to conflicts of interest were first introduced into the General Code:a) through BN58b) with the promulgation of the General Codec) with the promulgation of FAISd) none of the above

2. BN58, in relation to conflicts of interest, introduced: a) more rules based regulationb) more principles based regulationc) a combination of the twod) none of the above

3. A conflict of interest includes in its definition any situation in which a FSP or representative has an actual or potential conflict of interest that: a) influences the objective performance of the product supplierb) influences the objective performance of the underlying

investmentsc) influences the objective performance of the FSP or

representatived) influences the objective performance of the Registrar

4. The provisions of BN58 become effective on: a) 19 April 2010b) 19 July 2010c) 19 October 2010d) 19 January 2011

5. In essence the new provisions relating to conflicts of interest require the FSP or representative to:a) avoidb) mitigatec) disclosed) all of the above


6. An FSP must, by 19 July, disclose all conflicts of interest:a) as soon as reasonably possibleb) within 30 days of inception of the policyc) at quotation staged) none of the above

7. An FSP must publish a conflicts of interest management policy for: a) all clientsb) members of the publicc) prospective clientsd) none of the above

8. An immaterial financial interest has a value of less than:a) R500b) R1 000c) R10 000d) R30 000

9. A FSP may only give or receive:a) commission in terms of the Long-term and Short-term

Insurance Actb) immaterial financial interestc) fees in respect of Long-term and Short-term Insurance

policiesd) all of the above

10. FSPs, who are also product suppliers, have to comply with conflict of interest provisions by:a) 19 July 2010b) 19 October 2010c) 19 April 2011d) none of the above


Chapter

6Manage and oversee typical daily transactions


KNOWLEDGE CRITERIAExplain how different products have different turnaround times and should be adhered to.Describe how there should be adequate controls in place to manage risk.

SKILLS CRITERIACheck that the systems and processes enable the implementation and execution of different turnaround times for different products.Check that the systems and processes have embedded controls to manage risk.


Purpose

This chapter focuses on the daily (business-as-usual) items as well as the risk management requirements that should be in place in order to mitigate these risks.

6.1 MANAGE AND OVERSEE TYPICAL DAILY TRANSACTIONS

6.1.1 Introduction

As Discretionary FSP’s invest their client’s money in various underlying securities, it is extremely important that these FSP’s understand the relevant product rules relating to each underlying investment. Various securities have different rules relating to whether they may be redeemed or how they may be taxed, i.e. either as income or dividends. In order to avoid prejudice to clients. Discretionary FSP’s and Hedge Fund FSP’s must not only understand the nature and rules of the underlying investments but also have systems, procedures and sufficient resources available to manage these investments and meet specific requirements on the underlying investments on a daily basis.

6.1.2 Risk Management

Section 11 of the General Code requires a FSP to at all times have and effectively employ the resources, procedures and appropriate technological systems that can be expected to eliminate as far as reasonably possible, the risk that clients, product suppliers and other FSP’s or representatives could suffer a financial loss through. These could be:

theft fraud other dishonest acts poor administration negligence professional misconduct culpable omissions


The General Code further requires an FSP, excluding a representative, to structure the internal control procedures concerned, as to provide reasonable assurance that –

a) the relevant business can be conducted in an orderly and efficient manner;

b) financial and other information used or provided by the FSP will be reliable; and

all applicable laws are complied with.

6.1.3 Oversee and manage the compliance function

Section 17 of FAIS compels an FSP who has more than one key individual or who has representatives, to appoint one or more compliance officers to monitor compliance with FAIS by the FSP and the representative(s), particularly in accordance with Subsection 17(3), and to take responsibility for the liaison with the Registrar.

The compliance officer may be a director, member, auditor, trustee, principal officer, public officer or company secretary of the FSP, or any other person with suitable qualifications and experience determined by the Minister by way of government notice.

Where the appointment of the compliance officer is terminated, the compliance officer must submit to the Registrar a statement of what the compliance officer believes to be the reasons for the termination of his/her/its appointment.

If the compliance officer would, but for the termination, have had reason to submit a written report of any irregularity or suspected irregularity in the conduct of affairs by the FSP, of which the compliance officer became aware in the execution of his duties, that compliance officer must submit that report to the Registrar even though his/her/its appointment has been terminated.

The compliance officer may only act in the capacity as compliance officer after approval for such appointment has been granted by the Registrar. The FSP must establish and maintain procedures to be followed by the FSP and any representative in order to ensure compliance with FAIS. The compliance officer, or where one has not been appointed, the FSP must submit reports to the Registrar in the format and manner prescribed by the Registrar.


Section 35(1)(c) of FAIS empowers the Minister of Finance, after consulting the Advisory Committee, by way of government notice to make regulations relating to, inter alia, the compliance arrangements, compliance monitoring systems and the keeping of records. These regulations have been promulgated and reinforce the proviso that the compliance officer may only act in the capacity as compliance officer where such compliance officer has been approved by the Registrar. The regulations stipulate that the Registrar will prescribe the format, supporting requirements and manner of submission of the application for approval of the compliance officer.

Further provisions contained in the regulations are that the FSP must ensure that the compliance function exists within the Risk Management Framework and that the compliance function must be managed with due diligence, care and degree of competency as may reasonably be expected from a person responsible for that function. The compliance officer is further compelled to provide the FSP with written progress reports in respect of the compliance monitoring and make recommendations to the FSP relating to any aspect of the compliance monitoring functions.

6.1.4 Requirements for approval of compliance officer

As stated above a person may only act as a compliance officer of an FSP where that person has been approved by the Registrar. This approval is subject to the compliance officer possessing personal qualities of honesty and integrity as well as satisfying the prescribed competency requirements. In order to provide certainty the Registrar published Board Notice 48 of 2008 (“BN48”), which details the qualifications that a compliance officer must possess in order to act as a compliance officer. Please note that these requirements are applicable to FSP’s who have more than one key individual or who have representative(s).

These qualifications are:

a) hold a legal or business diploma or degree at NQF level 6, and have at least three (3) years' experience in a compliance or risk management function in the financial services industry; or

b) have attained any specific financial services industry, or compliance- related certificate, diploma or degree at NQF level 5 recognised by the Registrar by notice in the Gazette as being appropriate for this purpose, and have at least three (3) years' experience in a compliance or risk management function in the financial services industry; or


c) be an accredited member of the Compliance Institute of South Africa, or be a member of any other organisation recognised by the Registrar by notice in the Gazette as being appropriate for this purpose and have at least 3 years' experience in compliance or risk management function in the financial services industry.

The Registrar also published transitional provisions that, inter alia, allow compliance officers that have been approved by the Registrar on the date of commencement of this Notice who do not meet these requirements, to comply with these educational requirements within three (3) years.

Board Notice 84 of 2003 (“BN84”) prescribes the functions that a compliance officer has to perform. These functions are:

1. to have adequate resources available to ensure proper compliance monitoring; of the FSP and any representative’s activities, have and be permitted direct access to, and demonstrable support from, the senior management of the business and in respect of any representative;

2. to function adequately independently or objectively;

3. to function, regarding the internal organisational structure of the business, in a manner ensuring that no actual or potential conflicts of interests arise as regards the duties and functions of other employees and, in particular the internal audit and control functions, and as regards the functions of any representative;

4. to be able and be enabled to keep written records of all activities undertaken in the course of compliance monitoring, to provide the FSP concerned with written reports on at least a quarterly basis on the course of, and progress achieved with, such monitoring duties and to make recommendations to the applicant as regards any aspect of the required compliance or the monitoring functions; and

5. to liaise directly with the Registrar particularly as regards reporting.

It is evident from the above, that the compliance officer is required to act independently and objectively in order to submit impartial reports to the Registrar. In order to facilitate this requirement, BN84 prescribes that the compliance officer must avoid all conflicts of interest regarding the execution of their duties. Mechanisms such as the internal audit and control functions


further enable the compliance officer to avoid actual or potential conflicts of interests regarding the duties and functions of other employees.

The compliance officer must demonstrate an understanding of the content of the compliance report in order to be able to sign it off.

Summary

The purpose of this chapter is to focus attention on the treatment of daily transactions.

Focus is also placed on the nature of the underlying investments, notice periods, taxation, etc. Systems and resources should be made available to deal with these underlying securities.


1. As Discretionary FSPs and Hedge Fund FSPs manage clients’ investments on a discretionary basis they must:a) understand the principles and rules that govern these

investmentsb) have sufficient systems and resources available to manage

these investmentsc) employ sufficient staff to manage these investmentsd) all of the above

2. The purpose behind Risk Management is to ensure that clients don’t suffer losses due to:a) negative market movementsb) incorrect hedging of investmentsc) theft, fraud, negligence, poor administration, professional

misconduct and other dishonest actsd) all of the above

3. FAIS requires a compliance officer to be appointed where:a) the FSP is a Category I FSPb) the FSP has more than 1 key individual and/or

representativesc) the FSP only has representatives


d) the FSP only has key individuals

4. Where the appointment of the compliance officer is terminated the:a) compliance officer must be removed as the compliance

officer of the FSP within 1 monthb) FSP must notify the Registrar within 1 month of terminationc) compliance officer must submit a report to the Registrar

detailing the reasons for the terminationd) none of the above

5. The compliance function must exist within the:a) FSPb) product supplierc) risk management frameworkd) product rules

6. In order to qualify as a compliance officer the individual has to:a) hold a business or legal diploma or degree at NQF Level 6b) have at least 3 years’ experience in a compliance or risk

management functionc) attain a specific financial services or compliance diploma or

degreed) all of the above



1. As Discretionary FSPs and Hedge Fund FSPs manage clients’ investments on a discretionary basis they must:a) understand the principles and rules that govern these

investmentsb) have sufficient systems and resources available to manage

these investmentsc) employ sufficient staff to manage these investmentsd) all of the above

2. The purpose behind Risk Management is to ensure that clients don’t suffer losses due to:a) negative market movementsb) incorrect hedging of investmentsc) theft, fraud, negligence, poor administration,

professional misconduct and other dishonest actsd) all of the above

3. FAIS requires a compliance officer to be appointed where:a) the FSP is a Category I FSPb) the FSP has more than 1 key individual and/or

representativesc) the FSP only has representativesd) the FSP only has key individuals

4. Where the appointment of the compliance officer is terminated the:a) compliance officer must be removed as the compliance

officer of the FSP within 1 monthb) FSP must notify the Registrar within 1 month of terminationc) compliance officer must submit a report to the

Registrar detailing the reasons for the terminationd) none of the above

5. The compliance function must exist within the:a) FSPb) product supplierc) risk management frameworkd) product rules

6. In order to qualify as a compliance officer the individual has to:


a) hold a business or legal diploma or degree at NQF Level 6b) have at least 3 years’ experience in a compliance or risk

management functionc) attain a specific financial services or compliance diploma or

degreed) all of the above



Chapter

7Legal Environment


KNOWLEDGE CRITERIAExplain the liquidity requirements.Explain the implications of the liquidity requirements.Describe the fidelity cover requirement.Explain the implications of the fidelity cover requirement.Describe the capital requirement.Explain the implications of the capital requirement.Explain why a Category II FSP is not allowed to engage in netting of transactions.Explain how a Category II FSP must ensure that it only conducts business with another authorised FSP that has the appropriate categories/subcategories of license, and that the business must also be conducted within the parameters of the client mandate.Describe the continual compliance with the license requirements and what the conditions are.

SKILLS CRITERIAApply the liquidity requirements to own businessApply the fidelity requirements to own businessApply the capital requirements to own businessVerify that there are systems in place to check whether netting of transactions does not take placeConfirm that it only conducts business with another FSP that has the appropriate categories/subcategories of license, and that the business must also be conducted within the parameters of the client mandate


Purpose

A myriad of legal requirements pertaining to Discretionary and Hedge Fund FSP’s exist. In order to address these legal requirements, it is important to grasp these principles. These principles are not intended to be a closed list and the student should raise any other principles relevant to this topic.

7.1 FINANCIAL SOUNDNESS

7.1.1 Financial Soundness

Section 8 of FAIS requires the FSP to maintain the fit and proper requirements of honesty and integrity, competency and operational ability, and, financial soundness. Financial soundness translates into two criteria, namely, Capital Adequacy and Liquidity. Board Notice 106 of 2008 (“BN106”) regulates these requirements in respect of Category II and IIA FSP’s. BN106 stipulates as general criteria to be met by all FSP’s that the FSP must not be an unrehabilitated insolvent or under liquidation of provisional liquidation.

7.1.2 Category II FSP

Section 9(4) of BN106 stipulates that Category II FSP’s need not maintain a specific rand amount in reserve to meet a capital adequacy requirement. Category II FSP’s are required to ensure that their assets (excluding goodwill, other intangible assets and investments in related parties) exceed the Category II FSP’s liabilities (excluding loans validly subordinated in favour of all other creditors).

The Category II FSP is also required to maintain current assets that are equal to or exceed current liabilities. This liquidity requirement is geared towards ensuring that the Category II FSP can meet any short-term claims that may arise from creditors. In addition to the aforesaid liquidity requirement, the Registrar expects the Category II FSP to maintain liquid assets equal to or greater than 8/52 weeks of its annual expenditure.


7.1.3 Category IIA FSP

Section 9(5) of BN106 stipulates that Category IIA FSP’s must maintain assets (excluding goodwill, other intangible assets and investments in related parties) that exceeds the Category IIA FSP’s liabilities (excluding loans validly subordinated in favour of all other creditors), by at least R3 million.

The Category IIA FSP is also required to maintain current assets that are equal to or exceed current liabilities. In addition to the aforesaid liquidity requirement, the Registrar expects the Category II FSP to maintain liquid assets equal to or greater than 13/52 weeks of its annual expenditure.

7.1.4 Implications of Liquidity Requirements

On face value these liquidity requirements do not appear to present any problems. However, when one considers the definition of Liquid Assets it does raise the question of where the Category II and/or IIA FSP may invest their capital adequacy and liquidity reserves. BN106 defines Liquid Assets as cash or cash equivalents that can be liquidated within seven (7) days without realising a loss on liquidation.

Expenses and liabilities in either of these Categories of FSP’s are probably substantial. It becomes apparent that the “seven (7) days without realising a loss on liquidation” restriction limits these FSP’s investment avenues. Having these substantial amounts of money in reserve, without being able to invest in appropriate investments, results in substantial opportunity cost losses.

7.2 FIDELITY COVER

7.2.1 Introduction

Section 16(2)(e) of FAIS prescribes that the Registrar must issue a Code of Conduct for categories of FSP’s that, inter alia, contain provisions requiring FSP’s to, where appropriate, put in place or hold suitable guarantees, professional indemnity or fidelity insurance cover, and mechanisms for adjustments of such guarantees or cover by the Registrar.

Section 13 of the General Code requires a FSP, excluding a representative, to and to the extent required by the Registrar maintain in force suitable guarantees or professional indemnity or fidelity insurance cover. Similarly, Section 7 of the Discretionary Code requires the FSP, where and to the extent required by the Registrar, to hold and maintain suitable guarantees,


professional indemnity or fidelity insurance cover. The Discretionary Code does not, however, provide any further clarity on the minimum cover amounts and any terms and conditions to be contained in such cover or guarantee.

On 25 March 2009 the Registrar in Board Notice 37 of 2009 (“BN37”) prescribed that a Category II FSP, excluding a representative, who receives or holds clients’ financial products or funds on the date of commencement of BN37 must, with effect from a date six (6) months after that date, maintain in force in respect of clients:

1. suitable guarantees of a minimum amount of R5 million; or

2. suitable professional indemnity or fidelity insurance cover of a minimum of R5 million.

This requirement was amended on 21 September 2009 by the Registrar in Board Notice 123 of 2009 (“BN123”). BN123 distinguishes between whether the FSP holds client’s financial products or funds (money), on the one hand, and where the FSP merely administers the client’s financial products or funds (money) without receiving or holding same. The issue is further distinguishable based on the Category of FSP we are considering. In terms of BN123 FSP’s who existed at the time of the Registrar issuing this Board Notice had a period of six (6) months in which to comply with the minimum cover or guarantee requirements. New FSP’s have a period of six (6) weeks in which to obtain the relevant cover or guarantee.

7.2.2 Category II FSP’s

Receiving or holding client’s financial products and/or funds

A Category II FSP who receives or holds clients’ financial products and/or assets must maintain suitable guarantees of a minimum of R5 million, or, suitable professional indemnity and fidelity insurance cover of not less than R5 million.

Not receiving or holding client’s financial products and/or funds

A Category II FSP who does not receive or hold clients’ financial products and/or assets must maintain suitable guarantees of a minimum of R1 million,


or, suitable professional indemnity and fidelity insurance cover of not less than R1 million.

Category IIA FSP’s

Receiving or holding client’s financial products and/or funds

A Category IIA FSP who receives or holds clients’ financial products and/or assets must maintain suitable guarantees of a minimum of R5 million, or suitable professional indemnity and fidelity insurance cover of not less than R5 million.

Not receiving or holding client’s financial products and/or funds

A Category IIA FSP who does not receive or hold clients’ financial products and/or assets must maintain suitable guarantees of a minimum of R5 million, or, suitable professional indemnity and fidelity insurance cover of not less than R5 million.

7.3 NETTING OF TRANSACTIONS

Section 1 of the Codes of Conduct of Administrative and Discretionary FSP’s defines “netting” as the offsetting of offers to purchase and repurchase financial products and where Administrative FSP’s buy and sell financial products on behalf of clients.

In essence, this is where a Discretionary FSP is faced with two instructions, namely, an investment instruction and a disinvestment instruction from the same underlying securities. These instructions in respect of the same underlying securities, allow the Discretionary FSP an opportunity to enter a book entry re-allocating the underlying securities from the seller to the purchaser, without actually disinvesting or investing the respective investor’s money. This practice is contrary to the provisions of Section 10(1)(e) of the General Code. The General Code requires the Discretionary FSP to take reasonable steps to ensure that the client’s financial products or funds are dealt with strictly in accordance with the mandate given to the FSP. Furthermore, should the Discretionary FSP be entitled to conduct “netting” the Discretionary FSP will have an opportunity to charge fees in respect of the investment and disinvestment transactions without these transactions actually existing. For these reasons section 3(2) of the Discretionary Code provides that the Discretionary FSP may not directly or indirectly engage in netting.


7.4 CONDUCTING BUSINESS WITH OTHER AUTHORISED FSP’S

Section 7(3) of FAIS prescribes that an authorized FSP 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 FAIS.

This means that the Category II and IIA FSP may only conduct business with FSP’s or representative who have been licensed in the category and sub-category of financial services and financial products, respectively. A look- through principle is applied by the Registrar in this regard. Failure by the Category II and/or IIA FSP to conduct the necessary due diligence procedures will result in the Category II and IIA FSP attracting liability for being in breach of FAIS. Practically this means that the Category II and/or IIA FSP must obtain a copy of the other FSP or representative’s license to ensure that they hold the necessary licenses or meet the minimum fit and proper requirements. From a representative or a Category I FSP perspective, the FSP or compliance officer will have to ensure that the representative or FSP, as the case may be, meets the minimum category and sub-category criteria.

In addition to the aforesaid, Section 10(1)(e) of the General Code requires the Discretionary FSP to take reasonable steps to ensure that the client’s financial products or funds are dealt with strictly in accordance with the mandate given by the client to the FSP. Compliance will conduct regular monitoring to ensure that the relevant licenses are held. Compliance will also ensure on a sample- monitoring basis that clients’ mandates are being adhered to.

7.5 CONTINUAL COMPLIANCE

In terms of Section 9(1) the Registrar may, subject to FAIS, at any time suspend or withdraw any license (including the license of a licensee under provisional or final suspension), if satisfied, on the basis of available facts and information, that the licensee-


a) no longer meets the requirements contemplated in Section 8;

b) did not, when applying for the license, make a full disclosure of all relevant information to the Registrar, or furnished false or misleading information;

c) has failed to comply with any other provision of this Act;

Please note that Subsection (a) requires continual satisfaction of the fit and proper requirements stipulated in section 8(1). This translates into a requirement of continual compliance. In addition to the aforesaid, please note that Subsection (c) does not specify a time. This means that the FSP could lose its license at any stage where non-compliance with FAIS has occurred.

7.6 CIVIL REMEDIES AVAILABLE TO THE REGISTRAR

Section 33 of FAIS grants the Registrar the authority, when satisfied on the basis of available facts and information that a person has contravened any provision of FAIS, or is likely to contravene or not to comply with FAIS, to apply to a court for an order restraining such person from continuing to commit any such act or omission or from committing it in future. The Registrar may also request the court to order that person to take such remedial steps as the court deems necessary to rectify the consequences of the act or omission, including consequences, which prejudiced or may prejudice any client.

The Registrar may institute action in a court against any person who has contravened or not complied with any provision of FAIS, for payment of –

a) an amount determined by the court as compensation for losses suffered by any other person in consequence of such contravention or non-compliance;

b) a penalty for punitive purposes in a sum determined in the discretion of the court to a maximum of three times the amount of any profit or gain which accrued or may have accrued to the person involved as a direct result of any such act or omission;

c) interest; and

d) costs of suit on such scale as may be determined by the court.


Any amount recovered by the Registrar must be deposited by the Registrar directly into a specially designated trust account, and thereupon –

a) the Registrar is, as a first charge against the trust account, entitled to reimbursement of all expenses reasonably incurred in bringing proceedings and in administering the distributions made to affected persons;

b) the balance, if any (the "distributable balance"), must thereafter be distributed by the Registrar to the affected persons;

c) any funds remaining after payment to affected persons will accrue to the Registrar in the Registrar's official capacity.

The distributable balance must be distributed on a pro rata basis to all affected persons who prove to the reasonable satisfaction of the Registrar that they are affected persons: provided that no money may be distributed to a person who has contravened or failed to comply with any provision of this Act.

Any amount not claimed by an affected person within three years from the date of the first distribution of payments, accrues to the Registrar in the Registrar's official capacity.

A court issuing any order under this section must order it to be published in the Gazette and by such other appropriate public media announcement as the court considers appropriate.

The Registrar may withdraw, abandon or compromise any civil proceedings instituted under this section, but any agreement or compromise must be made an order of court and the amount of any payment made in terms of any such compromise must be published in the Gazette and by such other public media announcement as the court considers appropriate.

Where civil proceedings have not been instituted, any agreement or settlement (if any) may, on application to the Court by the Registrar after due notice to the other party, be made an order of Court and must be published in the Gazette and by such other public media announcement as the court considers appropriate.

Summary


In this chapter we attempt to deal with the more prominent legal issues pertaining to Discretionary and Hedge Fund FSP’s. Where appropriate, we distinguish these two types of FSP’s based on their respective requirements.

Under the topic “Financial Soundness” we not only distinguish the respective categories of FSP’s dealt with in this book; we also seek to distinguish the different capital adequacy requirements from the liquidity requirements as contained in the Board Notice.

We also provide information relating to the fidelity cover that is required to be in place for Category II and IIA FSP’s.

We deal with the netting of transactions as prohibited by Discretionary Code.

We briefly consider the requirements when dealing with other FSP’s and therefore also touch on the monitoring responsibility in respect of this action.

We discuss the need for continual compliance with FAIS and impact that non-compliance could have on the FSP’s license.

Finally, we consider the civil remedies available to FSP’s.



1. Section 8 of FAIS requires FSPs to maintain:a) integrity and honestyb) operational ability and competencyc) financial soundnessd) all of the above

2. Financial soundness translates into:a) operational ability and competenceb) capital adequacyc) liquidityd) capital adequacy and liquidity

3. A Category II FSP must maintain capital adequacy of:a) assets that exceed its expensesb) assets that exceed its liabilities c) assets that exceed its liabilities by R1.5 milliond) assets that exceed its liabilities by R3 million

4. A Category IIA FSP must maintain capital adequacy of:a) assets that exceed its expensesb) assets that exceed its liabilities c) assets that exceed its liabilities by R1.5 milliond) assets that exceed its liabilities by R3 million

5. A Category II FSP must maintain liquidity of:a) 8/52 weeks of its annual expenditureb) 13/52 weeks of its annual expenditurec) 16/52 weeks of its annual expenditured) 24/52 weeks of its annual expenditure

6. A Category IIA FSP must maintain liquidity of:a) 8/52 weeks of its annual expenditureb) 13/52 weeks of its annual expenditurec) 16/52 weeks of its annual expenditured) 24/52 weeks of its annual expenditure

7. BN106 defines liquid assets as those assets which:


a) can be liquidated within a period of 1 month without incurring a loss on liquidation

b) consists purely of cashc) can be liquidated within a period of 2 weeks without incurring

a loss on liquidationd) can be liquidated within a period of 7 days without incurring a

loss on liquidation

8. BN123 distinguishes the types of Fidelity Cover that a Category II and IIA FSP must hold on the basis of whether the FSP:a) receives or holds clients’ fundsb) receives or holds clients’ investmentsc) receives or holds clients’ investments and/or fundsd) receives or holds clients’ investment contracts

9. Netting of transactions refers to the situation where an FSP:a) ensures that the net investment amount accrues to the clientb) offsets returns on investments against expenses levied

against the investment amount to determine real returnsc) offsets purchases with repurchases of the same underlying

financial products thereby reducing market trades for the ultimate benefit of the FSP


10. Where Category II and IIA FSP’s conducts business with other FSP’s they have to ensure that the other FSP’s: a) possess the relevant licenses for the Category and sub-

categoryb) have sufficient capital and liquidity to meet the solvency

requirementc) employ a sufficient amount of employees who are suitably

qualifiedd) none of the above


Self-Assessment Answers1. Section 8 of FAIS requires FSPs to maintain:

a) integrity and honestyb) operational ability and competencyc) financial soundnessd) all of the above

2. Financial soundness translates into:a) operational ability and competenceb) capital adequacyc) liquidityd) capital adequacy and liquidity

3. A Category II FSP must maintain capital adequacy of:a) assets that exceed its expensesb) assets that exceed its liabilities c) assets that exceed its liabilities by R1.5 milliond) assets that exceed its liabilities by R3 million

4. A Category IIA FSP must maintain capital adequacy of:a) assets that exceed its expensesb) assets that exceed its liabilities c) assets that exceed its liabilities by R1.5 milliond) assets that exceed its liabilities by R3 million

5. A Category II FSP must maintain liquidity of:a) 8/52 weeks of its annual expenditureb) 13/52 weeks of its annual expenditurec) 16/52 weeks of its annual expenditured) 24/52 weeks of its annual expenditure

6. A Category IIA FSP must maintain liquidity of:a) 8/52 weeks of its annual expenditureb) 13/52 weeks of its annual expenditurec) 16/52 weeks of its annual expenditured) 24/52 weeks of its annual expenditure


7. BN106 defines liquid assets as those assets which:a) can be liquidated within a period of 1 month without incurring

a loss on liquidationb) consists purely of cashc) can be liquidated within a period of 2 weeks without incurring

a loss on liquidationd) can be liquidated within a period of 7 days without

incurring a loss on liquidation

8. BN123 distinguishes the types of Fidelity Cover that a Category II and IIA FSP must hold on the basis of whether the FSP:a) receives or holds clients’ fundsb) receives or holds clients’ investmentsc) receives or holds clients’ investments and/or fundsd) receives or holds clients’ investment contracts

9. Netting of transactions refers to the situation where an FSP:a) ensures that the net investment amount accrues to the clientb) offsets returns on investments against expenses levied

against the investment amount to determine real returnsc) offsets purchases with repurchases of the same

underlying financial products thereby reducing market trades for the ultimate benefit of the FSP


10. Where Category II and IIA FSP’s conducts business with other FSP’s they have to ensure that the other FSP’s: a) possess the relevant licenses for the Category and

sub-categoryb) have sufficient capital and liquidity to meet the solvency

requirementc) employ a sufficient amount of employees who are suitably

qualifiedd) none of the above



Chapter

8Record-keeping


KNOWLEDGE CRITERIAExplain the period for which records must be kept.Describe the requirements specifically in respect of telephone and/or electronic requirements.

SKILLS CRITERIAVerify that systems are in place to manage the record-keeping risks of electronic and telephonic transactions.


PurposeFAIS and its subordinate legislation has specific record-keeping requirements that have to be satisfied by a Discretionary and/or Hedge Fund FSP. In addition to these FAIS requirements, other legislation such as FICA also prescribes record- keeping requirements that FSP’s have to satisfy. This chapter deals with these requirements.

8.1 REQUIREMENTS FOR RECORD-KEEPING

8.1.1 FAIS

Section 18 of FAIS requires an FSP, except to the extent exempted by the Registrar, to maintain records for a minimum period of five (5) years regarding –

a) known premature cancellations of transactions or financial products by clients of the provider;

b) complaints received together with an indication of whether or not any such complaint has been resolved;

c) the continued compliance with the requirements referred to in Section 8 of FAIS;

d) cases of non-compliance with FAIS, and the reasons for such non-compliance; and

e) the continued compliance by representatives with the requirements referred to in Section 13(1) and (2) of FAIS.

Whilst it is commonly understood that the FSP must maintain records for five (5) years you will note that the Section 18 requirements do not relate to the maintenance of “advice” records. In addition to the FSP’s responsibilities in terms of section 18, Section 9 of the General Code compels the FSP to keep a record of advice provided to the client reflecting:


a) a brief summary of the information and material on which the advice was based;

b) the financial product(s) that was/were considered;

c) the financial product(s) recommended, with an explanation of why the product(s) were selected, is or are likely to satisfy the client’s needs and objectives;

Provided that such record of advice is only required to be maintained where, to the knowledge of the FSP, a transaction or contract in respect of a financial product is concluded by or on behalf of the client as a result of the advice furnished to the client.

d) And where the financial product(s) recommended is/are (a) replacement product/s –

i. the comparison of fees, charges, special terms and conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided, between the terminated product and the replacement product; and

ii. the reasons why the replacement product(s) was/were considered to be more suitable to the client’s needs than retaining or modifying the terminated product.

A written copy of this record of advice must be provided to the client by the FSP (who is not a direct marketer).

Section 3(2) of the General Code goes further to require an FSP to maintain appropriate procedures and systems in place to –

i. record the verbal and written communications relating to the financial service rendered to a client;

ii. store and retrieve these records and any other material documentation relating to the client or financial service rendered to the client; and

iii. keep such client records and documentation safe from destruction.


In terms of this section the FSP must maintain these records for a period of five (5) years after termination of the product or the rendering of the financial services, whichever occurs last in time. FSP’s are not required to keep these records themselves but must ensure that these records can be produced to the Registrar within seven (7) days of the Registrar’s request. These records may be kept in electronic format, which is accessible and readily reducible to written or printed format.

Finally Section 14 of the General Code requires a FSP that advertises a financial service by telephone to maintain –

a) an electronic, voice-logged record of all communications. Where no financial service is rendered as a result of the advertisement, such record need not be maintained for a period exceeding 45 days;

b) a copy of all such records must be provided on request by the client or the Registrar within seven (7) days of the request;

c) all the information required by Sections 4(1)(a) and (c) and 5(a) and (c) shall not be required: provided that the client is provided with basic details (such as business name and telephone number or address) of the FSP or relevant product supplier, and of their relevant compliance departments: Provided further that, if the promotion results in the rendering of a financial service, the full details required by those sections are provided to the client in writing within thirty (30) days of the relevant interaction with the client.

One of the functions of the compliance officer is to monitor the FSP’s compliance with the requirements to maintain records.

8.1.2 FICA

In conjunction with the sections of FAIS and subordinate legislation discussed above, Section 22 of the Financial Intelligence Centre Act of 2001, (Act 38 of 2001) (“FICA”) requires an accountable institution to maintain records of the identity of clients for a period of five (5) years after the date of the establishment or termination of the business relationship or last transaction, whichever occurs last in time. The records to be kept in terms of FICA are:

a) the identity of the client;

b) if the client is acting on behalf of another person—i. the identity of the person on whose behalf the client is

acting; and


ii. the client’s authority to act on behalf of that other person;

c) if another person is acting on behalf of the client—

i. the identity of that other person; and

ii. that other person’s authority to act on behalf of the client;

d) the manner in which the identity of the persons referred to in paragraphs (a), (b) and (c) was established;

e) the nature of that business relationship or transaction;

f) in the case of a transaction—

i. the amount involved; and

ii. the parties to that transaction;

g) all accounts that are involved in—

i. transactions concluded by that accountable institution in the course of that business relationship; and

ii. that single transaction;

h) the name of the person who obtained the information referred to in paragraphs (a), (b) and (c) on behalf of the accountable institution; and

i) any document or copy of a document obtained by the accountable institution in order to verify a person’s identity in terms of Section 21(1) or (2) of FICA.

Section 24 of FICA allows an accountable institution to outsource its responsibility to keep records to a third party provided that the accountable institution has free and easy access to these records. Should any such third party fail to properly comply with the record-keeping requirements of Section 22, the accountable institution shall be liable for that failure.Where an accountable institution outsources its responsibility to keep records to a third party, the accountable institution must provide the Financial Intelligence Centre with the prescribed particulars regarding that third party.


The lists of accountable institutions are:

1) an attorney as defined in the Attorneys Act, 1979 (Act 53 of 1979);

2) a board of executors or a trust company or any other person that invests, keeps in safe custody, controls or administers trust property within the meaning of the Trust Property Control Act, 1988 (Act 57 of 1988);

3) an estate agent as defined in the Estate Agents Act, 1976 (Act 112 of 1976);

4) a financial instrument trader as defined in the Financial Markets Control Act, 1989 (Act 55 of 1989);

5) a management company registered in terms of the Unit Trusts Control Act, 1981 (Act 54 of 1981);

6) a person who carries on the "business of a bank" as defined in the Banks Act, 1990 (Act 94 of 1990);

7) a mutual bank as defined in the Mutual Banks Act, 1993 (Act 124 of 1993);

8) a person who carries on a "long-term insurance business" as defined in the Long-term Insurance Act, 1998 (Act 52 of 1998), including an insurance broker and an agent of an insurer;

9) a person who carries on a business in respect of which a gambling license is required to be issued by a provincial licensing authority;

10) a person who carries on the business of dealing in foreign exchange;

11) a person who carries on the business of lending money against the security of securities;

12) a person who carries on the business of rendering investment advice or investment broking services, including a public accountant as defined in the Public Accountants and Auditors Act, 1991 (Act 80 of 1991), who carries on such a business;

13) a person who issues, sells or redeems travellers’ cheques, money orders or similar instruments;


14) the Postbank referred to in section 51 of the Postal Services Act, 1998 (Act 124 of 1998);

15) a member of a stock exchange licensed under the Stock Exchanges Control Act, 1985 (Act 1 of 1985);

16) the Ithala Development Finance Corporation Limited;

17) a person who has been approved or who falls within a category of persons approved by the Registrar of Stock Exchanges in terms of Section 4 (1) (a) of the Stock Exchanges Control Act, 1985 (Act 1 of 1985);

18) a person who has been approved or who falls within a category of persons approved by the Registrar of Financial Markets in terms of Section 5 (1) (a) of the Financial Markets Control Act, 1989 (Act 55 of 1989);

19) a person who carries on the business of a money remitter.

Where the FSP is also a registered long-term insurer in terms of the Long-term Insurance Act of 1998 (Act 52 of 1998), an additional requirement has to be satisfied. In terms of Directive 148.A.i (LT) of 2007 a long-term insurer who outsources its record-keeping responsibility to a third party must conduct regular compliance reviews to ensure that the second accountable institutions are properly keeping the prescribed records.

These records may be kept in electronic format. The industry standard is to store and to retrieve these records electronically. The FSB in its FAIS Newsletter Volume 6 of June 2008 recommends that where hardcopy client records and files are kept, that these files and records be backed up electronically. Section 25 of FICA goes further to encourage the keeping of records in electronic format as a certified extract of these electronic records are rendered admissible in terms of this section as evidence in a court of law.

8.1.3 Security requirements, confidentiality and access to records

Section 3(3) of the General Code compels the FSP to keep all records relating to the client, a product supplier in relation to the client or a supplier confidential unless the client has provided the FSP with a written consent to disclose such information. The Protection of Personal Information Bill contains substantially more onerous requirements that have to be satisfied in this regard. As this bill


is still to be promulgated we shall refrain from dealing with these provisions at this stage.

Summary

In this chapter we deal with the record-keeping requirements applicable to FSP’s.

We start by looking at the record-keeping requirements specified in FAIS.

We then consider the additional requirements stipulated in the General Code.

We then consider the maintenance of confidentiality and access to records.

Finally, we consider the requirements stipulated in FICA.



1. FAIS requires an FSP to maintain records for a minimum period of:a) 18 monthsb) 3 yearsc) 5 yearsd) 7 years

2. Record must be kept of:a) known premature cancellations of transactions or financial

products by clients of the FSPb) complaints received and an indication of whether the

complaint has been resolvedc) cases of non-compliance with FAIS and the reasons for such

non-complianced) all of the above

3. Records of the advice provided by the FSP must be kept for:a) 18 monthsb) 3 yearsc) 5 yearsd) 7 years

4. The General Code requires the FSP to maintain appropriate procedures and systems to:a) record the verbal and written communications relating to the

financial service rendered to the clientb) store and retrieve these records and any other material

documentation relating to the client or financial services rendered to the client

c) keep such client records and documentation safe from destruction

d) all of the above

5. The General Code requires the FSP to:a) maintain records itselfb) ensure that it can produce these records within a period of 7

days, where records are stored by external service providersc) ensure that records are backed-up regularlyd) none of the above


6. Where the FSP advertises the financial service telephonically, they are required to maintain records for:a) 45 daysb) 90 daysc) 180 dayd) 365 days

7. In terms of FICA, all accountable institutions are required to comply with the “know-your-client” requirements. These records should be kept for a period of: a) 5 years after the inception of the business relationshipb) 5 years from the date of termination of the business

relationshipc) 5 years from the date of inception or termination of the

business relationship or last transactiond) 5 years from the date of inception or termination of the

business relationship or first transaction

8. An accountable institution may outsource its FICA responsibilities to third parties provided that:a) the accountable institution can produce the records within a

period of seven daysb) the accountable institution has free and easy access to the

recordsc) the accountable institution can access the records within a

period of seven daysd) none of the above

9. Where the accountable institution elects to outsource its responsibilities in terms of FICA and that accountable institution is a Long-term Insurer, the accountable institution must:a) ensure that it has free and easy access to the recordsb) ensure that it can produce the records within seven daysc) ensure through regular compliance reviews that the other

accountable institution is properly satisfying the FICA requirements


10. Where an FSP maintains records in respect of clients and product suppliers in relation to the client, the FSP must ensure that it:a) keeps the records confidential


b) keeps the records confidential from external third partiesc) discloses the records to providers and product suppliers for

fair valued) none of the above



1. FAIS requires an FSP to maintain records for a minimum period of:a) 18 monthsb) 3 yearsc) 5 yearsd) 7 years

2. Record must be kept of:a) known premature cancellations of transactions or financial

products by clients of the FSPb) complaints received and an indication of whether the

complaint has been resolvedc) cases of non-compliance with FAIS and the reasons for such

non-complianced) all of the above

3. Records of the advice provided by the FSP must be kept for:a) 18 monthsb) 3 yearsc) 5 yearsd) 7 years

4. The General Code requires the FSP to maintain appropriate procedures and systems to:a) record the verbal and written communications relating to the

financial service rendered to the clientb) store and retrieve these records and any other material

documentation relating to the client or financial services rendered to the client

c) keep such client records and documentation safe from destruction

d) all of the above

5. The General Code requires the FSP to:a) maintain records itselfb) ensure that it can produce these records within a

period of 7 days, where records are stored by external service providers

c) ensure that records are backed-up regularlyd) none of the above


6. Where the FSP advertises the financial service telephonically, they are required to maintain records for:a) 45 daysb) 90 daysc) 180 dayd) 365 days

7. In terms of FICA, all accountable institutions are required to comply with the “know-your-client” requirements. These records should be kept for a period of: a) 5 years after the inception of the business relationshipb) 5 years from the date of termination of the business

relationshipc) 5 years from the date of inception or termination of

the business relationship or last transactiond) 5 years from the date of inception or termination of the

business relationship or first transaction

8. An accountable institution may outsource its FICA responsibilities to third parties provided that:a) the accountable institution can produce the records within a

period of seven daysb) the accountable institution has free and easy access to

the recordsc) the accountable institution can access the records within a

period of seven daysd) none of the above

9. Where the accountable institution elects to outsource its responsibilities in terms of FICA and that accountable institution is a Long-term Insurer, the accountable institution must:a) ensure that it has free and easy access to the recordsb) ensure that it can produce the records within seven daysc) ensure through regular compliance reviews that the

other accountable institution is properly satisfying the FICA requirements


10. Where an FSP maintains records in respect of clients and product suppliers in relation to the client, the FSP must ensure that it:


a) keeps the records confidentialb) keeps the records confidential from external third partiesc) discloses the records to providers and product suppliers for

fair valued) none of the above


Chapter

9Client reporting requirements


KNOWLEDGE CRITERIAExplain why clients must receive written reports at quarterly intervals, that provide them with investment and related information.

SKILLS CRITERIAVerify that there are systems and processes that enable the preparation and delivery of accurate quarterly reports.


Purpose

FAIS and its subordinate legislation have specific reporting requirements that have to be satisfied by a Discretionary and/or Hedge Fund FSP. These requirements encompasses reporting to clients and reporting to the Registrar. In this chapter we will only deal with client reporting.

9.1 REQUIREMENTS FOR CLIENT REPORTING

Section 6.1 of the Discretionary Code requires the Discretionary FSP to furnish the client with a written report that complies with Subsection 6.2 of the Discretionary Code. This written report must be provided –

a) on request; and

b) at regular intervals not exceeding three months at a time, unless the client consents in writing not to receive the report because such client is able to access the information made available by the Discretionary FSP through electronic means, such as the Internet or a facsimile service, on a continuous basis.

Section 6.2 of the Discretionary Code requires the Discretionary FSP to furnish the client with a written report that contains such information as is reasonably necessary to enable the client to –

a) produce a set of financial statements;

b) determine the composition of the financial products comprising the investment and the changes therein over the period reported on; and

c) determine the market value of the financial products comprising the investment and the charges therein over the period reported on.

In addition to the above, a Discretionary FSP must, on request by a client, furnish the client with detailed information about the:

a) original cost of financial products held, as well as the current market value thereof;


b) financial products purchased or sold during the period;

c) cash receipts and payments during the period;

d) income earned and expenditure incurred during the period;

e) non-cash transactions during the period including, without limiting the generality of the foregoing, capitalisation issues and scrip dividends and option expiries;

f) financial products received or delivered to a client or nominee company during the period;

g) profits and losses realised during the period;

h) with regard to foreign financial products –

i. the conditions in terms of which the rendering of intermediary services with regard to a financial product will take place;

ii. the manner in which such financial product may be acquired;

iii. the jurisdictions from which the financial products may be acquired;

iv. the specific licensed exchange or other exchange on which the financial products are listed or traded, if applicable;

v. the country in which the financial products are licensed or registered, if applicable;

vi. the name and address of the foreign FSP’s used, if applicable;

vii. the name and address of the foreign regulator regulating the foreign FSP and if such FSP is approved or registered by such regulator;

viii. the name and address of the foreign regulator under whose jurisdiction the rendering of intermediary services in relation to specific financial products falls.


Summary

The General Code prescribes that FSP’s must provide their clients with written reports.

These reports must be provided on a quarterly basis.

The content of the written reports are prescribed in the General Code and is detailed in this chapter.



1. A Discretionary FSP must send the client a written report at least:a) monthlyb) quarterlyc) half-yearlyd) none of the above

2. The client may request a written report which must then be provided by the Discretionary FSP on: a) at least a monthly basisb) request c) quarterlyd) none of the above

3. The report must contain information reasonably necessary to enable the client to: a) produce a set of financial statementsb) calculate the client’s tax liabilityc) determine whether further investment would be appropriated) all of the above

4. The Discretionary FSP must, on request, furnish the client with: a) the original cost of the financial products held on behalf of

the clientb) the current market value of the financial products held on

behalf of the clientc) financial products sold or purchased during the periodd) all of the above

5. Where the Discretionary FSP purchases foreign financial products, they must furnish the client with:a) the conditions in terms of which the rendering of intermediary

services with regard to the financial product will take placeb) the manner in which such financial product may be acquiredc) the jurisdictions from which the financial product may be

acquiredd) none of the above



1. A Discretionary FSP must send the client a written report at least:a) monthlyb) quarterlyc) half-yearlyd) none of the above

2. The client may request a written report which must then be provided by the Discretionary FSP on: a) at least a monthly basisb) request c) quarterlyd) none of the above

3. The report must contain information reasonably necessary to enable the client to: a) produce a set of financial statementsb) calculate the client’s tax liabilityc) determine whether further investment would be appropriated) all of the above

4. The Discretionary FSP must, on request, furnish the client with: a) the original cost of the financial products held on behalf of

the clientb) the current market value of the financial products held on

behalf of the clientc) financial products sold or purchased during the periodd) all of the above

5. Where the Discretionary FSP purchases foreign financial products, they must furnish the client with:a) the conditions in terms of which the rendering of intermediary

services with regard to the financial product will take placeb) the manner in which such financial product may be acquiredc) the jurisdictions from which the financial product may be

acquiredd) none of the above


Chapter

10Prohibitions and guidance notes


KNOWLEDGE CRITERIAExplain the prohibitions in terms of the Discretionary Code.Describe why an FSP must have a personal account trading policy and why this is important.

SKILLS CRITERIACheck that there are processes and controls in place to ensure that the FSP adheres to the prohibitions in terms of the Discretionary Code.Check that there is a personal account trading policy and that there are controls in place to check that this is adhered to.


Purpose

In this chapter we consider the restrictions contained in the Discretionary Code. We also consider the guidelines issued by the Registrar in respect of personal account trading.

These restrictions and the guidelines in respect of the personal account trading are primarily directed at protecting the interests of the client above that of the Discretionary and/or Hedge Fund FSP.

10.1 PERSONAL ACCOUNT TRADING POLICY

The FSB, in its document titled “The Personal Account Trading Position Paper” (“the Paper”) explains personal account trading to encompass “individual employees of a financial institution trading in securities or other financial instruments, the risks and rewards of which are for their own direct or indirect benefit”. The Paper goes further to express the FSB’s view that this activity should be prohibited. However, in acknowledging that financial institutions would then experience difficulty in employing sufficiently experienced and qualified staff should such a prohibition be enforced, the Paper provides financial institutions with principles that should be incorporated into a Personal Account Trading Policy (“the PA Policy”).

The FSB also published the “Guidelines for Personal Account (“PA”) Trading Rules for Employees of Participants in the Financial Markets” (“the Guidelines”). These Guidelines require Financial Institutions to:

1. Employ adequate resources and empowered senior staff who will be responsible for:

a) approval of all PA Trades in financial instruments;

b) keep proper records of all such transactions;

c) report to the compliance officer, audit committee, and the board of directors;

d) reporting any material transgressions to the appropriate regulator;


e) closing positions entered into in contravention of the rules.

2. Ensure that all employees obtain prior written approval prior to conducting PA Trades for themselves or connected persons. Such written approval must have an expiry and review date attached to it. In the application for prior written approval the employee must declare:

a) the intent of the PA Transaction, stating whether the transaction is for speculative or for investment purposes;

b) the type of security;

c) the nature of the transaction (i.e. purchase or sale, quantity and proposed date and time, etc);

d) the broking firm through which the transaction will be executed (off-market trades in listed securities should be prohibited); and

e) the identity of the counterparty for unlisted securities.

It is further recommended that employees be compelled to hold their positions for at least 30 (thirty) days.

3. Conditions of Employment - the rules and principles pertaining to PA Trading should form part of the Conditions of Employment of affected staff.

4. Whilst the Guidelines addresses the issue of Conflicts of Interest, the most recent amendments to the General Code better addresses these issues as FSP’s have an obligation to abide by these provisions. That being said:

a) employees trading in PA securities should do so through an appropriate trading desk at their own financial institution;

b) rules must exist that prevent any conflict of interest arising between the interests of the client and the relevant employee;


c) employees should not be allowed to conduct PA Trading through the same counter s/he is trading for clients’ or his/her employer within a specific period of time without the employer’s express written consent. Such consent must be provided by the compliance officer who in conjunction with the senior dealer review’s the request;

d) employees may not request or accept any credit or special dealing facilities with external parties.

5. These rules are applicable to new listings as well

6. Application and sanction - these rules should be applied to all employees, including senior management and appropriate sanctions should be applied to any employee who transgresses these rules.

7. Employees may not act as underwriters or sub-underwriters of securities where their employer (financial institution) is acting in that capacity, or the employee is aware of the fact that the employer will be offered participation, underwriting or sub-underwriting in that security.

The Registrars of Long-term and Short-term Insurance, on 1 February 2004, issued Directive 134.A.ii (LT&ST), making these rules applicable to long-term and short-term insurance companies.

For the purposes of these Guidelines:

Connected person means:

i. a spouse or partner;

ii. minor children;

iii. any person in a business or profit-sharing relationship with the employee, including partners in an investment club;

iv. a trust in which the employee or any person mentioned in (i) or (ii) is a beneficiary;

v. a company in which the employee or any person mentioned in (i), (ii) or (iv) is a shareholder;


vi. a pension fund (other than a pension fund managed by the institution) of which the employee or any person mentioned in (i), (ii) and (iii) is a beneficiary; and

vii. or any other accounts where the person has a direct or indirect benefit.

Employee means:

viii. any person employed by the institution.

ix. including persons dealing on behalf of the institution or its clients

x. any person who is privy to confidential or proprietary information which could result in a conflict of interest if the employee used the information to his/her advantage, and

xi. includes a person on secondment or contract, and connected persons.

Rules mean:

xii. the personal account trading rules enforced by the institution from time to time and which comply with the minimum standard set out in this document.

Securities means:

xiii. Includes "securities and financial instruments" as defined in the Financial Markets Control Act, (Act 55 of 1989), the Stock Exchanges Control Act (Act 1 of 1985) respectively, and any unlisted instruments such as bonds, futures, options, forward rate agreements, swaps, equities and derivatives of any of these, but excludes all unit trusts other than unit trusts listed on a recognised exchange or with assets under management by the institution.

The Registrars for Long-term and Short-term insurers have taken the above provision and issued Directive 134.A.ii (LT and ST). As this is a Directive, the Long-term and Short-term insurers must comply with the provisions relating to Personal Account trading as opposed to other participants in the financial services arena where these provisions are only guidelines.

10.2 PROHIBITIONS IN TERMS OF THE DISCRETIONARY CODE


Except where a client’s prior written approval is obtained by a Discretionary FSP, Section 3 of the Code prohibits the Discretionary FSP from directly or indirectly –

a) selling to or providing third party/ies with a client’s details, unless obliged by, or in terms of, any law;

b) exercise a vote in a ballot conducted by a unit trust management company;

c) exercise voting rights on behalf of clients to gain control of a listed or unlisted company, except where such voting rights are exercised to protect the interests of clients on whose behalf the financial products involved are held as investments or on the instructions of such clients;

The Code goes further to prohibit the Discretionary FSP from directly or indirectly engaging in the netting of transactions.

Discretionary FSP’s may not directly or indirectly –

a) sell any financial products owned by that Discretionary FSP to any client;

b) buy for own account any financial products owned by any client.

It is evident that these prohibitions exist to avoid the Discretionary FSP from acting contrary to the best interests of clients in conflicts of interest situations.


Summary

In this chapter we looked at prohibitions and guidelines in respect of personal account trading applicable to Discretionary and Hedge Fund FSP’s.

Specific prohibitions are contained in the Discretionary Code.

Guidelines have been issued by the Registrar dealing with the Registrar’s attitude towards personal account trading and the requirement that there be a Personal Account Trading Policy.

The Registrar for Long-term and Short-term Insurers have duplicated the provisions relating to personal account trading (as contained in the guidelines) and issued Directive 134.A.ii (LT&ST).

As the directive is peremptory, all long-term and short-term insurers must comply with the provisions relating to personal account trading (as opposed to other participants in the financial services arena where the provisions are only guidelines).


1. The purpose of the Personal Account Trading Policy is to:a) prohibit employees of financial institutions from trading in

securities for their own benefitb) regulate the employees of financial institutions when trading

in securities for their own gainc) specify the types of securities in which employees of financial

institutions may invest in d) publish the investment philosophy of the Discretionary FSP

2. In the Personal Account Trading Position Paper the Registrar indicates that:a) he intends to prohibit personal account trading in the near

futureb) he does not approve of Personal Account Tradingc) he does not approve of Personal Account Trading, but

appreciates that financial institutions would not be in a position to employ quality employees if personal Account Trading was prohibited


d) he approves of Personal Account Trading and would like to encourage employees of financial institutions to engage in Personal Account Trading through Personal Account Trading Policy

3. The Guidelines for Personal Account Trading Rules for Employees of Participants in the Financial Markets require participants in the financial markets to:a) employ adequate resources and empowered senior

employeesb) ensure that employees obtain written approval prior to

conducting a Personal Account Tradec) incorporate (by reference) the rules of the Personal Account

Trading Policy in the conditions of employmentd) all of the above

4. The Personal Account Trading Policy should require employees to declare:a) the intent of the Personal Account Transaction, stating

whether the transaction is for speculative or investment purposes

b) the type of securityc) none of the aboved) all of the above

5. The Personal Account Trading Guidelines refers to “connected persons”. A person is a connected person as contemplated in the PA Guidelines if that person is:a) a spouse or partnerb) a minor c) any person in a business or profit sharing relationship with

the employee, including partners in an investment clubd) all of the above

6. Employees provided for in the PA Guidelines do not include:a) temporary employeesb) outsourced third party administratorsc) IT equipment suppliers d) connected persons

7. The Discretionary Code specifically prohibits:a) the selling or providing of client detailsb) the selling or providing of client details, unless obligated by

law


c) the selling or providing of client details to entities outside the group of companies

d) the selling of client details to entities outside the group of companies

8. The Discretionary Code prohibits the Discretionary FSP from:a) selling its own financial products to the clientb) providing the client with advicec) administering the client’s productsd) purchasing the financial product for a client

9. A Discretionary FSP is prohibited from:a) providing the client with interim statementsb) advertising its services to prospective clientsc) buying for its own account the financial products owned by

the clientd) providing administration services to clients

10. Participants in the Financial Services arena may comply with the Personal Account Trading Position Paper and Guidelines except:a) where the Registrar is provided with an undertaking in terms

whereof these participants will only conduct intermediary services in certain categories and sub-categories

b) where the Registrar has exempted participants in the Financial Services arena from having to comply with these provisions

c) where the participants are long-term or short-term insurersd) none of the above



1. The purpose of the Personal Account Trading Policy is to:a) prohibit employees of financial institutions from trading in

securities for their own benefitb) regulate the employees of financial institutions when

trading in securities for their own gainc) specify the types of securities in which employees of financial

institutions may invest in d) publish the investment philosophy of the Discretionary FSP

2. In the Personal Account Trading Position Paper the Registrar indicates that:a) he intends to prohibit personal account trading in the near

futureb) he does not approve of Personal Account Tradingc) he does not approve of Personal Account Trading, but

appreciates that financial institutions would not be in a position to employ quality employees if personal Account Trading was prohibited

d) he approves of Personal Account Trading and would like to encourage employees of financial institutions to engage in Personal Account Trading through Personal Account Trading Policy

3. The Guidelines for Personal Account Trading Rules for Employees of Participants in the Financial Markets require participants in the financial markets to:a) employ adequate resources and empowered senior

employeesb) ensure that employees obtain written approval prior to

conducting a Personal Account Tradec) incorporate (by reference) the rules of the Personal Account

Trading Policy in the conditions of employmentd) all of the above

4. The Personal Account Trading Policy should require employees to declare:


a) the intent of the Personal Account Transaction, stating whether the transaction is for speculative or investment purposes

b) the type of securityc) none of the aboved) all of the above

5. The Personal Account Trading Guidelines refers to “connected persons”. A person is a connected person as contemplated in the PA Guidelines if that person is:a) a spouse or partnerb) a minor c) any person in a business or profit sharing relationship with

the employee, including partners in an investment clubd) all of the above

6. Employees provided for in the PA Guidelines do not include:a) temporary employeesb) outsourced third party administratorsc) IT equipment suppliers d) connected persons

7. The Discretionary Code specifically prohibits:a) the selling or providing of client detailsb) the selling or providing of client details, unless

obligated by lawc) the selling or providing of client details to entities outside the

group of companiesd) the selling of client details to entities outside the group of

companies

8. The Discretionary Code prohibits the Discretionary FSP from:a) selling its own financial products to the clientb) providing the client with advicec) administering the client’s productsd) purchasing the financial product for a client

9. A Discretionary FSP is prohibited from:a) providing the client with interim statementsb) advertising its services to prospective clients


c) buying for its own account the financial products owned by the client

d) providing administration services to clients

10. Participants in the Financial Services arena may comply with the Personal Account Trading Position Paper and Guidelines except:a) where the Registrar is provided with an undertaking in terms

whereof these participants will only conduct intermediary services in certain categories and sub-categories

b) where the Registrar has exempted participants in the Financial Services arena from having to comply with these provisions

c) where the participants are long-term or short-term insurers



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