INSETA Learning Material RE 3

FSB REGULATORY EXAMINATION PREPARATION
Section 2:
First Level Regulatory Examination:
FSPs (sole proprietors) and Key
Individuals in Categories II and IIA
INSETA Section 2 10b
INSETA
Table of contents
Heading
Page number
Task list
Glossary
CHAPTER 1:
CATEGORY II AND IIA BUSINESS MODEL
1.1
Introduction
1.2
Characteristics of Category II and IIA FSP
1.3
Separation of Client Assets
18
1.4
Roles and responsibilities of various parties
19
1.5
Need for Relevant Contracts
27
Self-Assessment Questions
29
Self-Assessment Answers
31
CHAPTER 2:
ROLE OF THE INDEPENDENT NOMINEE
33
2.1
Purpose of Independent Nominee
34
2.2
Duties of Independent Nominee
38
41
42
CHAPTER 3:
MANAGE AND OVERSEE CLIENT MANDATES
45
3.1
Use of client mandates
46
3.2
Client mandates
46
50
52
CHAPTER 4:
DISCLOSURES
55
4.1
56
Minimum disclosures
65
68
CHAPTER 5:
CONFLICTS OF INTEREST
71
5.1
72
Conflicts of Interest
80
83
CHAPTER 6:
MANAGE AND OVERSEE TYPICAL DAILY TRANSACTIONS
85
6.1
86
Different product turnaround times
90
92
CHAPTER 7:
LEGAL ENVIRONMENT
95
7.1
Financial soundness
96
7.2
Fidelity cover
97
7.3
Netting of transactions
99
7.4
Conducting business with other authorised FSPs
100
7.6
Continual compliance
101
7.7
Civil remedies available to the Registrar
101
104
106
CHAPTER 8:
RECORD-KEEPING
109
8.1
110
Requirements for record-keeping
117
120
CHAPTER 9:
CLIENT REPORTING
123
9.1
124
Requirements relating to client reporting
126
128
CHAPTER 10:
PROHIBITIONS IN TERMS OF DISCRETIONARY CODE OF
CONDUCT
129
10.1
Personal account trading
130
10.2
Prohibitions in terms of the Discretionary Code
134
125
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.
Manage the role of the independent nominee.
Manage and oversee client mandates.
Manage and oversee typical daily transactions.
Manage and oversee disclosures.
Understand the legal environment of Category II and/or IIA FSP.
Apply the record-keeping requirements.
Comply with requirements when reporting to clients.
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 FSPs 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
1
Category II and IIA Business Model
This chapter covers the following criteria:
KNOWLEDGE CRITERIA
Describe the characteristics of a Category II and/or Category IIA FSP and
how that differentiates it from other FSPs in Category I or III.
Discuss the separation of client assets from Category II and/or IIA FSPs
assets.
Explain the role of various parties.
Describe the need for relevant contractual agreements to be in place with the
relevant other party.
SKILLS CRITERIA
Take the difference between Category II and IIA FSPs 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
FSPs (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 FSPs, one immediately experiences a complication.
Category II FSPs are commonly referred to as Discretionary FSPs whereas
Category IIA FSPs are commonly referred to as Hedge Fund FSPs. Whilst
these names are used to distinguish these two categories of FSPs, they are,
in fact, both Discretionary FSPs and are dealt with by the same Code of
Conduct.
The focus of this book is to concentrate on Category II and IIA FSPs 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 FSPs jointly as Discretionary FSPs. We shall emphasise
Category IIA or Hedge Fund FSPs, where appropriate. Whilst exceptions may
exist, the general principle is that the provisions and obligations are
applicable to both FSPs 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 FSPS
1.2.1
Advice versus intermediary services
As stated above, FSPs 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 FSPs, we are still none the wiser as to the post-FAIS nature of
these FSPs. 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 FSPs.
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
clientsa)
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,
10
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 clients 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.
11
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 FSPs

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 FSPs, read together with the General Code of Conduct
(where applicable) and any other applicable law.
12
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 clients
investments, without having to seek the clients 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 clients specific/individual consent to each transaction
and exercises a greater discretion over the clients 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;
13
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 FSPs were promulgated. Of particular relevance to
Category II and IIA FSPs is the Code of Conduct of Discretionary FSPs (the
Discretionary Code). The Discretionary Code defines a Hedge Fund FSP to be
an FSP
14
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 FSPs); 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
15
b)
a position in which the nominal exposures to assets in the portfolio

are less than nil or more than 100% of the market value of the
portfolio;
Net short position, means a condition in which a portfolio has a greater

nominal exposure to short positions than long positions in any asset class or
in aggregate across the portfolio, meaning that more capital (including
collateral) supports short positions than is invested in long positions and
which may in certain cases require additional capital to be invested in the
portfolio over and above the initial capital investment;
Short position, means
a)
a position where an asset is sold by a seller for delivery at a future

date or time, and the seller does not own such asset at the time of
the sale; or
b)
in the case of a derivative instrument, a position where

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

impact on the value of the derivative instrument; or
ii.
an increase in the price of the underlying asset has a negative

impact on the value of the derivative instrument.
The reference to a portfolio in the definition of hedge funds above

indicates that a Hedge Fund FSP may elect to conduct its business in the form
or a collective investment scheme portfolio. This provision is not regarded in
the financial services industry as being exclusive and it is therefore possible
for a Hedge Fund FSP to elect another structure in which to conduct its
business. It is therefore important to understand what it means to hedge,
in relation to a Hedge Fund FSP as these categories of FSPs 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)
16
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 FSPs and Hedge

Fund FSPs 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 FSPs 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 FSPs is the distinguishing factor between the Discretionary and
Hedge Fund FSP on the one hand, and other FSPs 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 clients financial circumstances,

needs and objectives and such information that is necessary to
enable the FSP to render suitable intermediary services to the client;
17
2.
identify the financial products that best suit the clients 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 FSPs 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 FSPs; 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 FSPs 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
18
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 FSPs. In addition to this Code of
Conduct Section 15 further authorises the Registrar to publish different Codes
of Conduct for the various Categories of FSPs. 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 FSPs 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 Shortterm 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 FSPs private assets; and
19
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 clients 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 clients funds.
1.4
ROLES AND RESPONSIBILITIES OF VARIOUS PARTIES
It is important, when considering the context of Discretionary FSPs, to briefly

consider the different parties and / or legal entities that interact or potentially
interact with the Discretionary FSPs. These parties and / or legal entities
include the following:
1.4.1
The Registrars
Different pieces of legislation create the various Registrars that regulate

FSPs, 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 FSPs
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
20
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 nominees function is to hold assets on behalf of clients of

long-term insurers, short-term insurers or pension funds, or, Administrative
and/or Discretionary FSPs 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
21
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
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.
22
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.
g)
the provisions of this Act and the deed
if the manager does not comply with the limitations and provisions
referred to in paragraph (f)(i) or (ii), state the reason for the noncompliance 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
23
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.
24
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 exchangetraded 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 socalled private banking".
The provision of 'investment management services' includes elements of
financial
statement
implementation
and
analysis,
asset
selection,
ongoing
monitoring
of
stock
selection,
investments.
plan
Investment
management is a large and important global industry in its own right

responsible for care-taking of trillions of dollars, euros, pounds and yen.
Coming under the remit of financial services many of the world's largest
companies are at least in part investment managers and employ millions of
staff and create billions in revenue.
(http://en.wikipedia.org/wiki/Investment_manager)
In essence the manager may elect to outsource the investment or asset
management function to an external asset or investment manager. The trustee
or custodian would still be responsible for ensuring that the manager and asset
manager remains within the parameters of the Investment Policy contained
supplemental deed
25
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 FSPs and representatives may (subject to the rules of the
fund) make them available to members of the public.
1.4.8
Third party FSPs
The identification of third party FSPs have become more important since the
addition of subsection (3) to Section 7 of FAIS. Subsection 7(3) reads as
follows:
(3) An authorised financial services provider or representative may only
conduct financial services related business with a person rendering financial
services if that person has, where lawfully required, been issued with a
license for the rendering of such financial services and the conditions and
restrictions of that license authorises the rendering of those financial
services, or is a representative as contemplated in this Act.
As a Category II and IIA FSPs will conduct business with other persons who
render financial services, it is important to ensure that those third Party FSPs
possess the necessary licenses, failing which the Category II and IIA FSPs
will attract liability. The key issue in 7(3) is to understand what it means to
render financial services.
26
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 persons business is a factual one, and all FSPs 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 FSPs deal with independent
intermediaries as the FSPs 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.
27
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 suppliers 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.
28
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.
29
1.
Section 1 of FAIS defines financial services as:

a)
rendering intermediary services
b)
providing advice
c)
rendering intermediary services and providing advice
d)
rendering intermediary services or providing advice OR

2.
3.
A discretionary FSP renders:

a)
intermediary services
b)
advice
c)
advice and intermediary services
d)
advice or intermediary services
Intermediary services include:

a)
an act, the result of which is that the client may enter into
any transaction in respect of a financial product
b)
an act, the result of which is that the client offers to enter

into any transaction in respect of a financial product
c)
an act, the result of which is that the client enters into any
transaction in respect of a financial product
d)
4.
all of the above
A Discretionary FSP is defined as:

a)
an FSP that renders intermediary services
b)
an FSP that renders intermediary services of a discretionary

nature
c)

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)

nature in respect

contract or policy), h and i of the definition of financial
product
30
5.
A hedge fund means:

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

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

result in losses greater than its aggregate market value
c)
a portfolio that uses leverage to hedge against market losses
d)
a portfolio that uses a short position to hedge against market

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

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

made by the Hedge Fund FSP
7.
c)
obtain a signed mandate from the client
d)
all of the above
Relevant contracts required by a Discretionary FSP include, but are

not limited to:
8.
a)
mandates from clients
b)
contracts with other FSPs
c)
contracts with third party service providers
d)
all of the above
A short position means:

a)
selling an asset that one does not own
b)
buying an asset with the intention of re-selling it
c)
selling an asset that has been held for a short period of time
d)
buying an asset directly off the JSE as opposed to buying an

asset through a third party provider such as a Collective
Investment Scheme Portfolio
9.
10.
A manager must have:

a)
well defined compliance procedures
b)
disclose all conflicts of interest
c)
maintain adequate financial resources to meet commitments
d)
all of the above
A CISCA deed means:

a)
an agreement between two parties
b)
an agreement in terms whereof a collective investment

scheme is established
c)
an agreement to transfer immovable property
31
d)
an agreement in terms whereof a trust is established
1.
Section 1 of FAIS defines financial services as:

a)
rendering intermediary services
b)
providing advice
c)
d)
rendering intermediary services or providing advice OR

2.
3.
A discretionary FSP renders:

a)
intermediary services
b)
advice
c)
advice and intermediary services
d)
advice or intermediary services
Intermediary services include:

a)
an act, the result of which is that the client may enter into
any transaction in respect of a financial product
b)
an act, the result of which is that the client offers to enter

into any transaction in respect of a financial product
c)
an act, the result of which is that the client enters into any
transaction in respect of a financial product
d)
4.
all of the above
A Discretionary FSP is defined as:

a)
an FSP that renders intermediary services
b)

nature
c)

nature in respect of financial products referred to in
contract or policy), d and e of the definition of financial
product
d)

nature in respect

contract or policy), h and i of the definition of financial
product
32
5.
A hedge fund means:

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

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

could result in losses greater than its aggregate market value
c)
a portfolio that uses leverage to hedge against market losses
d)
a portfolio that uses a short position to hedge against market

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

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

made by the Hedge Fund FSP
7.
c)
obtain a signed mandate from the client
d)
all of the above
Relevant contracts required by a Discretionary FSP include, but are

not limited to:
8.
a)
mandates from clients
b)
contracts with other FSPs
c)
contracts with third party service providers
d)
all of the above
A short position means:

a)
selling an asset that one does not own
b)
buying an asset with the intention of re-selling it
c)
selling an asset that has been held for a short period of time
d)
buying an asset directly off the JSE as opposed to buying an

asset through a third party provider such as a Collective
Investment Scheme Portfolio
9.
10.
A manager must have:

a)
well defined compliance procedures
b)
disclose all conflicts of interest
c)
maintain adequate financial resources to meet commitments
d)
all of the above
A CISCA deed means:

a)
an agreement between two parties
b)
an agreement in terms whereof a collective investment

scheme is established
c)
an agreement to transfer immovable property
33
d)
34
an agreement in terms whereof a trust is established
Chapter
2
The role of the independent nominee
KNOWLEDGE CRITERIA
Describe the obligations and requirements regarding the use of nominee
companies.
Explain the purpose of the Nominee Company.
Describe the duties the Nominee Company is responsible for.
SKILLS CRITERIA
Verify that there are processes in place to check that the Independent
Nominee Company executes its responsibilities towards the Category II and
IIA FSPs.
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.
35
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 FSPs. 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 investors 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
36
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
37
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 Longterm 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
38
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
39
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,
requirements listed in (a)
to
demonstrate
that
it
has
met
the
(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
40
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 FSPs 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.
41
1.
The following Registrars published the Board Notice 63 of 2007.

Select the incorrect answer:
2.
a)
Registrar of Financial Services Providers
b)
Registrar of Long-term Insurers
c)
Registrar of Collective Investment Schemes
d)
Registrar of Pension Funds
Independent nominees must obtain the Registrars prior written

approval when they want to hold:
a)
long-term insurance assets
b)
short-term insurance assets
c)
assets on behalf of an Administrative or Discretionary FSP

who holds assets on behalf of a Long-term or Short-term
Insurer or Collective Investment Schemes
d)

Insurer or Pension Funds
3.
A prescribed condition for independent nominees is:

a)
they may not have natural persons as shareholders
b)
they may not dispose of shares without the prior written

approval of the Registrar
c)
their Articles and Memorandum of Association must stipulate

that their sole object is to hold assets on behalf of investors
of the Administrative FSP, Discretionary FSP, Long-term
Insurer, Short-term Insurer, Central Securities Depository or
exchange, as the case may be
d)
they must be owned by one or more Long-term Insurers,

Short-term Insurers, Administrative or Discretionary FSPs,
Central Securities Depository or exchange
4.
The holding company of an independent nominee must demonstrate

that it:
a)
is fit and proper to own an independent nominee
b)
has the culture and operational ability to own an independent

nominee
c)
has evidence of documented internal control ensuring that

the Independent Nominee is effectively run
42
d)
5.
has an independent bank account for institutional investors
An approved independent nominee must annually submit to the

Registrar:
a)
audited financial statements
b)
an audit report within 3 months of the financial year-end

setting out whether any assets were held on behalf of other
person(s) in safe custody
c)

d)
a declaration by the holding company in the prescribed

format
6.
An independent nominee company function is to:

a)
hold assets on behalf of beneficial owners
b)
hold investments on behalf of beneficial owners
c)
hold investments in the names of the beneficial owners on

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

owners of those investments
7.
Independent nominees may:

a)
offer to pay certain expenses for its holding company
b)
provide a surety for its holding company or any of its

subsidiary companies
8.
c)
not incur any expenses or liabilities
d)
not pay for any of its expenses or liabilities
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
43
9.
The holding company of the independent nominee may outsource the

control and operation of the Nominee Register to another company
where:
a)
the outsource company has a minimum of 5 million equity

capital
b)
the
outsource
company
has
sufficient
contracts
with
outsourced administrators to ensure sufficient delivery of

administration services
c)
the outsource company complies with section 11 of the

Regulations to FAIS
d)
the outsource company satisfies the requirements prescribed

in Section 5.2.2 of Board Notice 63 of 2007
10.
Independent nominee companies may:

a)
own assets and make investments for their own benefit
b)
not have natural persons as shareholders
c)
at any time dispose of shares to members of the public
d)
be listed on the JSE
1.
The following Registrars published the Board Notice 63 of 2007.

Select the incorrect answer:
2.
a)
Registrar of Financial Services Providers
b)
Registrar of Long-term Insurers
c)
Registrar of Collective Investment Schemes
d)
Registrar of Pension Funds
Independent nominees must obtain the Registrars prior written

approval when they want to hold:
a)
long-term insurance assets
b)
short-term insurance assets
c)

Insurer or Collective Investment Schemes
d)

Insurer or Pension Funds
44
3.
A prescribed condition for independent nominees is:

a)
they may not have natural persons as shareholders
b)
they may not dispose of shares without the prior written

approval of the Registrar
c)
their Articles and Memorandum of Association must stipulate

that their sole object is to hold assets on behalf of investors
of the Administrative FSP, Discretionary FSP, Long-term
Insurer, Short-term Insurer, Central Securities Depository or
exchange, as the case may be
d)
they must be owned by one or more Long-term Insurers,

Short-term Insurers, Administrative or Discretionary FSPs,
Central Securities Depository or exchange
4.
The holding company of an independent nominee must demonstrate

that it:
a)
is fit and proper to own an independent nominee
b)
has the culture and operational ability to own an independent

nominee
c)
has evidence of documented internal control ensuring that

the Independent Nominee is effectively run
d)
5.
has an independent bank account for institutional investors
An approved independent nominee must annually submit to the

Registrar:
a)
audited financial statements
b)

c)

d)
a declaration by the holding company in the prescribed

format
6.
An independent nominee company function is to:

a)
hold assets on behalf of beneficial owners
b)
hold investments on behalf of beneficial owners
c)
hold investments in the names of the beneficial owners on

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

owners of those investments
45
7.
Independent nominees may:

a)
offer to pay certain expenses for its holding company
b)
provide a surety for its holding company or any of its

subsidiary companies
8.
c)
not incur any expenses or liabilities
d)
not pay for any of its expenses or liabilities
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.
46
Independent nominee companies may:

a)
own assets and make investments for their own benefit
b)
not have natural persons as shareholders
c)
at any time dispose of shares to members of the public
d)
be listed on the JSE
Chapter
Manage and oversee client mandates

KNOWLEDGE CRITERIA
Explain why the Category II and/or IIA FSP must use mandates that have
been approved by the FSP.
Describe
the
requirements
regarding
the
development,
amendments,
approval and use of specimen mandates.

Explain why a mandate cannot be used if it is not approved by the FSB.
Explain why a mandate cannot be used if it is not signed by the client or his
duly authorised representative.
Explain why such a mandate must adhere to the requirements in the
Discretionary Code of Conduct.
SKILLS CRITERIA
Manage clients mandates in accordance with mandatory requirements.
47
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 FSPs) must obtain a signed mandate
from the client prior to rendering any financial services. The Discretionary FSP
must at all times adhere to the clients 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 FSPs including Hedge Fund FSPs)
Section 5(2) of the Discretionary Code stipulates that the Discretionary FSPs
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.
48
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)
Category III FSPs
(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;
49
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 clients 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 clients 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
50
3.2.2
Additional Mandate (Applicable to Hedge Fund FSPs 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.
51
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 clients identity document
b)
a signed mandate from the client
c)
proof that the client is insured
d)
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 mandate
b)
whether the nominee earns any fees for holding investments

for clients
c)
how many clients the nominee holds investment on behalf of
d)
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 Services
b)
The Registrar for Collective Investment Schemes
c)
The
Registrar
for
Financial
Services
Providers
and
Representatives
d)
The Registrar for Long-term and Short-term Insurance

Companies
4.
Discretionary FSPs may:

a)
52
only take interest after the first day
5.
b)
only take interest after the second day
c)
not take interest on monies deposited into its bank account
d)
use interest to defray its expenses
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:
6.
a)
The client
b)
An independent nominee nominated by the client
c)
The Long-term insurance company nominated by the client
d)
An independent nominee nominated by the product supplier
Hedge Fund FSPs must obtain an additional mandate from their

clients in which the client:
a)
approves of the underlying asset managers
b)
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
53
1.
Prior to rendering intermediary services, the Category II or IIA FSP

must obtain:
a)
a copy of the clients identity document
b)
a signed mandate from the client
c)
proof that the client is insured
d)
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 mandate
b)
whether the nominee earns any fees for holding investments

for clients
c)
how many clients the nominee holds investment on behalf of
d)
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 Services
b)
The Registrar for Collective Investment Schemes
c)
The
Registrar
for
Financial
Services
Providers
and
Representatives
d)
The Registrar for Long-term and Short-term Insurance

Companies
4.
54
Discretionary FSPs may:

a)
only take interest after the first day
b)
only take interest after the second day
c)
not take interest on monies deposited into its bank account
d)
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:
6.
a)
The client
b)
An independent nominee nominated by the client
c)
The Long-term insurance company nominated by the client
d)
An independent nominee nominated by the product supplier
Hedge Fund FSPs must obtain an additional mandate from their

clients in which the client:
a)
approves of the underlying asset managers
b)
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
55
56
Chapter
4
Disclosures
KNOWLEDGE CRITERIA
Explain how to ensure transparency.
SKILLS CRITERIA
Confirm that disclosures are adequate to enable the client to make an
informed decision.
57
Purpose
This 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 FSPs.
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 FSPs 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 FSPs
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:
58
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 clients
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 clients

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
Suppliers 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
59
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 suppliers 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:
60
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.
61
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
FSPs 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 clients particular investment)
and
performance
benchmarks
or
other
criteria
applicable to such charges or fees; and
62
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
63
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,
consequences
paragraph
of
(xiv),
the
frequency
non-compliance
any
thereof,
and,
anticipated
the
subject
or
to
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 noncompliance;
vii.
the nature, extent and frequency of any incentive,

remuneration,
brokerages
consideration,
(valuable
commission,
consideration),
fee
which
or
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
guarantees;
64
other
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
clients 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 nondisclosure 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.
65
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.
66
1.
In terms of the General Code an FSP is compelled to make

disclosure to the client on:
2.
a)
the product supplier
b)
the product provider
c)
the financial services to be provided
d)
all of the above
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 predeterminable, 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)
3.
4.
none of the above
The General Code requires the FSP to disclose whether:

a)
the product supplier holds more than 5% of the FSPs shares
b)
c)
d)
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 supplier
b)
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 above
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5.
The FSP must disclose to the client the fact that it received more
than:
6.
a)
30% from the product supplier
b)
c)
d)
None of the above
The representative of an FSP must, at the earliest reasonable

opportunity, disclose to the client whether the FSP has:
7.
a)
professional indemnity insurance cover
b)
guarantees
c)
fidelity insurance cover
d)
none of the above
The FSP may make the required disclosures orally, provided that it
confirms these disclosures in writing within:
8.
a)
15 days
b)
25 days
c)
30 days
d)
45 days
Specific disclosures that the FSP must make at the earliest

reasonable opportunity are:
a)
the name, class or type of financial product concerned
b)
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 noncompliance and any anticipated or contractual escalations,
increases or additions)
c)

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)
9.
all of the above
The FSP is required to separately disclose any charges and fees

levied against the product, including:
68
a)
the recipient thereof
b)
the currency in which it will be levied
c)
how the fees will be levied
d)
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 quarterly
b)
at least half-yearly
c)
at least annually
d)
none of the above
69
1.
In terms of the General Code an FSP is compelled to make

disclosure to the client on:
2.
a)
the product supplier
b)
the product provider
c)
the financial services to be provided
d)
all of the above
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 predeterminable, 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)
3.
4.
none of the above
The General Code requires the FSP to disclose whether:

a)
b)
c)
d)
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 supplier
b)
the contractual relationship with the FSP
c)
names and contact details of relevant compliance and

complaints departments of the product supplier
70
d)
5.
none of the above
The FSP must disclose to the client the fact that it received more
than:
6.
a)
b)
c)
d)
None of the above
The representative of an FSP must, at the earliest reasonable

opportunity, disclose to the client whether the FSP has:
7.
a)
professional indemnity insurance cover
b)
guarantees
c)
fidelity insurance cover
d)
none of the above
The FSP may make the required disclosures orally, provided that it
confirms these disclosures in writing within:
8.
a)
15 days
b)
25 days
c)
30 days
d)
45 days
Specific disclosures that the FSP must make at the earliest

reasonable opportunity are:
a)
the name, class or type of financial product concerned
b)

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 noncompliance and any anticipated or contractual escalations,
increases or additions)
c)

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)
9.
all of the above
The FSP is required to separately disclose any charges and fees

levied against the product, including:
a)
the recipient thereof
b)
the currency in which it will be levied
c)
how the fees will be levied
71
d)
10.
all of the above
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:
72
a)
at least quarterly
b)
at least half-yearly
c)
at least annually
d)
none of the above
Chapter
5
Conflict of interest
KNOWLEDGE CRITERIA
Explain how to manage conflicts of interest.
SKILLS CRITERIA
Confirm that adequate avoidance, mitigation and disclosures are made in
order for the client to make an informed decision.
73
Purpose
FSPs 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
clients 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 clients 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 institutions 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
74
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 FSPs 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 FSPs

Conflicts of Interest Management Policy to avoid or mitigate the
conflict;
75
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 FSPs 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:
5.
a)
are specifically agreed to by the client in writing; and
b)
may be stopped at the discretion of that client;
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.
76
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
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 FSPs 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 FSPs,
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;
77
iii.
iv.
a parent or stepparent of that person;

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.
b)
a person who is in a commercial partnership with that person;
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
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)
78
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 Registrars 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
79
a)
an FSP who is a sole proprietor;
b)
a representative for that representatives 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 interests 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 FSPs 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 Registrars 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:
80
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 FSPs

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 FSPs 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:
81
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 clients 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:
2.
82
a)
through BN58
b)
with the promulgation of the General Code
c)
with the promulgation of FAIS
d)
none of the above
BN58, in relation to conflicts of interest, introduced:

a)
more rules based regulation
b)
more principles based regulation
c)
a combination of the two
d)
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 supplier
b)
influences the objective performance of the underlying

investments
c)
influences
the
objective
performance
of
the
FSP
or
representative
d)
4.
5.
influences the objective performance of the Registrar
The provisions of BN58 become effective on:

a)
19 April 2010
b)
19 July 2010
c)
19 October 2010
d)
19 January 2011
In essence the new provisions relating to conflicts of interest require

the FSP or representative to:
6.
7.
8.
a)
avoid
b)
mitigate
c)
disclose
d)
all of the above
An FSP must, by 19 July, disclose all conflicts of interest:

a)
as soon as reasonably possible
b)
within 30 days of inception of the policy
c)
at quotation stage
d)
none of the above
An FSP must publish a conflicts of interest management policy for:

a)
all clients
b)
members of the public
c)
prospective clients
d)
none of the above
An immaterial financial interest has a value of less than:

a)
R500
b)
R1000
c)
R10 000
d)
R30 000
83
9.
A FSP may only give or receive:

a)
commission in terms of the Long-term and Short-term

Insurance Act
b)
immaterial financial interest
c)
fees in respect of Long-term and Short-term Insurance

policies
d)
10.
all of the above
FSPs, who are also product suppliers, have to comply with conflict of
interest provisions by:
84
a)
19 July 2010
b)
19 October 2010
c)
19 April 2011
d)
none of the above
1.
The principles relating to conflicts of interest were first introduced

into the General Code:
2.
3.
a)
through BN58
b)
with the promulgation of the General Code
c)
with the promulgation of FAIS
d)
none of the above
BN58, in relation to conflicts of interest, introduced:

a)
more rules based regulation
b)
more principles based regulation
c)
a combination of the two
d)
none of the above
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 supplier
b)
influences the objective performance of the underlying

investments
c)
influences
the
objective
performance
of
the
FSP
or
representative
d)
4.
5.
influences the objective performance of the Registrar
The provisions of BN58 become effective on:

a)
19 April 2010
b)
19 July 2010
c)
19 October 2010
d)
19 January 2011
In essence the new provisions relating to conflicts of interest require

the FSP or representative to:
a)
avoid
b)
mitigate
c)
disclose
d)
all of the above
85
6.
7.
8.
9.
An FSP must, by 19 July, disclose all conflicts of interest:

a)
as soon as reasonably possible
b)
within 30 days of inception of the policy
c)
at quotation stage
d)
none of the above
An FSP must publish a conflicts of interest management policy for:

a)
all clients
b)
members of the public
c)
prospective clients
d)
none of the above
An immaterial financial interest has a value of less than:

a)
R500
b)
R1 000
c)
R10 000
d)
R30 000
A FSP may only give or receive:

a)
commission in terms of the Long-term and Short-term

Insurance Act
b)
immaterial financial interest
c)
fees in respect of Long-term and Short-term Insurance

policies
d)
10.
all of the above
FSPs, who are also product suppliers, have to comply with conflict of
interest provisions by:
86
a)
19 July 2010
b)
19 October 2010
c)
19 April 2011
d)
none of the above
Chapter
6
Manage and oversee typical daily transactions
KNOWLEDGE CRITERIA
Explain 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 CRITERIA
Check 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.
87
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 FSPs invest their clients money in various underlying

securities, it is extremely important that these FSPs 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 FSPs and Hedge Fund FSPs 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 FSPs or representatives could
suffer a financial loss through. These could be:
theft
fraud
other dishonest acts
poor administration
negligence
professional misconduct
culpable omissions
88
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.
89
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 FSPs 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 compliancerelated 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
90
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 representatives 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
91
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

investments
b)
have sufficient systems and resources available to manage

these investments
2.
c)
employ sufficient staff to manage these investments
d)
all of the above
The purpose behind Risk Management is to ensure that clients dont

suffer losses due to:
a)
negative market movements
b)
incorrect hedging of investments
c)
theft, fraud, negligence, poor administration, professional

misconduct and other dishonest acts
d)
92
all of the above
3.
FAIS requires a compliance officer to be appointed where:

a)
the FSP is a Category I FSP
b)
the
FSP
has
more
than
key
individual
and/or
representatives
4.
c)
the FSP only has representatives
d)
the FSP only has key individuals
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 month
b)
FSP must notify the Registrar within 1 month of termination
c)
compliance officer must submit a report to the Registrar

detailing the reasons for the termination
d)
5.
6.
none of the above
The compliance function must exist within the:

a)
FSP
b)
product supplier
c)
risk management framework
d)
product rules
In order to qualify as a compliance officer the individual has to:

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

management function
c)
attain a specific financial services or compliance diploma or

degree
d)
all of the above
93
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

investments
b)
have sufficient systems and resources available to manage

these investments
2.
c)
employ sufficient staff to manage these investments
d)
all of the above
The purpose behind Risk Management is to ensure that clients dont

suffer losses due to:
a)
negative market movements
b)
incorrect hedging of investments
c)
theft, fraud, negligence, poor administration, professional

misconduct and other dishonest acts
d)
3.
all of the above
FAIS requires a compliance officer to be appointed where:

a)
the FSP is a Category I FSP
b)
the
FSP
has
more
than
key
individual
and/or
representatives
4.
c)
the FSP only has representatives
d)
the FSP only has key individuals
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 month
b)
FSP must notify the Registrar within 1 month of termination
c)
compliance officer must submit a report to the Registrar

detailing the reasons for the termination
d)
5.
94
none of the above
The compliance function must exist within the:

a)
FSP
b)
product supplier
c)
risk management framework
d)
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 6
b)
have at least 3 years experience in a compliance or risk

management function
c)
attain a specific financial services or compliance diploma or

degree
d)
all of the above
95
96
Chapter
7
Legal Environment
KNOWLEDGE CRITERIA
Explain 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 CRITERIA
Apply the liquidity requirements to own business
Apply the fidelity requirements to own business
Apply the capital requirements to own business
Verify that there are systems in place to check whether netting of
transactions does not take place
Confirm 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
97
Purpose
A myriad of legal requirements pertaining to Discretionary and Hedge Fund FSPs
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 FSPs. BN106 stipulates as
general criteria to be met by all FSPs 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 FSPs need not maintain a
specific rand amount in reserve to meet a capital adequacy requirement.
Category II FSPs are required to ensure that their assets (excluding goodwill,
other intangible assets and investments in related parties) exceed the
Category II FSPs 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.
98
7.1.3
Category IIA FSP
Section 9(5) of BN106 stipulates that Category IIA FSPs must maintain
assets (excluding goodwill, other intangible assets and investments in related
parties) that exceeds the Category IIA FSPs 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 FSPs are probably
substantial. It becomes apparent that the seven (7) days without realising a
loss on liquidation restriction limits these FSPs 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 FSPs that, inter alia, contain provisions requiring
FSPs 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
99
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 clients financial products or funds (money), on the one hand,
and where the FSP merely administers the clients 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 FSPs 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 FSPs have a period of six (6) weeks in which to obtain the
relevant cover or guarantee.
7.2.2
Category II FSPs
Receiving or holding clients 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.
100
Not receiving or holding clients 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 FSPs
Receiving or holding clients 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 clients 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 FSPs

defines netting as the offsetting of offers to purchase and repurchase
financial products and where Administrative FSPs 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 investors
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 clients financial products or funds are
dealt with strictly in accordance with the mandate given to the FSP.
101
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 FSPS
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
FSPs or representative who have been licensed in the category and subcategory of financial services and financial products, respectively. A lookthrough 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 representatives 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 clients 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 samplemonitoring basis that clients mandates are being adhered to.
102
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 licenseea)
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;
103
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.
104
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 FSPs. Where appropriate, we
distinguish these two types of FSPs based on their respective requirements.
Under the topic Financial Soundness we not only distinguish the respective
categories of FSPs 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 FSPs.
We deal with the netting of transactions as prohibited by Discretionary Code.
We briefly consider the requirements when dealing with other FSPs 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 noncompliance could have on the FSPs license.
Finally, we consider the civil remedies available to FSPs.
105
1.
2.
3.
4.
5.
6.
106
Section 8 of FAIS requires FSPs to maintain:

a)
integrity and honesty
b)
operational ability and competency
c)
financial soundness
d)
all of the above
Financial soundness translates into:

a)
operational ability and competence
b)
capital adequacy
c)
liquidity
d)
capital adequacy and liquidity
A Category II FSP must maintain capital adequacy of:

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

a)
b)
c)
d)
A Category II FSP must maintain liquidity of:

a)
8/52 weeks of its annual expenditure
b)
c)
d)
A Category IIA FSP must maintain liquidity of:

a)
b)
c)
d)
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 cash
c)
can be liquidated within a period of 2 weeks without incurring

d)
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:
9.
a)
receives or holds clients funds
b)
receives or holds clients investments
c)
receives or holds clients investments and/or funds
d)
receives or holds clients investment contracts
Netting of transactions refers to the situation where an FSP:

a)
ensures that the net investment amount accrues to the client
b)
offsets returns on investments against expenses levied

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

financial products thereby reducing market trades for the
ultimate benefit of the FSP
d)
10.
none of the above
Where Category II and IIA FSPs conducts business with other FSPs
they have to ensure that the other FSPs:
a)
possess the relevant licenses for the Category and subcategory
b)
have sufficient capital and liquidity to meet the solvency

requirement
c)
employ a sufficient amount of employees who are suitably

qualified
d)
none of the above
107
1.
2.
3.
4.
5.
6.
108
Section 8 of FAIS requires FSPs to maintain:

a)
integrity and honesty
b)
operational ability and competency
c)
financial soundness
d)
all of the above
Financial soundness translates into:

a)
operational ability and competence
b)
capital adequacy
c)
liquidity
d)
capital adequacy and liquidity
A Category II FSP must maintain capital adequacy of:

a)
b)
c)
d)
A Category IIA FSP must maintain capital adequacy of:

a)
b)
c)
d)
A Category II FSP must maintain liquidity of:

a)
b)
c)
d)
A Category IIA FSP must maintain liquidity of:

a)
b)
c)
d)
7.
BN106 defines liquid assets as those assets which:

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

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

d)
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:
9.
a)
receives or holds clients funds
b)
receives or holds clients investments
c)
receives or holds clients investments and/or funds
d)
receives or holds clients investment contracts
Netting of transactions refers to the situation where an FSP:

a)
ensures that the net investment amount accrues to the client
b)
offsets returns on investments against expenses levied

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

financial products thereby reducing market trades for the
ultimate benefit of the FSP
d)
10.
none of the above
Where Category II and IIA FSPs conducts business with other FSPs
they have to ensure that the other FSPs:
a)
possess the relevant licenses for the Category and subcategory
b)
have sufficient capital and liquidity to meet the solvency

requirement
c)
employ a sufficient amount of employees who are suitably

qualified
d)
none of the above
109
110
Chapter
8
Record-keeping
KNOWLEDGE CRITERIA
Explain the period for which records must be kept.
Describe the requirements specifically in respect of telephone and/or
electronic requirements.
SKILLS CRITERIA
Verify that systems are in place to manage the record-keeping risks of
electronic and telephonic transactions.
111
Purpose
FAIS 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 FSPs 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 noncompliance; 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 FSPs 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:
112
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 clients
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 clients 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.
113
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. FSPs 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 Registrars 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 FSPs

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
114
i.
the identity of the person on whose behalf the client is

acting; and
ii.
c)
d)
the clients authority to act on behalf of that other person;
if another person is acting on behalf of the client

i.
the identity of that other person; and
ii.
that other persons authority to act on behalf of the client;
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
g)
i.
the amount involved; and
ii.
the parties to that transaction;
all accounts that are involved in

i.
transactions concluded by that accountable institution in the

course of that business relationship; and
ii.
h)
that single transaction;
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 persons 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.
115
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

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
116
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

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 Longterm 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.
117
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
FSPs.
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.
118
1.
2.
FAIS requires an FSP to maintain records for a minimum period of:

a)
18 months
b)
3 years
c)
5 years
d)
7 years
Record must be kept of:

a)
known premature cancellations of transactions or financial

products by clients of the FSP
b)
complaints
received
and
an
indication
of whether
the
complaint has been resolved

c)
cases of non-compliance with FAIS and the reasons for such

non-compliance
d)
3.
4.
all of the above
Records of the advice provided by the FSP must be kept for:

a)
18 months
b)
3 years
c)
5 years
d)
7 years
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 client
b)
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)
5.
all of the above
The General Code requires the FSP to:

a)
maintain records itself
b)
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 regularly
119
d)
6.
none of the above
Where the FSP advertises the financial service telephonically, they

are required to maintain records for:
7.
a)
45 days
b)
90 days
c)
180 day
d)
365 days
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 relationship
b)
5 years from the date of termination of the business

relationship
c)
5 years from the date of inception or termination of the

business relationship or last transaction
d)

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 days
b)
the accountable institution has free and easy access to the

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

d)
9.
Where
none of the above

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 records
b)
ensure that it can produce the records within seven days
c)
ensure through regular compliance reviews that the other

accountable
institution
is
properly
satisfying
the
FICA
requirements
d)
120
none of the above
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 parties
c)
discloses the records to providers and product suppliers for

fair value
d)
none
of
the
above
121
1.
2.
FAIS requires an FSP to maintain records for a minimum period of:

a)
18 months
b)
3 years
c)
5 years
d)
7 years
Record must be kept of:

a)
known premature cancellations of transactions or financial

products by clients of the FSP
b)
complaints
received
and
an
indication
of whether
the
complaint has been resolved

c)
cases of non-compliance with FAIS and the reasons for such

non-compliance
d)
3.
4.
all of the above
Records of the advice provided by the FSP must be kept for:

a)
18 months
b)
3 years
c)
5 years
d)
7 years
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 client
b)
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)
5.
all of the above
The General Code requires the FSP to:

a)
maintain records itself
b)
ensure that it can produce these records within a period of 7

days, where records are stored by external service providers
c)
122
ensure that records are backed-up regularly
d)
6.
none of the above
Where the FSP advertises the financial service telephonically, they

are required to maintain records for:
7.
a)
45 days
b)
90 days
c)
180 day
d)
365 days
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 relationship
b)
5 years from the date of termination of the business

relationship
c)

business relationship or last transaction
d)

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

b)
the accountable institution has free and easy access to the

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

d)
9.
Where
none of the above

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 records
b)
ensure that it can produce the records within seven days
c)
ensure through regular compliance reviews that the other

accountable
institution
is
properly
satisfying
the
FICA
requirements
d)
none of the above
123
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 parties
c)
discloses the records to providers and product suppliers for

fair value
d)
124
none of the above
Chapter
9
Client reporting requirements
KNOWLEDGE CRITERIA
Explain why clients must receive written reports at quarterly intervals, that
provide them with investment and related information.
SKILLS CRITERIA
Verify that there are systems and processes that enable the preparation and
delivery of accurate quarterly reports.
125
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;
126
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 FSPs 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.
127
128
Summary
The General Code prescribes that FSPs 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.
129
1.
2.
A Discretionary FSP must send the client a written report at least:

a)
monthly
b)
quarterly
c)
half-yearly
d)
none of the above
The client may request a written report which must then be provided
by the Discretionary FSP on:
3.
a)
at least a monthly basis
b)
request
c)
quarterly
d)
none of the above
The report must contain information reasonably necessary to enable

the client to:
4.
a)
produce a set of financial statements
b)
calculate the clients tax liability
c)
determine whether further investment would be appropriate
d)
all of the above
The Discretionary FSP must, on request, furnish the client with:

a)
the original cost of the financial products held on behalf of

the client
b)
the current market value of the financial products held on

behalf of the client
5.
c)
financial products sold or purchased during the period
d)
all of the above
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 place
b)
the manner in which such financial product may be acquired
c)
the jurisdictions from which the financial product may be

acquired
d)
130
none of the above
1.
2.
A Discretionary FSP must send the client a written report at least:

a)
monthly
b)
quarterly
c)
half-yearly
d)
none of the above
The client may request a written report which must then be provided
by the Discretionary FSP on:
3.
a)
at least a monthly basis
b)
request
c)
quarterly
d)
none of the above
The report must contain information reasonably necessary to enable

the client to:
4.
a)
produce a set of financial statements
b)
calculate the clients tax liability
c)
determine whether further investment would be appropriate
d)
all of the above
The Discretionary FSP must, on request, furnish the client with:

a)
the original cost of the financial products held on behalf of

the client
b)
the current market value of the financial products held on

behalf of the client
5.
c)
financial products sold or purchased during the period
d)
all of the above
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 place
b)
the manner in which such financial product may be acquired
c)
the jurisdictions from which the financial product may be

acquired
d)
none of the above
131
Chapter
10
Prohibitions and guidance notes
KNOWLEDGE CRITERIA
Explain 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 CRITERIA
Check 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.
132
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 FSBs 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;
133
d)
reporting any material transgressions to the appropriate

regulator;
e)
2.
closing positions entered into in contravention of the rules.
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 FSPs 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;
134
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
employers express written consent. Such consent must be
provided by the compliance officer who in conjunction with
the senior dealer reviews 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;
135
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.
ix.
any person employed by the institution.

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.
136
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 clients 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 clients 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 FSPs 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.
137
Summary
In this chapter we looked at prohibitions and guidelines in respect of personal
account trading applicable to Discretionary and Hedge Fund FSPs.
Specific prohibitions are contained in the Discretionary Code.
Guidelines have been issued by the Registrar dealing with the Registrars
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 benefit
b)
regulate the employees of financial institutions when trading

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

institutions may invest in
d)
2.
publish the investment philosophy of the Discretionary FSP
In the Personal Account Trading Position Paper the Registrar indicates

that:
a)
he intends to prohibit personal account trading in the near

future
b)
he does not approve of Personal Account Trading
c)
he does not approve of Personal Account Trading, but

appreciates that financial institutions would not be in a
138
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
employees
b)
ensure that employees obtain written approval prior to

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

Trading Policy in the conditions of employment
d)
4.
all of the above
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
5.
b)
the type of security
c)
none of the above
d)
all of the above
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 partner
b)
a minor
c)
any person in a business or profit sharing relationship with

the employee, including partners in an investment club
d)
6.
all of the above
Employees provided for in the PA Guidelines do not include:

a)
temporary employees
b)
outsourced third party administrators
c)
IT equipment suppliers
d)
connected persons
139
7.
The Discretionary Code specifically prohibits:

a)
the selling or providing of client details
b)
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.
9.
The Discretionary Code prohibits the Discretionary FSP from:

a)
selling its own financial products to the client
b)
providing the client with advice
c)
administering the clients products
d)
purchasing the financial product for a client
A Discretionary FSP is prohibited from:

a)
providing the client with interim statements
b)
advertising its services to prospective clients
c)
buying for its own account the financial products owned by

the client
d)
10.
providing administration services to clients
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
140
c)
where the participants are long-term or short-term insurers
d)
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 benefit
b)
regulate the employees of financial institutions when trading

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

institutions may invest in
d)
2.
publish the investment philosophy of the Discretionary FSP
In the Personal Account Trading Position Paper the Registrar indicates

that:
a)
he intends to prohibit personal account trading in the near

future
b)
he does not approve of Personal Account Trading
c)
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
employees
b)
ensure that employees obtain written approval prior to

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

Trading Policy in the conditions of employment
d)
all of the above
141
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
5.
b)
the type of security
c)
none of the above
d)
all of the above
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 partner
b)
a minor
c)
any person in a business or profit sharing relationship with

the employee, including partners in an investment club
d)
6.
7.
all of the above
Employees provided for in the PA Guidelines do not include:

a)
temporary employees
b)
outsourced third party administrators
c)
IT equipment suppliers
d)
connected persons
The Discretionary Code specifically prohibits:

a)
the selling or providing of client details
b)
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.
142
The Discretionary Code prohibits the Discretionary FSP from:

a)
selling its own financial products to the client
b)
providing the client with advice
c)
administering the clients products
d)
purchasing the financial product for a client
9.
A Discretionary FSP is prohibited from:

a)
providing the client with interim statements
b)
advertising its services to prospective clients
c)
buying for its own account the financial products owned by

the client
d)
10.
providing administration services to clients
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
d)
none of the above
143

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FSB REGULATORY EXAMINATION PREPARATION

INSETA Section 2 10b

INSETA Section 2 10b

Characteristics of Category II and IIA FSP

Separation of Client Assets

Roles and responsibilities of various parties

Need for Relevant Contracts

Purpose of Independent Nominee

Duties of Independent Nominee

Use of client mandates

INSETA Section 2 10b

Different product turnaround times

Conducting business with other authorised FSPs

Civil remedies available to the Registrar

Requirements for record-keeping

Requirements relating to client reporting

Personal account trading

Prohibitions in terms of the Discretionary Code

INSETA Section 2 10b

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

Manage the role of the independent nominee.

Manage and oversee client mandates.

Manage and oversee typical daily transactions.

Manage and oversee disclosures.

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

Apply the record-keeping requirements.

Comply with requirements when reporting to clients.

Institute a personal account of trading policy.

Apply prohibitions in terms of the Discretionary Code of

Deal with Nominee Regulations.

Please note that any reference to:

masculine gender implies also the feminine

singular indicates also the plural, and vice-versa.

INSETA Section 2 10b

Codes of Conduct: the Codes of Conduct for Administrative and

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

Discretionary Code: The Code of Conduct for Discretionary Financial

FAIS: the Financial Advisory and Intermediary Services Act 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

General Code: General Code of Conduct for Authorised Financial

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

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

Registrar: unless otherwise indicated, means the Registrar of

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

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

INSETA Section 2 10b

INSETA Section 2 10b

When considering the nature of a Category II or IIA Financial Services

INSETA Section 2 10b

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

CHARACTERISTICS OF CATEGORY II AND/OR IIA FSPS

Advice versus intermediary services

As stated above, FSPs may, in terms of FAIS, render different categories of

furnishes advice and renders intermediary services; or

renders an intermediary service.

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

in respect of the purchase of any financial product; or

in respect of the investment in any financial product; or

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

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

INSETA Section 2 10b