Inappropriate promotion of portfolios in a collective investment scheme in securities

By Francisco Khoza and Siphesihle Linda Nyoka

On 7 May 2009, the Registrar of Collective Investment Schemes (“Registrar”) issued CISCA Circular No. 10 (the “Circular”) dealing with the promotion of portfolios in a collective investment scheme in securities.

According to the Circular, the Registrar has noted that some members of the collective investment schemes industry have been promoting collective investment scheme portfolios as being in compliance with prudential requirements under the Pension Funds Act, 1956. The prudential requirements are those set out in Regulation 28 of the Pension Funds Act,1956 which a pension fund’s investment strategy must comply with.

In the Circular the Registrar makes it clear that a collective investment scheme portfolio may not be marketed as a portfolio in compliance with the prudential requirements for pension funds, if such requirements are not specifically stated in the portfolio’s investment policy. The Registrar’s position is supported by section 106 of the Collective Investment Schemes Control Act, 2002, which states that no person may make a statement or disseminate information which he or she knows, or ought reasonably to know, is false or misleading or is likely or intended to, among other things, induce other person to purchase or deal in a participatory interest. In addition, the conduct dealt with in the Circular is contrary to the advertising requirements under the code for advertising applicable to collective investment schemes and supervised by the Association for Savings and Investment in South Africa.

The Circular states that, where the prudential guidelines applicable to pension funds are incorporated in the investment policy of a collective investment scheme portfolio, then such prudential guidelines must apply at all time in their entirety.

The Circular also stated that a pension fund may obtain a certificate from its auditor confirming that the relevant portfolio complies with the prudential guidelines. Similarly, if the manager of a collective investment scheme so wishes, he or she may obtain an auditor’s certificate that the relevant CIS portfolio complies with the pension fund prudential guidelines.

The investment policies of collective investment scheme portfolios that are affected by the Circular are required to amend their terms of the Collective Investment Schemes Control Act, 45 of 2002 by no later than 30 September 2009. Managers who do not wish to make amendments are required to immediately stop promoting such portfolios as being in compliance with prudential guidelines applicable to pension funds.

The Financial Services Board will consider taking regulatory action against those who fail to comply with the Circular.

The Circular can be found on the Financial Services Board website: www.fsb.co.za (under the CIS section dealing with industry circulars).

 
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