The purpose of this note is to summarise points to consider when: (a) a foreign collective investment scheme (“FCIS”) wants to conduct business in South Africa: and (b) an EU domiciled FCIS, doing business in South Africa, wants to adopt the extended investment powers under the Undertaking for Collective Investment in Transferable Securities, adopted in December 2001 (“UCITS III”).
Approval of FCISs
Section 65 of the Collective Investment Schemes Control Act (“CISCA”) regulates the activities of FCISs conducting or wishing to conduct business in South Africa. The section provides, among others, that only funds that have received approval from the Registrar of collective investment schemes may solicit investments in such a fund from members of the South African public, subject to various conditions set out by the Registrar. In essence the FCIS may only commence to solicit investments from members of the public in South Africa upon registration. It is a criminal offence for a person to solicit investments in a FCIS which has not been approved by the Registrar.
Two questions arise from the above, what is meant by “solicit” and “members of the public” mean?
Solicit is broadly defined in the CISCA and includes any act to promote investment by members of the public in a collective investment scheme. Solicit therefore includes general public invitations, telephone marketing and any other marketing activities related to a specific scheme aimed at members of the public.
Members of the public include any member of any section of the public and any financial institutions regulated by law. The definition however excludes persons within a restricted circle who share a common interest and receive an invitation in what can reasonably be regarded as a domestic or private business venture.
FCISs that are already operational in the South African market and have gained the necessary approval must comply with ongoing FSB requirements. Details of the conditions to be met by a FCIS in order to do business in South Africa are set out in the Financial Services Board Notice 2076 of 2003 dealing with Conditions in Respect of a Collective Investment Scheme Carried on outside but Promoted in the Republic. Further conditions and requirements are set out in the form of circulars issued from time to time by the Registrar.
According to the service level commitment (“SCL”) issued by the FSB in September 2008, the Registrar is committed to turnaround applications for registration of a FCIS within 120 calendar days.
Adopting the UCITS III regime
Various EU domiciled schemes have in the recent past, due to the lifting of restrictions by the FSB, sought to include in their policies, the expanded investment powers under the UCITS III regime (e.g. using financial derivatives as part of the investment strategy of the FCIS). If the FCIS is already approved by the Registrar adopting the extended investment powers under UCITS III regime will usually entail an amendment of fund documents that were approved by the Registrar (e.g. the prospectus and risk management policy). The requirements to be met by FCISs are set out in the Financial Services Board Notice No 46 of 2007. The requirements set out in the Board Notice include, among others, the following:
• giving the existing South African investors 3 (three) months prior notice.
• the notice to the investors must include the key differences between UCITS I and UCITS III and any applicable additional risk relating to the use of financial derivative instruments
• notice to the South African investors that the fund’s risk management and control policies are appropriate given the fund’s risk profile, and are available to the investors on request.
• the fund’s documentation is revised, for new South African investors, highlighting the changes effected.
• the fund must provide copies of the above documents to the Registrar.
According to the SCL the Registrar is committed to turnaround an application for any amendment to a FCIS within 60 calendar days.