## _cr1557 ## Source details **Canonical URL:** [_cr1557](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1557.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1557.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1557.pdf.json) --- ### Executive summary — key findings - Legal framework is robust and provides the authorities with broad supervisory, investigative and enforcement powers. - Arrangements exist for on-site and off-site monitoring of regulated entities. - Powers to cooperate with domestic and foreign counterparts are extensive. - Accounting and auditing standards are high, as is the disclosure regime that applies to listed companies in practice. - Market infrastructure is robust for the current, largely domestic, character of direct market participants. ### Structural and institutional challenges - Securities regulatory structure is complex: responsibility divided across several authorities and market infrastructures that report to two different government ministries. - Supervision within the Financial Services Board (FSB) is divided on a sectoral basis that may not reflect the way some important market participants carry on business. - The proposed twin peaks structure is expected to address at least some complexity; where responsibilities continue to be shared there is potential for both gaps and duplication. - The FSB should ensure a common understanding among relevant regulators of the scope, depth and focus of their supervision, particularly with the Johannesburg Stock Exchange (JSE) and the South African Reserve Bank (SARB). ### Supervisory and enforcement weaknesses - Some areas of supervision and enforcement require strengthening; the FSB should ensure scope of regulation and intensity of supervision are more uniform across its divisions. - CIS framework is notably less comprehensive and intrusive than that in other areas. - Disclosure regime for unlisted companies and CIS has substantive gaps; CIS valuation and accounting standards have gaps. - Capital and reporting requirements for financial services providers (FSPs) should be strengthened. - FSB should pursue full use of enforcement authority, including continuing to pursue more criminal prosecutions. - Recent initiatives to build effective relationships with other responsible authorities should help enforcement efforts. ### Governance and independence concerns - Certain aspects of the FSB’s governance structure raise concerns about its independence, although no indications of interference with day-to-day operations were found. - Presence of industry members on certain Board Committees and the Minister of Finance’s authority to remove a Board or Executive Committee member for reasons other than misconduct or incompetence may be perceived as a threat to independence. - Government recognized need for greater regulatory independence, reflected in governance models set out in the twin peaks bill. - Independence of the Independent Regulatory Board for Auditors (IRBA) should also be strengthened. ### Institutional responsibilities (high level) - FSB: responsible for supervising collective investment scheme (CIS) managers and exchanges; Registrar of CIS, Securities Services, Credit Rating Agencies and Financial Services Providers under respective sectoral Acts. - JSE: issuer regulation for listed companies (Listing Requirements), pre-settlement process for equities trades, can require margin to cover open positions; only securities exchange in South Africa. - CIPC (DTI): incorporation and registration of all companies; monitoring public companies’ compliance with the Companies Act disclosure requirements. - TRP: authority to enforce South African laws concerning mergers, acquisitions and changes in corporate control under the Companies Act. - SARB: limited securities supervisory responsibilities; regulatory responsibility for bank activities exempted from the FAIS Act (investment banks’ merchant banking services to clients other than pension funds and natural persons). ### Recent legislative changes noted - Financial Markets Act (FMA) replaced the Securities Services Act (SSA) on June 3, 2013; FMA focuses on licensing and regulation of market infrastructures and prohibition of insider trading and other market abuses; provides framework for regulating OTC derivatives under regulations that can be issued by the Minister of Finance. - Credit Rating Services Act (CRSA) came into effect on April 15, 2013; introduced framework for registration and supervision of credit rating agencies. - Financial Services Laws General Amendment Act 45 of 2013 came into force on February 28, 2014; aligned supervisory powers of the Registrar, provided for enhanced protection of information and sharing of information provisions, clarified and extended consumer education and protection mandate of the FSB, and extended the Registrar’s powers to act swiftly to prevent the failure of any financial institution. ### Market infrastructure ownership and roles - JSE is a public company listed on the JSE main list. - SAFCOM, a wholly-owned subsidiary of the JSE, clears JSE derivatives transactions; SAFCOM does not have self-regulatory responsibilities because it is an associated rather than an independent clearing house under the FMA. - Strate is the South African central securities depository (CSD) for listed equity securities and government and corporate debt securities; Strate is licensed under the FMA and is jointly owned by the JSE (44.6 percent) and the four largest South African banks each owning 12–15 percent. Citibank owns 0.1 percent of Strate’s shares. ### Key market statistics (as presented in Table 1) - Shares: - Number of listed shares: 406402 389 - Market capitalization (billion USD): 1,175988 1,015 - Market capitalization as percent of GDP: 191.3267.09 291.97 - Market capitalization of top 10 issuers (billion USD): 414474 546 - New listings: 1614 13 - Annual turnover (billion USD): 454419 409 - Annual turnover of top 10 issuers (billion USD): 229198 186 - Average daily trading volume (number of shares): 287,019,977247,374,883 255,567,541 - Average daily turnover (million USD): 1,8231,674 1,635 - Bonds: - Number of listed bonds: 135152 133 - Market capitalization (billion USD): 184221 188 - Market capitalization as percent of GDP: 50.7159.60 54.10 - New listings: 732896 815 - Annual turnover (billion USD): 2,8832,801 2,001 - Average daily turnover (million USD): 11,57911,203 8,002 - Equity derivatives: - Annual turnover (billion USD): 598515 520 - Average daily trading volume (number of contracts): 597,682547 894 869,886 - Average daily turnover (million USD): 2,4002,061 2,078 - Number of exchange members: 126126 120 - Interest rate and currency derivatives: - Annual turnover (billion USD): 4355 78 - Average daily trading volume (number of contracts): 60,68177,631 152,835 - Average daily turnover (million USD): 171220 314 - Commodity derivatives: - Annual turnover (billion USD): 5562 50 - Average daily trading volume (number of contracts): 11,51311,998 11,153 - Average daily turnover (million USD): 219249 201 - Sources: FSB and JSE. ### JSE membership and ownership details - JSE membership by market: - Equities members: 2011 — 63; 2012 — 61; 2013 — 62. - Equity Derivatives members: 2011 — 126 (9); 2012 — 126 (9); 2013 — 120 (10). - Interest Rate and Currency Derivatives members: 2011 — 98 (6); 2012 — 98 (6); 2013 — 102 (6). - Commodity Derivatives members: 2011 — 100 (5); 2012 — 100 (5); 2013 — 92 (5). - Bonds members: 2011 — 46; 2012 — 47; 2013 — 49. - Ownership of JSE equity firms: - Local banking groups: 19 percent. - Local listed companies: 8 percent. - Local insurance groups: 6 percent. - Local private ownership: 40 percent. - Foreign banking groups: 19 percent. - Foreign investment firms: 8 percent. - Aggregate: Domestic private or listed companies own 48 percent of firms; 25 percent are owned by domestic banks or insurance companies; 27 percent are owned by foreign banks or investment firms. ### Financial Services Providers (FSPs) licensed under the FAIS Act — numbers (as of March 31) - Category I (Advisers and others): 2011 — 11,322; 2012 — 10,333; 2013 — 10,164; 2014 — 10,152. - Category II (Discretionary): 2011 — 551; 2012 — 561; 2013 — 585; 2014 — 613. - Category IIA (Hedge Fund): 2011 — 117; 2012 — 118; 2013 — 117; 2014 — 113. - Category III (Administrative): 2011 — 232; 2012 — 224; 2013 — 27. - Category IV: 2011 — 385; 2012 — 668; 2013 — 87. - Total number of authorized firms: 2011 — 12,051; 2012 — 10,790; 2013 — 10,958; 2014 — 10,992. ### Collective Investment Schemes (CIS) and Assets Under Management (AUM) - Fund management industry AUM: ZAR 1.5 trillion (USD 161 billion) at the end of 2013. - AUM managed by 48 fund managers in a total of 1,084 portfolios. - Money market funds (MMFs): 17 percent of total AUM in local CIS. - Unregulated hedge funds manage approximately USD 10 billion of assets, primarily in trusts and partnerships. - Assets under Management in South African Collective Investment Schemes (Billion ZAR): - South African Funds: 2011 — 956; 2012 — 1,160; 2013 — 1,373. - Total: 2011 — 1,011; 2012 — 1,230; 2013 — 1,499. - Equity: 2011 — 214; 2012 — 253; 2013 — 297. - Multi-asset: 2011 — 283; 2012 — 394; 2013 — 627. - Real Estate: 2011 — 32; 2012 — 47; 2013 — 48. - Money Market: 2011 — 253; 2012 — 245; 2013 — 257. - Other Interest Bearing: 2011 — 173; 2012 — 221; 2013 — 143. - Other Funds: 2011 — 55; 2012 — 70; 2013 — 126. ### Preconditions for effective securities regulation — key points - Foreign issuers can access markets under similar conditions to domestic issuers, although infrequently used. - Authorization process does not distinguish between domestic and foreign intermediaries that want to provide investment services. - Companies legislation is modern and includes provisions on company management, shareholder rights, duties of directors and officers, preparation and audit of company accounts, and proceedings of shareholder meetings. - Insolvency Act: Act No. 24 of 1936; updated to address protection of customers’ assets held by intermediaries and give exchange and clearing systems ability to close out or unwind incomplete transactions on the insolvency of a market participant. - Accounting and auditing standards: all public companies required to prepare financial statements in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB); International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board (IAASB) have been officially adopted. ### Main findings by IOSCO Principle clusters (selected) - Principle 1 (PI): Multiple authorities and sectoral Acts create complexity and potential gaps; exemptions power exercised not uniformly transparent. - Principle 2 (PI): Minister of Finance has extensive appointment/removal powers creating potential appearance of indirect political influence; FSB lacks uniform publication approach for supervisory/enforcement measures. - Principle 3 (BI): FSB has sufficient powers, authority and funding; attracting and maintaining expertise is a challenge; decision-making has been siloed. - Principle 9 (FI): Market infrastructures (JSE and Strate) have wide self-regulatory responsibilities; FSB oversight includes rule approval, reporting, self-assessment review and on-site visits. - Principle 11 (FI): FSB has comprehensive enforcement powers and can take action against breaches of legislation it administers; EC has wide powers. - Principle 16 (PI): Initial and most continuous disclosure requirements for JSE-listed offers are satisfactory; significant gaps exist for unlisted public companies and other entities offering securities to the public. - Principle 19 (PI): Auditors of public companies are subject to appropriate oversight via IRBA; IRBA’s independence and resources could be strengthened. - Principle 24–27 (NI/FI): CIS-related requirements on conflicts, record-keeping, valuation, accounting and disclosure are insufficiently granular; MMFs apply constant NAV and permit longer maturities than IOSCO recommends. - Principle 30–32 (PI/BI): Capital requirements exist for intermediaries; FSP capital formula insufficiently risk-sensitive; no uniform written contingency plans for FSP failure at FSB or JSE. ### Recommended action plan — prioritized policy recommendations (selected) - Harmonize regulatory responsibilities and powers under upcoming twin peaks legislation to remove gaps and inconsistencies across sectors (Principle 1). - Ensure future twin peaks governance provides sufficient political and commercial independence; remove requirement for Minister of Finance to approve FAIS Act fees (Principle 2). - Develop an FSB-wide policy for publication of supervisory and enforcement measures (Principle 2). - Ensure coordinated supervision and decision making under the conduct authority in the twin peaks framework; maintain and attract sufficient expertise (Principle 3). - Finalize and publish the FSB code of norms and standards under section 18(3) of the FSB Act; harmonize FSB rule-making processes and improve public access to legislation and regulatory measures (Principle 4). - Align staff securities holding/trading restrictions across employment contracts and Staff Code of Conduct and extend restrictions to FSB Board, Board Committee and DMA members (Principle 5). - Develop holistic, organization-wide arrangements for monitoring, mitigating and managing systemic risk arising from securities markets, and ensure FSCF/FSOC/dedicated macroprudential functions adopt a broad systemic-risk approach (Principle 6). - Establish a holistic process to review the regulatory perimeter so products, entities and activities do not fall outside regulation; proactively survey the marketplace for emerging conflicts of interest (Principles 7, 8, 23). - Impose more detailed record-keeping requirements for CIS managers and grant the CIS Registrar the same information-demand powers as under the FMA and FAIS Act (Principle 10). - Align sanction publication practices of the CIS Division with other Divisions (Principle 11). - Build cooperative arrangements between the FSB Enforcement Unit and criminal enforcement authorities; enhance depth of on-site visits for CIS managers and conduct on-site reviews of trustees (Principles 12, 24). - Shorten Companies Act deadlines: publish audited annual financial statements within 120 days or less; require semi-annual interim financial statements and prompt disclosure of material changes including change in auditor (Principles 16, 18, 20). - Expand IRBA’s authority to share information proactively with other regulators and consider enhancing IRBA independence and resources; reduce registered auditors’ participation on IRBA investigative/disciplinary committees (Principle 19). - Fully implement the FSB supervisory plan for credit rating agencies, including sufficient on-site visits (Principle 22). - Enhance conflict of interest, record-keeping and conduct-of-business requirements for CIS managers to align with IOSCO standards and other sectors (Principle 24). - Clarify prohibition of related-party custody to exclude all related companies from providing trustee services to CIS managers; consider enhancing sub-custodian requirements (Principle 25). - Require offering documents for all CIS, require CIS accounts to follow high quality international accounting standards, use standard formats for CIS disclosures, and apply sufficient requirements to identify misleading advertisements (Principle 26). - Significantly enhance regulatory requirements on valuation of all CIS asset types and determine high quality accounting standards for valuations; consider conversion of constant NAV MMFs to floating NAV or introduce additional safeguards as recommended by IOSCO; require disclosure and frequency standards for CIS unit prices and explicit treatment of pricing errors (Principle 27). - Adopt a more risk-sensitive capital formula for FSPs that varies directly with risks undertaken and require more timely accounting updates and more frequent capital reporting; consider early warning obligations and require deduction of exposures to related companies when calculating capital (Principle 30). - Require periodic independent reviews of internal controls and risk management for FSPs and JSE members, improve coordination of supervision where firms are both JSE members and FSPs, and consider mandatory written account agreements for all accounts (Principle 31). - Each of the FSB and JSE should adopt written contingency plans outlining actions and responsibilities for regulated entities in financial difficulty (Principle 32). - Enhance use of criminal enforcement to combat market abuse through continued cooperation between the FSB, SAPS and NPA; consider extending insider trading prohibition to unlisted derivatives with listed underlyings (Principle 36). - Introduce a short selling reporting regime and increase monitoring of short selling activities (Principle 37). ### Assessment methodology and scope - Assessment conducted in South Africa from May 6 to 23, 2014, as part of the IMF FSAP by Eija Holttinen, Monetary and Capital Markets Department, IMF and Tanis MacLaren, external expert working for the IMF. - Assessment based on the IOSCO Principles approved in 2010 and the Assessment Methodology adopted in 2011. - Principle 38 was not assessed due to the existence of separate standards for securities settlement systems and central counterparties. - Assessment considered both legal/regulatory frameworks and their implementation in practice, including inspection programs, cycle, scope and quality of inspections, and follow-up enforcement actions. - Sources included self-assessment by authorities, reviews of legislation and regulations, meetings with FSB, CIPC, IRBA, NPA, SAPS, market infrastructures and market participants, and other documentation. *Source: IMF staff assessment as presented in the source content.* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Key findings on regulatory framework and market infrastructure - The legal framework is robust and provides the authorities with broad supervisory, investigative and enforcement powers. - There are arrangements for on-site and off-site monitoring of regulated entities. - Powers to cooperate with domestic and foreign counterparts are extensive. - Accounting and auditing standards are high, as is the disclosure regime that applies to listed companies in practice. - The market infrastructure is robust for the current, largely domestic, character of direct market participants. ### Structural and institutional challenges - The securities regulatory structure is complex: responsibility is divided across several authorities and market infrastructures that report to two different government ministries. - Supervision within the Financial Services Board (FSB) is divided on a sectoral basis that may not reflect the way some important market participants carry on business. - The proposed twin peaks structure is expected to address at least some of this complexity; however, where responsibilities continue to be shared there is a potential for both gaps and duplication. - The FSB should ensure a common understanding among relevant regulators of the scope, depth and focus of their supervision, particularly with the Johannesburg Stock Exchange (JSE) and the South African Reserve Bank (SARB). ### Supervisory and enforcement weaknesses - Some areas of supervision and enforcement require strengthening; the FSB should ensure that the scope of regulation and intensity of supervision are more uniform across its divisions. - The CIS framework is notably less comprehensive and intrusive than that in other areas. - The disclosure regime for unlisted companies and CIS has substantive gaps, as do the CIS valuation and accounting standards. - The capital and reporting requirements for financial services providers (FSPs) should be strengthened. - The FSB should pursue the use of all available enforcement authority, including by continuing to pursue more criminal prosecutions. - Recent initiatives to build effective relationships with other responsible authorities should help enforcement efforts. ### Governance and independence concerns - Certain aspects of the FSB’s governance structure raise concerns about its independence, although there were no indications of any interference with its day-to-day operations. - The presence of industry members on certain Board Committees and the authority of the Minister of Finance to remove a Board or Executive Committee member for reasons other than misconduct or incompetence may be perceived as a threat to the FSB’s independence. - The government has recognized the need for greater regulatory independence, reflected in the governance models set out in the twin peaks bill. - The independence of the Independent Regulatory Board for Auditors (IRBA) should also be strengthened. ### Assessment methodology and scope - Assessment conducted in South Africa from May 6 to 23, 2014, as part of the IMF FSAP by Eija Holttinen, Monetary and Capital Markets Department, IMF and Tanis MacLaren, external expert working for the IMF. - The assessment was based on the IOSCO Principles approved in 2010 and the Assessment Methodology adopted in 2011. - Principle 38 was not assessed due to the existence of separate standards for securities settlement systems and central counterparties. - The assessment considered both legal/regulatory frameworks and their implementation in practice, including inspection programs, cycle, scope and quality of inspections, and follow-up enforcement actions. - Sources included (i) a self-assessment and additional written responses prepared by the authorities; (ii) reviews of relevant legislation and regulations; (iii) meetings with management and staff of the FSB, the Company and Intellectual Property Commission (CIPC), the IRBA, the National Prosecuting Authority (NPA) and the South Africa Police Services (SAPS); and (iv) meetings with market infrastructures and market participants, including the JSE, Strate (Pty) Ltd (Strate), ASISA, the Financial Intermediaries Association of Southern Africa, securities brokers, fund management companies, asset managers, issuers, an audit firm, and a credit rating agency (CRA). ### Institutional responsibilities (high level) - FSB: responsible for supervising collective investment scheme (CIS) managers and exchanges; Registrar of CIS, Securities Services, Credit Rating Agencies and Financial Services Providers under respective sectoral Acts. - JSE: issuer regulation for listed companies (Listing Requirements), pre-settlement process for equities trades, can require margin to cover open positions; only securities exchange in South Africa. - CIPC (DTI): incorporation and registration of all companies; monitoring public companies’ compliance with the Companies Act disclosure requirements. - TRP: authority to enforce South African laws concerning mergers, acquisitions and changes in corporate control under the Companies Act. - SARB: limited securities supervisory responsibilities; regulatory responsibility for bank activities exempted from the FAIS Act (investment banks’ merchant banking services to clients other than pension funds and natural persons). ### Recent legislative changes noted - Financial Markets Act (FMA) replaced the Securities Services Act (SSA) on June 3, 2013; FMA focuses on licensing and regulation of market infrastructures and prohibition of insider trading and other market abuses; provides framework for regulating OTC derivatives under regulations that can be issued by the Minister of Finance. - Credit Rating Services Act (CRSA) came into effect on April 15, 2013; introduced framework for registration and supervision of credit rating agencies. - Financial Services Laws General Amendment Act 45 of 2013 came into force on February 28, 2014; aligned supervisory powers of the Registrar, provided for enhanced protection of information and sharing of information provisions, clarified and extended consumer education and protection mandate of the FSB, and extended the Registrar’s powers to act swiftly to prevent the failure of any financial institution. ### Market infrastructure ownership and roles - The JSE is a public company listed on the JSE main list. - SAFCOM, a wholly-owned subsidiary of the JSE, clears JSE derivatives transactions; SAFCOM does not have self-regulatory responsibilities because it is an associated rather than an independent clearing house under the FMA. - Strate is the South African central securities depository (CSD) for listed equity securities and government and corporate debt securities; Strate is licensed under the FMA and is jointly owned by the JSE (44.6 percent) and the four largest South African banks each owning 12–15 percent. Citibank owns 0.1 percent of Strate’s shares. ### Key market statistics (as presented in Table 1) - Shares: - Number of listed shares: 406402 389 - Market capitalization (billion USD): 1,175988 1,015 - Market capitalization as percent of GDP: 191.3267.09 291.97 - Market capitalization of top 10 issuers (billion USD): 414474 546 - New listings: 1614 13 - Annual turnover (billion USD): 454419 409 - Annual turnover of top 10 issuers (billion USD): 229198 186 - Average daily trading volume (number of shares): 287,019,977247,374,883 255,567,541 - Average daily turnover (million USD): 1,8231,674 1,635 - Bonds: - Number of listed bonds: 135152 133 - Market capitalization (billion USD): 184221 188 - Market capitalization as percent of GDP: 50.7159.60 54.10 - New listings: 732896 815 - Annual turnover (billion USD): 2,8832,801 2,001 - Average daily turnover (million USD): 11,57911,203 8,002 - Equity derivatives: - Annual turnover (billion USD): 598515 520 - Average daily trading volume (number of contracts): 597,682547 894 869,886 - Average daily turnover (million USD): 2,4002,061 2,078 - Number of exchange members: 126126 120 - Interest rate and currency derivatives: - Annual turnover (billion USD): 4355 78 - Average daily trading volume (number of contracts): 60,68177,631 152,835 - Average daily turnover (million USD): 171220 314 - Commodity derivatives: - Annual turnover (billion USD): 5562 50 - Average daily trading volume (number of contracts): 11,51311,998 11,153 - Average daily turnover (million USD): 219249 201 - Sources: FSB and JSE. *Source: _cr1557 - EXECUTIVE SUMMARY (IMF assessment document).* ### 14. The number of JSE members has remained stable over the past three years. While the ### 14. The number of JSE members has remained stable over the past three years. While the ### JSE membership by market - Equities members: 2011 — 63; 2012 — 61; 2013 — 62. - Equity Derivatives members: 2011 — 126 (9); 2012 — 126 (9); 2013 — 120 (10). - Note: Number of clearing members in each category shown in brackets; there are no clearing members on the Equities Market. - Interest Rate and Currency Derivatives members: 2011 — 98 (6); 2012 — 98 (6); 2013 — 102 (6). - Commodity Derivatives members: 2011 — 100 (5); 2012 — 100 (5); 2013 — 92 (5). - Bonds members: 2011 — 46; 2012 — 47; 2013 — 49. - Source: JSE. ### Cross-border activities - Direct membership by foreign firms on the JSE is prohibited. - The most active equities trading members are subsidiaries of foreign investment banks. - Foreign subsidiaries of member firms are not regulated by the JSE; the JSE does not have routine access to information on these activities. - Local members do not appear to have significant operations abroad. ### Ownership of JSE equity firms - Local banking groups: 19 percent. - Local listed companies: 8 percent. - Local insurance groups: 6 percent. - Local private ownership: 40 percent. - Foreign banking groups: 19 percent. - Foreign investment firms: 8 percent. - Aggregate: Domestic private or listed companies own 48 percent of firms; 25 percent are owned by domestic banks or insurance companies; 27 percent are owned by foreign banks or investment firms. - Source: JSE. ### Financial Services Providers (FSPs) licensed under the FAIS Act - The number of FSPs has been stable over the past four years; Category I FSPs (chiefly advisers and financial planners) declined due to consolidation and increasing costs of compliance. - Number of firms as of March 31: - Category I (Advisers and others): 2011 — 11,322; 2012 — 10,333; 2013 — 10,164; 2014 — 10,152. - Category II (Discretionary): 2011 — 551; 2012 — 561; 2013 — 585; 2014 — 613. - Category IIA (Hedge Fund): 2011 — 117; 2012 — 118; 2013 — 117; 2014 — 113. - Category III (Administrative): 2011 — 232; 2012 — 224; 2013 — 27. - Category IV: 2011 — 385; 2012 — 668; 2013 — 87. - Total number of authorized firms: 2011 — 12,051; 2012 — 10,790; 2013 — 10,958; 2014 — 10,992. - Source: FSB. ### Collective Investment Schemes (CIS) and assets under management (AUM) - Fund management industry AUM: ZAR 1.5 trillion (USD 161 billion) at the end of 2013. - AUM managed by 48 fund managers in a total of 1,084 portfolios. - Money market funds (MMFs): 17 percent of total AUM in local CIS. - Unregulated hedge funds manage approximately USD 10 billion of assets, primarily in trusts and partnerships. - Assets under Management in South African Collective Investment Schemes (Billion ZAR): - South African Funds: 2011 — 956; 2012 — 1,160; 2013 — 1,373. - Total: 2011 — 1,011; 2012 — 1,230; 2013 — 1,499. - Equity: 2011 — 214; 2012 — 253; 2013 — 297. - Multi-asset: 2011 — 283; 2012 — 394; 2013 — 627. - Real Estate: 2011 — 32; 2012 — 47; 2013 — 48. - Money Market: 2011 — 253; 2012 — 245; 2013 — 257. - Other Interest Bearing: 2011 — 173; 2012 — 221; 2013 — 143. - Other Funds: 2011 — 55; 2012 — 70; 2013 — 126. - Notes: Several portfolios may be managed under the same scheme. South African funds refer to funds that have invested their assets in South Africa. - Source: ASISA. ### Preconditions for effective securities regulation - Foreign issuers can access the markets under similar conditions to domestic issuers, although infrequently used. - Authorization process does not distinguish between domestic and foreign intermediaries that want to provide investment services. - Companies legislation: modern; includes provisions on company management, shareholder rights, duties of directors and officers, preparation and audit of company accounts, and proceedings of shareholder meetings. - Public companies subject to additional requirements, including accounting standards. - Detailed rules governing takeovers and related significant transactions administered by the TRP. - Companies legislation governs liquidation, winding up and restructuring of insolvent companies; new provisions facilitate restructuring to avoid liquidation. - Insolvency Act: Act No. 24 of 1936; updated to address protection of customers’ assets held by intermediaries and giving the exchange and clearing systems the ability to close out or unwind incomplete transactions on the insolvency of a market participant. - Dedicated independent tribunals and courts exist for securities-related matters; judiciary independence protected by the Constitution; specialized tribunals and a specialized commercial crimes court are in place. - Accounting and auditing standards: all public companies required to prepare financial statements in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB); International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board (IAASB) have been officially adopted. ### Main findings (numbered) - 23. Principles for the regulator: - Securities regulatory and supervisory responsibilities are defined in various Acts and allocated to several authorities and market infrastructures. - Different Divisions within the FSB, led by Deputy Registrars, operate fairly independently. - The complex division of responsibilities may lead to regulatory gaps and inconsistencies. - Supervisory cooperation aims to reduce risks from the fragmented model, including monitoring systemic risk and assessing the regulatory perimeter; optimal structures are not yet in place. - The FSB has sufficient powers, authority and funding; ensuring sufficient staff expertise in the transition to the new twin peaks structure is a challenge. - There may be an appearance of undue political or commercial influence in the FSB decision-making due to the ministerial appointment process and certain governance arrangements. - Some FSB internal policies and practices require strengthening and harmonizing across the organization. - There are requirements to address conflicts of interest of supervised entities. - 24. Principles for self-regulation: - The JSE and Strate have statutory obligations to undertake certain important self-regulatory responsibilities. - Intermediary activities covered by their supervision are exempt from supervision by the FSB. - The FSB assesses their self-regulatory capacity and arrangements upon licensing and on an ongoing basis. - Conflicts of interest between the JSE’s and Strate’s commercial and self-regulatory functions must be managed in a manner satisfactory to the FSB. - 25. Principles for enforcement: - The FSB has broad powers to inspect, investigate and conduct surveillance of securities markets and activities. - The FSB can take comprehensive action against breaches of the laws it administers. - The FSB’s risk-based system drives its supervisory program: off-site supervision and on-site inspections including full reviews, thematic reviews, and ad-hoc visits. - The FSB’s Enforcement Committee (EC) has wide powers to impose sanctions and has obtained significant monetary sanctions. - All sanctions imposed by the EC are published as are most others imposed by the Registrars. - Criminal cases have been referred for investigation and prosecution, but very few have led to convictions. - Record-keeping requirements under CISCA are minimal and the depth of CIS supervisory activities could be enhanced. - 26. Principles for cooperation: - The FSB can share information and cooperate with other authorities domestically and internationally. - The FSB is a signatory to many Memoranda of Understanding (MOUs), including the IOSCO Multilateral MOU (MMOU) and a number of bilateral MOUs. - The FSB participates in several domestic supervisory colleges involving financial groups. - The FSB does not require the permission of any outside authority to share or obtain information, nor does it require an independent interest in the matter to assist. - 27. Principles for issuers: - Initial disclosure requirements for securities to be listed on the JSE are satisfactory; most continuous disclosure requirements are satisfactory. - Significant gaps exist in the initial and continuous disclosure requirements applicable to unlisted public companies (e.g., no requirement to provide public disclosure of material changes or prepare interim financial statements). - Reporting deadlines for financial statements are slow by international standards, although JSE issuers report more promptly in practice. - Public company shareholders are treated equitably with respect to voting and participation in takeover bids. - Full information must be provided for any takeover bid and the price paid to shareholders must be equivalent. - Extensive disclosure requirements exist for substantial shareholders, directors and other parties. - All public companies in South Africa must prepare financial statements in accordance with IFRS as issued by the IASB; processes exist to review financial statements to ensure standards are met. - 28. Principles for auditors, credit rating agencies, and other information service providers: - IRBA supervises auditors of public companies, including registration, inspection, and discipline of auditors. - IRBA’s independence could be enhanced by a broadened funding model and limitations on the participation of auditors on its governance bodies. - Extensive requirements exist for auditors to be independent of the entities they audit; these requirements are enforced by IRBA. - Financial statements of public companies must be audited in accordance with the ISA as issued by the IAASB. - The regulatory framework for CRAs complies with international standards and the FSB is launching its CRA supervisory program. - Analytical or evaluative service providers are not relied on and are not required to be authorized. - 29. Principles for collective investment schemes: - Regulatory requirements apply to registration of CIS managers and trustees and approval of the CIS deed. - Regulation of conflicts of interest, record-keeping and conduct of business is insufficiently granular. - The FSB’s intensity of supervision on CIS managers and trustees would benefit from enhancement. - CIS are subject to investment limits and restrictions and managers are required to segregate client assets and funds. - Related party custody is prohibited in practice. - Limited public disclosure requirements apply to CIS and accounting standards for CIS are not specified. - Valuation of CIS assets is largely regulated in a very general manner, leaving significant room for discretion and placing responsibility for appropriate valuations on trustees. - MMFs apply constant net asset value (NAV), and permit longer maturity investments than recommended by IOSCO. - Hedge fund regulation complies with IOSCO minimum requirements through requirements imposed on the hedge fund manager as an FSP. - 30. Principles for market intermediaries: - Framework exists at the FSB and JSE for licensing and applying on-going requirements on market intermediaries. - License applicants undergo a detailed fit-and-proper review. - Initial and ongoing capital requirements apply for all types of intermediaries. - The JSE’s capital formula is risk-based and timely reporting requirements apply; the JSE directly monitors members’ capital daily. - Certain categories of FSPs are subject to higher minimum capital amounts; the capital formula that applies to FSPs is not sensitive to the full range of risks and focuses on solvency and liquidity. - Routine reporting by these firms is limited. - Market intermediaries must have risk management and internal control systems, but there is no requirement that these systems be reviewed on behalf of the firm by an objective party. - Regulations address protection of clients, including requirements for business conduct and segregation of clients’ assets. - There is no written plan in place at the FSB or JSE for dealing with a firm failure, but each has extensive powers to intervene to protect clients and the market. *Source: IMF staff summary of JSE, FSB, ASISA, and legislative material as presented in the source content.* ### 31. Principles for secondary markets. Exchanges are subject to comprehensive regulatory ### _cr1557 - 31. Principles for secondary markets. Exchanges are subject to comprehensive regulatory ### Market structure and supervisory responsibilities - The JSE, as the only exchange, is responsible for market surveillance and supervision of its members. - The FSB performs detailed supervision of the JSE and is conscious of the potential for regulatory capture arising from such close involvement. - Sufficient pre- and post-trade transparency requirements apply under the JSE Rules. - Insider trading, market manipulation and disclosure of false and misleading information are prohibited and subject to both administrative and criminal sanctions. - Monitoring, investigations and enforcement require cooperation between several authorities. - There has been only one criminal conviction for market abuse (fraud). - The JSE closely monitors open positions in equity and derivatives markets and can take prompt action when needed. - Covered short selling is permitted, but there are no disclosure requirements to the regulator or the market. ### Summary implementation of the IOSCO Principles — key findings (selected) - Principle 1 (PI): FSB’s and the Registrar’s responsibilities are set out in multiple Acts; multiple authorities for certain sectors create complexity and potential gaps; exemptions power exercised not uniformly transparent. - Principle 2 (PI): Minister of Finance has extensive appointment/removal powers creating potential appearance of indirect political influence; FSB publishes an annual report but lacks an FSB-wide publication approach for supervisory/enforcement measures. - Principle 3 (BI): FSB has sufficient powers, authority and funding; attracting and maintaining expertise in certain areas is a challenge; decision-making has been siloed. - Principle 4 (BI): Sectoral Acts impose different rulemaking requirements; a new framework for rule-making including stakeholder consultation is under preparation. - Principle 9 (FI): Market infrastructures (JSE and Strate) have wide self-regulatory responsibilities; FSB oversight includes rule approval, reporting, self-assessment review and on-site visits. - Principle 11 (FI): FSB has comprehensive enforcement powers and can take action against breaches of legislation it administers. - Principle 13 (FI) and 14 (FI): FSB can share public and non-public information domestically and internationally and is a signatory to many MOUs, including the IOSCO MMOU. - Principle 16 (PI): Initial and most continuous disclosure requirements for JSE-listed offers are satisfactory; significant gaps exist for unlisted public companies and other entities offering securities to the public. - Principle 19 (PI): Auditors of public companies are subject to appropriate oversight via IRBA; IRBA’s independence and resources could be strengthened. - Principle 27 (NI): Valuation requirements for CIS assets are largely very general; MMF assets are valued at amortized cost and maximum maturities permitted for MMF assets are longer than recommended by IOSCO. - Principle 30 (PI): Initial and ongoing capital requirements exist for intermediaries; the capital formula for FSPs is insufficiently risk-sensitive. - Principle 31 (BI): Market intermediaries are required to have risk management and internal control systems; no compulsory independent periodic review of internal controls other than auditor reporting on client assets. - Principle 32 (BI): No written FSB plan for dealing with an FSP failure; FSB has extensive powers and has used them in practice; JSE has no written plan but has extensive powers; guarantee funds exist for JSE member losses but not for FSPs. - Principle 34 (FI): JSE is responsible for market surveillance and supervising members; FSB does not conduct real-time surveillance but regularly reviews trading and investigates improper conduct referred by the JSE. - Principle 35 (FI): Sufficient pre- and post-trade transparency required by JSE Equities Rules; immediate post-trade transparency applies to all trades. - Principle 36 (BI): Market abuse is prohibited under the FMA and subject to administrative and criminal sanctions; monitoring largely conducted by the JSE with referrals to the FSB; only one criminal conviction for market abuse to date. - Principle 37 (BI): JSE monitors open positions in equity and derivatives; naked short selling is prohibited and covered short selling is defined narrowly; no reporting requirements on short selling to the JSE, FSB or the market. ### Recommended action plan — prioritized policy recommendations (selected) - Harmonize regulatory responsibilities and powers under upcoming twin peaks legislation to remove gaps and inconsistencies across sectors (Principle 1). - Ensure future twin peaks governance provides sufficient political and commercial independence; remove requirement for Minister of Finance to approve FAIS Act fees (Principle 2). - Develop an FSB-wide policy for publication of supervisory and enforcement measures (Principle 2). - Ensure coordinated supervision and decision making under the conduct authority in the twin peaks framework; maintain and attract sufficient expertise (Principle 3). - Finalize and publish the FSB code of norms and standards under section 18(3) of the FSB Act; harmonize FSB rule-making processes and improve public access to legislation and regulatory measures (Principle 4). - Align staff securities holding/trading restrictions across employment contracts and Staff Code of Conduct and extend restrictions to FSB Board, Board Committee and DMA members (Principle 5). - Develop holistic, organization-wide arrangements for monitoring, mitigating and managing systemic risk arising from securities markets, and ensure FSCF/FSOC/dedicated macroprudential functions adopt a broad systemic-risk approach (Principle 6). - Establish a holistic process to review the regulatory perimeter so products, entities and activities do not fall outside regulation; proactively survey the marketplace for emerging conflicts of interest (Principles 7, 8, 23). - Impose more detailed record-keeping requirements for CIS managers and grant the CIS Registrar the same information-demand powers as under the FMA and FAIS Act (Principle 10). - Align sanction publication practices of the CIS Division with other Divisions (Principle 11). - Build cooperative arrangements between the FSB Enforcement Unit and criminal enforcement authorities; enhance depth of on-site visits for CIS managers and conduct on-site reviews of trustees (Principles 12, 24). - Shorten Companies Act deadlines: publish audited annual financial statements within 120 days or less; require semi-annual interim financial statements and prompt disclosure of material changes including change in auditor (Principles 16, 18, 20). - Expand IRBA’s authority to share information proactively with other regulators and consider enhancing IRBA independence and resources; reduce registered auditors’ participation on IRBA investigative/disciplinary committees (Principle 19). - Fully implement the FSB supervisory plan for credit rating agencies, including sufficient on-site visits (Principle 22). - Enhance conflict of interest, record-keeping and conduct-of-business requirements for CIS managers to align with IOSCO standards and other sectors (Principle 24). - Clarify prohibition of related-party custody to exclude all related companies from providing trustee services to CIS managers; consider enhancing sub-custodian requirements (Principle 25). - Require offering documents for all CIS, require CIS accounts to follow high quality international accounting standards, use standard formats for CIS disclosures, and apply sufficient requirements to identify misleading advertisements (Principle 26). - Significantly enhance regulatory requirements on valuation of all CIS asset types and determine high quality accounting standards for valuations; consider conversion of constant NAV MMFs to floating NAV or introduce additional safeguards as recommended by IOSCO; require disclosure and frequency standards for CIS unit prices and explicit treatment of pricing errors (Principle 27). - Adopt a more risk-sensitive capital formula for FSPs that varies directly with risks undertaken and require more timely accounting updates and more frequent capital reporting; consider early warning obligations and require deduction of exposures to related companies when calculating capital (Principle 30). - Require periodic independent reviews of internal controls and risk management for FSPs and JSE members, improve coordination of supervision where firms are both JSE members and FSPs, and consider mandatory written account agreements for all accounts (Principle 31). - Each of the FSB and JSE should adopt written contingency plans outlining actions and responsibilities for regulated entities in financial difficulty (Principle 32). - Enhance use of criminal enforcement to combat market abuse through continued cooperation between the FSB, SAPS and NPA; consider extending insider trading prohibition to unlisted derivatives with listed underlyings (Principle 36). - Introduce a short selling reporting regime and increase monitoring of short selling activities (Principle 37). *Source: IMF staff assessment as presented in the document.* ### 32. National Treasury would like to express its appreciation for the report on the detailed ### _cr1557 - 32. National Treasury would like to express its appreciation for the report on the detailed ### Overview - Paragraph 32: National Treasury expresses appreciation for the detailed assessment of the IOSCO objectives and principles of securities regulation, describing the report as "very comprehensive", "balanced, constructive" and useful for future improvements. - South Africa did not question any of the ratings but provided comments on certain principles. - The FSB raised concerns about possible lack of consistency in assessment methodology between the 2008 and 2014 FSAPs, with specific reference to downgrades in CIS assessments despite no change in principles, legislation, or practice over the 6 year period. ### Purpose of the Detailed Assessment (Paragraphs 33–34) - Primary purpose: ascertain whether legal/regulatory securities market requirements and the operations of securities regulatory authorities meet IOSCO Principles. - Use of assessment: identify gaps, inconsistencies, weaknesses and areas needing further powers and/or better implementation; establish priorities for improvements. - Assessment categories (exact wording preserved): - fully implemented - broadly implemented - partly implemented - not implemented - not applicable - Benchmarks for a Principle: - A Principle is considered fully implemented when all assessment criteria specified for that Principle are generally met without any significant deficiencies. - A Principle is considered broadly implemented when the exceptions to meeting the assessment criteria specified for that Principle are limited to those specified under the broadly implemented benchmark for that Principle and do not substantially affect the overall adequacy of the regulation that the Principle is intended to address. - A Principle is considered partly implemented when the assessment criteria specified under the partly implemented benchmark for that Principle are generally met without any significant deficiencies. - A Principle is considered not implemented when major shortcomings (as specified in the not implemented benchmark for that Principle) are found in adhering to the assessment criteria specified for that Principle. - A Principle is considered not applicable when it does not apply because of the nature of the country’s securities market and relevant structural, legal and institutional considerations. - Methodology recognizes variable means of implementation depending on domestic context, structure, and stage of development. ### Principles for the Regulator — Principle 1: Responsibilities and Powers (Table 8 excerpt) - Focus: The FSB is the main supervisory authority in areas covered by the IOSCO Principles; discussion in Principles 1–5 focuses on the FSB. - Functions of the FSB defined in Section 3 of the FSB Act (exact bullets preserved): - Supervise and enforce compliance with laws regulating financial institutions and the provision of financial services; - Advise the Minister of Finance on matters concerning financial institutions and financial services, either of its own accord or at the request of the Minister of Finance; and - Provide, promote or otherwise support financial education, awareness and confidence regarding financial products, institutions and services. - Additional specific powers included in Section 19 of the FSB Act, Section 26 of the FAIS Act and Section 24 of the CRSA (rule making), and Section 84 of the FMA (market abuse supervision and investigations). - Most responsibilities and powers are assigned to relevant Registrars under each sectoral Act or special bodies established under applicable Acts. ### FSB Organizational and Registrar Roles - Executive Officer assisted by one or more Deputy Executive Officers and a Chief Actuary; Executive Officer performs functions entrusted under the FSB Act (Section 13 FSB Act). - Executive Officer also acts as Registrar under sectoral Acts where relevant (exact list preserved): - Registrar of Financial Services Providers (Section 2(1) FAIS Act); - Registrar of Collective Investment Schemes (Section 7(1) CISCA); - Registrar of Securities Services (Section 6(1) FMA; and - Registrar of Credit Rating Agencies (Section 21 CRSA). - Powers and functions of the Registrar set out in sectoral Acts, especially: Section 4 FAIS Act, Sections 14-23 CISCA, Sections 6 and 94-97 FMA, and Sections 23-28 CRSA. - Power to conduct on-site visits and instruct inspector to conduct inspection stipulated in: - Chapter 1A of the Financial Institutions (Protection of Funds) Act 28 of 2001 (Protection of Funds Act) and - Inspection of Financial Institutions Act 80 of 1998 (Inspection Act). - Section 10(3) FSB Act requires establishment of an Enforcement Committee (EC) to hear matters and issue sanctions; Chapter 2 of the Protection of Funds Act provides the Registrar with wide enforcement powers including referral to the Enforcement Committee (see Principle 11). - DMA exercises certain powers to investigate and institute proceedings under Section 85 of the FMA (see Principles 11, 12 and 36). ### Functional Structure (as described) - Collective Investment Schemes Division undertakes Registrar of CIS responsibilities. - Financial Intermediary and Advisory Services and Consumer Education Division handles Registrar of FSPs functions. - Capital Markets Department undertakes functions of Registrar of Securities Services. - Credit Rating Agency Unit responsible for Registrar of Credit Rating Agencies. - Market Abuse Department supports the DMA. ### Interpretation of Authority and Exemptions - South African constitution includes principle of legality; FSB issues circulars/guidance notes to interpret statutory provisions and provides industry comment opportunity. - Exemptive powers (exact statutory references preserved): - Minister of Finance or the Registrar may exempt persons under FAIS Act (Section 44), CISCA (Section 22), FMA (Section 6(3)(m)) and CRSA (Section 27). - Registrar can exempt regulated entities from certain specific requirements as provided in various Acts. - Registrar may issue directives generally or limited in application to particular persons/services or categories. - Publication requirements (exact references preserved): - Section 6(5) of the FMA requires the Registrar to publish its directives in the Gazette and on the official website and to table a copy in Parliament if they apply generally. - Section 27(4) of the CRSA requires publication of exemptions that apply generally or to a type of registered CRA in the Gazette and through other media deemed appropriate; Section 26(5) CRSA requires publication of directives where issued to ensure protection of investors. - Section 44(4)(a) FAIS Act allows Registrar to exempt by notice on the official website. - CISCA enables Registrar to provide various exemptions, only some of which must be published in the Gazette. - Section 21 of the FSB Act requires the annual report of the Board to include a list of all directives and exemptions issued under FSB legislation during the reporting period and that directives and exemptions must be available on the official web site; requirement introduced only in the General Amendment Act, so no such list has yet been published and not all CISCA exemptions have been applied to the website. ### Consistency of Regulation and Division of Responsibilities - FSB is working to align conduct requirements across regulated entities (proposed draft codes of conduct for authorized users under the FMA and FSPs under FAIS Act). - Product regulation not coordinated across substantially similar products due to division of responsibilities among FSB, CIPC and JSE; within FSB, different Registrars regulate economically similar products (e.g., a CIS and a unit linked insurance plan). - Division between FSB and SARB: - Banks must be authorized as FSPs if providing financial services requiring authorization under FAIS Act (see Principle 29). - In such cases supervisory responsibility divided between FSB and SARB. - Investment banks’ merchant banking services to clients other than pension funds and natural persons have been exempted from FAIS Act; SARB has sole regulatory responsibility for such exempted services. - FAIS Act exclusions and market infrastructures: - FAIS Act does not apply to authorized users (exchange members), CSD participants and clearing members (Section 45(1)(a)(i) FAIS Act); their regulation assigned to exchanges, CSDs and independent clearing houses in the FMA. - JSE responsible for authorizing its members and supervising compliance with exchange rules and directives (see Principles 9 and 29-31). If JSE member conducts activities under FAIS Act not covered by JSE Rules, FSB supervises those activities. - Strate as a licensed CSD responsible for authorizing participants and supervising compliance with its rules and directives. - SAFCOM is an associated (not independent) clearing house; clearing members are JSE members; SAFCOM does not have supervisory/enforcement responsibilities like an independent clearing house—these are undertaken by the JSE. - JSE supervises listed issuers’ compliance with JSE disclosure requirements (FSB performs this role for JSE shares) (see Principle 16). - JSE has primary responsibility for ongoing market surveillance (except trading in its own shares, responsibility of the FSB); FSB responsible for investigating and enforcing market abuse violations (see Principles 11, 12, and 36). ### Communication and Cooperation — Statutory and Practical Arrangements - Section 22(3) FSB Act permits the Executive Officer or Deputy Executive Officer to: - Liaise with any regulatory authority on matters of common interest; - Participate in the proceedings of any regulatory authority; - Advise or receive advice from any regulatory authority; - Prior to taking any material regulatory action against a financial institution, inform any regulatory authorities having a material interest in that financial institution of the pending regulatory action, or where not possible, inform the relevant regulatory authorities as soon as possible after taking the regulatory action; and - Negotiate and enter into bilateral or multilateral cooperation agreements, including MOUs, with regulatory authorities to: - Coordinate and harmonize the reporting and other obligations of financial institutions and issuers; - Provide mechanisms for the exchange of information; - Provide procedures for the coordination of supervisory activities to facilitate the monitoring of financial institutions or issuers on an ongoing basis; and - Assist any domestic regulatory authority in regulating and enforcing any laws of that regulatory authority that are similar to the FSB legislation. - Section 6(3)(o) of the FMA obliges the Registrar of Securities Services to make adequate arrangements for effective cooperation with the Governor of the SARB in respect of monitoring and mitigating systemic risk. - Cooperation in practice: - FSB has signed an MOU with the SARB and the Financial Intelligence Centre (FIC) for exchanging information and streamlining supervision and enforcement. - FSB-SARB MOU provides for regular liaison at officer and senior executive level on operational and policy matters, including supervisory processes, audit/inspection strategies, statistical analysis, market intelligence, training participation, and supervision of financial conglomerates. - FSB and SARB formed a Systemic Risk Committee (see Principle 6), organize standing bilateral senior management discussions, sometimes conduct joint on-site visits and share supervisory information. - FSB participates in the FSCF and the Financial Stability Oversight Committee (FSOC) with other authorities, market infrastructures and market participants (see Principle 6). - Cooperation between FSB and CIPC limited to enforcement in case of misleading disclosures (see Principles 12 and 16). - Close cooperation between FSB and market infrastructures: Section 70 of the FMA allows the Registrar or a nominee to attend market infrastructure Board meetings and take part (but not vote). FSB represented in JSE and Strate meetings and meets regularly with their representatives (see Principles 9 and 34). ### Assessment and Comments (exact assessment entry preserved) - Assessment: Partly Implemented - Comments (key points preserved): - Responsibilities, powers and authority of the FSB and the Registrar are set out in several Acts; FSB Act, Inspection Act and Protection of Funds Act apply across all FSB functions; sectoral Acts may assign somewhat different powers to respective Registrars. - Current structure has led to differences of approach between various FSB divisions and departments that execute powers assigned to each Registrar. - Division of supervision of market intermediaries—exchange members and FSPs—between FSB and JSE has potential to lead to regulatory gaps: - JSE carries primary responsibility for supervision of exchange members focused on business covered by JSE Rules. - Exchange members can provide services not covered by JSE Rules; such activities require licensing as FSPs. - Under JSE Rules, members may provide same services as FSPs under FAIS Act (e.g., investment management). - Care needed in approving JSE Rules to ensure regulatory frameworks do not diverge, creating an unlevel playing field. - Risk exists that differing understandings of responsibilities by JSE and FSB may cause gaps or duplication in supervision of JSE members’ activities. - Sectoral Acts provide exemptive powers to the Registrar; to promote transparency and enable verification of equality of treatment, it is important to implement the publication requirement of (text ends). *Source: INTERNATIONAL MONETARY FUND, Detailed Assessment excerpt from the supplied content.* ### Section 21 of the FSB Act in a uniform manner across the Registrars. ### _cr1557 - Section 21 of the FSB Act in a uniform manner across the Registrars. ### Scope and overarching concern - Current sectoral legislation and the division of responsibilities both within the FSB and between the FSB and the other authorities result in substantially the same type of products not being subject to consistent regulatory requirements. - The FSB and other authorities are encouraged to harmonize the regulatory framework for the products themselves to ensure fair treatment of financial services customers across various sectors. ### Principle 2 — Operational independence and accountability (political independence and accountability) - Principle statement: "The regulator should be operationally independent and accountable in the exercise of its functions and powers." - Description heading: "Political independence and accountability" and "Appointment and removal of FSB Board members and senior management." ### Appointment, composition, and disqualification of FSB Board members - Requirements for constitution of the FSB Board are in Section 4 of the FSB Act; the Minister of Finance may appoint as many Board members as he/she deems necessary and may appoint an alternate member for every Board member; the Minister appoints one Board member as chairperson and another as deputy chairperson. - Section 5 of the FSB Act disqualifies a person from appointment as an FSB Board member or alternate member if any of the following apply: - "He is not a citizen of, and permanently resident in, South Africa;" - "In the opinion of the Minister of Finance, he/she is actually engaged in the business of a financial institution or actually engaged in the rendering of a financial service, subject to the possibility of the Minister of Finance to disregard this requirement on the basis of consultation with the recognized association or organization of the relevant financial institution or financial service in which such person is actually engaged;" - "He is an unrehabilitated insolvent;" - "He/she has at any time been convicted (whether in South Africa or elsewhere) of theft, fraud, forgery or uttering a forged document, perjury, any offence under the Prevention of Corruption Act, 1958, the Corruption Act, 1992, certain provisions of Chapter 2 of the Prevention and Combating of Corrupt Activities Act, 2004, or any offence involving dishonesty, and has been sentenced to imprisonment without the option of a fine or to a fine exceeding ZAR 100; or" - "He is of unsound mind." - Note: "Section 5 does not consistently refer to two genders." - The FSB Board Charter (not formally approved by the Minister of Finance) limits the Minister’s choice in appointing the Board chairperson and deputy chairperson to independent Board members; requires the Board to reflect appropriate demographics and mixture of skills; commits to continuous professional development for Board members; and assigns Board members to various Board Committees, including those dealing with regulatory, supervisory and enforcement decisions. - Current FSB Board composition includes one SARB representative and one Ministry of Finance representative; other members have varying backgrounds and none appears to be currently directly engaged in the provision of financial services. - A member or alternate member must vacate office if subject to a disqualification or if absent for more than two consecutive Board meetings without leave of the Chairman. - The Minister of Finance may terminate membership at any time if "in the opinion of the Minister of Finance sufficient reasons exist for it" (Section 6 FSB Act), but the Minister is bound by the principle of legality in the South African Constitution and decisions are subject to Section 3 of the Promotion of Administrative Justice Act 3 of 2000 (PAJA). ### Terms, reappointment, and limits - Term of a Board member and alternate member is determined by the Minister of Finance at appointment and cannot exceed three years. - "The term of office of not more than 50 percent of the members or alternate members can expire within any calendar year." - Vacancy replacements may be appointed to act for the unexpired period; persons whose term has expired are eligible for reappointment. - No limitations currently on number of terms; some FSB Board members have served since the 1990s. ### Appeal Board appointments and composition - Minister of Finance appoints members of the FSB Appeal Board (Section 26A); office bearers of any political party, members of Parliament or provincial legislature, or municipal councillors cannot be appointed to the Appeal Board. - A member of the Appeal Board is appointed for a maximum period of three years and may be reappointed; Minister appoints chairperson and deputy chairperson from Appeal Board members. - There are currently 12 members in the Appeal Board, including "five attorneys, two advocates and four members that are active in the accounting field." The chair of the Appeal Board is a retired judge. - Minister must remove an Appeal Board member if he/she no longer meets criteria in Section 26A(3) of the FSB Act; Minister may terminate membership for unsatisfactory performance after affording a reasonable opportunity to be heard; Minister may terminate all members if Appeal Board performance is unsatisfactory. - Minister determines remuneration and allowances for Board, Appeal Board and Board Committee members not in full-time State employment. ### Executive Committee (Executive) appointments and practice - Under Section 9 of the FSB Act, the FSB is required to have an Executive which performs functions between Board meetings in accordance with Board policy and instructions. - Executive Committee consists of the Executive Officer, the Deputy Executive Officers, the Chief Actuary and such other officers or employees as the FSB may appoint. - Minister of Finance appoints the Executive Officer, the Deputy Executive Officers and the Chief Actuary after consultation with the Board (Section 13(1)(a) FSB Act). - Current FSB Executive Committee consists of ten members: the Executive Officer, five Deputy Executive Officers, the Chief Actuary, the Chief Financial Officer, the Chief Information Officer and the Chief Operations Officer. - "Therefore, seven out of ten Executive Committee members have been appointed by the Minister of Finance." - The FSB Act does not specifically address the Minister’s power to remove Executive Committee members; in practice the Minister would have discretion as appointing official, subject to PAJA. ### DMA appointments - Minister of Finance appoints chairperson, other members and alternate members of the DMA; term not exceeding three years and eligible for reappointment. - Minister may remove the chairperson or terminate membership for good cause after giving opportunity to be heard. - DMA members appointed include: - The Executive Officer and/or his/her deputy; - One person and an alternate from the JSE; - One person of appropriate experience and an alternate from each of: Accountant; Insurance industry; Banking industry; Fund management industry; Any organization that represents shareholders’ rights or similar organization chosen by the Minister of Finance; - One person of appropriate experience and an alternate nominated by the SARB; and - Two other persons of appropriate experience and their alternates. - According to the FSB, no DMA members are currently active market participants. ### Consultation requirements with the Minister of Finance - Section 18(2) of the FSB Act requires the FSB and its Executive Committee members to consult with the Minister of Finance on any matter relating to the exercise of such of their powers and duties under the FSB Act or any other law as the Minister may determine; the FSB reports the Minister has not issued any such determination and such consultation does not take place. - Section 71(4)(b)(i) requires the Registrar to inform the Minister of any amendment he/she has made to the rules of a market infrastructure, giving reasons and explaining the urgent imperative under exceptional circumstances that required the amendment; there is no requirement to consult before making such amendments. ### Minister’s regulation-making powers and interactions with Registrars - Various sectoral Acts empower the Minister of Finance to make regulations; differing requirements exist regarding consultation with Registrars: - FAIS Act requires the Minister to consult the Registrar before making regulations; - CISCA and CRSA do not include a similar requirement; - FMA requires the Minister to consider any recommendations from the Registrar prior to publication of draft regulations. - Section 107(1) of the FMA requires the Minister to maintain the operational independence of the Registrar when making regulations. - Minister must submit draft regulations made under the FMA and the CRSA (but not FAIS Act and CISCA) to Parliament for scrutiny at least one month before promulgation when Parliament is in session; a copy of promulgated regulations must be tabled in Parliament. ### FSB subordinate measures, rule-making and publication - The FSB has power to make rules under Section 19 of the FSB Act, Section 26 of the FAIS Act and Section 24 of the CRSA. - Registrar may issue Board Notices in the Gazette and/or on the official website under some sectoral Acts. - As of February 28, 2014 the Registrar may issue directives under all sectoral Acts that can apply generally or only to a specific person or service. - Registrar can prescribe binding subordinate measures such as fit and proper requirements and codes of conduct without requirement to consult or seek approval of the Minister of Finance or other government authority. - All FSB subordinate measures must be published either in the Gazette or on the official website; in practice the FSB publishes such measures on its website even when only Gazette publication is required. - The non-harmonized structure of the FSB website across divisions makes identifying up-to-date, binding measures challenging. ### Independence from commercial or sectoral interests - It appears none of the FSB Board members currently work for an FSB regulated entity; a few engage in investment activities. - The Licensing Committee of the Board includes three industry representatives and is consulted in every FSB licensing decision. - The Board is increasingly informed of FSB supervisory and enforcement activities. ### Political and public accountability; reporting and publication - FSB Act includes reference to the FSB annual report in Section 21; in practice the FSB prepares an annual report after the end of its financial year (March). - The FSB Annual Report includes a description of activities and audited financial statements audited by the Auditor General (which in practice outsources audit work to a professional audit firm). - The FSB Annual Report is submitted to Parliament and is expected to be presented to the relevant portfolio committee; the Annual Report is also published on the FSB website. - Some Registrars have specific statutory annual report requirements (e.g., Section 23 of CISCA requires the Registrar to submit an annual report concerning CISCA activities and to table it in Parliament within 14 days of its publication if Parliament is in session, or otherwise within 14 days of the commencement of its next session). - Publication practices for supervisory and enforcement actions vary by Registrar; some statutes specifically require publication (examples: Section 14A of the FAIS Act and Section 6G of the Protection of Funds Act) but there are no uniform publication requirements. ### Stability and continuity of funding - Section 16 of the FSB Act: funds of the FSB consist of service fees and levies imposed on financial institutions, money borrowed and money accruing from any other source. - FSB may impose levies on financial institutions by notice in the Gazette (Section 15A FSB Act); before imposing levies the Board must publish proposed levies and allow representations within a specified time and have regard to such representations before imposing final levies. - FSB fees charged under the FAIS Act (but not other Acts) are determined by the Minister of Finance after consultation with the Registrar by notice in the Gazette (Section 41 FAIS Act). - FSB may seek an order from an adjudicatory body to be compensated for costs of an investigation on a regulatory breach; if violators are ordered to return profits or to pay a monetary penalty, FSB places these funds into a segregated account to compensate victims and to pay for investor education programs. - The FSB’s annual budgetary process aims at reaching a zero balance at the end of the financial year; when surplus funds are collected, the FSB explores refunds of excess levies as rebates to specific industries. ### Legal protection and insurance - Section 23 of the FSB Act provides legal protection: no person will be liable for any loss or damage caused by anything done or omitted in the bona fide exercise of any power, duty or function under the FSB Act, relevant sectoral Acts, the Inspection Act or the Protection of Funds Act. - The Act does not provide that FSB will indemnify persons for costs of defending suits; the FSB has an insurance policy to cover its and its management’s and employees’ legal costs in case of a suit. - In practice, several actions for civil damages have been instituted against the FSB (for example referenced in the FSB 2012/2013 Annual Report). ### Accountability for decisions and procedural fairness - South African Constitution and PAJA require all administrative decisions affecting rights to be lawful, reasonable and procedurally fair; PAJA gives effect to administrative justice and ensures legality of administrative action. - FMA (Section 6(3)(f)) specifically requires the Registrar to act in accordance with PAJA; other Acts are also subject to PAJA via PAJA’s definition of administrator. - Protection of Funds Act sets detailed procedures for referrals to the EC and EC proceedings; FSB Act sets process for Appeal Board proceedings. - Sectoral Acts include procedural requirements on notice and reasons prior to adverse actions; statutory examples include: - FAIS Act Section 9(2)(a)(ii): before suspending or withdrawing a license, Registrar must inform licensee of intention and grounds and give reasonable opportunity to make submissions; - FMA Section 60(2): before cancelling or suspending a license, Registrar must inform market infrastructure of intention, give reasons, and call upon market infrastructure to show cause within a specified period; - CISCA Section 16(2): Registrar may not cancel or suspend registration of a manager unless notified of intention and grounds, allowed to make representations, and afforded reasonable opportunity to rectify defects or irregularities; - CISCA Section 18(2): before imposing a fine, Registrar must by written notice inform the manager or third party of intention, specify particulars and reasons, specify amount of the intended fine, and call upon the manager or third party to show cause within a specified period. - Protection of Funds Act Section 6D(4)(a): a determination of an EC panel "must be in writing and state the reasons for the determination." *Source: _cr1557 - Section 21 of the FSB Act in a uniform manner across the Registrars.** ### Section 3 of PAJA contains general procedural fairness requirements. It requires that ### _cr1557 - Section 3 of PAJA contains general procedural fairness requirements. It requires that ### Procedural fairness under PAJA (Section 3) - Administrative action which materially and adversely affects the rights or legitimate expectations of any person must be procedurally fair. - An administrator must give an affected person: - Adequate notice of the nature and purpose of the proposed administrative action; - A reasonable opportunity to make representations; - A clear statement of the administrative action; - Adequate notice of any right of review or internal appeal, where applicable; and - Adequate notice of the right to request reasons. ### Right to reasons (Section 5) - No specific requirement to include reasons in the original decision, but reasons may be requested and furnished afterwards. - Any person whose rights have been materially and adversely affected by administrative action and who has not been given reasons may, within 90 days after the date on which that person became aware of the action or might reasonably have been expected to have become aware of the action, request written reasons from the administrator. - The administrator must, within 90 days after receiving the request, give the requesting person adequate reasons in writing for the administrative action. - An administrator may depart from the requirement to furnish adequate reasons if it is reasonable and justifiable in the circumstances, and must forthwith inform the person making the request of such departure. ### Ministerial publication of classes of actions (efficiency measure) - The Minister may, at the request of an administrator, by notice in the Gazette publish a list specifying administrative actions or classes of actions for which the administrator will automatically furnish reasons without a request. - The Minister must, within 14 days after the receipt of such request and at the cost of the relevant administrator, publish such list. - This process has not been applied to FSB actions. - In practice, the FSB gives reasons for all substantive decisions where a person’s rights are affected (e.g., licensing decisions). ### Appeal to the FSB Appeal Board (FSB Act Section 26 / 26A) - A person aggrieved by a decision may appeal to the FSB Appeal Board within 30 days of becoming aware of, or ought to have become aware of, the decision, in the manner and on payment of the fees prescribed by the Minister of Finance. - An appeal does not suspend the decision unless the chairperson or a deputy chairperson directs otherwise on application by a party. - Each appeal is assigned to a panel of at least three suitably qualified Appeal Board members; the chairperson of a panel hearing must be an advocate, attorney or judge. - Appeals are decided on written evidence, factual information and documentation submitted to the decision maker before the decision was taken; new evidence is generally not permitted unless the chairperson grants an exemption. - If further evidence is allowed, the matter reverts to the decision maker for reconsideration and the appeal is deferred. - The Appeal Board may confirm, set aside or vary the decision under appeal, order that its decision be given effect to, or remit the matter for reconsideration by the decision maker. - An Appeal Board order has legal force and may be enforced as if issued in civil proceedings in a division of the High Court within whose area the Appeal Board sat. - The decision of the Appeal Board must be in writing, furnished to every party within a reasonable period, and made public. - The Appeal Board also hears appeals on decisions of an exchange, CSD and independent clearing house authorized under the FMA (Section 105), and appeals on decisions of the Ombud under Section 39 of the FAIS Act. - The appeal body for EC decisions is the High Court (Section 6F Protection of Funds Act); launching such appeal proceedings does not suspend the operation or execution of a determination unless the chairperson of the EC directs otherwise. ### Judicial review (PAJA Sections 7, 6 and 8) - Section 7: A court or tribunal may not review an administrative action under PAJA unless any internal remedy provided for in any other law has first been exhausted. The FSB Appeal Board process constitutes such an internal remedy. - Judicial review proceedings must be instituted without unreasonable delay, and no later than 180 days after the date on which the appeal proceedings at the Appeal Board have been concluded. - Section 6: A court or tribunal has power to review an administrative action if any of the following apply: - The administrator who took it was not authorized to take the action or acted under an unauthorized delegation, or was biased or reasonably suspected of bias; - A mandatory and material procedure or condition prescribed by an empowering provision was not complied with; - The action was procedurally unfair; - The action was materially influenced by an error of law; - The action was taken for a reason not authorized by the empowering provision, for an ulterior purpose or motive, because irrelevant considerations were taken into account or relevant considerations were not considered, because of the unauthorized or unwarranted dictates of another person or body, in bad faith, or arbitrarily or capriciously; - The action itself contravenes a law or is not authorized by the empowering provision or is not rationally connected to the purpose for which it was taken, the purpose of the empowering provision, the information before the administrator, or the reasons given for it by the administrator; - The action concerned consists of a failure to take a decision; - The exercise of the power or the performance of the function authorized by the empowering provision is so unreasonable that no reasonable person could have so exercised the power or performed the function; - The action is otherwise unconstitutional or unlawful. - Section 8: Remedies in judicial review proceedings include orders that are just and equitable, such as: - Directing the administrator to give reasons or to act in the manner the court or tribunal requires; - Prohibiting the administrator from acting in a particular manner; - Setting aside the administrative action and remitting the matter for reconsideration by the administrator, with or without directions; - In exceptional cases substituting or varying the administrative action, correcting a defect resulting from the administrative action or directing the administrator or any other party to pay compensation; - Declaring the rights of the parties in respect of any matter to which the administrative action relates; - Granting a temporary interdict or other temporary relief; - As to costs. ### Market infrastructure procedural fairness - FMA Section 11(9): An exchange, before refusing an application to include securities in the list, must inform the issuer of its intention to refuse, give reasons for intended refusal, and call on the issuer to show cause within a period specified by the exchange. Same requirements for removal from listing or suspension. - JSE Equities Rules Section 3.100: JSE has sole discretion to accept or reject membership applications or accept subject to conditions; must notify applicant in writing of decision and conditions. A person aggrieved may appeal to the FSB Appeal Board. Similar provisions exist in the JSE IRC and Derivatives Rules. - Strate Rules Section 3.7: Controlling body examines applicant compliance and may admit or reject after consultation. If rejection is determined, it must provide notice of intended decision with reasons and give the applicant five business days to state its case (written or oral). After representations, or absence thereof, final decision is made. Right to appeal to the FSB Appeal Board applies. - JSE and Strate rules include procedural fairness structures for disciplinary matters. ### Assessment and governance comments - Assessment: Partly Implemented. - Comments and governance observations: - The Minister of Finance has power to appoint and remove members of the FSB Board, the Appeal Board, the DMA, and the majority of the FSB Executive Committee, with very few limitations. - Three Board Committees are consulted by the FSB on regulatory, licensing and enforcement decisions; some Committees include industry representatives, potentially creating the perception of undue political or industry influence. - The DMA, which does not include active market participants, is noted as a suitable model. - Recommendation: Upcoming twin peaks legislation should include clear procedures for appointment and removal of heads and members of governing bodies of the conduct and prudential authorities, and clear limitations on reasons for removal (Key Question 5 of the IOSCO Assessment Methodology). Consider the role of industry representatives in governance. - The FSB is financed through fees and levies from supervised entities. Fees charged under the FAIS Act are determined by the Minister of Finance; this requirement is recommended to be removed as it may undermine FSB independence regarding supervision of FSPs. - There is no uniform FSB-wide policy on publication of supervisory and enforcement measures; it is important for the FSB to have such a policy to ensure consistent information to market participants and the public. ### Principle 3 — Powers, resources and capacity: key facts and budget figures - The FSB’s powers and authorities are sufficient for responsibilities assigned under the Acts referenced in Principle 1. - The FSB’s budget growth: - The FSB’s budget has grown on average by 11.4 percent/year between the financial years 2010/2011 and 2012/2013 and is projected to grow on average by further 5.4 percent/year from the current financial year to the financial year 2016/2017. - FSB Budget Development (ZAR Thousand) — selected line items and totals as presented: - Administration: 137,197; 166,449; 178,870; 194,061; 200,578; 212,566; 224,766 - Financial advisory and intermediary supervision/2: 105,257; 112,908; 121,785; 119,064; 124,837; 131,951; 139,527 - Insurance supervision: 44,518; 67,911; 76,188; 95,327; 99,866; 105,812; 112,112 - Pension fund supervision: 88,826; 93,915; 106,843; 107,306; 112,515; 118,508; 125,508 - CIS supervision: 15,078; 18,772; 18,267; 19,212; 20,149; 21,408; 22,723 - Market infrastructure supervision: 8,371; 20,685; 10,554; 11,394; 11,960; 12,693; 13,477 - DMA: 8,452; 14,235; 10,482; 13,906; 14,572; 15,457; 16,397 - CRA regulation: -; -; -; 3,046; 3,300; 3,619; 3,983 - Hedge fund regulation: -; -; -; 689; 903; 1,073; 1,271 - Total: 407,699; 494,875; 522,989; 564,005; 588,680; 623,415; 659,764 - Notes: - The FSB’s financial year runs from the beginning of April to the end of March of the following year. - Financial advisory and intermediary supervision includes insurance advisors and intermediaries; budget cannot be broken down between securities and insurance categories. ### Resources, staffing, training and governance — key statistics and arrangements - Staffing: - The FSB had 511 full-time staff members at the end of the financial year 2012/2013. - Staff turnover at the FSB level was 11.2 percent (2012/2013), up from 6.0 percent the previous financial year. At the end of the financial year 2013/2014, the FSB level staff turnover was 12.0 percent. - Compensation and recruitment: - The FSB has authority to pay salaries comparable to private financial services industry pay scales; staff are compensated at levels higher than government norms. - The FSB has used additional reward structures (e.g., performance bonuses for top performers and Executive Committee members during the 2012/2013 financial year). - Challenges remain in filling open positions with staff having sufficient expertise. - FSB Staff Composition and Turnover (selected entries presented as in source): - Capital Markets: Total Number of Staff March 31, 2013: 10; Staff Turnover (in percent) March 31, 2013: 30; Total Number of Staff March 31, 2014: 9; Staff Turnover (in percent) March 31, 2014: 0 - Market Abuse: 9; 11; 9; 0 - CRA: 0; 0; 3; 0 - FAIS Supervision: 57; 21; 64; 19 - FAIS Enforcement: 6; 33; 9; 22 - FAIS Registration: 30; 10; 28; 21 - FAIS Compliance: 20; 5; 17; 25 - CIS: 21; 10; 22; 14 - Systems and surveillance: - Some FSB reporting systems do not support automation of compliance monitoring (e.g., quarterly portfolio reporting by CIS managers). - JSE has the main responsibility for market surveillance; the FSB does not have its own market surveillance capacity. - Training: - During financial year 2012/2013, the FSB spent ZAR 1.35 million on training and ZAR 520,000 on seminars and conferences. - The FSB High Potential Program (University of Stellenbosch) was run for middle management development; 28 employees finished the program during the 2012/2013 financial year. - Governance — Board Charter and responsibilities (high-level duties as stated): - All Board members are non-Executive members; certain executives are standing invitees to Board meetings. - Board responsibilities include exercising leadership and custodianship of corporate governance; facilitating and approving strategies; identifying key performance and risk areas; ensuring strategies result in sustainable outcomes; providing ethical leadership; ensuring effective and independent Audit Committee; governance of risk; information technology governance; compliance with laws and governance standards; ensuring effective risk-based internal audit; reporting on internal controls; ensuring integrity of financial reports; acting in the best interests of the FSB. * _cr1557 - Section 3 of PAJA contains general procedural fairness requirements. It requires that_* ### Section 5 of the Board Charter stipulates the matters that are reserved for decision by ### _cr1557 - Section 5 of the Board Charter stipulates the matters that are reserved for decision by ### Matters reserved for Board decision - Approving the FSB’s policies, code of conduct, strategic plan, business plan and any material changes in strategic direction or material deviations in its business plan; - Approving the delegation of authorities; - Appointing Executive Committee members other than the ministerial appointments; - Recommending to the Minister of Finance to take a particular course of action proposed by the FSB; - Exercising oversight powers over the Executive Officer acting as Registrar; - Making recommendations to the Minister of Finance regarding the appointment to and removal from the Board, including the appointment of the Chairperson and Deputy Chairperson; - Appointing the Chief Operations Officer, the Chief Financial Officer and the Chief Information Officer. - In practice the FSB Board meets quarterly, primarily to oversee the FSB’s internal operations and governance. The Board is also regularly informed of supervisory and enforcement matters, but it does not make decisions on them. - According to Section 9(3) of the FSB Act, the FSB (i.e.,the Board) may set aside or vary any decision of the Executive Committee, except a decision in consequence of which a payment has been made or any other right has been granted to any person. ### Board Committees - Legal basis: Section 10(1) of the FSB Act permits establishment, dissolution or reconstitution of committees; any person meeting Board membership conditions may be appointed as a Committee member. - Committees established: Audit Committee, Risk Management Committee, Human Resources Committee, Remuneration Committee, Licensing Committee, Litigation Committee and Legislative Committee. - Enforcement Committee: Under Section 10(3) of the FSB Act, the FSB is required to establish an Enforcement Committee to be responsible for enforcing compliance with the laws regulating financial institutions and the provision of financial services. - Composition and functions: - Audit, Risk Management, Human Resources, Remuneration Committees: composed only of FSB Board members (2012/2013 Annual Report). - Licensing Committee: three Board members, five other members; function is to ensure the Registrar acts according to the legislation administered by the FSB. Three of the Licensing Committee members work for FSB regulated entities. - Litigation Committee: three Board members, four other members; oversees the FSB litigation process for claims against or by the FSB. - Legislative Committee: four Board members, four other members; considers new legislation or amendments relating to the FSB’s supervisory functions. ### Executive management and delegation - Executive Committee: performs functions of the FSB in accordance with the FSB’s policy and instructions between Board meetings. - Executive Officer/Registrar: subject to Board supervision; Deputy Executive Officer or the Chief Actuary performs delegated functions and is accountable to the Executive Officer (Section 13(3) FSB Act). - Delegation: powers of the FSB or Registrar may be delegated to other persons, including any employee; sub-delegation is permitted. The Board, Executive Officer and Deputy Executive Officers must develop an appropriate system of delegation (Section 20 FSB Act). - In practice: - The Executive Officer/Registrar has delegated many duties to relevant Deputy Registrar/Deputy Executive Officer; further delegations within divisions. - Supervisory decisions are primarily taken by relevant Deputy Registrars. - Enforcement decisions are taken either by the Deputy Registrar or the Enforcement Committee. - Licensing decisions are submitted for discussion and recommendation to the Licensing Committee prior to decision-making. - The FSB Executive Committee meets every two weeks to discuss FSB-wide issues, but it does not make supervisory or enforcement decisions as a committee. ### Investor education - Function under Section 3 of the FSB Act: provide, promote or otherwise support financial education, awareness and confidence regarding financial products, institutions and services. - Cross-sectoral Consumer Education Unit: promotes and implements programs on budgeting, savings, insurance, investments, retirement funds, dealing with financial services providers, consumer rights and responsibilities and consumer recourse mechanisms. - Delivery channels: workshops, radio and television, printed media and exhibitions. - International engagement: - FSB is a member of the Advisory Board of the International Network on Financial Education (INFE), and co-chairs the INFE Expert Sub-group on National Strategies. - FSB chairs the Technical Committee on Consumer Financial Education of the Committee of Insurance, Securities and Non-banking Financial Authorities. - National initiatives: - National survey on financial literacy levels in South Africa in 2011. - National Strategy for Consumer Financial Education in South Africa developed in 2013; strategy development process guided by the National Treasury. - Market infrastructure reporting: under Section 69 of the FMA, a market infrastructure must within four months after the financial year end submit an annual report containing prescribed details, including a status report on consumer education initiatives, if any (Board Notice 101). ### Assessment and operational challenges - Assessment: Broadly Implemented - Comments: - The FSB and the Registrar have sufficient policies and governance practices to perform their functions and exercise their powers within the current legislative framework. - The legislation and FSB structure have fostered a siloed approach to decision making; FSB has sought improved coordination via regular Executive Committee meetings. - Conversion of the FSB to a conduct authority and related legislative governance changes should assist in harmonizing responsibilities. - Resource and personnel issues: level of resources generally considered sufficient, but challenges in recruiting staff with sufficient expertise and high staff turnover in certain departments. - Transformation to the conduct authority and assumption of new tasks will further enhance the need to maintain current and attract new talent. ### Principle 4 — Regulatory process clarity and consistency - General: Regulation and rulemaking procedures of the Minister of Finance and the FSB are addressed only at a general level across sectoral Acts. - General Amendment Act: Section 18(3) added to the FSB Act requires the Minister of Finance to prescribe a code of norms and standards for consultation for the FSB Board and Registrars, which must: - Require that appropriate stakeholders to be consulted are identified; the purpose and scope of consultation are clear; the timing, medium and process of consultation are appropriate, proportional and transparent; consultation material is clear; and stakeholder input is considered and feedback provided; and - Stipulate requirements and standards relating to publication. - Commencement: The commencement date of the above provision has been delayed until the Minister’s code has been prepared. The intention is to publish the code, once it has been finalized. ### Development of Minister of Finance regulations (procedural summaries by Act) - FAIS Act: - Section 35: Minister may by notice in the Gazette, after consultation with the Registrar, make regulations on certain matters. No other process requirements in the FAIS Act. - CISCA: - Section 114: refers to regulations by the Minister of Finance, but does not include any requirements on the process for developing such regulations. - FMA: - Section 107(2): before the Minister makes any regulation, he/she must: - Ensure consultation with recognized industry bodies; - Consider any recommendations from the Registrar prior to the publication of draft regulations; - Publish a notice of the release of draft regulations in the Gazette, indicating that the draft regulations are available on the National Treasury official website, and call for public comment in writing within a period (at least 30 days) stated in the notice; - For draft regulations under Section 5(1) of the FMA (such as extending regulation to unlisted securities or a new category of unregulated persons), publish on the National Treasury official website, with the draft regulations, a policy document that informs the draft regulations, and a report on the expediency, effect and implication of the regulations; - For draft regulations extending regulation to a new category of unregulated persons, publish a notice identifying the persons who may be declared to be regulated persons and inviting comment from those persons in writing within a period (at least 30 days) stated in the notice; - Submit the draft regulations to the Parliament, while it is in session, for parliamentary scrutiny at least one month before their promulgation; - Table a copy of the promulgated regulations in the Parliament; - Within a reasonable period after prescribing regulations, publish on the National Treasury official website a document summarizing the comments received, and provide a brief response to those comments that were not accommodated. - CRSA: - Section 34: requires the Minister to publish a notice of the publication of the draft regulations in the Gazette, submit the draft regulations to Parliament for parliamentary scrutiny and submit a copy of the regulations to Parliament. The FMA requirements to consult industry, consider Registrar recommendations and publish a feedback statement do not apply. - Note: Until February 28, 2014, the FAIS Act and CISCA provided for advisory bodies of industry representatives to be consulted before regulations; the General Amendment Act removed the requirement to establish Advisory Committees. ### Development of FSB rules and other regulatory measures - Legal basis: Section 19 of the FSB Act permits the FSB to make rules on any matter it deems necessary to achieve the objectives of the FSB Act and to make them known in such manner as it deems fit. - Heterogeneity: Procedural requirements for FSB rules and regulatory measures are not uniform across sectoral Acts; legislation does not include a formal requirement for the FSB or the Registrar to consult market participants or the public before issuing their own regulatory measures. - Publication focus: Legal requirements often focus on publication of final measures through different media rather than on consultation. - Procedural Requirements for FSB Regulatory Measures (as presented): - FAIS Act — Rules: Section 26(2)(b): publication in the Gazette. - CISCA — Section 52: No procedural requirements. No reference to FSB rule making power. - FMA — Same requirements as for the Minister’s regulations. - CRSA — Directives and rules: publication in the Gazette and in any other appropriate media, tabling of a published copy in the Parliament; specific sections cited include Section 6(5) (publication in the Gazette and on the official website, tabling a published copy in the Parliament) and Section 26(5) (publication in the Gazette and in any other appropriate media, tabling of a published copy in the Parliament). - Directives of general application: FAIS Section 38C(5) and CISCA Section 15B(5): publication on the official web site and in any other appropriate media. - Various other measures (codes of conduct, determinations, declarations, fitness and propriety requirements): Notice on the official web site, unless notice in the Gazette is specifically required. - Practice: - Registrars publish draft regulatory measures for comment accompanied by explanatory memoranda. - After consultation, some Registrars issue explanatory response documents (including comments matrices) and public statements. - The Board’s Legislative Committee reviews measures before finalization. - Registrar of Securities Services empowered to issue guidelines on application and interpretation of the FMA (Section 6(3)(k) FMA); other Registrars issue circulars and guidance notes in practice. - FSB website includes links to or copies of relevant Acts, Minister’s regulations and FSB regulatory measures; some Acts available only through subscription-based service. Divisions do not follow a consistent structure in presenting information on the website. ### Development of self-regulation (exchanges and market infrastructures) - Exchanges: - Section 11(6) of the FMA: an exchange must have a consultation process for amending its listing requirements; process must set out persons to be consulted, manner of consultation including time periods. - Exchanges must submit proposed amendment, explanation, and any concerns raised to the Registrar for approval. - Registrar must publish the amendment on the official website and a notice in the Gazette calling for objections within 14 days. - Implemented through Sections 1.30-1.31 of the JSE Listing Requirements (Equities) and Debt Listing Requirements: public consultation via Stock Exchange News Service (SENS) inviting comments for a period of one month; JSE submits proposals and consultation outcomes to the Registrar for approval. - Market infrastructure rules: - Section 71 of the FMA: contains similar provisions relating to amendment of the rules of a market infrastructure. - Example: JSE Equities Rules (Section 2.60): - Any member of the JSE Executive may propose in writing any amendment of the rules or directives. - JSE Executive will consider the proposed amendment and notify members by JSE Gazette of its decision. - If, within ten days of the announcement of the JSE Executive’s decision to adopt the proposal, five or more members object in writing, the objection will be referred to the JSE Board for determination. - If no objection within the prescribed period, or if the JSE Board upholds the Executive’s decision, the amendment must be submitted to the Registrar for approval. - If an objection to a proposed directive amendment has not been lodged within the prescribed period, or the JSE Board upholds the Executive’s decision, the amendment will take effect immediately. - Similar process in Sections 2.6-2.19 of Strate Rules. ### Procedural fairness and licensing decisions - Licensing criteria and locations: - FAIS Act: Section 6A (fit and proper requirements) and Chapter II — criteria for authorizing FSPs and suspending/withdrawing authorization (see Principle 29). - CISCA: Section 42 — criteria for registration of managers of CIS in securities; Section 16 — cancellation or suspension of a manager’s registration (see Principle 24). - FMA: Section 8 — authorization requirements for applicants for exchange license (see Principle 33); Sections 28, 48 and 55 — applicants for a CSD license, clearing house license and trade repository license, respectively; Section 60 — cancellation or suspension of license of market infrastructures. - CRSA: Sections 5 and 6 — requirements for registration as a registered CRA and suspension and cancellation of such registration (see Principle 22). - Complementary materials: Criteria are complemented by publicly available FSB Board Notices, fit and proper requirements, etc. - Procedural requirements for authorization/registration, including possibility to appeal, are described in Principle 2. - Authorization requirements for exchange members, CSD participants, and clearing members must be included in exchange rules (Section 17(2)(a) FMA), CSD rules (Section 35(2)(b) FMA) and clearing house rules (Section 53(2)(b) FMA). - Procedural fairness requirements applicable to market infrastructures are described in Principle 9. *Source: _cr1557 - Section 5 of the Board Charter stipulates the matters that are reserved for decision by* ### Section 22 of the FSB Act includes the requirements on the use and disclosure of ### _cr1557 - Section 22 of the FSB Act includes the requirements on the use and disclosure of ### Use and disclosure of information (Section 22 of the FSB Act) - No information obtained in the performance of any relevant power or function may be used or disclosed to any person except: - In the course of performing functions under, or as enabled by the relevant Acts; - For the purposes of legal proceedings or other proceedings; - When required to do so by a court; or - By the Executive Officer or Deputy Executive Officer, if in their opinion disclosure is appropriate: - For purposes of warning the public against conducting business with a financial institution or other person conducting activities in contravention of the FSB legislation; - For purposes of informing the public of actions taken against a financial institution under the FSB legislation; - For purposes of alerting the public to activities carried out by one or more financial institutions which the Executive Officer or Deputy Executive Officer believes to constitute a potential risk to consumers and in respect of which consumers should take care; or - In the public interest. ### Inspection Act confidentiality (Section 8) - A person carrying out an inspection must preserve and aid in preserving secrecy with regards to all matters that come to his/her knowledge while conducting the inspection. - An inspector may not communicate any such matter to any person except the Registrar, unless: - a court of law orders such communication; or - communication is necessary to properly carry out the inspection. - The Registrar may disclose information obtained during an inspection if he/she has reason to believe that: - an offence or irregularity has been committed relating to the affairs of the inspected institution; or - an inspected institution is in an unsound financial condition. - Information may be disclosed to persons and entities affected by or having an interest in the information, including: - A department or organ of State; - A regulatory authority; - A self-regulating association or organization; - A statutory Board charged with supervisory or regulatory duties; and - A shareholder, partner, member, director, auditor, accounting officer, liquidator, curator, executor or trustee of the inspected institution. ### Consistency of application of powers - FSB and Registrars ensure consistency through: - issuance of guidance notes and circulars on the application of powers and authority; - providing all respondents an equal period to respond to a supervisory action; - similar suspension periods and similar conditions for lifting suspension for similar contraventions. - Assessment: Broadly Implemented - Comments and recommendations: - Procedures used by the Minister of Finance and the FSB are not currently documented and disclosed to the public. - Section 18(3) of the FSB Act requires the Minister of Finance to prescribe a code of norms and standards for consultation — an important development. - Upcoming legislative changes should harmonize legal requirements for consultation across sectors to ensure a uniform process and legal backing to current practices. - Authorities are encouraged to expressly consider the cost of compliance by preparing an impact assessment, cost-benefit analysis or equivalent when enacting new or substantive changes to existing requirements. - Legislation and regulatory measures should be made easily available to the public, including posting copies on the FSB website in an easily identifiable location and removing the need to subscribe to a commercial service. ### Principle 5 — Code of conduct, conflicts of interest, and professional standards - Code of conduct and avoidance of conflicts of interest: - All FSB staff (including Executive Committee members) are subject to a Staff Code of Conduct. - No employee is permitted to have any direct or indirect interest in any entity regulated by the FSB. - Standard contract of employment requires declaration of any other business interest before commencing work. - Employees must take reasonable steps to ensure no personal conflict of interest exists or may arise; consult Head of Department if uncertain. - Employees must disclose, annually and in writing, detailed particulars of other outside business interests and business interests or employment of their spouse or life partner in or by any institution regulated by the FSB or providing a service to the FSB. - The FSB Executive Committee may instruct an employee to cease any activities posing a risk of conflict of interest or impacting work performance. - Restrictions on holding and trading in securities: - Standard contract of employment (under "investment in shares") prohibits an employee from having any direct interest in any entity regulated by the FSB — prohibiting holding securities of regulated entities. - Staff Code of Conduct requires prior written approval from Head of Department, Deputy Executive Officer or Executive Officer to deal in any security. - Approval must not be granted for any security of an entity regulated by the FSB if there is a real or perceived possibility of creating a conflict of interest or of acting in contravention of the market abuse prohibitions in the FMA. - Securities encompass shares, options, derivatives, single stock futures, contracts for difference and bonds. - Confidentiality, secrecy and protection of personal data: - Section 22 confidentiality requirements apply to: - A member or former member of the FSB Board, a Board Committee, the Appeal Board or the EC (or any alternate member or former alternate member); - The Executive Officer, the Deputy Executive Officers, the Chief Actuary, persons appointed by the FSB, officers and employees (including any employee, contractor, consultant or person acting on behalf of the FSB), while appointed or after such appointment has terminated. - Section 8 of the Inspection Act includes confidentiality provisions for inspectors (see Principle 4). - Enforcement of the code of conduct: - Disciplinary proceedings may be instituted against any employee who contravenes the FSB Staff Code of Conduct. - Possible sanctions: warning, suspension without pay, final written warning, demotion or dismissal. - Contravention of confidentiality provisions in the Inspection Act and the FSB Act constitutes a criminal offence. - Penalty for contravening the Inspection Act: a fine or imprisonment for a period not exceeding two years. - Penalty for contravening Section 22 of the FSB Act: a fine not exceeding ZAR 1 million or imprisonment for a period not exceeding five years or both such fine and such imprisonment. - Responsibility for enforcing staff discipline lies with line managers; FSB has policies in place and uses internal or external experts depending on the case. - Example: nine employees have been subject to formal disciplinary action since January 2013, ranging from written warnings to termination of employment; one separation agreement was caused by a conflict of interest. - Assessment: Broadly Implemented - Comments and recommendations: - The standard contract prohibits investment in shares of regulated entities, but the Staff Code of Conduct appears to enable a manager to grant approval for dealing in securities of a regulated entity under certain, not very strict conditions. - The FSB should align or merge the requirements in the contract of employment and Staff Code of Conduct and ensure the holding and trading prohibition applies to all securities, not only shares. - Ensure appropriate restrictions apply to all persons with access to confidential supervisory information, such as the FSB Board, Board Committee and DMA members. - Consider introducing a process to ensure confidential information relating to entities other than those directly regulated by the FSB cannot be used for trading purposes (for example, confidential information received on listed companies in connection with an investigation or enforcement case). ### Principle 6 — Monitoring, mitigating and managing systemic risk - Legal and institutional framework: - Objectives of the FMA include contributing to the maintenance of a stable financial market environment and reducing systemic risk (Section 2). - FMA obliges the Registrar to inform the Minister of Finance and the Governor of the SARB of any matter that may pose systemic risk and to make adequate arrangements for cooperation with the Governor (Sections 6(3)(n) and (o)). - FSB and inter-agency arrangements: - FSB and SARB have formed a Systemic Risk Committee in the process of initiating activities, including compilation of a systemic risk register. Responsibility on FSB side lies in the Capital Markets Department. - FSB staff attend Strate’s Participant Failure Committee due to potential systemic implications of a failure of a CSD participant. - FSB is a member of the FSCF (financial industry wide contingency planning and crisis management forum) chaired by a Deputy Governor of the SARB. FSCF objectives: identify potential systemic threats, develop and coordinate plans to mitigate them, and manage systemic crises. - FSCF members include: SARB, FSB, National Treasury, Banking Association of South Africa (BASA), South African Insurance Association (SAIA), JSE, Payments Association of South Africa (PASA), South African Bankers Services Co Limited (Bankserv), Strate and ASISA. - MOU and terms of reference commit FSCF members to share information required to assess systemic risk, report incidents with systemic risk potential, participate in crisis management processes and contribute to mitigation of systemic risk. Main forum meets twice a year. - FSB’s participation in FSCF meetings has not been regular in the past; SARB, JSE and Strate regularly attend. - Responsibility for FSCF work is allocated to the Capital Markets Department rather than having an FSB-level function for broader systemic risks. - FSCF has an Operational Risk Sub-committee to identify and monitor operational risks with potential systemic impact and to develop, test and maintain crisis management and contingency plans. - FSOC has been informally established prior to the twin peaks legislation; one purpose is to coordinate managing risk to financial stability. FSOC is jointly chaired by the Governor of the SARB and the Minister of Finance. - Assessment: Partly Implemented - Comments and recommendations: - IMF assessments of Principles 6 and 7 focus on whether arrangements allow for a holistic view of risk, periodic reassessment of risk, and proper follow-up actions. - The FMA’s scope is limited to market infrastructures, authorized users, central securities depository participants and clearing members; as a result, most FSB-level systemic risk activities are undertaken by the Capital Markets Department. - Need for FSB to develop organization-wide arrangements for monitoring, mitigating and managing systemic risk possibly arising from securities markets in a more holistic manner. - Processes via the FSCF and expected FSOC enhancements partly compensate for lack of FSB-level arrangements, but current arrangements are very high level and FSB has not been an active contributor to FSCF discussions. - FSCF discussions have focused on trading and post-trading matters; limited analytical work relevant to securities markets has been conducted. - Cross-sectoral bodies and any dedicated macroprudential function should adopt and maintain a broad approach to analyzing potential sources of systemic risk, ensuring securities markets risks are sufficiently covered. ### Principle 7 — Review of the regulatory perimeter - Description and approach: - FSB assists National Treasury in drafting sectoral legislation and regularly interacts with SARB and National Treasury on legislative amendments. - FSB has a five year review cycle for all legislation under its responsibility. - Legislation is assessed against IOSCO Principles, FSAP findings and recommendations, recommendations of the G-20 and the Financial Stability Board, and developments in comparable jurisdictions. - Capital Markets Department conducts regular reviews and benchmarking based on IOSCO reports to align the legislative and regulatory framework with international best practice. - FMA allows the Minister of Finance to prescribe regulations; the Registrar can issue additional regulatory measures and market infrastructures can issue their own rules. - Registrar of Securities Services envisages conducting annual reviews of the new FMA and proposing legislative amendments where necessary. - FAIS Division has adopted a risk-based approach to supervision of FSPs; reviews legislation for gaps and researches market risks, updates FAIS Act and subordinate legislation as needed; exemptions are granted for specific periods and reviewed; indefinite exemptions include provision for withdrawal at any time. - CIS Division assesses regulatory framework for necessary amendments; annual work plan includes reviews; industry and ASISA provide input; CIS Division benchmarks against IOSCO and makes changes where necessary. - Recent measures and perimeter extensions: - FMA addressed gaps by requiring reporting of systemic risks, addressing SROs’ conflicts of interest and introducing codes of conduct for regulated persons. - Regulatory perimeter extended to regulation of credit rating agencies (see Principle 22). - Ongoing projects include: - planned extension of the hedge fund regulatory framework to hedge funds themselves in addition to hedge fund managers (see Principle 28); - Treating Customers Fairly project; - assessment of Bitcoin’s risks to investors undertaken jointly by National Treasury, SARB and the Registrars of Financial Services Providers, Securities Services and Collective Investment Schemes. *Source: _cr1557 - Section 22 of the FSB Act includes the requirements on the use and disclosure of* ### Section 5(1) of the FMA provides a specific power for the Minister of Finance to ### _cr1557 - Section 5(1) of the FMA provides a specific power for the Minister of Finance to ### Ministerial powers, regulatory perimeter, and Registrar measures - Section 5(1) of the FMA gives the Minister of Finance power to prescribe requirements for the regulation of unlisted securities and to extend regulation to currently unregulated persons if, in his/her opinion, it would further the objects of the FMA. - Ministerial regulations can be complemented by measures issued by the Registrar under Sections 6(7) and 6(8) of the FMA. - The Minister of Finance and the FSB have used these provisions to propose extending the regulatory framework to OTC derivatives. - The Registrar of Securities Services has published for comment a draft regulatory framework for regulation of public unlisted companies making a market in their own shares, motivated by growth in trading of black economic empowerment shares. - The Capital Markets Department conducted gap analyses of the exchange’s listing requirements against IOSCO reports on ETFs, ETNs, commodity derivatives, securitization and asset-backed securities; this resulted in a review of current listing requirements. - The Capital Markets Department conducted a gap analysis of the Codes of Conduct for JIBAR and SABOR relative to the IOSCO Principles for Financial Benchmarks; this resulted in a review of the Codes of Conduct. - The FMA now provides for authorization of inter-dealer brokers as a category of authorized user; exchange rules must provide how an authorized user acting as an inter-dealer broker must conduct inter-dealer broking services, including broadcasting bids and offers and circumstances regarding transacting in listed securities via an inter-dealer broker that is not an authorized user. ### FAIS, Private Equity Fund Managers, product-issuer incentives, and property syndications - The FAIS Division intends to include private equity fund managers under the FAIS Act; the Registrar developed a draft Code of Conduct for Private Equity Fund Managers currently under industry consultation. - The Registrar of FSPs discovered structuring of sign-on bonuses to intermediaries that avoided FAIS Act restrictions on incentives; the Registrar decided to amend the FAIS General Code of Conduct to prohibit payment of such bonuses. - Following failures of property syndications, the Registrar is investigating the appropriateness of extending the FAIS scope to property syndications. ### Assessment of regulatory perimeter and institutional coordination - Assessment: Broadly Implemented - Comments: - The FSB’s approach to assessing the regulatory perimeter remains largely sectoral, though cross-Registrar and cross-authority projects are increasing. - Due to complex division of responsibilities among authorities and FSB Registrars, further enhancement of joint approaches is needed to prevent products, entities, or activities of concern from falling outside the regulatory perimeter and to align regulatory approaches across sectors; this will assist in ensuring sufficient accountability. ### Principle 8 — Conflicts of interest and misalignment of incentives - Description: - Regulation of conflicts of interest and misalignment of incentives is performed at the regulated-entity level; statutes and subsidiary instruments administered by the FSB generally require regulated entities to have policies and procedures to identify, eliminate or mitigate, and monitor conflicts of interest. - Disclosure to clients, customers, users or the public is mandated in most situations where there is or might be a conflict of interest. - There is no formal, overall FSB-wide process proactively focused on potential conflicts in the marketplace or where there might be misalignment of incentives; new or changing conflicts may be identified via processes under Principle 7 or supervisory processes. - Regulatory responses to conflicts identified have been introduced as issues were identified. - CISCA: - CISCA contains a high level requirement for the CIS manager to avoid conflicts between manager interests and investor interests. - The Registrar of CIS considers conflicts at registration, requires a conflict of interest policy, is finalizing regulations requiring disclosure of conflicts in certain marketing material and subscription forms, and includes potential/actual conflicts in on-site supervisory visits; the Registrar can direct managers to eliminate conflicts found. - FAIS Act and General Code of Conduct: - Conflicts and misaligned incentives are addressed by the General Code of Conduct for Authorized FSPs and Representatives, Board Notice 80/2003. - The General Code covers prohibitions on certain incentives (section 3A) and avoidance/management of conflicts (sections 3(1)(b) and (c)); clients must be informed in writing. - The General Code was amended in 2010 to add section 3A after investigations found inadequate disclosure and the need to prohibit certain incentives. - Section 3A(1)(b) prohibits an FSP offering incentives to representatives for giving preference to: - The quantity of business secured to the exclusion of the quality of the service rendered to clients; - A specific product supplier, where a representative may recommend more than one product supplier to a client; or - A specific product of a product supplier, where a representative may recommend more than one product of that product supplier to a client. - Representatives may not receive a financial interest (including remuneration) paid for giving preference to quantity over quality or for preferring a specific supplier or product. - FSPs must make full disclosure of actual or potential conflicts before transaction conclusion and on an on-going basis but not less than annually. - FSPs must have a comprehensive conflict of interest management policy approved by their Boards and reviewed annually; the policy must include a list of all associates and names of any third party in which the provider holds an ownership interest, be published in appropriate media, and be easily accessible for public inspection. - Compliance officers must monitor compliance with conflict provisions and submit an annual report to the FSB on implementation, monitoring, compliance, and accessibility of the policy. - Since 2010, the Registrar of FAIS has received several complaints of non-compliance leading to investigations and some enforcement action; the FSB established a task team to investigate industry practices designed to circumvent conflict provisions. - JSE Rules: - Under the JSE Equities Rules, members must avoid conflicts of interest in dealings with clients and where conflicts cannot be avoided ensure fair treatment by disclosure, confidentiality, or declining to act; a member must not unfairly place its interests above those of its clients (section 8.10.2.5). - FMA: - Section 62 of the FMA requires a market infrastructure to take steps to avoid, eliminate, disclose and otherwise manage possible conflicts between regulatory functions and commercial services, including: - Implement appropriate arrangements that comply with requirements prescribed by the Registrar; - Document and make publicly available these arrangements; and - Conduct an annual assessment, in the manner prescribed by the Registrar, of the arrangements and publish the results. - Market infrastructures must report annually on compliance with Section 62. - The JSE, as an exchange licensed under the FMA, retains self-regulatory responsibilities and is accountable to the Registrar for ensuring FMA objectives are met in its self-regulatory role; the JSE must supervise issuer and authorized user compliance and enforce governing rules. - After demutualizing in 2006 and proposing to list its own shares, supervision of the JSE under the JSE Listing Requirements was transferred to the FSB to prevent conflicts; a new JSE Board Committee, the SRO Oversight Committee, was created to independently check JSE self-regulatory activities and conflict management. - Governance structures and Chinese Walls have been implemented at Strate to mitigate conflicts. - Under section 74(1) of the FMA, the Registrar may prescribe codes of conduct for authorized users, participants and clearing members; draft Codes of Conduct require disclosure to clients of personal interests and circumstances giving rise to conflicts and taking reasonable steps to ensure fair treatment. - Firms must take reasonable steps to ensure they and persons acting on their behalf do not offer, give, solicit or accept incentives, remuneration, consideration, fee or brokerage as an inducement if likely to conflict with duties owed to clients in respect of securities services. - These codes will be published for public comment. - Assessment: Broadly Implemented - Comments: - No formal FSB-wide process focusing on conflicts and misalignment of incentives exists; when issues are identified they are addressed and several actions have occurred in recent years. - Sectoral legislation and JSE Rules require identification, avoidance, management, mitigation and disclosure of conflicts, except CISCA where provisions are more high level. - Where disclosure is required, it must be made in documents available to affected clients. - There is a general need for an FSB-wide process to proactively survey the marketplace to identify and address emerging conflicts early. ### Principle 9 — Self-Regulation, SRO oversight, and market-infrastructure responsibilities - Description of self-regulation in South Africa: - The securities regulatory framework requires exchanges, CSDs and independent clearing houses to be licensed under the FMA and to carry out certain self-regulatory tasks (no longer formally called SROs in the FMA). - JSE and Strate are currently the only market infrastructures with self-regulatory responsibilities; SAFCOM is an associated clearing house and not required to undertake such responsibilities; Strate’s self-regulatory functions are limited to CSD participants. - Section 10 (exchange self-regulatory tasks): - Exchanges must: - Issue exchange rules; - Supervise authorized users’ compliance with exchange rules and directives; - Supervise issuers’ compliance with listing requirements; - Supervise authorized users’ and issuers’ compliance with the FMA, report non-compliance to the Registrar and assist the Registrar in enforcing the FMA; and - Enforce the exchange rules, directives and listing requirements. - Exchange rules must provide for: - Equitable criteria for authorization and exclusion of authorized users, including fitness and propriety requirements for authorized users and their managers; - Authorization and criteria for authorization of securities services that authorized users or categories of authorized users may provide in different categories of securities; - Prudent capital adequacy, guarantee and risk management requirements for (various categories of) authorized users; and - An efficient, honest, transparent and fair manner and terms for effecting transactions in listed securities by authorized users, whether for own account or on behalf of others. - Section 11 (listing requirements): - A licensed exchange must make listing requirements prescribing: - Requirements for issuers of listed securities and of securities intended to be listed and such issuers’ agents; - Standards of conduct for issuers of listed securities and their directors, officers and agents; and - Standards of disclosure and corporate governance for issuers of listed securities. - Section 17 (monitoring, surveillance, and disciplinary reporting): - Exchange rules must provide for: - How the exchange monitors authorized users’ compliance with the FMA, exchange rules and directives; - Surveillance of matters relevant to the FMA, exchange rules and directives; and - Steps to investigate and discipline authorized users or officers/employees who contravene rules, and obligation to furnish a report on disciplinary proceedings to the Registrar within 30 days after completion of such proceedings. - CSDs and clearing houses (Sections 30, 35(2), 50(3), 53(2)): - CSDs must: - Issue depository rules; - Supervise participants’ compliance with the FMA and depository rules and directives, report non-compliance to the Registrar and assist enforcement; - Enforce depository rules and directives. - Depository rules must provide equitable criteria for authorization and exclusion of participants, including fitness and propriety requirements, and steps to investigate and discipline participants with reporting to the Registrar within 30 days after completion of disciplinary proceedings. - Clearing house rules must provide for authorization criteria for clearing/settlement services, prudent capital adequacy, guarantee and risk management requirements for (various categories of) clearing members, and enable restriction of activities of different categories of clearing members subject to different conditions. - Disciplinary measures for contraventions of listing requirements: - Possible penalties include: - A reprimand; - A fine not exceeding ZAR 7.5 million, to be adjusted by the Registrar annually to reflect the Consumer Price Index, as published by Statistics South Africa; - Disqualification, in the case of a natural person, from holding the office of director or officer of a listed company for any period of time; - Suspension or termination of listing; or - Any other penalty appropriate in the circumstances. - Section 71(6) penalties (market infrastructure rules may prescribe these for contraventions of rules or failures to comply): - Possible penalties include: - A reprimand; - A censure; - A fine not exceeding ZAR 7.5 million, to be adjusted by the Registrar annually to reflect the Consumer Price Index, as published by Statistics South Africa; - Suspension or cancellation of the right to be a clearing member, an authorized user or a participant; - Disqualification, in the case of a natural person, from holding the office of a director or officer of a clearing member, an authorized user or a participant for any period of time; - A restriction on the manner in which a clearing member, an authorized user or a participant may conduct business or may utilize an officer, employee or agent; - Suspension or cancellation of the authorization of an officer or employee of a clearing member, an authorized user or a participant to perform a function in terms of the rules; or - Any other penalty that is appropriate in the circumstances. - Licensing requirements and conduct standard: - A licensed exchange must conduct its business in a fair and transparent manner with due regard to the rights of authorized users and their clients (Section 10(1) FMA). *Source: _cr1557 - Section 5(1) of the FMA provides a specific power for the Minister of Finance to* ### Section 8 of the FMA sets out the requirements applicable to an applicant for an ### _cr1557 - Section 8 of the FMA sets out the requirements applicable to an applicant for an ### Requirements for an applicant for an exchange license and a licensed exchange - Must have made arrangements for the efficient and effective surveillance of all transactions effected through the exchange and for the supervision of authorized users so as to identify possible market abuse and ensure compliance with the exchange rules, the exchange directives and the FMA. - Must have made arrangements for the efficient and effective monitoring of compliance by the issuers of listed securities with the exchange’s listing requirements. - Must have made arrangements for the efficient and effective supervision of authorized users so as to ensure compliance with the Financial Intelligence Centre Act 38 of 2001 (FICA). ### CSD and independent clearing house licensing requirements - Section 28(1)(d) of the FMA: an applicant for a CSD license and a licensed central securities depository must have made arrangements for the efficient and effective monitoring of compliance by participants with the depository rules. - Applicants for an independent clearing house license must have made arrangements for the efficient and effective supervision of clearing members so as to ensure compliance with the clearing house rules, the clearing house directives and the FMA. ### Board Notice 104 of 2013 — business plan requirements for market infrastructure applicants Business plan, approved by the Board, must deal at least with: - Plans to ensure the integrity of the market and its authorized users, participants, external central securities depositories, other persons or clearing members. - The surveillance procedures established to ensure compliance by authorized users, participants, external central securities depositories, other persons and clearing members with the FMA and the proposed rules and directives of the market infrastructure and the resources of the applicant available to perform this function. - Procedures to be followed to effectively discipline the applicant’s authorized users, participants, external central securities depositories and clearing members who fail to comply with the rules of the market infrastructure. ### Supervision by the FSB - Rules of a market infrastructure must be approved by the Registrar according to the process described in Principles 4 and 34; same process applies to an exchange’s listing requirements (Section 11(6) FMA). - Reporting requirements under Section 69 of the FMA and document submission under Section 70(2) of the FMA apply to a CSD (Strate) and any future independent clearing houses; their rules are also subject to Registrar approval. - FSB representatives attend Strate Board and Board Committee meetings and Strate’s Participant Failure Committee meetings. - Strate: requirement to prepare an annual self-assessment; FSB conducts on-site visits (latest visit focused on Strate’s participant supervision). ### Power of the Registrar to assume self-regulatory functions - Section 10(3) of the FMA: Registrar may assume responsibility for one or more of the exchange’s regulatory or supervisory functions if necessary to achieve the objectives of the FMA. - Before assuming responsibility, the Registrar must inform the exchange, give reasons, and call upon the exchange to show cause within a period specified by the Registrar. - Same possibility applies to CSD and independent clearing house under Sections 30(3) and 50(3), respectively. ### Professional standards and confidentiality (Section 73 of the FMA) A market infrastructure or its officers may not disclose confidential information obtained under the FMA unless: - The person to whom the confidential information relates has given consent; - Disclosure is required or permitted under a law or a court order; - Disclosure is necessary to carry out his, her or its functions or in the course of performing duties under any law; or - Disclosure is required for the purposes of legal proceedings. - A market infrastructure may disclose information to any market infrastructure or supervisory authority, domestic or foreign, if such disclosure will further one or more of the objectives of the FMA. ### Procedural and disciplinary standards - JSE Equities Rules: Disciplinary Committee may not impose any penalty unless alleged improper conduct has been put to the person and that person has been given an opportunity, orally or in writing, to explain after being warned that the explanation may be used in evidence. - Right to demand a Tribunal hearing within three days after a reprimand, censure, or fine (but not a warning); Tribunal may impose a more severe penalty. - Strate Rules Sections 12.2 and 12.3: requirement to include reasons in notice on planned enforcement action and provide participant opportunity to make representations. - JSE: SRO Oversight Committee created in 2011; reports biannually to JSE Board, publishes reports in JSE’s Annual Report and submits to the FSB. ### Conflicts of interest (Section 62 of the FMA and Board Notices) - Market infrastructure must take necessary steps to avoid, eliminate, disclose and otherwise manage possible conflicts of interest between regulatory functions and commercial services, including implementation of appropriate documented and publicly available arrangements complying with Registrar requirements. - Market infrastructure must conduct an annual assessment, in the manner prescribed by the Registrar, of such arrangements and publish the results. - FSB Board Notice 101: requires market infrastructure to report in its annual report on results of the annual assessment of its conflict of interest arrangements. - Registrar (July 2013) requested JSE and Strate to demonstrate conflict mapping and management arrangements; FSB prepared a draft Board Notice on conflicts of interest (not yet in force). - Board Notice 95 of 2013 — self-listing of exchange securities: controlling body must implement arrangements to prevent conflicts; consider complaints; determine whether a conflict has arisen or may arise; report complaints to the Registrar as soon as reasonably possible with material facts and proposals for resolution. - Practice: FSB acts as listing authority for JSE’s shares listed on the exchange to minimize significant conflicts. - Exchange annual report to Registrar must include a section on regulatory and supervisory structure and a confirmation that all complaints relating to a conflict of interest were referred to the Registrar during the year. ### Assessment - Assessment: Fully Implemented ### Principles for the Enforcement of Securities Regulation — Principle 10: inspection, investigation and surveillance powers Powers to inspect and obtain information: - Under section 4(5)(a) of the FAIS Act the Registrar may: - Conduct an on-site visit under Chapter 1A of the Protection of Funds Act; or - Instruct an inspector to conduct an inspection under the Inspection Act. - Section 95 of the FMA gives the Registrar the same powers with respect to entities governed by that Act; section 14(1) of CISCA provides similar authority for its regulated entities. - Provisions do not require prior notice to the entity; Registrar may conduct on-site visits for general supervision or to investigate suspected non-compliance and contraventions. - Protection of Funds Act powers used for routine inspection/examination; Inspection Act authority aimed at forensic investigations for enforcement actions. - Under section 4A of the Protection of Funds Act, the Registrar may conduct an on-site visit and has full access to books and records under the FMA, FAIS Act and CISCA. - Under the Inspection Act, inspector may summon any person and require production of books and records (sections 4 and 5); inspections can include search warrants, searches and seizures. - FAIS Act: Registrar may direct an FSP, representative or compliance officer to furnish specified information or documents (section 4(2)). - FMA section 6(3)(d): Registrar “may require any person, including a regulated person, to furnish the Registrar, within a specified period, with specified information or documents.” JSE investigative powers: - JSE Equities Rule 12.10 provides for inspection by the JSE Surveillance Department of members regarding compliance with the FMA, JSE Equities Rules, JSE Equities Directives and FICA; no requirement for notice prior to an on-site visit. - Equities Rule 12.10.2.1.5: Director: Surveillance or designees may call for any person subject to JSE jurisdiction to produce books, documents, tapes or electronic records; investigations include enquiries to assess compliance and scheduled/ongoing investigations; powers extend to requests for data and information. ### Surveillance of trading and market abuse investigation powers - FSB lacks direct online access to the JSE surveillance system; Market Abuse Department staff meet with JSE market surveillance team on a biweekly basis and may request information at any time. - FSB retains exclusive responsibility to monitor trading in JSE shares that are listed on the JSE; an experienced FSB employee is assigned to monitor this trading. - DMA investigation powers under section 84 of the FMA for market abuse (insider trading, market manipulation and false and misleading statements) include: - Summoning any person to provide any information regarding an investigation into market abuse; - Interrogating any person under oath; - On the authority of a warrant, without prior notice, entering and searching premises of any person, and seizing relevant documentation. - JSE and Strate responsible for surveillance of their authorized users and participants respectively. Equities Rules 12.10.1.1 and 12.10.1.2 permit JSE Surveillance Department to set up and maintain systems for market surveillance and compliance monitoring. ### Record-keeping requirements - FAIS Act sections 18 and 19, FMA section 90, CISCA sections 4 and 74: high-level record-keeping requirements and require records to be kept for a minimum of five years. - Section 18 of the FAIS Act requires FSPs to keep records for a minimum period of five years regarding: - Known premature cancellations of transactions or financial products by clients of the provider; - Complaints received together with an indication whether or not any such complaint has been resolved; - The continued compliance with the fit and proper requirements; - Cases of non-compliance with the FAIS Act, and the reasons for such non compliance; - The continued compliance by representatives of the authorized FSP with the requirements of the FAIS Act. - Board Notice 96 of 2013 (applies to JSE member firms, the JSE and Strate): accounting records must show transactions and financial commitments and client positions with substantial accuracy at close of business on any day (section 2(1)); computerized records allowed subject to acceptable back-up and recovery and printable reproduction. - Board Notice 96 of 2013, section 6: authorized user, participant and clearing member must maintain, where applicable, extensive accounting records including as minimum: - A daily record of all sums of money received and expended; - A record of funds held in trust; - A record of all income and expenditure; - A record of all assets and liabilities, including any provisions for financial commitments or contingent liabilities; - A record of all purchases and sales of securities which reflects the: - Date and time of each transaction; - Person from whom securities were bought or to whom they were sold unless processed through an automated trading system recognized by the relevant exchange; - Name of the person on whose behalf the securities were bought or sold; - Quantity and description of the securities which were bought or sold; - Name of the issuer of the securities; - Price per security and the total consideration; - Fees and charges; - Taxes that are payable in respect of each transaction; - Terms of the contract; - Capacity (principal or agent) in which the transaction was entered into; - A record of all securities and documents of title in possession, safe custody or under control showing: - Name of the issuer of the securities; - Quantity and description of the securities; - Identification numbers of the securities and documents of title, where applicable; - Name of the registered holder and, if the registered holder is a nominee controlled by the regulated person, the name of the person on whose behalf the nominee is holding the securities; - Person from whom the securities were received and to whom they were delivered; - Date of receipt and delivery; - Location where the securities or documents of title are kept; - Details of any pledge to which the securities may be subject; - Person on whose behalf securities or documents of title have been received or delivered; - Purpose for which the securities or documents of title are held. - JSE Rules (Equities Rule 8.10.4): requirements for maintenance of client records; members to retain all instructions given by clients to execute transactions for at least six months after the relevant transactions (Rule 8.10.4.5); all other client records to be kept for at least five years after rendering the services. - Similar record-keeping requirements under Derivatives Rules and IRC Rules (Rule 10.20 of IRC Rules and Rule 16.10.5 of Derivatives Rules). - Equities Directive DA1 section 1.1: members must “maintain accounting records on a continual basis so that at all times its records are up to date.” ### Client identity - Record-keeping provisions require entities regulated under the FMA and FAIS Act to keep records of all clients. - JSE members: Equities Rule 8.60 requires obtaining and maintaining client information for each account to identify clients; Equities Rule 8.10.4 requires appropriate maintenance of such client records. *Source: _cr1557 - Section 8 of the FMA sets out the requirements applicable to an applicant for an (PDF).* ### Section 56 of the Companies Act deals with beneficial ownership of companies subject ### _cr1557 - Section 56 of the Companies Act deals with beneficial ownership of companies subject ### Beneficial ownership (Section 56, Companies Act) - Allows for shares to be held in the name of one person for the beneficial interest of another. - Requires disclosure to the company of the identity of the ultimate owner of the security and prescribes the manner of disclosure. - A regulated company is required to: - Maintain a register of such disclosures. - Publish in its annual financial statements a list of the persons who hold beneficial interests of five percent or more of the total number of securities of any class issued by the company, together with the extent of those beneficial interests. - These registers are open to access by the public. - Note: Regulated companies are defined in sections 117 and 118 of the Companies Act to include public companies, state–owned companies unless exempted, and certain private companies. ### Client identification, record-keeping, and monitoring (FICA) - Section 21 of FICA: Establishing and verifying the identity of clients. - Section 22 of FICA: - Obligates accountable institutions (including all securities FSPs, regulated entities under the FMA, and CIS managers other than those that manage participation bond CIS) to keep information and verification documents obtained to establish their clients’ identities. - Information must be kept for a period of at least five years from the date on which the business relationship is terminated. - Accountable institutions must have procedures to regularly monitor transactions and business relationships with clients, having regard to the risk of money laundering and terrorist financing. - Detection and reporting requirements under FICA: - Identify unusual and suspicious transactions (section 29). - Report cash transactions above ZAR 25,000 (section 28). - Identify property related to terrorist financing activities (section 28A). - Suspicious transactions must be reported to the FIC. - Section 45(1) of FICA empowers the FSB to supervise and enforce compliance with FICA on all accountable institutions regulated by it. - The Registrar requires FSPs to have policies, procedures and systems in place to comply with FICA and other anti-money laundering legislation (Fit and Proper Notice, Part IV). ### JSE, Strate, and market infrastructure supervision (FMA) - The FMA assigns supervisory responsibilities to the exchange (JSE) and CSD (Strate); the FSB supervises their compliance with these responsibilities. - The FSB has full access to information at the JSE and Strate under section 6(3) of the FMA. - The JSE has authority under Equities Rule 8.10.4.4 to request client particulars; client particulars must be made available for investigation within seven days of a request by the JSE. In practice, JSE surveillance systems contain all prescribed client particulars. - The Registrar has authority under section 96 of the FMA to order changes to the market infrastructures’ processes following an on-site visit or inspection. The Registrar may direct a regulated entity to: - Take any steps or cease carrying on any act, in order to terminate or remedy any irregularity or state of affairs disclosed by the on-site visit or inspection; or - Prohibit or restrict specified activities of a director, managing executive, officer or employee, if the Registrar believes that he/she is not fit and proper to perform such activities. - JSE and other market infrastructures such as Strate are subject to confidentiality requirements under the FMA. ### Assessment and record-keeping comments - Assessment: Broadly Implemented. - Comments: - The powers of the Registrar under the FMA and FAIS Act and those of the JSE under its rules to supervise their respective firms are extensive, as are the record-keeping requirements that apply. - Notable gaps exist under CISCA when compared to the requirements and powers available under the FMA and FAIS Act. - Each Registrar under the FMA, FAIS Act and CISCA should have equivalent powers. - While firms authorized under the FMA, FAIS Act and CISCA are subject to the same record-keeping requirements under FICA, they should also be subject to an equivalent level of detailed record-keeping requirements under their authorizing Acts. ### Principle 11 — Enforcement powers (Registrar, FSB, CISCA, DMA, Protection of Funds Act) - General: - The FSB has authority under FSB legislation to conduct on-site visits of regulated entities or investigations (inspections) and to take action where non-compliance with the laws is found. - The Registrar of FAIS can investigate complaints of non-compliance and, in complex or serious cases, appoint inspectors under the Inspection Act; these powers are not limited to licensed firms. The Registrar may withdraw or suspend licenses or approvals and debar individuals. - CISCA powers: - The Registrar of CIS may conduct an investigation, impose fines, and request an audit of a CIS manager. - The Registrar may call for an inspection or investigation into the affairs of a CIS manager (section 14). - The Registrar may apply to court for an order to wind up the manager or the CIS, to appoint a new trustee or manager, or to appoint a curator in respect of the manager’s business (section 15). - Section 16 of CISCA empowers the Registrar of CIS to cancel or suspend the registration of a manager. - DMA powers: - The DMA can investigate any person for market abuse set out in Chapter X of the FMA, including: - Insider trading (section 78); - Market manipulation (section 80); - False, misleading or deceptive statements (section 81). - Front-running client trading is prohibited for FSPs under section 3(1)(f) of the General Code of Conduct. - Registrar powers under FMA: - Section 94(1) gives the Registrar authority to investigate a failure to comply with the FMA and sets out powers if non-compliance is found, including: - Apply to court to wind up a company under the Companies Act; - Apply for the appointment of a curator; - Issue a compliance order; - Forward the matter to the criminal enforcement authorities (section 96). - Courts can declare a person disqualified for a definite or indefinite period of time. - Protection of Funds Act powers: - The Registrar may: - Apply to the High Court for the appointment of a curator to take control of and manage the whole or any part of a regulated firm; - Agree with a regulated firm to appoint a statutory manager for that firm; - Institute proceedings in the High Court to compel a regulated firm to comply with the law or any lawful request or instruction issued by the Registrar; - Seize assets or prevent the dissipation or destruction of assets or evidence (section 6). - Decisions and appeals: - Decisions of the Registrar under the FMA, FAIS Act and CISCA are appealable to the Appeal Board; Appeal Board decisions are subject to review by the High Court. ### Enforcement Committee (EC) — sanctions, process, and transparency - EC establishment and role: - The Protection of Funds Act established the EC as an administrative body charged with adjudicating on alleged contraventions of and non-compliance with legislation, regulations, codes of conduct, etc. administered by the FSB (section 6D(1) of the Protection of Funds Act). - The Board of the FSB appoints the EC. Members are appointed for their knowledge and experience (with reference to the different industries). - The chairperson and deputy chairpersons must either be advocates or attorneys with more than 10 years experience, or judges. - Referral and settlement: - The Registrar may refer matters to the EC based on evidence from routine supervisory activities, on-site visits, or an inspection under the Inspection Act. - At any time prior to a referral to the EC or during or after EC proceedings, the matter may be settled by written agreement (section 6B(7)). This agreement must be filed with the Chairperson and made an order of the EC. - Approximately 80 percent of matters are settled in this way. - EC powers and penalties: - If the EC determines a respondent has contravened FSB legislation, it may: - Require the person to pay a sum of money to the FSB; there is no upper limit to the amount of such penalty; - Order the person to pay compensation to make good the loss or damages suffered by the affected parties; - Order a person guilty of insider trading to pay to the FSB a sum of up to ZAR 1 million plus three times the profit made or loss avoided (as set under section 82 of the FMA); - Make a cost order covering the cost of constituting the EC panel and all expenses reasonably incurred by the Registrar or DMA in investigating the alleged non-compliance and referring the matter to the EC (section 6D). - The EC’s orders are enforceable as if they were judgments of the High Court of South Africa. - Section 6D(3) sets out factors the EC may take into account when deciding on a penalty, including the nature and seriousness of the contravention, the impact, the entity’s previous conduct, and the extent of the profits derived, etc. - Publication and transparency: - The practice of the FAIS Division is to publish every sanction decision and it maintains a register of representatives of FSPs that includes names of representatives who have been debarred. - The CIS Division does not routinely publish penalties imposed. - All decisions of the EC (including settlements) are published on the FSB’s website once the Chair of the EC issues the decision. A news release is also issued in all cases. - All Appeal Board hearings and those conducted by the EC are open to the public. - The JSE publishes all penalties other than private censures; private censures are described on a no-names basis in public documents. ### Referral to criminal authorities and criminal penalties - The FSB may refer matters to the NPA and SAPS, e.g., under section 11 of CISCA and section 96(e) of the FMA. The FSB provides litigation support in these cases; the FSB does not have authority to institute a criminal prosecution itself. - Statutory criminal penalties vary by statute: - From a fine of an unstated amount and a maximum of two years in jail under section 12 of the Inspection Act. - To up to ZAR 50 million and up to ten years in jail under the market abuse provisions in section 109 of the FMA. ### Suspension of licences, trading, and JSE market controls - Licensing and registration suspension: - The Registrar of FAIS can suspend any license if he/she is satisfied that the licensee has committed a material contravention of the FAIS Act. - Section 16 of CISCA empowers the Registrar of CIS to cancel or suspend the registration of a manager. - Exchange trading suspension: - The licensed exchange has the power to suspend trading of securities under section 12 of the FMA and must make rules regarding when such suspensions will be imposed. - JSE Equities Rules — Rule 6.10.6 (JSE Equities Trading system): - The Market Controller may: - Decide that the market or segments of the market in equity securities be paused, suspended, halted or closed, if he is of the opinion that a fair and realistic market does not exist; - Reduce or extend the hours of operation of the JSE equities trading system for any particular business day; - Without prior notice to any person, pause, suspend, halt or close the JSE equities trading system for trading at any time and for any period; - Take such other steps as may be necessary to ensure an orderly market. *Source: _cr1557 - Section 56 of the Companies Act deals with beneficial ownership of companies subject (IMF).* ### Section 12 of the Equities Rules contains provisions permitting the JSE to suspend a ### _cr1557 - Section 12 of the Equities Rules contains provisions permitting the JSE to suspend a ### Suspension and listing powers - Section 12 of the Equities Rules permits the JSE to suspend a member for breaches of the Rules or when otherwise in default of its obligations. - Under the JSE Listing Requirements, the exchange has the general power to suspend the listing of any security on the exchange (sections 1.1-1.9), whether for failing to comply with the listing requirements, at the request of the issuer or for other reasons. - The detailed listing rules set out when such actions will be taken and the process that will be followed. ### Access to information and inspection powers - The Registrar has full access to information at regulated entities (see Principle 10). - Section 6(3)(d) of the FMA: the Registrar “may require any person, including a regulated person, to furnish the Registrar, within a specified period, with specified information or documents.” - Under the Inspection Act, an inspector may: - Summon and interview under oath any person who has information relating to the inspection; - Call for the delivery of any documentary evidence that has a bearing on the inspection; and - Enter and search any premises, and seize any documentation relating to the inspection (in some instances a search warrant is required for this purpose). ### Private remedies - Private persons may have rights under common law (such as for negligent misrepresentation) and by contract to take action for misconduct relating to the securities laws. - Section 87 of the FMA protects common law rights to sue for damages for market abuse dealing or offence, except to the extent recovered under section 82 (liability for insider trading). - Section 6I of the Protection of Funds Act: “no provision of the Act, whether it relates to civil or criminal matters, and no act performed under any such provision, may be construed as limiting any right of a person affected by the contravention to seek appropriate legal redress in terms of the common law or any other statutory law.” ### Cooperation with other regulators and information sharing - Section 9 of the Inspection Act permits the Registrar to disclose information to other regulators, organs of state and affected parties if an offence has been committed or an institution is in an unsound financial condition. - The Registrar may also share information with foreign regulators. - Inspectors may obtain information directly and, if unable, may obtain it from any other domestic agency by notice to such agency. - MOUs exist between the FSB and other regulatory authorities for exchange of information; investigative powers extend to information held by other agencies. ### Assessment and publication practices - Assessment: Fully Implemented - Comments: - The FSB generally publishes all penalties imposed under the FMA and FAIS Act. - The JSE publishes all penalties other than private censures; private censures are described on a no-names basis in public documents. - The exception to general publication practice is under CISCA. - Publication practices of the FSB should be uniform across the FSB Divisions. ### Principle 12 — Risk-based supervision (RiBS) and FSB supervisory framework - In 2005, the FSB changed from compliance-based to risk-based supervision and implemented an agency-wide Policy Framework for Risk-Based Supervision (RiBS); latest version approved in 2011. - RiBS objectives: - Identify as early as possible, assess, prioritize and mitigate important risks that present the greatest financial risk to an institution’s continued viability and that may impede the FSB’s aims; - Create incentives for institutions to manage their risks effectively. - Key objectives of RiBS: - Assess the safety and soundness of the regulated financial institutions; - Intervene on a timely basis where practices are imprudent or unsafe; - Ensure enforcement and regulatory action where institutions remain non-compliant despite opportunities to correct deficiencies. - Implementation: - RiBS evaluates an institution’s risk profile, financial condition, risk management processes and compliance with applicable legislation. - Each Division within the FSB has developed its own RiBS approach; objectives, supervisory cycle and assignment of risk ratings are similar across divisions. - Supervisory activities for CIS managers appear under Principle 24; market intermediaries under Principle 31; JSE and Strate under Principles 9 and 34. ### Exchange surveillance and unusual transaction detection - Section 8(1) of the FMA requires an applicant for an exchange license and a licensed exchange to have systems “for the efficient and effective surveillance of all transactions effected through the exchange and for the supervision of authorized users so as to identify possible market abuse and ensure compliance with the exchange rules and exchange directives and this Act.” - The JSE has market surveillance teams assigned to each trading market (Cash Equities, Derivatives and Bonds) that monitor markets continuously. - JSE systems can identify market participants, flag unusual trading patterns, and allow JSE staff to contact listed companies and authorized users immediately for information or explanations. - The JSE’s detailed records allow tracing of order execution on its markets. ### Detection, Market Abuse Department role and DMA investigations - The Market Abuse Department (within the Investment Institutions Division of the FSB) investigates market abuse offences defined in Chapter X of the FMA and enforces prohibitions against market abuse. - Market abuse offences under the FMA (for listed companies): - Insider trading (prohibited in section 78) - Market manipulation (prohibited in section 80) - False reporting/misrepresentations (prohibited in section 81) - Market Abuse Department staffing: investigators with legal or accounting experience. - Investigation process: - Investigate matters, report to the DMA to close or refer for enforcement action. - Majority of investigations arise from referrals from JSE Surveillance and Issuer Regulation Departments and public complaints; most detected via JSE surveillance systems. - DMA investigators and JSE surveillance staff meet bi-weekly; cases logged, allocated, documents requested, subpoenas issued, forensic report drafted for the DMA. - DMA meeting and reporting practices: - DMA holds quarterly meetings and issues press releases updating public on status of current investigations; determinations by the EC on matters referred for enforcement are published once finalized. - DMA Investigations — Number by Year (Source: FSB – DMA): - 2011: 21 - 2012: 15 - 2013: 21 - DMA 2012/2013 outcomes: - During 2012/2013 financial year, the DMA held three meetings and considered 17 completed investigations; of the 17 cases, 11 were closed due to no or insufficient evidence. - The DMA referred six cases for enforcement action in 2012/2013: - Four cases related to alleged market manipulation in the Afgri Limited, Metair Investments Limited, Phalaborwa Mining Limited and Comair Limited shares. - Two cases related to false and misleading statements by Alliance Mining Corporation Limited and Africa Dawn Limited. - Administrative penalties imposed: - ZAR 10 million against two individuals for price manipulation in Afgri Limited, Metair Investments Limited, Phalaborwa Mining Limited and Comair Limited shares; - ZAR 71,500 against two individuals for insider trading involving Africa Cellular Towers Limited shares; - ZAR 68,460 for insider trading involving Dimension Data Limited shares. ### FSB inspections and enforcement activity (FSPs, FAIS Act) - FSB inspections by Enforcement of FSPs — Number by Year (Source: FSB): - 2011: 14 - 2012: 21 - 2013: 12 - 2014 to March 9*: [no number provided in source for total; note: * of which three have been completed.] - Enforcement activities under the FAIS Act — Summary table (July 1, 2011 to April 1, 2014) (Source: FSB): - 2011: - Investigations Received: 98 - Cases Finalized: 67 - Cases Closed: 17 - Lack of Evidence: 50 - Sanctions Imposed (Thousand ZAR): 503 - 2012: - Investigations Received: 132 - Cases Finalized: 97 - Cases Closed: 24 - Lack of Evidence: 73 - Sanctions Imposed (Thousand ZAR): 5,375 - 2013: - Investigations Received: 63 - Cases Finalized: 42 - Cases Closed: 6 - Lack of Evidence: 36 - Sanctions Imposed (Thousand ZAR): 1,840 - 2014: - Investigations Received: 26 - Cases Finalized: 20 - Cases Closed: 1 - Lack of Evidence: 19 - Sanctions Imposed (Thousand ZAR): 50 - Notes on FAIS outcomes: - Numbers from 2012 onward include cases carried over from previous years. - Many matters concluded via written settlement agreements. - Penalties imposed for breaches of the FAIS Act, Regulations or Codes of Conduct. - Common offences: carrying on activities without being licensed; selling/marketing products or services for unlicensed providers; failure to maintain liquidity; payment of prohibited incentives; conflicts of interest; signing blank documents. - Individual fines ranged from ZAR 10,000 to ZAR 1.5 million. - CIS enforcement cases: - 2011: 0 cases - 2012: 0 cases - 2013: 1 case — Marketing unauthorised foreign product - 2014: 1 case — Unauthorised name change ### JSE-specific supervisory responsibility - Under the FMA, responsibility for supervising compliance by authorized users of exchanges is assigned to licensed exchanges. - The JSE is responsible to monitor, detect and investigate compliance matters with respect to its members. - Applicants for an exchange license and licensed exchanges are required to have adequate mechanisms and procedures to address these obligations. *Source: _cr1557 - Section 12 of the Equities Rules contains provisions permitting the JSE to suspend a* ### Section 12 of the JSE Equities Rules deals with the exchange’s supervision and ### _cr1557 - Section 12 of the JSE Equities Rules deals with the exchange’s supervision and ### Supervision and enforcement powers (Section 12 overview) - Section 12 of the JSE Equities Rules permits the exchange to suspend the membership of a member for breaches of the Rules or when otherwise in default of their obligations. - JSE Rule 12.30 defines improper conduct for any person who at the time of the alleged act or practice was a member or employee of a member. ### JSE Rule 12.30 — What constitutes improper conduct - Committing or attempting to commit any act which is dishonest or fraudulent; - Contravening, attempting to contravene, or failing to comply with any one or more provisions of the FMA, a rule or a directive; and - Negligently or recklessly conducting the business or affairs of the member in such a way that actual or potential prejudice is, or may be, caused to the JSE, any other member, a client of a member or the general public. - The failure by a member to introduce appropriate and reasonable safeguards or controls to avoid such prejudice may be treated, where appropriate, as constituting either negligence or recklessness. ### Disciplinary Committee powers and typical enforcement approach - The Disciplinary Committee of the JSE may take action under Rule 12.40.2.2 against anyone found committing improper conduct and may impose penalties deemed appropriate. - Possible penalties include a warning, reprimand, censure or imposition of a fine (with or without ordering that a contribution be made towards the JSE’s costs). - The JSE would typically only take enforcement action against members if the nature of the weaknesses in the member's arrangements was severe or if the weaknesses had resulted in some form of prejudice to clients. ### JSE enforcement cases (reported for the last three years) - Source: JSE. - Listed cases (Nature of Misconduct — Period of Misconduct — Year Closed — Penalty Imposed): - Reckless trading by derivatives traders — Pre 2011 — 2013 — Traders prevented from re-entering market - Client losses concealed by derivatives trader — Pre 2011 — 2013 — Traders prevented from re-entering market - Cherry picking by derivatives trader — Pre 2011 — 2013 — Traders prevented from re-entering market - Proprietary losses concealed by senior executive — Pre 2011 — 2012 — No action. No rule breaches. Matter dealt with by member - Cherry picking by derivatives trader — Pre 2011 — 2014 — Trader prevented from re-entering market - Cherry picking by derivatives trader — Pre 2011 — 2014 — Trader prevented from re-entering market - Equities trader booking false transactions to clients — Pre 2011 — Ongoing — - Senior executive booking trades at false prices — Pre 2012 — Ongoing — - Individual trading without registration — 2011 — 2012 — Individual to make submission if he attempts to register - Bond firm making profits on agency transactions — Pre 2011 — 2013 — No action. Insufficient evidence of misconduct - Equity member and trader booking trades off market — Pre 2011 — Ongoing — Member has withdrawn from market but trader to be charged - Breaches of anti-money laundering requirements — 2012 — Ongoing — Enforcement action being considered by FSB - Breach of client mandates by portfolio manager — 2013 — Ongoing — ### System to respond to intelligence received (FSB process) - Sources of information: news media reports, complaints, tip-offs (including FSB Tip-Offs Anonymous hotline), general e-mail address, Ombuds outcomes. - Allocation and tracking: - Matters are allocated to the relevant FSB division and recorded in each division's complaints register. - Information is allocated to an analyst for evaluation; if meritorious the Registrar may instruct an inspection. - Inspection powers available to inspectors: interviews under oath, calling for documents, search and seizure powers – with or without a search warrant. - Internal audit: internal auditors of the FSB perform random sampling of complaints to ensure appropriate handling. ### Expected compliance systems (registrations, compliance officers, JSE Rule 4.30) - Registrar must be satisfied that a CIS manager has appropriate internal policies and procedures for compliance with relevant legislation (see Principle 24 discussion). - An FSP under the FAIS Act with more than one key individual or representative must have a fit and proper compliance officer approved by the FSB to monitor compliance with the law; FSP must have appropriate systems and procedures to ensure compliance with the FAIS Act (section 17). - JSE Rule 4.30 requires appointment of fit and proper compliance officers whose duties include: - Implementing resources, systems and procedures required to promote and monitor compliance by the member and its employees with the FMA, the rules and the directives; - Reporting to the Director: Surveillance any breaches by the member of the FMA, the rules and the directives or any other issue considered irregular; - Ensuring that the content of the JSE Gazettes is communicated to and understood by all relevant employees. ### Failure to supervise (FAIS Act and JSE obligations) - Sections 8 and 13 of the FAIS Act obligate an FSP to supervise and oversee representatives and ensure ongoing compliance with fit and proper requirements; the FSP is responsible for actions and omissions of its representatives. - Section 14(1) of the FAIS Act requires the FSP to withdraw authority from a representative who contravened or no longer complies with FAIS Act provisions, fit and proper requirements, applicable code of conduct, or other applicable laws, and to inform the Registrar. - Section 14A empowers the Registrar to take direct action against an FSP’s representative for contraventions and to suspend or withdraw the FSP license under section 9 for offences committed by the representative. - JSE Rule 3.30.1.2 requires members to ensure employees are suitable, adequately trained and properly supervised; failure to supervise is a breach and JSE may impose penalties on the member, its representatives or officers and directors. ### Criminal enforcement (performance and cooperation efforts) - Criminal enforcement of white collar crime in South Africa: relatively small number of successful criminal prosecutions, attributed to complexity of offences, lack of training, and difficulty proving beyond a reasonable doubt. - Enforcement Unit of the FSB (period 2011 to March 2014): - Referred a total of 14 cases to the SAPS and/or criminal prosecution authorities. - Of these, one has led to a conviction with a penalty of ZAR 10,000 and 6 months in jail; the other investigations are stated to be ongoing. - FSB actions to improve criminal enforcement: - Actively engages police and the NPA, briefs the NPA, acts as expert witness, assists in training police investigators and prosecutors. - Funds production of expert witnesses for cases. - Building cooperative relationships with the Special Commercial Crimes Unit (SCCU) of the NPA, anti-corruption unit of SAPS and the Asset Forfeiture Unit (AFU) of the NPA. - Example: Ledimar Financial Services case used FIC powers to freeze assets, AFU orders to preserve assets and seize bank accounts to return money to defrauded investors. - SCCU has decided to increase focus on crimes where the amount involved exceeds ZAR 5 million and is seeking FSB support for prosecutions. - Ministry of Justice has established special commercial crimes courts with trained magistrates. ### Assessment and comments on Principle 12 (Supervision and enforcement) - Assessment: Broadly Implemented - Key findings: - Expectations regarding supervision and surveillance are met for the FAIS Division, Capital Markets Department, Market Abuse Department and the JSE. - Routine supervisory activities of the FAIS Division and the JSE are extensive and intensive; JSE conducts detailed market surveillance under FSB supervision. - Regulated firms uniformly reported that FSB and JSE inspectors/reviewers are professional, experienced and knowledgeable about the firms they examine. - Concerns exist about effectiveness of supervisory program under CISCA (see Principle 24). - Enforcement effectiveness is mixed: successes via the EC process and material penalties on some market abuse matters; limited success in criminal enforcement. - To be fully implemented under Principle 12, a reasonable number of prosecutions and criminal convictions must have been achieved; current criminal conviction record is limited. - Potential improvements: swifter JSE enforcement process and more significant penalties could improve effectiveness. - Enforcement Unit’s relationship-building with key players may yield improved criminal enforcement outcomes in future. ### Principle 13 — Authority to share public and non-public information (overview) - Description: FSB has comprehensive authority to obtain and share information with domestic and foreign counterparts. - Legal basis: - Section 22 of the FSB Act imposes a general duty of confidentiality and limits disclosures to specified circumstances, including: - In the course of performing functions under the FSB legislation; - For purposes of legal proceedings or when required by a court; - By the Executive Officer or Deputy Executive Officer if disclosure is appropriate to a regulatory authority for specified supervisory and financial-stability purposes. - Permitted disclosure purposes to a regulatory authority include: - Ensuring financial sector institutions promote consumer and investor protection, fair treatment, efficiency and integrity in financial markets and public confidence; - Ensuring safety and soundness of financial institutions and their ability to meet commitments; - Ensuring stability of the financial system; - Coordinating supervision with other regulatory authorities; - Disclosing information in accordance with a cooperation agreement or otherwise where the receiving regulatory authority has a material interest in the information. - Definition of regulatory authority: broadly includes domestic and foreign regulators and domestic market infrastructures responsible for supervision. ### Cross-authority and cross-border information sharing (statutory features) - FMA section 6(3)(e) allows the Registrar to furnish information acquired under the Act to any person charged with a function under any law, including supervisory authorities. - Section 88 of the FMA authorizes the DMA to share information concerning market abuse matters with a specified list of domestic and foreign institutions and regulators. - Inspection Act: Registrar may disclose information to other regulators, organs of state and affected parties if an offence has been committed or an institution is in an unsound financial condition; may share information with foreign regulators (section 9); section 3A permits inspections to assist another regulator under an MOU or agreement. - The FSB can subpoena witnesses and compel document production at the request of another regulator, including inquiries concerning potential violations of foreign law that are not violations of South African law. - No requirement for dual illegality: the conduct alleged by a foreign regulator need not be a breach of South African law for the FSB to share information. - International cooperation instruments: - FSB is a signatory to the IOSCO MMOU. - FSB is a signatory to the SADC MMOU. - FSB has entered into bilateral MOUs with more than 75 foreign regulatory authorities (MOUs not published; list posted on website). - Record-keeping and access: - Intermediaries and market infrastructures must keep extensive records identifying beneficial owners and transaction reconstruction information; FSB has full access to these records and may share with other regulators under statutory authority. - IRBA section 47(5) of the APA permits disclosure of inspection information of a registered auditor to appropriate regulators at their written request. ### JSE rule on use and referral of surveillance information (Rule 12.20) - 12.20.1: Any information, document, book, tape or electronic record or other object obtained by the JSE Surveillance Department, whether by investigation or otherwise, may be used in evidence in disciplinary proceedings contemplated in rule 12.40 and may be furnished by the JSE Surveillance Department to any other body which may have jurisdiction over the matter under consideration, whether outside or within the Republic. - 12.20.2: If the JSE Surveillance Department becomes aware of any possible contravention of law by a person over whom the JSE does not have jurisdiction, the JSE Surveillance Department may refer such matter to the appropriate authority or authorities, whether outside or within the Republic. - Similar provisions exist under the JSE’s Derivatives Rules and IRC Rules. ### Confidentiality safeguards and conditions on sharing - Section 22(4) of the FSB Act requires assurance that receiving regulatory authorities have appropriate safeguards similar to those of the FSB before information is disclosed. - Conditions on information requested or provided: - Must only be used for the purpose for which it was requested; - Must not be made available to third parties without consent of the providing regulatory authority; - If lawfully compelled to make provided information available, must: - Inform the providing regulatory authority of the event and circumstances; and - Where possible, use all reasonable means to oppose disclosure or protect the information (section 22(4)(d)). *Source: _cr1557 - Section 12 of the JSE Equities Rules deals with the exchange’s supervision and* ### Section 22(3)(a)(v)(bb) of the FSB Act provides that the Executive Officer or a Deputy ### _cr1557 - Section 22(3)(a)(v)(bb) of the FSB Act provides that the Executive Officer or a Deputy ### Cross-border cooperation and information exchange - Section 22(3)(a)(v)(bb) of the FSB Act authorizes the Executive Officer or a Deputy Executive Officer of the FSB to negotiate and enter into bilateral or multilateral cooperation agreements, including MOUs, with regulatory authorities to provide mechanisms for the exchange of information. - "Regulatory authority" is defined to include both domestic and foreign regulators responsible for the supervision or enforcement of legislation and market infrastructures as defined in the FMA. - The FSB is a signatory to the IOSCO MMOU and the SADC MMOU and has entered into many bilateral MOUs with foreign regulatory authorities. - The International and Local Affairs Unit of the FSB (established April 2012) handles requests for information from other regulators. - From April 1, 2012 to March 31, 2014 there were 186 requests for information. Processing time for a request: 3-15 working days after receipt. - FSB Information Requests Received April 1, 2012-March 31, 2014: - Information only: 124 - Assistance to be provided by FSB: 18 - Completion of surveys and questionnaires: 44 - Total: 186 - The FSB has not refused to provide information in response to a request from another authority that is a party to one of the MMOUs or MOUs signed by the FSB. If a request did not fall into the jurisdiction of the FSB, it was referred to the relevant entity. - Assessment: Fully Implemented - Comments: Requests from foreign regulators are given priority. ### Assistance to foreign regulators and inspection powers - As a signatory to the IOSCO MMOU, the FSB can provide the assistance contemplated by Key Questions 2, 4, 5 and 6 without needing an independent interest in the matter. - If the FSB does not have the information, it may, under section 3A of the Inspection Act and section 95(2) of the FMA, conduct an inspection to obtain the needed information. - The FSB has full access to all records kept by market participants; most South African market participants are required to keep extensive records regarding clients and their transactions (see Principle 10). - Under the Companies Act, the names of all beneficial owners are required to be disclosed routinely and on demand to the company (section 56); companies must keep registers of beneficial owners that are public information. - The JSE’s surveillance system can provide extensive details on trades. ### Financial conglomerates: supervisory framework and information sharing - The term "financial conglomerate" is not defined in South African financial sector legislation, and no formal group-wide supervisory framework for conglomerate supervision is in place. - An informal approach to supervision of major financial conglomerates exists in practice between the FSB and the Bank Supervision Department (BSD) of the SARB. - The FSB and BSD determine which groups are major financial conglomerates and which authority will be the lead supervisor. - Group-wide supervision of FSB-regulated entities is currently undertaken on a moral suasion basis (relying on general authority and standing rather than specific legislative provisions). - The FSB can request information relating to financial conglomerates indirectly through regulated financial institutions under sectoral legislation it administers and can share such information with other regulators in accordance with section 22 of the FSB Act. - Assessment: Fully Implemented - Comments: (none provided) ### Disclosure regime for issuers (Principle 16) - Two disclosure regimes govern entities issuing securities to the public in South Africa: - Disclosure obligations under the Companies Act and related Regulations (apply to all companies incorporated in South Africa). - Obligations imposed on listed companies and applicants for listing by the JSE Listing Requirements. - CIPC (part of the DTI) is responsible for company registration and disclosure under the Companies Act. The JSE Listing Requirements are issued by the JSE and approved by the FSB. ### Initial offerings and prospectus requirements - The Companies Act states only companies may make offers of securities to the public and sets detailed requirements; in practice other legal entities (e.g., trusts issuing exchange-traded funds) can issue to the public and, if listed on the JSE, the exchange’s listing requirements apply regardless of issuer structure. - If the issuer is a CIS, then CISCA applies. If the issuer is not a company and the securities are not listed, it is not clear what regime would govern the offering. - Under the Companies Act, an offer to the public generally must be accompanied by a prospectus meeting section 100 of the Companies Act and Part 4 of the Regulations. Under section 99, the prospectus and material contracts must be filed with and registered by the CIPC. - Offerings other than initial public offerings by JSE listed companies are exempt from the Companies Act prospectus provisions if they meet JSE Listing Requirements (section 99(3)(a)(i)). - Section 96 of the Companies Act lists exemptions from prospectus requirements, including: - Offers made only to sophisticated investors (financial institutions, exchange members, FSPs or entities registered with the SARB); - Minimum block purchased as principal at least ZAR 100,000; - Rights offerings meeting prescribed terms and securities to be listed; - Sales to directors and prescribed officers; - Transactions relating to employee share schemes. - Under section 100, every prospectus must contain all information an investor may reasonably require to assess the assets and liabilities, profit and losses, current financial position and prospects of the company and the securities being offered, and must adhere to detailed requirements in the Regulations. ### Prospectus content and Regulation 56 mandated structure - Section 56 of the Regulations requires a prospectus to include all material information in separate prescribed sections and paragraph headings: - Section 1 — Information about the company (name, address, directors, auditors, history, share capital, options, commissions, material contracts, interest of directors/promoters, loans, shares issued otherwise than for cash, property, amounts paid to promoters, preliminary and issue expenses). - Section 2 — Information about the offered securities (purpose, opening/closing dates, particulars, minimum subscription). - Section 3 — Statements and reports relating to the offer (adequacy of capital, directors’ report on material changes, statement as to listing, auditor reports where business or subsidiaries will be acquired, requirements for prospectus of a mining company). - Section 4 — Additional material information (separate enumerated paragraphs for material information not contemplated in Sections 1–3). - Section 5 — Inapplicable or immaterial matters (list of regulation numbers/headings not applicable). - Each Regulation goes into detail on required information. - In practice a prospectus is expected to contain audited financial results for the past three years, though there is no explicit statutory requirement. - The Companies Act does not expressly mandate specific disclosure of issuer business risks in a prospectus; CIPC practice requires a table reflecting all risks and mitigation actions as per an unpublished prospectus vetting checklist, and expects prospective investors to be given this table. - Subscriptions must not be accepted unless the investor is in possession of a copy of the prospectus or is aware of its contents (section 108). ### JSE Listing Requirements and continuous disclosure - JSE Listing Requirements set detailed pre-listing and ongoing disclosure rules (Sections 6–11, 19), including: - Information on issuer and capital; directors, management and advisors; securities applied for listing; group activities; three years’ audited financial information; material contracts; compliance with King III Code. - Special disclosure for property, mineral, investment companies, asset-backed securities, options, structured products, exchange-traded funds. - No particular format or presentation order is specified by the JSE. - Under the Companies Act and JSE Listing Requirements, audited annual financial statements must be provided to shareholders by the end of six months after the end of the financial year. - There are no general Companies Act requirements for interim financial statements; in practice, JSE companies are expected to produce provisional annual financial statements within three months of year-end, reviewed by the issuer’s auditor prior to issue. - Timeliness: Companies Act permits distribution under a prospectus to continue during a four month period after registration; thereafter no sales unless a new prospectus is registered (section 107). The JSE Listing Requirements mandate information in disclosure documents be as at the issue date or as near to that date as practicable (e.g., paragraph 6.9(c)). ### Advertising, roadshows, and pre-listing communications - Section 98 of the Companies Act governs advertising a public offering outside a prospectus: advertisement must state it is not a prospectus, include how to obtain a copy of the prospectus, and must not contain untrue or misleading statements about material aspects. - The JSE Listing Requirements contain no specific advertising provisions beyond the general principle of full, equal and timely public disclosure of material information. - For JSE listings, issuer management may make presentations or meetings with prospective investors only after listing is granted. Advisors are free to use offering materials during the pre-listing process (road shows are commonly used). There is no specific JSE oversight of these pre-listing communications. ### Material change disclosure and market-sensitive announcements - Under Regulation 75, directors must include in the prospectus any material changes between the end of the financial year for which audited financial statements exist and the date of the prospectus. - A company must lodge a supplementary prospectus if there is any material change related to the public offer during the distribution period; no specific time is stated for lodging the supplementary prospectus. The amendment must be published to persons known to have received the original prospectus. An investor may withdraw subscription within 20 days after publication if dissatisfied (Companies Act, section 100(1) and (12)). - The Companies Act has no general requirement that public companies make prompt public disclosure of material changes outside an offering period. - The JSE Listing Requirements mandate full, equal and timely public disclosure to all holders and the public of price-sensitive activities throughout the listing period (paragraph 3.4). - The Listing Requirements require issuers to release, without delay, announcements of developments not public knowledge that may lead to material movements in reference price, and to issue a cautionary notice where developments may lead to material price movements; full details must be provided when a binding agreement is concluded. - JSE requires a Trading Statement when there is a reasonable certainty that reported financial results will differ by more than 20 percent from the preceding period. - Transactions in company assets equal to 5 – 25 percent of company market capitalization must be disclosed, including share offerings or buybacks for more than 3 percent of market capitalization (paragraph 3.4). - These announcements are made in summary form over SENS (Stock Exchange Notification System); companies must also post required information on the company’s website and sometimes in the news media. - Continuing obligations to update information are set out across Listing Requirements (Sections 8–11). *Source: FSB; Companies Act and related Regulations; JSE Listing Requirements as described in the supplied text.* ### Section 29 of the Companies Act provides that financial statements must present fairly ### Section 29 of the Companies Act provides that financial statements must present fairly ### Presentation requirements, prospectus liability, and signatures - Financial statements must "present fairly the state of affairs and business of the company and explain the transactions and financial position of the business of the company." They "must not be misleading or incomplete in any material respect." - Under section 214(1)(d) a person is guilty of an offence if the person is a party to the preparation or dissemination of a prospectus that contains an untrue statement. - "Untrue statement" is defined as a statement that is misleading in the form and context in which it is made and includes omission from a prospectus or written statement of any matter that, in the context, is calculated to mislead by omission (section 95). This provision covers statements made in the prospectus, statements incorporated by reference, and statements contained in other documents that accompany the prospectus. - The Regulations require prospectuses to be signed by each director (Regulation 52). - The Companies Act (sections 104-106) imposes liability on directors, promoters, experts and anyone who authorized the issue of the prospectus for any loss or damage caused to any purchaser under the prospectus as a result of any untrue material statement. - Under the Listing Requirements: - Sponsors and AltX Designated Advisors (DAs) are responsible for ensuring issuers’ announcements and documents comply with the Listing Requirements. - A directors’ responsibility statement must be included in all prospectuses, prelisting statements and transaction circulars: directors collectively and individually accept full responsibility for accuracy and certify that, to the best of their knowledge and belief, there are no omitted facts that would make any statement false or misleading, that all reasonable enquiries have been made, and that the document contains all information required by law and the JSE Listing Requirements (paragraph 7.B.22). - Every director of the applicant must sign the company’s prospectus, pre-listing statement, or circular; any other person who has accepted responsibility (such as an auditor or expert) must also sign (paragraph 7.B.23). ### CIPC mandate, vetting process, and operational details - The Companies Act established the CIPC. The CIPC mandate includes: - Registering and maintaining information concerning companies in South Africa; - Monitoring and promoting compliance; - Promoting the reliability of financial statements; and - Effective enforcement of the Act (sections 186 and 187). - The CIPC is mandated to vet prospectuses filed under the Companies Act and ensure content adheres to the Companies Act and other relevant legislation (e.g., property syndication schemes under the Consumer Protection Act). - A new division, Corporate Disclosure Regulation and Compliance, was established within the CIPC to monitor compliance with disclosure requirements. The division was set up in September 2013 and is establishing a disclosure framework, disclosure process and guidelines. - Vetting process details: - All prospectuses are vetted following an electronic checklist that includes disclosure requirements and a narrative explanation. - A vetting committee conducts a substantive review of prospectuses. - A process for periodic reporting after registration requires the company to report on the offer when it closes and again six months later to confirm continued compliance (e.g., funds used for stated purposes). - Filing statistics and sanctions: - From January 1, 2011 to December 31, 2013, 46 prospectuses were filed with the CIPC. All of these were for domestic companies. - No sanctions have been imposed in connection with the prospectus process. - The CIPC is planning to issue a guidance note on expected prospectus content and the prospectus process in the near future. ### JSE review, publication, and accessibility of documents - Information filed with the JSE for listing applications and transaction circulars is subject to a detailed review process involving several analysts with relevant expertise and a final senior manager review and approval prior to approval for issue or listing. - Approved circulars and other documents are uploaded to the JSE system and are available to the public on the exchange’s website. - Listed firms are required to have websites and must post information on the issuer’s website. Hardcopies of documents must be available to investors at the issuer’s registered office. ### Omitted information, exemptions, and JSE dispensations - Under section 6(2) of the Companies Act, a person may apply for an administrative order exempting specified items of the MOI or rules from statutory requirements. - For prospectuses, section 100(9) allows exclusion of otherwise required information if publication would be unnecessarily burdensome, seriously detrimental to the company, or against public interest, provided users would not be unduly prejudiced. The applicant must apply to the exchange (if listed) or the CIPC (if unlisted). - JSE Listing Requirements provide for exceptions: - Paragraph 3.10: the JSE may grant a dispensation from public disclosure if directors consider disclosure will or probably will prejudice the issuer's legitimate interests. - Paragraph 6.16: JSE may authorize omission of information from pre-listing statements when satisfied that: - The information is of minor importance and will not influence any assessment of the financial position, changes in equity, results of operations or cash flows; - Disclosure would be contrary to the public interest and its omission is not likely to mislead investors with regard to any important/material facts and/or circumstances; or - Disclosure would be seriously detrimental to the applicant or would constitute an invasion of privacy and its omission is not likely to mislead investors with regard to any important/material facts and/or circumstances. - Material change reports are not to be released during trading hours unless first published in accordance with SENS rules (paragraph 3.5). - The JSE can suspend trading at an issuer’s request (paragraph 1.9) or when trading activity appears unusual (Equity Rule 6.80, Interest Rate and Currency Rule 7.40, Derivatives Rule 7.190). - Trading with knowledge of undisclosed material information is a market abuse offence under Chapter X of the FMA and subject to substantial penalties. - JSE enforcement powers include censuring the issuer, its directors, its sponsor or AltX DA, and executives of the sponsor or DA for breaches; the JSE may refer matters to the FSB where insider trading or market abuse may have occurred (Listing Requirements, Sections 1 and 3). ### Cross-border offerings and foreign issuer requirements - Cross-border offerings are not common in the jurisdiction. - No prospectuses by foreign companies were filed with the CIPC in the past three years. - Only 45 of the listings on the JSE are secondary listings (slightly over 10 percent). - Many secondary-listed companies have primary listings on exchanges such as NASDAQ, Euronext, or exchanges in London, Toronto or Australia. - Under the Companies Act, foreign issuers must comply with usual prospectus requirements and file their MOI and details of their directors at least 90 days before the offering (section 99). - An issuer seeking a primary listing on the JSE must comply with all initial and on-going JSE Listing Requirements regardless of location. - Issuers seeking a secondary listing must comply with entry criteria for all applicants; however, if the primary listing exchange is a member of the World Federation of Exchanges, the JSE usually relies on that exchange’s disclosure. The issuer must also comply with the JSE’s rules on immediate public disclosure of material changes. - The JSE may require both initial and continuing requirements to be complied with for a secondary listing when JSE requirements are considered much more onerous than those of the primary exchange. ### Assessment, implementation status, and identified gaps - Assessment: Partly Implemented - Comments and identified gaps: - Initial disclosure requirements for offers to the public to be listed on the JSE are satisfactory, as are most continuous disclosure requirements for listed issuers. - Significant gaps exist in initial and continuous disclosure requirements for public companies that are not listed on the exchange. - Unlisted entities (other than companies and CIS) offering securities to the public do not appear to be required to make any disclosure, initially or thereafter. This gap is compounded by the ability of an issuer to sell securities directly to the public without a licensed market intermediary or issuer licensing. - Under the Companies Act, initial prospectus disclosure requirements: - Do not contain specific information on the financial information that must be provided and there is no requirement that information in the prospectus be timely; and - Do not require the prospectus to contain detailed information on the risks of the issuer and the securities. - Recommendation: Relevant regulations should be supplemented to include these provisions; in the meantime, the CIPC should issue guidance. - Continuous disclosure weaknesses: - Very few continuous disclosure requirements in the Companies Act beyond preparing annual financial statements within six months of the company’s year-end. This is identified as "very slow." - No requirement for interim statements and no requirement for prompt public disclosure of material changes after the prospectus distribution period. - A company must file notice of change of auditor to the CIPC within 10 days after the change, but this notice does not need to be communicated to shareholders. - Recommendations: - All entities that have issued securities to the public should be subject to both initial and continuous disclosure requirements, regardless of listing status. This should include annual audited and interim financial statements. - All public companies should publish and file annual audited financial statements promptly after year end. Most major jurisdictions set a maximum deadline of 120 days; consideration should be given to amending the Companies Act to shorten the deadline accordingly. - The Companies Act should be amended to require publication of interim financial statements at least semi-annually, within a reasonable period after period end. - All public companies should make prompt public disclosure of material changes. A change in auditor should always be considered a material change, giving rise to an immediate obligation to inform relevant authorities and make prompt public disclosure. The Companies Act should be amended to include both requirements. - JSE-specific timing and recommendations: - Under JSE Rules the stated reporting deadline for annual audited financial statements is six months, which is "very slow" by international standards; de facto practice expects attested financial statements within three months and audited statements typically issued within that period. It would be better if this requirement were mandatory. - The 90-day deadline for semi-annual statements under the JSE is also described as long by international standards. - Recommendations for the JSE: - Make the de facto 90-day deadline for audited financial statements a firm requirement. - Consider whether AltX issuers should adhere to the same time frame or be given longer timelines. - Consider shortening the reporting period for interim statements of JSE companies; 60 days or less is noted as more common for main listings on major exchanges. ### Equality of treatment, shareholder rights, and governance provisions - Companies Act provisions: - Section 37: All shares of any particular class must have identical preferences, rights, limitations and other terms. - Each share has a voting right attached unless specifically limited by the Companies Act or the company’s MOI. There must be at least one class of shares designated as voting shares. - Shareholders have the right to vote on any proposal to amend the rights attached to the shares held. - Section 66(4) permits direct appointment of directors by particular persons if set out in the MOI; for-profit companies (other than state-owned) must provide for election by shareholders of at least 50 percent of the directors and 50 percent of any alternate directors. - Transactions such as sale of the business or substantial assets, or amalgamation, are subject to disclosure (sections 112 and 113) and require approval by special resolution (75 percent approval) (section 115). - Section 62: shareholders of public companies must be given at least 15 days notice of a meeting and provided with: - The date, time and place for the meeting, and the record date for the meeting; - The general purpose of the meeting, and any specific purpose that might apply; - A copy of any proposed resolution received by the company and notice of the percentage of voting rights required for adoption; - Information on the financial statements of the company (if an annual meeting); and - A statement on shareholders’ rights to attend the meeting or appoint a proxy. - This information must be sent by mail and posted on the company’s website. - Section 58: a shareholder may appoint a proxy. The company is not obliged to provide a form of proxy, but if it does, the form must be sent to all shareholders entitled to vote and must summarize statutory provisions governing proxies. - Section 51: when the company receives satisfactory evidence of transfer of certificated securities, it must enter the transfer in its register. - Dividends are declared by the board and the record date for payment must be published (section 46). - Chapter 5 of the Companies Act and Regulations govern fundamental transactions, takeovers and offers, including detailed timing requirements and shareholder approvals. - Directors are subject to extensive legal duties and liabilities under section 77 and must act in the best interests of the company. - Chapter 6 governs business rescue and compromises with creditors; under section 137, alterations in classification or status of issued securities during business rescue are invalid unless directed by the court or contemplated in an approved business rescue plan. - Shareholders of the same class are treated alike on business rescue, liquidation or insolvency. - JSE requirements on equality of treatment: - Paragraphs 3.27 to 3.33 require issuers to ensure all holders of any class of securities that are in the same position receive fair and equal treatment. - An issuer may not issue securities with voting rights differing from other securities of the same class. - Paragraph 3.29 requires securities in each class to rank equally in respect of all rights; they must be identical and have the same nominal value, paid up amount per share, right to unrestricted transfer, right to attend and vote at general/annual meetings and right to dividends. - JSE Listing Requirements paragraphs 1.14 to 1.16 and Schedule 10.15 to 10.17 set specific requirements for voting in related party transactions, repurchase of securities and the issue of shares for cash. - Amendments to share capital and rights attached to any class of listed shares are subject to JSE and shareholder approval. - Public companies issuing new stock must provide existing shareholders with a pre-emptive rights offering unless 75 percent of voting shareholders approve the issue. *Source: _cr1557 - Section 29 of the Companies Act provides that financial statements must present fairly* ### Section 9 of the Listing Requirements governs significant transactions proposed by the ### _cr1557 - Section 9 of the Listing Requirements governs significant transactions proposed by the ### Listing requirements, circulars, and shareholder communications - Section 9 governs significant transactions proposed by JSE listed companies; public notice/circular requirements vary by nature and size of transaction. - Larger transactions require shareholder approval; fundamental changes require a circular containing the information required by the JSE. - All circulars and pre-listing statements (including proxies) require JSE approval prior to issue (as noted under Principle 16). - Proxy form and notice convening a meeting of holders of JSE listed voting securities must be sent to each person entitled to vote (paragraph 3.52). - Circulars and pre-listing statements (including proxies) must be sent to all beneficial shareholders, including specific instructions for dematerialized and certificated shareholders (paragraph 3.49). - Paragraph 11.1 requires that if voting or other action is required, the document must: - Contain all information necessary to allow the holders of the securities to make a properly informed decision; and - Contain a heading drawing attention to the importance of the document and advising holders of securities that are in any doubt as to what action to take, to consult appropriate independent advisers. - All certifications of paper share transfers must be completed within 24 hours of lodgment; in the dematerialized environment, be approved as Strate eligible in terms of the Central Securities Depository Rules (paragraph 3.51). ### Takeovers, mergers, and the Takeover Regulation Panel (TRP) - Takeovers and mergers are regulated by the TRP under Chapter 5 of the Companies Act and Chapter 5 of the Regulations (Takeover Regulations). - The takeover regime applies to all “affected transactions” regarding a “regulated company” (public or state-owned company or a private company where 10 percent or more of its issued securities have been transferred other than among related persons within 24 months prior to the date of the transaction) (Companies Act, sections 117 and 118(1)). - “Affected transactions” (section 117) include: - A transaction or series of transactions disposing of all or the greater part of the assets of a regulated company, under section 112; - An amalgamation or merger as contemplated in section 113, if it involves at least one regulated company; - A scheme of arrangement between a regulated company and its shareholders as contemplated in section 114; - The acquisition of, or announced intention to acquire, a beneficial interest in any voting securities of a regulated company under section 122(1); - The announced intention to acquire a beneficial interest in the remaining voting securities of a regulated company not already held by a person or persons acting in concert; - A mandatory offer under section 123; and - A compulsory acquisition under section 124. - Under section 119, the TRP must regulate affected transactions to: - Ensure the integrity of the marketplace and fairness to holders of securities of regulated companies; - Ensure provision of necessary information and adequate time for regulated companies and holders to obtain and provide advice; and - Prevent actions designed to impede, frustrate, or defeat an offer or fair and informed decisions by holders. - TRP’s tasks must ensure, among other things: - No person may enter into an affected transaction unless ready, able and willing to implement it; - All holders of any particular class of voting securities of a target regulated company are afforded equivalent treatment; - No relevant information is withheld; and - All holders receive the same information and sufficient time to reach a properly informed decision. ### Information, announcements, and document approval - The bid must be notified in writing to the target's board or its advisers (Takeover Regulation 99); no prior notification to the TRP is required. - The TRP must be notified when a cautionary announcement or a firm intention announcement is made (Regulation 99); the TRP encourages consultation beforehand. - All documents relating to an affected transaction must be approved by the TRP before posting or publication (Regulation 117). - The target's board must be reasonably satisfied that the bidder is, or will be, in a position to implement the offer in full; TRP must be satisfied that the bidder has sufficient resources before approving the offer document (Regulation 99). - Cautionary announcement: brief statement published in the press and on SENS to preserve trading integrity; usually states that: - Talks are taking place and a potential bidder is considering making an offer; or - An announcement is pending which could have a material effect on the price of the bidder's or the target's shares (Regulation 100). - A company must make a cautionary announcement if it acquires knowledge of any material price sensitive information and confidentiality cannot be maintained or is suspected breached. - Announcement of a firm intention to make an offer must be made when the target's board has been notified in writing of a firm intention to make an offer from a serious source or where a mandatory offer must be made; the target is responsible for the announcement (press and SENS) and it must contain: - The terms of the offer; - The identity of the bidder; - The details of any existing holders of shares in the target; - All material conditions to which the offer is subject; and - The details of any arrangements that exist between the bidder and the target or any concert party of the bidder or the target (Regulation 101). ### Offer documents, target response, and standards of accuracy - The bidder must proceed with the offer in 20 business days following the announcement, unless posting the offer is subject to an unfulfilled condition (e.g., bidder shareholder approval or competition authority approval). - The bidder must send the offer document to target shareholders; this document must include: - The reasons for the offer, and the intentions of the bidder regarding continuation of the business and continuation in office of the target's directors; - Financial and other information on the target and the bidder; - The bidder's holdings in the target; - Whether directors' remuneration will be affected by the acquisition or associated transaction; - The terms and mechanics of the takeover offer; - Arrangements, undertakings or agreements between the bidder and the target in relation to the takeover offer; and - A fair and reasonable opinion from an independent expert (Regulation 106(4)). - Within 20 business days of posting the offer document, the target's board must circulate its views (response circular) to shareholders, setting out: - The board's comments on statements in the offer document regarding bidder intentions for the target and its directors; - The holding of any shares in the bidder by the target; - Whether the target's directors intend to accept or reject the offer in respect of their own holdings; - Material particulars of the service contracts of the directors; and - Disclosures of any arrangements, undertakings or agreements between the bidder and the target (Regulation 106(7)). - Offer and target board documents must satisfy the highest standards of accuracy and be adequately and fairly presented. - If the offer is revised, an updated offer document must be sent to target shareholders containing details of any material changes and the information required by the Companies Act (Regulation 104). ### Timetable for takeover offers (Regulation 102) - Timetable begins when the firm intention announcement is published. - After publication, the bidder has 20 business days to post the offer document to the target's shareholders. - The offer must initially be open for acceptance for at least 30 business days after the offer document is posted. - The target's independent board must advise shareholders of its views within 20 business days of posting the offer document via a response circular. - The offer must be declared unconditional within 45 days from posting the offer document, or the offer will lapse. - Once declared unconditional, the bidder must announce that fact within one business day and the offer must remain open for a further ten business days after that announcement. - Consideration must be settled within six business days of the offer becoming or being declared unconditional, or the offer being accepted, whichever is later. - An offer may be extended by announcement prior to the initial closing date if the right to do so was reserved in the offer document. - If consideration is revised (increased or alternate consideration), the offer must remain open for 15 business days following the revision; shareholders who accepted the original consideration may revise their acceptance. ### Mandatory offers and price rules - A mandatory offer must be made for the rest of the target's shares if a bidder's holding (or combined with any concert party) increases to 35 percent or more of the voting rights of the target (Companies Act, section 123). - Mandatory offers must be made at the highest price paid for the relevant shares in the six months preceding the offer (Regulation 111(2)). - A transaction is exempt from mandatory offer if holders of a majority of the independent shares of the target have agreed to waive the mandatory offer (Regulation 86(4)). ### Consideration rules and equal treatment - Bidder may offer cash, shares, other securities, or a mixture. However, if the bidder or concert parties acquired shares carrying 5 percent or more of voting rights during the six month period before the offer and paid cash, the offer must be in cash (or with a cash alternative) at not less than the highest price paid by the bidder in that six-month period (Regulation 111(2)). - If any bidder or person acting in concert acquires any shares subject to the bid after the firm announcement at a price higher than the bid price, the offer must be amended to reflect the higher price (Regulation 111(6)). - No person may be given more favorable terms than those offered to all affected shareholders. - Comparable offers required to all classes of issued securities that have voting rights or may have voting rights in the future, such as options (Regulation 87(2)). ### Squeeze-out and compulsory acquisition - If a takeover offer is made and 90 percent of a class of the target's shareholders accept the offer, the bidder can compulsorily purchase the shares of non-accepting shareholders in that class (Companies Act, section 124). - A court may authorize a squeeze-out despite less than 90 percent acceptance in certain circumstances. - A non-accepting shareholder can apply to court within 30 business days of posting of the compulsory acquisition notice for an order to prohibit it or make it subject to conditions. ### Disclosure of significant shareholdings and reporting thresholds - A person acquiring a beneficial interest of five percent, or any multiple of five percent (i.e., five, 10, 15), of a particular class of shares of a regulated company must notify the company within three business days of acquisition. - A person must notify the company within three business days if a disposal results in dropping below a multiple-of-five-percent threshold. - The regulated company must notify the TRP and shareholders of such disclosures unless the transaction was a disposition of less than 1 percent of the class (Companies Act, section 122). - Under the Listing Requirements, an issuer must publish the information provided in a disclosure notice within 48 hours on SENS. - Disclosure requirements apply irrespective of whether acquisition or disposal was direct, indirect, individual or in concert. Options and other interests must be taken into account in calculating thresholds. - A regulated company must disclose shareholdings of more than five percent in its annual financial statements and shareholders' circulars (Companies Act, section 56(7) and Listing Requirements, paragraph 8.63). - Under the Listing Requirements, listing particulars must include names and securities positions of any person holding more than five percent of any class of securities of a listed issuer. ### Nominee shareholders and identity disclosure - A nominee shareholder must disclose to the company the identity of the beneficial holder within five business days after the end of every month during which a change has occurred (Companies Act, section 56(4)). - The company can compel a nominee to disclose the identity of the beneficial holder at any time (section 56(5)). ### Disclosure of directors' and senior management shareholdings and transactions - Companies required to have audited financial statements (all public companies) must include disclosure of the number and class of any securities issued to any director or person holding a prescribed office or any related person (Companies Act, section 30(4)). - In a bid, Regulation 106 requires bid circulars to disclose the shareholdings of directors: - Of the target company in both the target and bidder companies; and - Of the bidder company in both the bidder and target companies. - Under Listing Requirements paragraphs 3.63–3.74, all transactions in securities by directors of listed companies must be disclosed to the issuer. Directors must disclose transactions without delay and, in any event, by no later than 24 hours after dealing. - The issuer must publicly announce such information on SENS without delay and, in any event, by no later than 24 hours after receipt (paragraph 3.63). - The provisions require reporting of a very wide list of transactions and securities, including off-market transactions. ### Parties acting in concert and aggregation of holdings - Persons acting in concert (section 117(b) and Regulation 84) with the bidder have holdings aggregated for calculations and reporting under the regime governing fundamental transactions and takeovers in Chapter 5. - Listing Requirements paragraph 3.63 requires securities positions of directors and their associates to be included in listing particulars, annual financial statements and circulars. - “Associate” includes immediate family, any trustee of a trust of which the person or immediate family is a beneficiary, and a company in which the person and/or associates have at least a 35 percent direct or indirect ownership interest. ### Enforcement mechanisms and practice - The Companies Act contains enforcement provisions in Chapter 7. Investigations may be performed by the CIPC or TRP under section 168. - Compliance orders may be issued under section 171 unless the alleged contravention could be otherwise addressed by court or Companies Tribunal. - The CIPC has issued approximately 160 compliance notices, often in response to irregularity notices filed by accountants or auditors. - Market participants indicated a substantial backlog of matters waiting for court action. - The CIPC has referred three cases for criminal enforcement under the new Companies Act; these matters are ongoing. - The JSE enforces compliance with Listing Requirements; circulars and information must be approved by the exchange prior to distribution. - The JSE Issuer Regulation Department devotes significant resources; five of thirty-five employees in the department are investigators. - Failure to comply with JSE requirements may result in sanctions such as a public censure or fine (paragraphs 1.20–1.22). - JSE disciplinary outcomes have ranged from private censures to suspension of listing and permanent removal from listing; private censures often imposed for minor technical breaches (e.g., filing documents a day late). - The exchange publishes periodic no-name summaries of actions to provide guidance. - The JSE has established the Financial Reporting Investigation Panel (FRIP) to monitor IFRS compliance; suspected breaches or audit problems are referred to relevant bodies (e.g., IRBA). - JSE reports annually to the FSB on actions taken; examples in the 2013 report: two issuers subject to public sanctions for failure to meet disclosure obligations; three companies removed from listing for failure to meet continued listing requirements; several issuers censured for late filing of financial statements. ### Cross-border issuers and assessment - Cross-border offerings are not significant in the jurisdiction; requirements applicable to these transactions are discussed under Principle 16. - Assessment: Fully Implemented. - Comments: The 15-day notice period for shareholder meetings may pose practical challenges for foreign shareholders unless the issuer has implemented electronic voting facilities; otherwise it may be difficult to receive materials, make an informed decision, execute the proxy and return it in advance of the meeting date. ### Principle 18 — Accounting standards - All public companies in South Africa, whether listed or unlisted, are required to prepare financial statements in accordance with the IFRS as issued by the IASB (Companies Act, sections 27-30, and Regulations 26-30; JSE Listing Requirements, paragraph 8.62). - Some small, unlisted public companies may use IFRS for Small and Medium-Sized Entities (SMEs) under Regulation 27. - All issuers with securities listed on the JSE, regardless of legal form, must prepare financial statements in accordance with the IFRS. - South Africa permitted use of IFRS in 1999 and adopted the IFRS in 2004. - The FSB is a member of the Monitoring Board of the IFRS Foundation. - Audited financial statements are required to be included in prospectuses under the Companies Act (section 100 and Chapter 4 of the Regulations). *Source: _cr1557 - Section 9 of the Listing Requirements governs significant transactions proposed by the (PDF).* ### references to inclusion of financial statement information in the detailed provisions ### references to inclusion of financial statement information in the detailed provisions ### Requirements for inclusion of financial statement information in prospectuses and listing materials - Paragraph 8.4 of the Listing Requirements mandates that prospectuses, pre-listing statements and transaction circulars contain three years of audited financial information. - Audited financial statements or annual reports that contain/are accompanied by audited annual financial statements must be prepared by all public companies, listed or unlisted (Companies Act, section 30, JSE Listing Requirements, paragraph 3.19). - Under paragraph 3.19 of the Listing Requirements, every issuer must, within six months after the end of each financial year and at least 15 business days before the date of the annual general meeting, distribute these audited statements to all holders of securities and submit them to the JSE. - JSE firms are expected to issue provisional annual financial statements within three months of the year-end and these statements must be reviewed by the issuer’s auditor prior to issue. The practice is to issue audited financial statements within the three month period. - Under the IFRS, both audited and interim statements are required to contain: - a balance sheet, - statement of results of operations, - statement of cash flow, - a discussion of changes in ownership equity, - notes to these statements. - Unaudited interim financial statements for listed companies must be prepared in accordance with: - IAS 34, - financial reporting guides issued by the Accounting Practices Committee of SAICA, - financial reporting pronouncements (FRP) issued by the FRSC. - A statement confirming that the interim statements have been so prepared must be included in the report (JSE Listing Requirements, paragraph 8.57). - Interim reports must be published and distributed to shareholders after the end of the first six-month period of a financial year, by no later than three months after that date. For issuers that prepare quarterly reports, these must be published as soon as possible after the end of each quarter (paragraph 3.15). - There is no general obligation for public companies to issue interim statements under the Companies Act; references exist in section 101(6)(c) and Regulation 106(7)(c). ### Oversight: Financial Reporting Standards Council (FRSC) and regulatory roles - The Companies Act established the FRSC to advise the Minister of Trade and Industry (MTI) on matters relating to financial reporting standards. - FRSC responsibilities include: - Receiving and considering relevant information from the CIPC and other sources relating to the reliability of, and compliance with, financial reporting standards; - Advising the MTI on matters relating to financial reporting standards, including the making of regulations that establish financial reporting standards and requirements for the form and content of the summaries of financial statements; - Adapting international reporting standards for local circumstances, including development of authoritative interpretations for specific issues that only occur in South Africa (section 204). - The regulations prescribe the use of either the IFRS or the IFRS for SMEs with respect to all public companies; therefore, the FRSC has no role in setting applicable accounting standards for these entities but may issue FRPs that do not contradict or weaken the IFRS or IFRS for SMEs. - The FRSC was formed in October 2011 and its members were appointed by the MTI to serve three year terms; they may be reappointed. Appointed members include auditors; preparers of financial statements; security holders or creditors; company law experts; and representatives from the FSB, SARB, and JSE. - FRPs and other publications must be developed following an open process involving publication for comment and input from accountants, auditors, preparers, regulators, academics, legal authorities and users of financial statements. ### Compliance monitoring and reviews (CIPC, JSE, FRIP/FRIP charter) - Companies Act: any financial statements prepared by a company should not be false, misleading or incomplete in any material respect (section 29(2)). Intentional preparation, approval, dissemination, or publication of materially false or misleading statements is criminalized (section 214). - Regulations obligate auditors and other independent reviewers to submit notices of reportable irregularities to the CIPC (section 29). CIPC may investigate or refer to the appropriate regulator. - CIPC responsibilities include promoting reliability of financial statements by monitoring compliance and making recommendations to the FRSC. - In April 2014 the CIPC established a system to select and review a sample of financial accountability supplements, audited annual financial statements, and independently reviewed annual financial statements filed under the Companies Act. - The program reviews five financial statements every month from high risk public and private companies that have a public interest score above 350. - There are over 3000 public companies in South Africa, not including those listed on the JSE. - Reviews address compliance with the Companies Act, IFRS and the King III Code and evaluate solvency and liquidity using simple balance sheet formulae (e.g., ratio of current assets to current liabilities; ratio of total assets to total liabilities). - The CIPC’s longer term intention is to adopt a process analogous to the JSE FRIP and engage with one or more universities to expand the review process. ### JSE proactive reviews of annual financial statements (AFS) and outcomes - The JSE and SAICA formed the GAAP Monitoring Panel (now FRIP) in 2002 to review financial statements of listed companies. - In April 2011, the JSE commenced proactive reviewing of AFS for IFRS compliance. In any year approximately 80 companies are reviewed. - Selection uses random selection and targeted selection based on pre-determined risk areas; partnership with the University of Johannesburg provides 21 additional expert reviewers. - The JSE may instruct management of a non-compliant company to publish or reissue information or censure the issuer (paragraph 8.65); matters may be referred to IRBA and/or SAICA (paragraph 8.66). - JSE monitoring statistics (as of end-2013): reviewed AFS of 216 issuers, with 10 repeat reviews. - JSE Annual Financial Statements Reviews (Total AFS reviewed and related case flows): - 2011: Total AFS reviewed 56; Cases closed immediately (no issues) 16; Letters of inquiry sent 40; Cases completed during period 45. - 2012: Total AFS reviewed 82; Cases closed immediately (no issues) 14; Letters of inquiry sent 68; Cases completed during period 78. - 2013: Total AFS reviewed 78; Cases closed immediately (no issues) 19; Letters of inquiry sent 59; Cases completed during period 84. - Cases pending: (11) (15) (9) (as reported in sequence for 2011, 2012, 2013 context). - Outcomes of JSE AFS Reviews (by year): - 2011: Material misstatements – immediate restatement and public announcement made 2; Misstatements – must be corrected with next published results 2; Non-material compliance issues – must be corrected in next published results 10; Total of AFS with required corrections 14; Smaller disclosure issues that will be corrected in future 15; Total cases with corrections 29; Other AFS without issues or only potential areas of improvement identified* 16; Total cases closed 45. - 2012: Material misstatements 7; Misstatements – must be corrected with next published results 2; Non-material compliance issues 10; Total of AFS with required corrections 19; Smaller disclosure issues 28; Total cases with corrections 47; Other AFS without issues or only potential areas of improvement identified* 31; Total cases closed 78. - 2013: Material misstatements 3; Misstatements – must be corrected with next published results 8; Non-material compliance issues 7; Total of AFS with required corrections 18; Smaller disclosure issues 33; Total cases with corrections 51; Other AFS without issues or only potential areas of improvement identified* 33; Total cases closed 84. - * includes files closed immediately. ### Cross-border and secondary listing recognition - For entities with a secondary listing on the JSE, South Africa recognizes IFRS, U.S. GAAP, IFRS as adopted by the European Union, UK GAAP, Australian GAAP and Canadian GAAP (Paragraph 8.13). - Of the 386 entities listed on the JSE, about 45 entities have a secondary listing. - Issuers with secondary listings usually are required to comply only with the listing requirements of the exchange where they have their primary listing, except if otherwise specifically stated in the Listing Requirements. ### Principles for auditors and IRBA oversight (Principle 19) - The Auditing Profession Act, 2005 (APA) established IRBA to regulate the auditing profession, including registration, inspection, discipline of auditors, and accreditation of professional bodies. - IRBA responsibilities include setting auditing standards and standards of professional competence, ethics, and conduct for registered auditors (RAs). - IRBA is a member of IFIAR. The ISA issued in 2009 by the IAASB has been officially adopted for use in South Africa; adoption is made legally effective by IRBA publishing notices in the government Gazette. - IRBA may develop and issue its own authoritative and non-authoritative pronouncements consistent with international standards. - IRBA’s Competency Framework requires applicants to be professional accountants qualified through a recognized professional body and, starting this year, complete an audit development program that entails at least two years of specialized work experience. Minimum continuing professional education requirements also apply. - There are approximately 4,300 auditors and 1,900 audit firms registered with IRBA. - IRBA governance and structure: - A part-time board appointed by the Minister of Finance, with minimum six and maximum ten members; no more than 40 percent may be practicing auditors. - Permanent committees mandated by the APA include: Disciplinary Committee; Investigation Committee; Inspection Committee; Committee for Auditing Standards; Committee for Auditor Ethics (section 20). - Permanent secretariat headed by a chief executive officer with approximately 65 full-time staff. - IRBA funding sources and composition: - Collection of prescribed fees and levies from RAs and audit firms; - Money appropriated by Parliament; - Other legal sources including sanctions imposed by IRBA (APA, section 25). - Funding composition: government 30 percent; percentage of firms' public interest assurance fees 30 percent; annual registration fees from RAs 40 percent. - Commentary: Questions raised whether reliance on funding from the regulated profession compromises IRBA’s independence. - IRBA reports annually to the Minister of Finance; extensive information published on IRBA website. - Resource constraints: IRBA may have resources to inspect higher risk RAs but does not have enough staff to do the full range of inspections mandated by the APA and faces challenges hiring experienced inspection/investigatory staff and specialists (e.g., IT auditors, banking auditors). ### IRBA inspections, processes, and statistics - APA mandates IRBA to inspect auditors of public interest companies at least once every three years (section 47(1)). RAs must cooperate and produce requested information, even confidential documents (section 47(3)). - Quality reviews are performed in three-year cycles with coverage/frequency determined by public interest and risk factors (size, number of partners, client nature, previous results, complaint history). - IRBA has established a business intelligence unit and a risk reporting system to support risk assessment. - Inspection guidelines (Manual of Information) cover quality control system and a sample of audit engagements; objectives reference IFAC ISQC 1 and the ISA. - Qualified professionals employed full-time carry out most inspections; there are eight inspectors. - Inspections process steps include schedule/notice, business intelligence analysis, pre-inspection requests, performance of inspection, discussion with firm, obtaining comments, formal report, internal quality review, presentation to Inspection Committee, relaying decision, and obtaining undertakings to implement corrective action. - Inspection Committee: maximum eight qualified and experienced individuals; majority not in public practice; roles include monitoring cycle progress, consistency and quality of reports, and determining inspection outcomes. - Possible Inspection Committee decisions: - Results satisfactory — firm reviewed in subsequent cycle; - Results not satisfactory — follow-up inspection after approximately 12 months; - Refer matter to Investigating Committee — may result in disciplinary action by IRBA. - Referral to Investigation Committee criteria: public at risk; required corrective actions not implemented after revisit; flagrant disregard for standards/Codes; refusal to cooperate. - Inspection scale: approximately 400 inspections conducted over the last year; expectation to level out at about 350 in-depth reviews per year. - IRBA Inspections Performed (annual data): - 2009: Firms 22; Engagements 1004. - 2010: Firms 38; Engagements 654. - 2011: Firms 22; Engagements 640. - 2012: Firms 6; Engagements 625. - 2013: Firms 14; Engagements 440. - Source: IRBA 2013 Annual Report. ### IRBA professional conduct, investigations, and sanctions - In 2010 IRBA adopted a Code of Professional Conduct and Disciplinary Rules based on the IESBA Code with additional South African requirements; IRBA Code and Rules updated as of March 2014. - Companies Act, JSE Listing Requirements and statutory requirements for regulated firms contain auditor independence requirements. - IRBA Inspections Department checks documentation of independence during inspections and IRBA can sanction non-compliance. - Investigation and disciplinary framework under APA: - Investigation Committee to investigate suspected misconduct and recommend prosecution to the IRBA Board (section 24). - Investigation Committee operates part-time, supported by IRBA Legal Department; APA does not grant subpoena power but may require RAs provide documents including audit work papers. - After investigation, recommendation goes to Disciplinary Advisory Committee (DAC), a sub-committee of the IRBA Board (DAC composed of four IRBA Board members, two practicing auditors). - DAC may prosecute or settle by agreement; DAC statistics in 2013: considered 66 cases and finalized 61 — of finalized cases, four practitioners admonished, 23 found guilty by consent (negotiated settlement), and 37 not prosecuted; one case dropped due to practitioner death; DAC referred three matters to the Disciplinary Committee. - Disciplinary Committee is tribunal for prosecutions; chair must be a former judge or senior advocate and majority of members must not be RAs (section 24). - Misconduct investigated and sanctioned (summary table, 2011–2013; I=Investigated, S=Sanctioned): - Failing To Perform with Due Care and Skill: - 2011: I 46, S 11 - 2012: I 49, S 17 - 2013: I 56, S 16 - Dishonesty: - 2011: I 10, S 1 - 2012: I 3, S 2 - 2013: I 3, S 2 - Non-Independence: - 2011: I 7, S 2 - 2012: I 4, S 1 - 2013: I 5, S 3 - Fee Dispute: - 2011: I 4, S 1 - 2012: I 1, S 1 - 2013: (not separately listed) - Failure to Reply To Correspondence or Telephone Calls: - 2011: I 2, S 1 - 2012: I 1 - General Unacceptable Conduct: - 2011: I 2 - 2012: I 4, S 1 - 2013: I 3 - Refusal to Resign: - 2011: I 2 - 2012: I 7, S 4 - 2013: I 1 - Criticism of Colleagues: - 2011: I 1 - 2012: I 1 - 2013: I 1 - Practice Review Complaint: - 2012: I 1, S 1 - 2013: I 5, S 4 - Partnership Dispute: - 2012: I 1 - Companies Act Contraventions: - 2012: I 1 - Black Economic Empowerment: - 2012: I 2 - Total: - 2011: I 74, S 16 - 2012: I 73, S 25 - 2013: I 77, S 25 - Source: IRBA. - Note: * I= Investigated, S=Sanctioned. - Sanctions and publication: - Most sanctions are fines. Over the past three years: one RA reprimanded, one suspended, three removed from the register of RAs. - Under section 51(3) of the APA potential sanctions include monetary fines up to ZAR 100,000 per charge, reprimands, suspension of registration, and cancellation of registration. - IRBA discretion whether to publish names of sanctioned auditors; policy often to describe charges/sanctions without names. In 2013 of four cases adjudicated the auditor’s name was published in two cases (registration canceled, payment of fines suspended). - For settlements by consent before Disciplinary Committee, IRBA policy is not to disclose names owing to concerns about client flight. - Exchange-level action: - Where the auditor acts for a JSE-listed issuer and there is evidence of improper conduct, the JSE may withdraw the auditor’s recognition to act for that listed firm or any listed firm. ### Assessment and comments - Assessment: Fully Implemented for the section on financial statement inclusion (with cross-reference to Principle 16 where gaps in interim requirements and deadlines are noted). - Assessment: Partly Implemented for auditor oversight (IRBA), with comments that IRBA’s authority to share inspection results is presently limited under section [text truncated in source]. - Comments in source note gaps in interim financial statement requirements and slow deadlines for releasing financial statements; the downgrade for these gaps is reflected in the rating for Principle 16 and not here. *Source: _cr1557 - references to inclusion of financial statement information in the detailed provisions* ### 47. They cannot be shared with the audit committee of the entity audited, nor can ### _cr1557 - 47. They cannot be shared with the audit committee of the entity audited, nor can ### Information sharing and IRBA independence - Under section 47 IRBA may only share information on receipt of a written request; IRBA cannot proactively share information with other regulators or with the audit committee of the entity audited. - Recommendation: Consideration should be given to expanding IRBA’s authority to share information, particularly on a proactive basis with other regulators. - Recommendation: Amend IRBA’s funding model to include additional sources beyond the government and the auditing profession. - Consider levying a fee on market participants that benefit from higher standards of auditing, such as public companies, to broaden IRBA’s funding base. - Example provided: In the United States, the largest source of funding for the Public Company Audit Oversight Board (PCAOB) comes from the companies whose financial statements must be audited by PCAOB-registered firms; registered securities brokers and dealers also contribute. - Recommendation: Reduce participation of practicing RAs on the Board and on committees, particularly on committees responsible for investigations and disciplinary matters, to strengthen independence in appearance and in fact. - Recommendation: Provide IRBA additional resources and greater freedom to contract with staff on appropriate terms to recruit and retain necessary expertise. - Recommendation: Consider including provisions permitting IRBA to indemnify board members and employees for legal costs if sued and make funds available to pay costs during the course of the suit. ### Auditor independence (Principle 20) — Description and requirements - The IRBA Code (referred to in Principle 19) contains extensive restrictions relating to audit firms and individuals regarding financial, business or other relationships with an entity that the firm audits (see section 290). - The IRBA Code adopts a “threats and safeguards” approach. Paragraph 290.7 requires the firm/auditor to: - Identify the threat to independence from a given relationship or circumstance; - Evaluate its significance; and - Apply safeguards to eliminate the threats or reduce them to an acceptable level. - If appropriate safeguards are not available or cannot be applied to reduce threats to an acceptable level, the auditor must eliminate the circumstance or relationship creating the threats or decline or terminate the audit engagement. - The Code defines and addresses the following categories of threats: - Self-interest; - Self-review; - Advocacy; - Familiarity; and - Intimidation. - Audit firm requirements: - Establish policies and procedures to provide reasonable assurance of compliance with prescribed ethical requirements. - Communicate independence requirements to personnel; identify and evaluate circumstances and relationships that create threats; take appropriate action to eliminate or reduce threats to an acceptable level or withdraw from the engagement. - Establish policies and procedures to ensure the firm undertakes or continues only engagements where it is competent, has capabilities (including time and resources), can comply with ethical requirements, and has considered client integrity. - Establish a monitoring process to provide reasonable assurance that quality control system policies and procedures are relevant, adequate and operating effectively. - Statutory and regulatory independence requirements also found in: - The Companies Act; - The JSE Listing Requirements; and - Statutory requirements applicable to regulated firms. ### Rotation, audit committees, reporting and enforcement - Auditor rotation requirements: - Companies Act requires individual audit partners (not the entire firm unless a sole proprietorship) to rotate from audit engagements after five consecutive years. - Two-year cooling off period if the individual leaves the engagement after having served for two or more consecutive years as the lead partner (section 92). - IRBA Code mandates a maximum term of seven years followed by a two year cooling off period (paragraph 290.151). - Audit committee requirements: - Companies Act (section 94) requires public companies (including listed and unlisted) and state-owned companies to establish audit committees; other companies may do so if specified in MOI. - Audit committee composition: directors not involved in day-to-day management (section 94(4)). - Statutory responsibilities include: nominate the external auditor for shareholder approval, determine the audit fee, pre-approve any non-audit services by the company auditor, and assess the independence of the auditor (section 94(7), (8)). - King III Code and JSE Listing Requirements require the audit committee of a listed company to approve the appointment of the auditor. - Individual RAs and audit firms must be accredited by the JSE and meet requirements in Section 22 of the Listing Requirements; RA must have been inspected by and have a clean record with IRBA. - SARB and FSB, among others, must give prior approval to the appointment of an auditor for a regulated firm (example: section 19(2) of the FAIS Act). - Reporting a change of auditor: - Companies Act: an unlisted public company must give notice of a change of auditor within 10 days after the change (Companies Act, section 85(3)); no other public disclosure required. - JSE Listing Requirements (Section 3.75–3.79): - Listed company must notify the JSE without delay of the resignation or termination of the listed company’s auditor; at the latest, the notice is due the next business day after the decision has been made (3.75). - Notice must be accompanied by a letter from the auditor stating the date of termination and what the auditor believes to be the reason for termination or resignation (3.76). - JSE may request the issuer to publish an announcement informing shareholders of the termination or resignation and the reason (3.78). - Annual financial statements for the year end in which the termination or resignation took place must include the same information (3.79). - Assessment and comment: - Assessment: Broadly Implemented - Comment: JSE requirements are timely and public; Companies Act requirements meet neither standard. Recommendation: Amend Companies Act to require prompt, public disclosure of a change of auditor; consider including this in the general obligation to disclose material information changes recommended under Principle 16. - Enforcement: - IRBA Code and Disciplinary Rules stipulate remedial measures and disciplinary proceedings. - Complaints may be lodged by any member of the public, other entities, or the Inspections Department of IRBA; investigated and referred for disciplinary action if warranted under the APA. - JSE’s FRIP panel monitors issuer compliance with financial reporting standards; problems relating to auditors are referred to IRBA. - IRBA is building relationships and has established MOUs to facilitate information sharing, but its ability to share information is constrained under the APA. ### Auditing standards (Principle 21) - The ISA issued in 2009 by the IAASB have been officially adopted for use in South Africa. - The Auditing and Assurance Standards Board of the PAAB adopted the original text of the IAASB International Standards on Quality Control, Auditing, Assurance and Related Services as standards to be applied in South Africa from January 1, 2005. - Following the APA, IRBA confirmed adoption of the International Engagement Standards as published in the successive IAASB Handbooks of International Quality Control, Auditing, Assurance, and Ethics Pronouncements (the IAASB Handbooks). - Continued adoption of IAASB Handbooks is done in accordance with section 4(1)(e) of the APA and effected by gazetting periodic IRBA Board Notices. - Section 22 of the APA provides for establishment of a Committee for Auditing Standards (CFAS) at IRBA: - CFAS assists IRBA to develop, maintain, adopt, issue or prescribe auditing pronouncements. - CFAS should have at least 12 members; members are not full-time IRBA employees. - Primary functions: review ISAs and other IAASB pronouncements and advise IRBA Board on adoption; prepare comments on IAASB exposure drafts; develop and draft IRBA pronouncements (guides, practice notes, communiqués). - Standards Department of IRBA provides Secretariat to CFAS; committee follows a robust procedural and consultative process. - Inspection and discipline: - Sections 47 – 49 of the APA: IRBA has authority to inspect the practice of an RA and is required to do so at least every three years if the RA audits a public interest company. - APA provides for investigation of improper conduct by an RA and taking disciplinary action as required. - Assessment: Fully Implemented ### Credit rating agencies oversight (Principle 22) — Definitions, scope, registration, and suspension - Definitions (Section 1(1) of the CRSA): - Credit rating: an opinion regarding the creditworthiness of an entity, a security or a financial instrument, or an issuer of a security or a financial instrument, using an established and defined ranking system of rating categories, excluding any recommendation to purchase, sell, or hold any security or financial instrument. - CRA: a person who provides credit rating services. - Credit rating services: data and information analysis, evaluation, approval, issuing or review for the purposes of credit ratings. - External CRA: a person who provides credit rating services and who is authorized or registered by a regulatory authority in another country with regulatory framework approved by the Registrar as equivalent to the CRSA and is supervised and monitored by a regulatory authority. - External credit rating: a credit rating issued by an external CRA. - Use of published credit ratings for regulatory purposes (Section 4 of the CRSA): - Requires such credit ratings be issued or endorsed by a CRA registered in accordance with the CRSA, or issued or endorsed by an external CRA approved by the Registrar. - The Registrar may prescribe additional requirements in respect of use of credit ratings for regulatory purposes. - CRSA applies to: - Credit rating services performed in South Africa; - Credit ratings that are issued by CRAs registered in South Africa; and - Any person that performs credit rating services or issues credit ratings that are published in South Africa. - CRSA timeline and registrations: - CRSA came into force on April 15, 2013. - First transitional period provided until December 17, 2013. - First two CRAs (Fitch and GCR) were registered on December 13, 2013. - Moody’s and S&P were provided exemptions from the December 17, 2013 deadline and were ultimately licensed on May 6, 2014. - S&P registered as an external CRA; other CRAs have South African subsidiaries registered as local CRAs. - Registration requirements (Section 5 of the CRSA) — applications must include: - Certificate of incorporation under the Companies Act if located in South Africa, or proof of registration as an external company under the Companies Act if an external CRA. - Details of: incorporation/registration/authorization in other countries; ownership, organizational structure and corporate governance; subsidiaries; resources and expertise; program of operations (including locations and types of business); expected outsourcing arrangements and details of persons assuming outsourcing functions; policies and procedures to identify, manage and disclose conflicts of interest; compensation and performance evaluation arrangements; compliance with or adherence to the code of conduct prescribed in the CRSA. - Description of procedures and methodologies to be used to issue and review credit ratings. - Information to satisfy fit and proper requirements regarding: personal character qualities of honesty and integrity; competence; operational ability; and financial soundness. - The application fee prescribed by the Registrar. - Any other information prescribed by the Registrar. - Registrar exemptions: - Registrar may exempt an applicant (or its holding company or related company in same group) registered by a foreign regulatory authority as a CRA from providing some or all information if applicant requests exemption and provides proof of such registration and the Registrar is satisfied registration granted in accordance with public regulation equivalent to the CRSA (Section 5(3) CRSA). - Registrar has provided some limited exemptions under this provision. - Consultation and decision-making (Section 5(6) of the CRSA): - Before deciding on an application the Registrar must consult with any local regulatory authority that relies on, refers to or uses credit ratings in its supervision and regulatory activities. - Footnote: In practice such consultation has so far been undertaken informally with the SARB. - If satisfied applicant complies with CRSA requirements, Registrar must grant application; if not satisfied, Registrar must refuse, notify applicant of refusal with written reasons and advise right to appeal. - Registrar may grant an application subject to any condition determined; Registrar must maintain a list on the FSB official website of all registered CRAs. - Suspension and cancellation of registration (Section 6 of the CRSA): - Registrar may suspend or cancel registration of a registered CRA if it: - Expressly renounces the registration or has provided no credit rating services for the preceding six months; - Has obtained the registration by providing false information or by any other irregular means; - No longer meets the conditions under which it was registered; - Has failed to comply with any condition imposed or directive issued under the CRSA; or - Has been liquidated. - Such suspension or cancellation may be subject to any conditions the Registrar may determine. - The PAJA procedural requirements apply. *International Monetary Fund — Staff report excerpt (content unit)._cr1557 - 47. They cannot be shared with the audit committee of the entity audited, nor can* ### Section 18 of the CRSA provides that a registered CRA may, subject to the approval of ### _cr1557 - Section 18 of the CRSA provides that a registered CRA may, subject to the approval of ### Endorsement of external credit ratings (Section 18) - A registered CRA may, subject to the approval of the Registrar, endorse external credit ratings if: - The credit rating services to be endorsed are undertaken partly or entirely by the registered CRA or by an external CRA belonging to the same group as the registered CRA; - The registered CRA has verified and is able to demonstrate on an ongoing basis to the Registrar that the external CRA is authorized or registered by a regulatory authority to perform credit rating services similar to those regulated under the CRSA and is subject to the laws of a country other than South Africa, which establish a regulatory framework equivalent to that established by the CRSA and are supervised by a regulatory authority; - The ability of the Registrar to assess and monitor the compliance of the external CRA with such foreign regulatory framework referred is not limited; - The registered CRA provides the Registrar, on the Registrar’s request, with all information necessary to enable the Registrar to monitor, on an ongoing basis, compliance with the CRSA; - There is an objective reason for the credit ratings to be issued in a country other than South Africa, or by an external CRA; and - A cooperation agreement has been entered into between the Registrar and the relevant regulatory authority of the external CRA, which provides at least for mechanisms for the exchange of information and procedures for the coordination of regulatory activities to facilitate the monitoring of credit rating activities resulting in the issuing of the endorsed credit rating on an ongoing basis. - No registered CRA has yet sought one of the above approvals. ### Ongoing supervision and enforcement (Section 23, Section 25) - Under Section 23 of the CRSA, the Registrar is required to supervise and enforce compliance with the Act and may by notice require any person, including a registered CRA, to provide within determined period specified information or documents necessary for the Registrar to exercise his/her powers under the CRSA. - The Registrar may take any measures that he/she considers necessary for the proper performance and exercise of the Registrar’s powers and functions for the implementation of the CRSA. - Section 25 includes the power of the Registrar to conduct on-site visits and instruct an inspector to conduct an inspection. - After an on-site visit or inspection, the Registrar may direct the person concerned to: - take any steps; - refrain from performing or continuing to perform any act; or - terminate or remedy any contravention of or failure to comply with any provision of the CRSA. - The EC also has certain powers vis-à-vis CRAs as provided in the Protection of Funds Act. ### Supervisory structure and planned functions (Credit Rating Services Unit) - The Credit Rating Services Unit of the FSB established on April 1, 2013 is responsible for supervising CRAs. - Its current business plan (for the financial year commencing on April 1, 2014) covers the following supervisory and regulatory functions: - Registration of CRAs; - Undertaking an annual assessment and review of the registered CRAs; - Conducting on-site reviews on selected CRAs; - Monitoring market developments to ensure that the local markets remain safe, sound, fair and efficient and that best practice standards are adopted in the management of risks; - Assessing the South African legislation in terms of the IOSCO Principles with the aim of complying with best international standards; - Monitoring compliance with the legislation and subordinate regulation/Board Notices; - Undertaking other functions relating to the administration of the CRSA; and - Handling and responding to complaints and queries from investors and consumers. - The Credit Rating Services Unit plans to conduct risk assessments on all registered CRAs and risk rate them according to the impact they have on investors and the probability of risks materializing. - In the assessment of probability, it takes into account the internal controls in place and how effective they are in preventing the risks from materializing or mitigating its impact. - The unit will disclose the risk assessment outcomes to each CRA on a confidential basis. - On-site visit schedule noted at the time of the assessment mission: - One CRA had been subject to a limited on-site visit. - A second CRA is planned to be subject to an on-site visit during the second quarter of 2014. - The two remaining ones are intended to be visited during the third quarter of 2014. - Further on-site visits will be driven by the results of the respective first visits and by matters arising from comments or complaints received from market participants, investors, the public and consumers. ### Oversight requirements and standards - Relevant oversight requirements that comply with the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies are in the CRSA and in the Board Notice 228 (Credit Rating Agency Rules) issued under Section 24 of the CRSA. ### Quality, integrity and record-keeping (Section 9, Section 14) - Section 9 requirements on credit rating methodologies, models and key rating assumptions: - Adopt, implement and enforce adequate measures to ensure that the credit ratings it issues are based on a thorough analysis of all the information that is available to it and that is relevant to its analysis according to its rating methodologies; - Use rating methodologies that are rigorous, systematic, continuous and subject to validation based on historical experience, including back-testing; - Regularly review its methodologies, models and key rating assumptions such as mathematical or correlation assumptions, any significant changes or modifications to them and their appropriateness, if they are used or are intended to be used for the assessment of new financial instruments; and - Establish internal arrangements to monitor the impact of changes in macro-economic or financial market conditions on credit ratings. - Publication and monitoring obligations: - A registered CRA must publish any credit rating or any decision to discontinue a credit rating impartially and in a timely manner. - When publishing a credit rating, it must state clearly and prominently any attributes and limitations of the credit rating and provide an explanation of the key elements underlying the credit rating. - A CRA must also regularly review its credit ratings. - A registered CRA must disclose its policies and procedures regarding unsolicited credit ratings. - Section 14 requires adequate records and audit trails of its credit rating services, which must be kept for a minimum period of five years or such longer period as may be prescribed in any other applicable law. - Part VII of the CRA Rules includes detailed requirements on record-keeping. - Section 5(1) requires an application for registration to include details on the CRA’s resources and expertise to perform credit rating services. - CRA Rules require the CRA to ensure sufficient resources to carry out high-quality credit analysis of all obligations of the rated entity it rates. - For monitoring, surveillance and updating, a CRA must ensure adequate personnel and financial resources are allocated to monitoring, surveilling and updating its ratings, except for ratings that clearly indicate they do not entail ongoing monitoring and surveillance. - Once a rating which requires ongoing monitoring and surveillance is published, the CRA must monitor and surveil the rating on an ongoing basis and update it by regularly reviewing the rated entity’s creditworthiness, initiating a review upon becoming aware of any information that might reasonably be expected to result in a rating action, including termination of a rating, and updating on a timely basis the rating, as appropriate. ### Conflicts of interest (Section 5(1), Section 7, Section 20, Part III of CRA Rules) - Registration application must include details of the CRA’s policies and procedures to identify, manage and disclose any conflicts of interest. - Section 7 requires organisation to ensure business interest does not impair independence and integrity of credit ratings or accuracy of credit rating services. - Section 20: No person, including the Registrar, may hinder, interfere with, obstruct or improperly attempt to influence a credit rating, the content of a credit rating, or any methodology, model or key assumption used by a registered CRA to derive a credit rating. - Part III CRA Rules require a CRA to: - Identify, eliminate or manage and record and disclose, clearly and prominently, any actual or potential conflicts of interest that may influence analysis and judgments of analysts, employees, or other natural persons directly involved in issuing or approving credit ratings; - Ensure disclosures of actual and potential conflicts of interest are complete, timely, clear, concise, specific and prominent. - Circumstances where a CRA may not issue a credit rating, or must immediately publicly disclose potential effects: - The CRA or its analysts, employees or other persons directly or indirectly own securities or financial instruments in the rated entity or a related third party or have any other direct or indirect ownership interest in that entity or party, other than holdings in CIS, pension funds or life insurance; - The rated entity or a related third party is directly or indirectly linked to the CRA by control; - An analyst, employee or other person is a member of the senior management of the rated entity or a related third party; - An analyst who participated in determining a credit rating, or a person who approved a credit rating, has had a relationship with the rated entity or a related third party that may cause a conflict of interest. - Safeguards on personnel and compensation: - An analyst or an employee of a CRA, or the spouse, partner or minor child of an analyst or employee, may not buy, sell or engage in any transaction in any securities guaranteed or otherwise supported by a rated entity within the analyst’s area of primary analytical responsibility, other than holdings in CIS, pension funds or life insurance. - A CRA must ensure that an analyst is not compensated or evaluated on the basis of the amount of revenue that the CRA derives from issuers that the analyst rates or with which the analyst regularly interacts. - A CRA must conduct formal and periodic reviews of compensation policies and practices for analysts and other employees who participate in or might otherwise have an effect on the rating process. - A CRA may not have employees directly involved in the rating process also involved in discussions regarding fees or payments with any rated entity, potential rated entity, related third party or any person directly or indirectly linked to the rated entity by control. - Prohibitions on employee participation in rating determinations if the employee: - Owns securities or financial instruments of the rated entity, other than holdings in diversified CIS, pension funds or life insurance; - Owns securities or financial instruments of any entity related to a rated entity, the ownership of which may cause or may be perceived as causing a conflict of interest, other than holdings in diversified CIS, pension funds or life insurance; - Has had a recent employment or other significant business relationship with the rated entity that may cause or may be perceived as causing a conflict of interest; - Has an immediate relation who currently works for the rated entity where this employment relationship constitutes a conflict of interest; - Has, or had, any other relationship with the rated entity or any of its related entities that may cause or may be perceived as causing a conflict of interest. ### Transparency and timeliness (Section 13, Section 10(1)) - Section 13 prescribes disclosure requirements. A registered CRA must disclose to the public and its subscribers: - The practices, procedures, processes, methodologies, models and key rating assumptions it uses in its credit ratings and credit rating services and any material modifications to them; - Its code of conduct; - The general nature of its compensation arrangements; - Its policy on publishing credit ratings and other related communication; and - Every 12 months, data about the historical default rates of its rating categories. - Section 10(1) requires that a registered CRA must publish any credit rating or any decision to discontinue a credit rating impartially and in a timely manner. *Source: _cr1557 - Section 18 of the CRSA provides that a registered CRA may, subject to the approval of* ### Part XI of the CRA Rules provides more detailed requirements on the transparency and ### _cr1557 - Part XI of the CRA Rules provides more detailed requirements on the transparency and ### Part XI: Transparency and timeliness of credit rating disclosures - A CRA must: - Distribute its credit rating decisions in a timely manner; - Publicly disclose its policies for distributing credit ratings, reports and updates; - Disclose to the public, on a non-selective basis and free of charge, any credit rating regarding publicly issued securities, or publicly rated entities, as well as any subsequent decisions to discontinue such a credit rating, if the rating action is based in whole or in part on material non-public information; and - Publish sufficient information about its procedures, methodologies and assumptions so that outside parties can understand how a credit rating was arrived at. This information must include the meaning of each rating category, rating outlook and the definition of default or recovery and the time horizon the agency used when making a rating decision. - Required disclosure on historical default rates must include: - Verifiable, quantifiable and historical information about the performance of the CRA’s credit ratings, organized and structured, and, where possible, standardized in such a way as to assist investors in drawing performance comparisons between different credit rating agencies; - An indication whether the default rates of these categories have changed over time; and - The credit ratings transition frequency. ### Confidential information and confidentiality requirements - Organizational and administrative requirements: - A CRA must establish appropriate and effective organizational and administrative requirements to protect confidential information made available to it by issuers, including prohibiting its analysts and employees from using such information to enter into transactions (Section 7(f)(ii)). - Section 19 of the CRA Rules: - Covers more detailed confidentiality requirements. - A CRA must adopt procedures and mechanisms to comply with the CRSA confidentiality requirement to protect information shared with it by issuers under confidentiality agreements or mutual understanding. - Unless otherwise permitted by the confidentiality agreement and consistent with applicable laws or regulations, a CRA or its employee may not disclose confidential information in press releases, through research conferences, to future employers, or in conversations with investors, other issuers, or other persons. - A CRA may use confidential information only for purposes related to its rating activities or in accordance with any confidentiality agreements with the issuer. ### Assessment and implementation status (South Africa) - Assessment: Broadly Implemented - Comments: - The legislative and regulatory framework established in South Africa complies with the requirements of the IOSCO Assessment Methodology. - The FSB registered the last two CRAs only in early May 2014, and has only recently started implementing its supervisory program. - The FSB needs to ensure implementation of its supervisory plan, including conducting sufficient on-site visits and other ongoing supervision to reach full implementation of this Principle. - The supervisory plan should apply to all registered CRAs, either directly or in cooperation with foreign authorities, independent of the nature of the CRA’s physical presence in South Africa (subsidiary, branch, staffing level, etc.). ### Principle 23: Oversight of other entities offering analytical or evaluative services - Description of scope under FMA and FAIS Act: - Advice is a regulated business under the FMA and the FAIS Act, but the definition of advice is fairly narrow and turns on advice aimed at a particular investor or group of investors based on the firm’s understanding of the investor’s risk profile and investment objectives. - The FAIS Act excludes an analysis or report on a financial product from the definition of advice provided such analysis does not express or imply a recommendation, guidance or proposal that any particular transaction is appropriate for the particular investment objectives, financial situation or needs of a client (section 1(3)(a)(ii)). - As a result, there are no requirements that expressly apply to sell-side securities analysts unless they also are advising as defined. - Applicable general standards: - General standards in the statutes, the Codes of Conduct under the FAIS Act and the JSE Rules govern regulated firms’ activities addressing conflicts of interest and conduct of business and would apply firm-wide to FSPs licensed under the FAIS Act and to JSE members. - Firms issuing research reports are responsible for ensuring reports meet conduct of business obligations owed to clients (see Principle 31) and for any investment recommendation/advice made to specific clients. - JSE Equities Rules addressing conflicts of interest and conduct: - Rule 8.20.6 requires the member firm to disclose whether it has an interest in the security in respect of which a recommendation is given; - Rule 8.10.2 requires a member to act honestly and fairly towards its clients and exercise independent professional judgment; - Rule 8.10.5 requires the member to avoid conflicts of interest and when they cannot be avoided, ensure the fair treatment of its clients by disclosure, confidentiality or declining to act, and not unfairly place its own interests above those of its clients; and - Rule 8.40 requires a member to implement controls regarding the personal account trading of its employees to avoid conflicts of interest with its clients. - Limits and supervisory perimeter: - The JSE’s authority is limited to its members; if research providers are not JSE members, these rules do not apply. - The South African securities markets and regulation do not rely materially on unregulated experts (business valuators or asset valuators). - Many local hedge fund managers use third party administrators responsible for valuing fund assets; these administrators would be registered as Category I FSPs under the FAIS Act and subject to FSB supervision and general conflict of interest rules. - The FAIS Act gives the Registrar authority to exempt activities and products from licensing requirements (section 1(3)) but not to expand the Act’s ambit without legislative change; the Registrar can prescribe codes of conduct that apply to categories of FSPs. - Assessment: Broadly Implemented - Comments and recommended action: - Research reports are not widely prepared or circulated; those that are generally relate to listed instruments and are issued by JSE members and made available only to their clients. - There is no specific conflict of interest or oversight regime that applies to this activity beyond general duties on conflicts of interest and business conduct where provided by a regulated entity. - The role of analysts and providers of other evaluative services should be part of the overall perimeter of regulation review process required under Principle 7 and the review of the remit of the FSB legislation. - Action should be taken if and when such activities become a more important factor in the marketplace. ### Principle 24: Standards for Collective Investment Schemes (CIS) - CISCA definition and types: - CISCA defines a CIS as a scheme, in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which two or more investors contribute money or other assets to and hold a participatory interest in a portfolio of the scheme through shares, units or any other form of participatory interest, and the investors share the risk and the benefit of investment in proportion to their participatory interest in a portfolio of a scheme or on any other basis determined in the deed, but not a CIS authorized by any other Act (Section 1 CISCA). - Currently all CIS are unit trusts, even though the definition would permit other legal forms, such as an open-ended investment company. - CISCA identifies four types of CIS: - CIS in securities; - CIS in property; - CIS in participation bonds; and - Declared CIS. - CIS in securities: scheme whose portfolio consists mainly of securities (Section 39 CISCA). - CIS in property: includes a scheme whose portfolio consists of property shares, immovable property, other assets determined by the Registrar of CIS or any similar investment in a foreign country with a foreign currency sovereign rating by a CRA complying with the requirements set by the Registrar (Sections 47 and 49 CISCA). - CIS in participation bonds: scheme whose portfolio consists mainly of participation bonds (Section 52 CISCA). - Declared CIS: a CIS other than a CIS in securities, property or participation bonds, declared by the Minister of Finance (Sections 62-63 CISCA). - The predominant form of CIS is CIS in securities. There are currently no declared CIS. - Other pooled arrangements: - Some asset pools (e.g., existing hedge funds) are private arrangements and do not fall under CISCA’s definition because CISCA requires the CIS be available to the public. - Registration and manager requirements: - A person that administers a CIS must be registered as a manager by the Registrar, be an authorized agent or be exempted from CISCA (Sections 5(1), 41(1), 48(1) and (53(1)). - Administration (Section 1 CISCA) includes: - The management or control of a CIS; - The receipt, payment or investment of money or other assets, including income accruals, in respect of a CIS; - The sale, repurchase, issue or cancellation of a participatory interest in a CIS and the giving of advice or disclosure of information on any of those matters to investors or potential investors; and - The buying and selling of assets or the handing over of them to a trustee or custodian for safe custody. - A manager may conduct business other than administration subject to the prior approval of the Registrar (Section 86 CISCA). - Majority of fund managers are also authorized as Category I FSPs for providing advice on their own CIS (authorizations under the FAIS Act). - Separate registration is required to be a manager of each category of CIS. A CIS manager must be a company under the Companies Act (Sections 41(2), 48(2) and 53(2) CISCA). - The Registrar must register an applicant as a manager of CIS in securities (Section 42 CISCA) if: - The Registrar is satisfied that the deed the applicant proposes to prepare for the purposes of the CIS in securities does not contain anything inconsistent with CISCA; - The proposed directors, management, trustee or custodian and auditors are qualified; - The applicant is fit to assume the duties and responsibilities of a manager; and - The registration of the applicant as a manager will be in the public interest. - The requirements of Section 42 apply also to CIS in property and participation bonds (Sections 51 and 64 CISCA). - Board Notice 911 of 2010 and Notice 910 requirements: - Board Notice 911 of 2010 requires the CIS manager application form to include names and curriculum vitae of the chairperson, directors and managing director, and names and curriculum vitae of all managerial staff responsible for administration with specific reference to experience related to their responsibilities. - Directors must submit a completed fit and proper form (Annexure of the FSB Board Notice 910 on the Determination of Fit and Proper Requirements and Conditions for Managers of Collective Investment Schemes – Notice 910). - Criteria leading to automatic disqualification (e.g., conviction in a criminal or civil proceeding for fraud or breach of fiduciary duty) are included in Part IV of Notice 910. - Duties of a CIS manager (Section 4 CISCA): - Avoid 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 CIS is exposed; - Organize and control the CIS in a responsible manner; - Keep proper records; - Employ adequately trained staff and ensure that they are properly supervised; - Have well-defined compliance procedures; - Maintain an open and cooperative relationship with the office of the Registrar and promptly inform it 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. - Recordkeeping and retention: - A CIS manager is subject to section 24 of the Companies Act requiring documents, accounts, books, writing, records or other information a company is required to keep under the Companies Act or any other public regulation must be kept for a period of seven years. - Section 74 of CISCA requires the manager to preserve the accounting records in respect of itself and every collective investment scheme administered by it in a safe place for a period of at least five years. - Detailed internal organization and operational conduct requirements (Parts V, VII and VIII of Notice 910): - Comply with standards of internal organization and operational conduct that aim to protect the interests of investors and ensure proper management of risk; - Conduct business in a way that protects the interests of investors and helps preserve the integrity of the CIS; - Be responsible for ensuring appropriate internal policies and procedures for compliance with relevant legislation and appropriate internal controls and risk management systems; - Ensure internal control structures, procedures and controls are in place, including documentation relating to business processes, policies and controls, technical requirements, system application testing, disaster recovery and back-up procedures on electronic data, appropriate training for all staff regarding the relevant legislative requirements, and a business continuity plan; - Record all financial and system procedures to ensure reporting according to applicable accounting requirements; - Ensure necessary controls and compliance procedures are in place to manage and monitor relevant systems in use; - Have general administration processing, accounting transactions and risk control measurements in place to ensure accurate, complete and timely processing of data, information reporting and assurance of data integrity; - Have periodic evaluation of risk management processes executed by an independent party (e.g., auditors or independent risk management consultants) to ensure compliance with all relevant legislation; - Have and effectively employ resources, procedures and appropriate technological systems that can reasonably be expected to eliminate the risk that investors may suffer financial loss through theft, fraud, other dishonest acts, poor administration, negligence, professional misconduct or culpable omissions, and to protect the interests of investors in general; and - Have adequate storage and filing systems for the safe-keeping of records, business communications and correspondence and adequate access to communication facilities. *Source: _cr1557 - Part XI of the CRA Rules provides more detailed requirements on the transparency and* ### Part III of Notice 910 requires the Board of Directors of a manager to have a minimum ### Part III of Notice 910 requires the Board of Directors of a manager to have a minimum ### Board composition and expertise - Minimum of four directors. - At least 50 percent of directors must be non-executive directors. - The majority of the non-executive directors must be independent. - There must be sufficient CIS, legal and accounting experience and expertise amongst the Board members. ### Capital and liquidity requirements for managers (Section 88–89 CISCA; FSB Board Notices) - Manager must on an ongoing basis maintain capital in liquid form for the matters and risks determined by the Registrar. - A manager may not be registered or continue as a manager unless net assets in liquid form exceed the minimum capital requirement determined by the Registrar (Section 89 CISCA). - Capital requirements determined in FSB Board Notices (Notices 2072, 2074 and 2076 of 2003). - Example: a manager of CIS in securities must always maintain capital that is at least ZAR 600,000 or a sum equivalent of 13 weeks’ fixed costs for the whole of the CIS business of a manager. - Seed capital requirement: the manager must invest seed capital of ZAR 1 million in each portfolio administered by it. - The seed capital may be reduced by 10 percent for every ZAR 1 million invested in the portfolio by investors that are not connected to the manager. - Therefore the seed capital may be reduced to zero when the portfolio reaches ZAR 10 million. - Position risk capital: if the manager holds participatory interests in its own portfolio, it has to maintain position risk capital equivalent to a certain percentage (between 10 and 25 percent) of the amount it paid for those participatory interests. - Similar requirements apply to managers of CIS in property and participation bonds. - Registrar powers: - May exempt managers of a particular category of CIS from the above capital requirements and determine different capital requirements for such managers. - May exempt a manager from compliance with the requirements for such period, not exceeding six months, and on such conditions as he/she may lay down. ### Fit and solvency (Part V of Notice 910) - Manager and its shareholders must not be under liquidation or provisional liquidation. - The assets of the manager itself and any direct and indirect shareholders of the manager must exceed the liabilities of the shareholder or manager. ### Trustee requirements - A CIS manager must appoint a trustee (Section 68 CISCA). - A person may not become or act as a trustee unless that person is registered as such (Section 68 CISCA). - Trustee eligibility (Section 69 CISCA): - Be a public company under the Companies Act; a company or institution incorporated under a special Act (excluding a close corporation referred to in the Close Corporations Act); an institution or branch of a foreign institution entitled to carry on the business of a bank under the Banks Act, 1990; or an institution registered as an insurer under the Long-term Insurance Act, 1998. - Maintain capital and reserves together amounting to not less than ZAR 10 million. - Have such general financial and commercial standing and independence that it is fit for performing trustee functions and be sufficiently experienced and equipped to perform such functions. - Registrar may not register a company or institution as a trustee for a CIS if it is a holding company or a subsidiary of the manager (as defined in the Companies Act). - In practice all trustees are banks. ### Asset manager authorization - The asset manager to which a CIS manager has delegated management of CIS assets must be an authorized FSP. - The CIS manager registration application must include the name of the FSP that will perform asset management and confirmation of its authorization as such (Section 1(k) of Notice 911). - CIS Department liaises with the FAIS Department to confirm authorization of the asset manager as an FSP. ### CIS structure and registration of manager/deeds - CIS are not subject to a formal registration requirement in South Africa, but the Registrar must be satisfied that the deed of an applicant for registration as a fund manager does not contain anything inconsistent with CISCA. - The main deed governing the scheme must be submitted to the Registrar; the Registrar requires in practice that the main deed complies with a standard deed published on its website. - Under a scheme, a manager may establish various portfolios; each portfolio requires a supplemental deed submitted to the FSB for approval. - Annexure E of Notice 569 of 2003 lists information that must accompany an application for approval of each individual portfolio. ### Marketing and distribution - Domestic marketing: Marketing and distributing CIS managed by a South African CIS manager can be undertaken only by the manager itself or an FSP authorized for selling CIS. JSE members may also distribute CIS. - Marketing a foreign CIS: Registrar may approve solicitation of investments by a foreign CIS if: - Application is in form determined by the Registrar. - Copy of approval/registration by relevant foreign jurisdiction submitting that the foreign CIS is authorized. - Foreign CIS can comply with conditions determined by the Registrar (Section 65 CISCA). - Conditions for approval (Section 2 of Conditions for Foreign CIS, Board Notice 257): - Operator must be authorized and supervised by a regulator with a regulatory environment of similar standing as South Africa. - Scheme must be available for investment in its domicile and promoted in South Africa to same type of investors under same or substantially similar requirements and conditions as in domicile. - Operator must enter into a representative agreement or establish and maintain a representative office. - Scheme must be sufficiently liquid to meet investor redemptions, do redemptions at regular intervals, not permit investment in instruments compelling physical delivery of a commodity, scheme particulars/prospectus must prohibit accepting physical delivery, and assets of investors must be protected by segregation and identification. - Registrar may require written confirmation from the foreign regulator that the operator is fit and proper and in good standing; Registrar may consider other disclosed information and give applicant reasonable opportunity to respond. - Application for approval must include, where applicable: - Full name of scheme and portfolio, operator, regulator in operator's country, trustee or fiduciary body, and custodian. - Detailed explanation of solicitation manner in South Africa. - Description of legal and operational structure. - Details of representative office or representative agreement and copies where applicable. - Written confirmation from applicable regulator verifying approval/authorization. - Certified copy of approval or registration of the scheme. - Certified copy of fund rules and instruments of incorporation of the operator. - Prospectus and any amendments. - Document listing differences and similarities between the scheme and a local CIS under CISCA. - Completed questionnaire obtainable from the Registrar. - Latest annual financial report or equivalent and any subsequent half yearly report. - Copy of any other document affecting investor rights. - Confirmation by auditor of representative office that the representative office complies with requirement to have at least ZAR 2 million of paid-up share capital and reserves. - Such further information as the Registrar may require. ### FSB registration process for a CIS manager - A company desiring registration as a manager of a CIS in securities must lodge an application with the Registrar (Section 42 CISCA). - CIS Division’s Registration and Compliance teams process the application against a checklist covering relevant CISCA requirements (fitness and propriety of directors, authorization of asset manager under FAIS Act, compliance of deed with standard deed, compliance of investment policy with Board Notice 80 requirements, etc.). - No on-site visit is conducted prior to registration. - After processing, application is submitted to the FSB Licensing Committee for recommendation to the Registrar. - Final registration decision made by the Registrar or Deputy Registrar (as per delegation of authority under Section 112(3) of CISCA). - No specific deadline in CISCA for processing a registration application, but the CIS Division has publicly committed to do this within three months. ### Conflicts of interest - General requirement (Section 4(1) CISCA): manager must avoid conflicts between interests of the manager and interests of an investor. - Specific requirements: - Section 4(2) CISCA requires disclosure of interests of directors and management to investors. - Section 92 CISCA prohibits a CIS manager, director or employee of the CIS manager from directly or indirectly having a personal interest in or deriving any pecuniary advantage from acquisition or sale of any assets of a portfolio. - No other requirements on prohibition, management and disclosure of conflicts of interest in CISCA or applicable Board Notices. ### Conduct of business - Section 2 CISCA general principles: manager must administer a CIS honestly and fairly, with skill, care and diligence in the interest of investors and the CIS industry; assets of an investor must be protected by segregation and identification. - No specific regulatory requirements on best execution, appropriate trading and timely allocation of transactions, churning, related party transactions, commission rebates, soft commission arrangements and inducements (Key Question 14 of Assessment Methodology). - Investments in an underlying portfolio where manager is linked by common management/control/indirect holding: manager or other company may not charge subscription or redemption fees on the underlying portfolio. - Preamble to Board Notice 80 of 2012 requires manager to ensure all investments in a CIS portfolio have been subjected to adequate due diligence in line with applicable investment objective. - Deed for a CIS in securities must contain provisions regarding charges and their method of calculation. - Every investor must be given at least three months’ written notice of an increase in any charge and of any change in method of calculation that could result in an increase or introduction of any additional charge (Schedule 1, Sections 1(i)-(j) CISCA). ### Delegation - Section 4(5) CISCA on delegation: - Manager may, with prior written approval of the Registrar, delegate any administrative function. - Actions/omissions by delegated person in performance of delegated function are regarded as done/omitted by the manager. - Registrar has in respect of a delegated person all powers and duties conferred or imposed upon the Registrar in respect of a manager. - No specific prohibition of systematic and complete delegation of core functions of a CIS manager. - Delegations effected through contractual arrangements; manager may terminate and make alternative arrangements, subject to prior approval of Registrar. - No specific regulatory requirements for disclosing delegation arrangements and identity of delegates to investors, but in practice ASISA fund fact sheet template covers disclosure of this information. ### Supervision and ongoing monitoring — Periodic reporting and ad hoc reporting - Monthly capital position reporting: CIS manager must submit calculation of its capital position to the Registrar as at the last business day of each calendar month within 14 business days after the end of the month (Board Notices 2072, 2074 and 2076). - Annual financial statements: manager must within 90 days after the close of its financial year send to the Registrar a copy of its duly audited financial statements and those of every portfolio administered by the manager. - Manager must, on or before a date specified by the Registrar, lodge such further information and explanations in connection with the financial and other statements as the Registrar may request (Section 90 CISCA). - Trustee/custodian report: required to prepare a report on administration of the CIS by the manager during each annual accounting period stating whether CIS has been administered in accordance with limitations imposed on investment and borrowing powers by CISCA and CIS deed; if non-compliant, report must state reason and outline steps taken to rectify; report must be sent to Registrar and to manager in good time for inclusion in annual report. - Quarterly asset reporting: manager of a CIS in securities must, within 30 days after the end of each calendar quarter, furnish the Registrar a full list of all underlying assets in any portfolio administered by it, including: - Market value of each asset. - Value of each asset as a percentage of total value of assets in the portfolio. - Value of each asset as a percentage of total amount of assets of that class issued by the group in which the investment is held. - Indication of which assets are exchange securities and on which exchange such assets are listed. - For unlisted assets, indication of mechanism used in pricing such asset. (Notice 569 of 2013). - FSB does not currently use any system for analysis of these reports that would create automatic alerts in case of breaches of relevant regulatory requirements. - Auditor reporting requirement: auditor must report to the manager any irregularity or undesirable practice in administration of CIS that comes to his/her notice in ordinary audit responsibilities or in performing other CISCA functions; must submit copy to the Registrar if reasonable cause to believe report is or might be of material significance to the Registrar (Section 75 CISCA). - A report is of material significance if it deals with a matter that, because of its nature or potential financial impact, has caused or is likely to cause financial loss to the scheme or any of its investors or creditors. - Trustee reporting requirement: trustee must report to the manager any irregularity or undesirable practice concerning the CIS of which it is aware; if manager does not take steps to rectify, trustee must report it to the Registrar as soon as possible (Section 70(2) CISCA). ### Approval and reporting of changes (Section 43 CISCA) - Manager must seek prior written approval of the Registrar before making certain changes, including: - Change its shareholding, directors or the name under which it is registered. - Use or refer to itself by a name other than the one under which it is registered or its literal translation. - Use or refer to itself by an abbreviation or derivative of such name. - Change the name of its CIS in securities or any portfolio administered by it as approved by the Registrar. ### On-site reviews and inspections - Registrar powers: Section 14 CISCA allows Registrar to conduct an on-site visit under Chapter 1A of the Protection of Funds Act or instruct an inspector under the Inspection Act. - After an on-site visit or inspection, Registrar may direct the person to take steps, refrain from acts, or terminate/remedy contraventions of CISCA (except those reserved to the EC in Section 6D(2)(b) of Protection of Funds Act). - Registrar may direct a manager to have all books and financial statements audited and submit results within specified time (Section 19 CISCA). - On-site visits in financial year 2013/2014: - FSB conducted on-site visits of all 57 registered managers. - Two of these visits were due to a complaint or tip-off. - All managers were included in the program for the year as general reviews. - On-site visits covered CIS managers’ risk management processes and internal controls, with objective to assess development and implementation of adequate control systems to mitigate risks inherent to administration of CIS. - Usual length of each on-site visit was one day. - No major findings were identified. - On-site visit reports reviewed during the assessment mission were very short, making it not possible to conclude depth of reviews in practice. - Thematic reviews selection: based on concerns uncovered during regular on-site program, desk-based review of statutory reports, complaints, press reports, and prevailing trends/innovations in CIS industry. - Last thematic reviews on CIS managers were undertaken in 2011, when 39 thematic reviews were conducted on fees charged by CIS managers to determine compliance with constituting documents and governing legislation. ### FSB inspections in CIS managers — activity table (three-year summary) - Periodic inspections: - 2011/2012: 0 - 2012/2013: 54 - 2013/2014: 55 - Total: 109 - Complaints: - 2011/2012: 1 - 2012/2013: 1 - 2013/2014: 2 - Total: 4 - Thematic visits on fees: - 2011/2012: 39 - 2012/2013: 0 - 2013/2014: 0 - Total: 39 - Total inspections: - 2011/2012: 40 - 2012/2013: 55 - 2013/2014: 57 - Grand total: 152 ### Enforcement - (Section heading present; no further enforcement details provided in the supplied content.) *Source: IMF staff report text provided in the content unit.* ### Section 15 of CISCA includes the powers of the Registrar after investigation. If the ### _cr1557 - Section 15 of CISCA includes the powers of the Registrar after investigation. If the ### Registrar powers after on-site visit or inspection (Section 15) - If the Registrar, after an on-site visit or inspection under Section 14, considers on reasonable grounds that the interests of the investors of a CIS or of members of the public so require, the Registrar may: - Apply to the court under the Companies Act for the winding-up of a manager or of a CIS; - Apply to the court under Section 5 of the Protection of Funds Act for the appointment of a curator for the business of the manager or for the business of a portfolio; - Require a manager to appoint, in accordance with the Registrar’s directions, in place of the serving trustee, a competent person nominated by the Registrar; - Require a manager to take steps, in accordance with the Registrar’s directions and the provisions of Section 102 of CISCA, for the winding-up of a portfolio of its CIS, and for the realization of its assets and the distribution of its net proceeds, together with any income accruals or other moneys available for distribution among the investors in proportion to their respective participatory interests; - Direct a manager, trustee or custodian to take any steps, or to refrain from performing or continuing to perform any act, in order to terminate or remedy any irregularity or undesirable practice or state of affairs disclosed by an investigation or inspection (except those reserved for the EC in the Protection of Funds Act); - Direct a manager to withdraw from the administration of a CIS, whereupon the trustee or custodian must in accordance with the Registrar’s directions but subject to CISCA arrange for another manager to take over the administration of the CIS; - If a person administers a CIS in contravention of CISCA, apply to the court to have the CIS wound up, in which case the court may make any order it considers appropriate for the winding-up of the CIS; - Instruct a manager to wind up a portfolio or amalgamate a portfolio with another portfolio; - If a manager fails to comply with a written request, direction or directive by the Registrar under CISCA, do or cause to be done all that a manager was required to do in terms of the request, direction or directive of the Registrar. ### Additional enforcement powers (Sections 15A, 16 and 18) - Subject to the conditions stipulated in CISCA, the Registrar may: - Issue a directive to any person to whom the CISCA applies; - Cancel the registration of a manager; and - Impose a fine for a failure to submit within a specified period any required statement, report, return or other document or information. ### Sanctions and recorded misconduct (past three years) - Misconduct by CIS Managers (Source: FSB) - Type of misconduct — 2011 — 2012 — 2013 — Total - Late submission of statutory reports — 0 — 2 — 2 — 4 - Marketing an unauthorized foreign CIS — 0 — 0 — 2 — 2 - Appointing auditors without approval — 0 — 0 — 1 — 1 - Changing shareholding without approval — 0 — 0 — 1 — 1 - Total — 0 — 2 — 6 — 8 - Notes: - The late submissions of statutory reports led to fines by the Registrar. - Other cases have been passed on to the EC that has so far sanctioned one case of marketing an unauthorized foreign CIS in 2011-2013. - In addition, in 2014 it has given one sanction for an unauthorized name change. ### Assessment and recommendations (supervisory framework) - Assessment: Partly Implemented - Comments: - The legislative and regulatory framework addresses many issues covered in the IOSCO Assessment Methodology but needs significant enhancement to: - Prohibit, restrict or manage conflicts of interest as required by Key Question 12 of the IOSCO Assessment Methodology; - Introduce specific record-keeping and conduct of business requirements applicable to CIS management as required in Key Questions 11 and 14 of the Assessment Methodology. - Regular on-site visits are conducted in all CIS managers, but depth of issues considered during visits could be increased to match intensity applied by other Registrars. - It would be important to extend the FSB on-site visit program to CIS trustees. ### Principle 25 — legal form, structure, segregation and protection of client assets - Legal form and deed amendments: - There are no specific restrictions on permitted legal forms for CIS in South Africa; in practice all CIS have been unit trusts. - Section 98(2)(a) CISCA: parties to a deed may amend it by supplemental deed, but no amendment is valid unless the majority in value of investors has consented in a manner prescribed in the deed. - Sections 67 and 42 of the standard deeds include detailed provisions on amending the deed and balloting investors; when a ballot is necessary the CIS manager must dispatch to every investor a memorandum approved by the Registrar containing reasons for the proposed amendment. - Section 99 CISCA: amalgamation, cession, transfer and takeover of rights require prior consent of both the Registrar and investors holding a majority in value of participatory interests. - Board Notice 577 of 2003 includes investor notification requirements for termination of a CIS in participation bonds. - Manager charges and notice: - Standard deeds require not less than three months’ written notice to investors of any increase in the manager’s charge or any change in the method of its calculation that could result in an increase or introduction of any new charge. - All amendments to the deed require approval of a majority in value of investors and the Registrar. - Compliance with investment restrictions: - Section 46 CISCA: Registrar may determine manner, limits and conditions for inclusion of securities or classes of securities in a portfolio (Board Notice 80). - Section 45 CISCA: restrictions on foreign equity and non-equity securities for CIS in securities: - Foreign equity securities must be traded on an exchange with full membership of the World Federation of Exchanges or listed on an exchange to which the manager has applied due diligence guidelines determined by the Registrar. - Investments in non-equity securities permitted if the country has a minimum foreign currency sovereign rating and the issuer a minimum long-term issuer credit rating on the international scale; minimum ratings and permitted agencies determined by the FSB; if multiple ratings exist the lower rating applies. - Manager must apply due diligence guidelines for issuers of non-equity securities determined by the Registrar. - Section 49 CISCA: a manager of a CIS in property may invest in immovable property in a foreign country and property shares or participatory interests in a CIS in property in a foreign country if such foreign country has a minimum foreign currency sovereign rating by an approved rating agency. - Section 70 CISCA: primary responsibility for monitoring compliance with investment restrictions lies with the trustee; trustee must prepare an annual report stating whether CIS has been administered in accordance with CISCA limitations and the deed, state reasons for non-compliance and steps taken to rectify the situation; report must be sent to the Registrar and the manager in good time to enable inclusion in manager’s annual report. - FSB monitors compliance on basis of quarterly reports under Section 3 of FSB Board Notice 569. - Segregation and safekeeping of assets: - Section 2(2) CISCA: assets of an investor must be protected by segregation and identification. - Section 104 CISCA: money or other assets handed to a manager, trustee or authorized agent for sale or repurchase of a participatory interest and the assets of a portfolio must be excluded from assets of the manager and trustee. - Paragraph 14 of the standard deed: assets of a portfolio must be registered in the name of the trustee or, with written consent of the Registrar, in the name of a nominee company of the trustee. - Section 105 CISCA: manager must open and maintain a separate operational trust account controlled by the trustee for each or all portfolios at a registered bank; in practice trustees open a separate trust account for each portfolio; Trustee must deposit funds on date of receipt or the first business day thereafter; funds may only be withdrawn for specified purposes. - Registrar may not register any company or institution as a trustee for a CIS unless satisfied it is not a holding company or a subsidiary of the manager; current drafting does not explicitly prevent a sister company from being trustee, though in practice Registrar has not permitted this. - Section 68(6) CISCA: trustee may appoint an independent representative when impracticable to perform duties; trustee remains responsible for duties. - Winding up: - Section 102 CISCA: if no fixed duration, manager or trustee may apply to Registrar to wind up portfolio subject to terms and conditions determined by the Registrar. - Court may order winding up of a fixed duration portfolio on application of manager or trustee if in interest of investors. - Upon winding up, manager must realize assets as soon as possible under control and supervision of trustee, with regard to investors’ interests; manager not liable for exercise of discretion in good faith unless grossly negligent; net proceeds deposited in trust account and distributed by manager or trustee among investors and manager in proportion to participatory or other interests. - Assessment: Broadly Implemented - Comments and recommendations: - Clarify drafting to prevent use of a sister company as trustee to avoid future legal challenges. - Consider enhancing requirements on the use of subcustodians (e.g., require subcustodians to be subject to appropriate regulation and supervision) given trustees’ and custodians’ role in safeguarding client assets and funds. ### Principle 26 — disclosure requirements for suitability and valuation of CIS - Applicability: - Section 50(1) CISCA: manager of a CIS in property must apply for permission for participatory interests to be dealt in on a licensed exchange; as a result all of them are listed at the JSE and subject to JSE disclosure requirements; discussion focuses on other types of CIS. - Initial disclosure obligations: - Section 3 CISCA: before entering into a transaction with an investor, information about investment objectives, calculation of net asset value and dealing prices, charges, risk factors and distribution of income accruals must be disclosed to the investor; necessary information to enable an informed decision must be given timely and comprehensibly. - CISCA does not specify how and by whom information is to be provided; in practice obligation falls on the person marketing the fund, often an FSP. - In practice the main public source is the fund fact sheet prepared by CIS managers based on ASISA templates. - Standard deed template requires a copy of the deed be made available at manager and trustee head offices for inspection during normal business hours. - Section 97(1) CISCA: every deed must set out requirements for administration of a portfolio and include provisions to regulate matters in Schedule 1 (CIS in securities) and Schedule 2 (CIS in property). - Deed content requirements (Schedule 1 — CIS in securities must provide): - The investment policy for each portfolio; - The manner assets are to be valued for calculating selling and repurchase prices; - Frequency of calculation of selling and repurchase prices and the valuation point on a specific day; - Basis for market value determination of assets other than securities listed on an exchange; - The manner and point in time valuation point will be applied to creation, sale, repurchase or cancellation of participatory interests; - The manner in which distributions are to be calculated and settled; - Limits, terms and conditions under which securities may be lent; - Limits, terms and conditions under which a manager may borrow money for the account of a portfolio; - The charges that may be levied and the method of calculation; - Not less than three months’ written notice to every investor of an increase in any charge and of any change in the method of calculation which could result in an increase or introduction of any additional charge; - The manner in which a deed may be amended. - Deed content requirements (Schedule 2 — CIS in property must provide): - The investment policy for each portfolio; - The frequency and basis on which assets are to be valued; - The manner in which participatory interests are to be created or cancelled; - The manner distributions are to be calculated and settled; - The limits, terms and conditions under which a manager may borrow money for the account of a portfolio; - The charges that may be levied and the method of calculation; - Not less than three months’ written notice to every investor of an increase in any charge and of any change in the method of calculation which could result in an increase or introduction of any additional charge; - The manner in which a deed may be amended. - Exemptions and gaps: - Registrar may by notice in the Gazette exempt a particular type or category of CIS from the above deed requirements and determine matters to be complied with. - There are no specific regulatory requirements to prepare an offering document or equivalent for CIS in securities and participation bonds; information required in Key Question 5 may not exist or may need to be derived from various sources. - The deed is the main legally required information source but is not normally published on managers’ websites; investors often rely on fund fact sheets prepared without a specific regulatory requirement. - The deed does not include certain information required in Key Question 5, such as the audited financial information concerning the CIS. - No specific requirement to disclose the appointment of any external administrator, investment manager or adviser in the deed (this information is normally available in the fund fact sheet). - Role of the FSB: - Registrar approves the CIS main deed and supplemental deeds for each portfolio. - Section 17 CISCA: Registrar may object to terms of any price list, advertisement, brochure or similar document relating to a CIS if considered misleading or objectionable and may direct the manager to discontinue or amend; this power has not been used. - Ongoing and periodic disclosure: - Section 3(a) CISCA obligation applies on an ongoing basis. - Section 90 CISCA: manager must, not later than 90 days after the close of the financial year of every portfolio, send to every investor a report containing information determined by the Registrar; copies of this report, financial statements of the manager and other relevant statements must be available at every office of the manager for inspection during ordinary office hours. - Paragraph 4 of Notice 569: content requirements for the annual report to investors: - A report by the chairman or managing director disclosing every material fact or circumstance that occurred during the year and that had an effect on the financial affairs of the portfolio and its manager, and, in particular, details of any deviation from the investment policy and objective as contained in the deed; - An abridged income statement and balance sheet of the portfolio; - Details of any qualification made by the auditor in his report on the financial statements of the manager and the portfolio; - The amount of each distribution by the portfolio and the date of distribution; - Performance figures of the portfolio for the current and previous years, based on repurchase price to repurchase price, compared, where relevant, to a market index; - Details of all charges levied by the manager, any charge levied on the repurchase of participatory interests and any change in such charges or in their calculation method; - The composition of the assets of the portfolio classified by appropriate category or industry sector; - A statement that copies of the audited annual financial statements of the manager and of the scheme managed by it are available, free of charge, on request by an investor. _Excerpt from the source PDF provided._ ### Section 74 of CISCA requires that a manager must in respect of itself and every CIS it ### _cr1557 - Section 74 of CISCA requires that a manager must in respect of itself and every CIS it ### Accounting records, financial statements, and audit requirements - Section 74 of CISCA requires that a manager must in respect of itself and every CIS it administers: - maintain the accounting records and prepare annual financial statements in conformity with generally accepted accounting practice; - preserve such records in a safe place for a period of at least five years as from the date of the latest entry; - cause such records and annual financial statements to be audited, not later than three months after the financial year end of the manager or CIS, or such later date as the Registrar may allow, by an auditor whose appointment has been approved by the Registrar under Section 73 of CISCA. - The reference to generally accepted accounting practice: - does not refer to any particular existing accounting standard in South Africa; - does not require preparation of the financial statements of a CIS manager or CIS in accordance with the IFRS that have to be used by public companies (listed and unlisted) and financial institutions. - Section 74 (reiterated later) requires the auditor to: - examine the accounting records and annual financial statements and ensure that the accounting records comply with the requirements of CISCA; - ensure that the financial statements are properly drawn up so as to fairly represent the financial position; - ensure that the results of the operations of every CIS portfolio are in accordance with the generally accepted accounting practice and the manner required by CISCA. ### Standard formats and disclosures - The deed has to follow the standard deed template. - Otherwise there are no standard format requirements applicable to any initial or periodic disclosure documents. - There are no specific requirements for the calculation of the NAV on a regular basis; the standard deed (paragraph 27) provides that the last valuation point determined by the manager may not be more than 24 hours prior to or after the valuation date, but it does not require that every weekday is a valuation date. - ASISA has issued the Standard on Calculation of NAV for CIS Portfolios, but: - ASISA standards are addressed only to its members; - they are non-binding and compliance with them is not monitored or enforced by ASISA or the FSB. ### Advertisements, promotional material, and lodging requirements - Section 100 of CISCA requires the following information in a price list, advertisement, brochure and similar document when the price of any participatory interest is mentioned or a particular portfolio is referred to: - The charges that may be levied by the manager, their method of calculation, amount and the time when they may be levied; - Information on the basis on which the manager undertakes to repurchase participatory interests and the basis on which selling and repurchase prices will be calculated; - Any reference to the yield to be derived from any participatory interest confined to the yield during the last preceding 12 months for which a distribution has been declared and a statement as to any facts likely to influence future yield (for documents published after the expiry of a period of 12 months following the date of the first offer) or information as to the probable yield (for documents published within the first-mentioned period); - If the document states that investors are entitled to participate in the CIS profits, amount of profits distributed during the previous financial year, expressed as a percentage of the aggregate market value, as at the close of that year, of all assets then held on behalf of investors in that portfolio; - A statement that the value of participatory interests is subject to fluctuation relative to the market value of the assets comprised in the portfolio, unless the Registrar has exempted the manager or its agent from this requirement. - Section 90(4) of CISCA requires a manager to lodge with the Registrar copies of all advertisements, brochures, pamphlets, circulars and announcements and of all proposed additions and changes to them published or proposed to be published by the manager or any of its authorized agents, unless exempted by the Registrar. - In practice, all managers of CIS in securities that are ASISA members (i.e., all except one) have been exempted from the above lodging requirements since 2003 under Board Notice 571 of 2003. - The only requirement that currently applies to advertisements on CIS in securities is the prohibition in Section 106 of CISCA to: - make a statement or disseminate information, if the person knows, or ought reasonably to know, it to be false or misleading; - make or publish a statement, promise or forecast likely or intended to be misleading, false or deceptive and conceal material information and induce another person to purchase or deal in a participatory interest. ### Assessment and identified gaps (Assessment: Not Implemented) - Regulatory requirements applicable to information on CIS in securities and participation bonds are limited to: - content of the deed; - the yearly report to investors. - Onus on providing information to potential investors is on the person who sells the CIS unit to the investor rather than on public disclosures; distributors may often have no connection to the CIS. - The deed includes some relevant information but only needs to be available for inspection at the head offices of the manager and trustee. - Significant gaps relative to Principle 26: - lack of a requirement to prepare a legally mandated offering document; - lack of requirement to prepare accounts in accordance with high quality, internationally acceptable accounting standards; - lack of standard formats for initial and periodic disclosures to investors; - inadequate regulatory mechanisms to address inaccurate, false or misleading advertisements. - Recommendation: The authorities should proceed to expeditiously address these gaps to improve compliance with this Principle. ### Asset valuation, NAV calculation, and trustee responsibilities (Principle 27) - Asset valuation: - CISCA requires that a security must be valued at its fair market price. - When a manager is unable to determine a market price for a listed or unlisted security, a fair market price must, at the request of the manager, be determined by a stockbroker who is a member of a licensed exchange; if the manager disagrees, it must refer the matter to the committee of the exchange, which must determine the fair market price (Section 44 CISCA). - Section 93 of CISCA defines amounts that may be deducted from the NAV of a portfolio, such as various charges and fees. - Schedule 1 of CISCA requires the deed of a CIS in securities to contain provisions on: - manner in which assets are to be valued for calculating selling and repurchase prices; - frequency of their calculation; - the point in time at which such calculations will be performed on a specific day (the valuation point). - If assets other than securities listed on an exchange may be included, the deed must include the basis on which market value of such assets is to be determined. - The deed must describe the manner in which and the point in time at which the valuation point will be applied to creation, sale, repurchase or cancellation of participatory interests. - Section 27 of the standard deed for CIS in securities provides that the NAV of a participatory interest is calculated by dividing the aggregate market value of assets and income accruals by the total number of participatory interests. - Board Notice 80 requires unlisted securities to be valued daily based on a generally recognized methodology and by a person acceptable to the trustee, and specifies valuation approach for participatory interests held by one portfolio in another (lower of repurchase price or NAV, at the latest available price before a repurchase price is calculated, or market value for ETFs). - Deed of a CIS in property must describe the frequency and basis on which assets are to be valued; Sections 10-12 of the standard deed for CIS in property include detailed requirements. - Trustee responsibilities: - Under Section 70 of CISCA, a trustee is required to ensure that the selling or repurchase price of participatory interests is calculated in accordance with CISCA and the deed. - Trustee must enquire into and prepare a report on the administration of the CIS by the manager during each annual accounting period stating whether the CIS has been administered in accordance with CISCA limitations and the deed; if non-compliant, the trustee must state the reason and outline steps taken to rectify, and send the report to the Registrar and the manager in time for inclusion in the annual report. ### Money market funds (MMFs) valuation and limits - Board Notice 80 of 2012: - money market and short-term debt portfolios consist solely of South African rand denominated money market instruments whose participatory interests are at all times valued at a constant price; - at the time of inclusion in a money market portfolio, a money market instrument cannot have a residual maturity exceeding 13 months; - the weighted average legal maturity of money market instruments included in a money market portfolio may not exceed 120 days; - the weighted average duration of money market instruments included in the portfolio cannot exceed 90 days. - Mark-to-market requirement: - A manager is required to perform a mark-to-market valuation of the MMF portfolio and each participatory interest every six months to determine the variance of the mark-to-market value with the constant price and report this calculation to the registrar within 30 days of performing the calculation. ### Subscription, redemption, pricing rules, and repurchase suspension - Subscription and repurchase: - Section 94 of CISCA provides that a manager may not sell any participatory interest at a price that exceeds or is less than the NAV of that participatory interest. - The deed must include information on the calculation of the selling and repurchase prices. - Schedule 1, paragraph 2 of CISCA requires the deed to provide for repurchase of participatory interests in a portfolio of a CIS in securities, including: - obligation of the manager to repurchase any number of participatory interests offered to it; - manager must determine a point in time by when repurchase requests must be received for determining which valuation point will be utilized for pricing (which may not be changed unless 30 days’ prior written notice has been given to investors); - a manager may, in circumstances determined by the Registrar under Section 114(3)(f) of CISCA, with the prior consent of the trustee, suspend repurchase of participatory interests; - a manager must, in circumstances determined by the Registrar under Section 114(3)(f) of CISCA, if the trustee so requires, without delay suspend the repurchase of participatory interests if the manager or trustee is of the opinion that the circumstances warrant the suspension in the interest of investors; - repurchase of such participatory interests must be settled in accordance with the conditions determined by the Registrar under Section 114(3)(f) of CISCA. - Trustee/custodian duty: ensure the basis on which sale, issue, repurchase or cancellation of participatory interests is carried out in accordance with CISCA and the deed and that selling or repurchase price of participatory interests is calculated accordingly. - Publication of prices: there is no regulatory requirement for the price of the CIS to be disclosed or published on a regular basis to investors or prospective investors; industry practice has developed of daily publication of prices in the print media. ### Pricing errors and supervisory handling - There are no regulatory requirements addressing pricing errors. - An ASISA standard includes general principles on dealing with pricing errors and determining their materiality for compensation purposes. - According to the FSB: - CIS managers report all pricing errors and a plan on how they will be resolved to the Registrar, who assesses all the reported pricing errors; - If the Registrar believes that the interests of the investors are prejudiced, the Registrar directs the CIS manager on steps to take. *Source: _cr1557 - Section 74 of CISCA requires that a manager must in respect of itself and every CIS it* ### Section 114(3)(f) of CISCA provides that the Registrar may by notice in the Gazette ### _cr1557 - Section 114(3)(f) of CISCA provides that the Registrar may by notice in the Gazette ### Suspension of repurchase of participatory interests (Section 114(3)(f) and Notice 573 of 2003) - The Registrar may by notice in the Gazette determine circumstances under which the manager of a CIS in securities may suspend repurchase of participatory interests and the conditions of such suspension. - Any offer of participatory interests for repurchase by an investor, the aggregate amount or value of which does not exceed the amount specified by the Registrar, on the day of such offer, is excluded from any suspension. - Notice 573 of 2003 (Suspension of Repurchase of Participatory Interests by Manager of CIS in Securities) provides detailed requirements: - With the consent of the trustee, the manager may suspend repurchase if the aggregate amount of offers for repurchase exceeds five percent of the market value of a portfolio as at the last valuation point. - A manager may enter into an agreement with an investor determining a more restrictive basis on which repurchase offers will be honored. - The repurchase of participatory interests, irrespective of aggregate amount or value, may not be suspended if ten business days' valid notice of the offer for repurchase has been given to the manager. - Repurchases offered by an investor where the aggregate amount or value does not exceed ZAR 50,000 on the day of such offer may not be suspended. ### Manager obligations and investor options during suspension - If the manager decides to suspend repurchase under the above circumstances, it must, forthwith and with the consent of the trustee: - Segregate a portion of the assets, equivalent to the value of all received offers for repurchase, from the rest of the assets in the portfolio. - Forthwith notify the investor(s) concerned that repurchasing has been suspended. - The investor must be given the option to withdraw its offer to repurchase on the day of such notification or to accept assets equivalent in value to the offer for repurchase. - Endeavor to honor the repurchase request within 20 business days from the date of suspension and notify the investor(s) accordingly. - Calculate, and communicate to the investor(s) on a daily basis, a single price per participatory interest based on the segregated assets. - If the manager fails to meet the offer to repurchase participatory interests within 20 business days, it must tender assets to that investor for payment, except if the investor consents to an extension of 20 business days to enable the manager to liquidate the relevant assets. - Forthwith notify the Registrar of the suspension of repurchasing, the reasons for it and how it will be dealt with. ### Assessment - Not Implemented ### Comments on valuation, MMFs, trustees, and disclosure requirements - Regulatory requirements on the valuation of CIS in securities are very general; there are no requirements on the accounting standards to be used to calculate the NAV of a CIS. - A fair market price can be determined by one member of the JSE, independent of the security in question. - There is a need to significantly enhance regulatory requirements on the valuation of CIS assets and determine the high quality accounting standards to be used in such valuations to comply with Key Questions 1, 2(b), 3 and 6 of the IOSCO Assessment Methodology. - MMFs use amortized cost to value their investments and apply a constant NAV for subscriptions and redemptions. The South African model is not fully in line with IOSCO Policy Recommendations for Money Market Funds. - The authorities should consider whether South African money markets funds could be converted to floating/variable NAV funds, as recommended by IOSCO. - Alternatively, the authorities should introduce appropriate additional safeguards as recommended by IOSCO. - Trustees play a significant role in ensuring the fairness and reliability of valuations; the Registrar should take this into account in planning its on-site visit program. - There are no regulatory requirements on disclosing CIS unit prices and the frequency of calculating the NAV of a CIS. - There are no regulatory requirements on the treatment of pricing errors; industry compliance with the ASISA standard may not provide sufficient legal backing for FSB enforcement. ### Principle 28 — Hedge funds: regulation and planned framework - Description: - FSB Board Notice 79 of 2003 includes a definition of hedge fund as a portfolio that uses any strategy or takes any position that could result in losses greater than its aggregate market value at any point in time, including but not limited to leverage or net short positions. - Currently there are no regulatory requirements for the hedge funds themselves; the definition is used to define a category of FSPs (hedge fund FSPs) subject to regulation. - Planned future requirements: - FSB developed a proposed regulatory framework for hedge funds (published for consultation in September 2012); draft regulations were published for public comment in April 2014. - The FSB expected to implement the new hedge fund regulations during the final quarter of 2014. - The new framework proposes to regulate hedge funds as CIS under CISCA; hedge funds would have to comply with CISCA requirements applicable to CIS. - Two types of hedge funds proposed: retail and restricted; restricted hedge funds would permit only qualified/sophisticated investors. - Foreign hedge funds could be approved to solicit investments in South Africa once new regulations are implemented. ### Requirements for authorization as a hedge fund manager - FSB Board Notice 89 defines a hedge fund FSP as an FSP rendering discretionary intermediary services in relation to a hedge fund or fund of hedge funds in connection with financial products defined in Sections 1(a)-(e) of the FAIS Act, in accordance with specified codes and applicable law. - Hedge fund managers currently must be authorized as Category IIA FSPs under the FAIS Act and must have a Category II license. - FSB Board Notice 88 (Application by Financial Services Providers for Authorization by the Financial Services Board Amendment Determination, 2007) specifies content of application for Category IIA FSP (Form FSP 15), including: - Relevant completed forms for each key individual, including experience in management of hedge fund portfolios. - Operational ability of the FSP relating to the hedge fund FSP application (Form FSP 15B). - Details of types of clients, total market value and percentages of hedge fund assets managed for each category of client (Form FSP 15C) or reasons why such information cannot be submitted. - A copy of all specimen mandates relating to management of hedge fund clients. - Latest audited financial statements of the FSP, and if older than three months, latest financial management accounts. - Description of the risk management processes employed in respect of the FSP’s hedge fund management business. - Personal details, qualifications and experience of persons responsible for risk management, administration and valuation of hedge fund portfolios (or full details of outsourced entities and responsible persons). - Foreign hedge fund managers cannot manage South African hedge funds; they can only be granted a Category I license and the management is considered to take place abroad. ### Operational conduct, conflicts of interest, and planned risk management requirements - Current requirements for risk management, protection and segregation of client assets and management of conflicts of interest by all FSPs, including hedge fund managers, are described in Principle 31. - Planned future requirements for hedge fund managers: - Required to have a risk management program setting out types of derivatives the hedge fund will use, risks associated with derivatives and how those risks will be managed. - Risk management program must provide information on the trading process and leverage applied. - Hedge fund assets intended to be subject to independent valuation: - All listed investments priced according to market prices. - Unlisted investments priced according to a methodology approved by the trustee and undertaken by a party approved by the trustee. ### Prudential requirements and reporting - General accounting and audit requirements applicable to all FSPs apply to hedge fund managers. - Part IX, Section 9 of Board Notice 106 (Determination of Fit and Proper Requirements for Financial Services Providers, 2008) includes financial soundness requirements for Category IIA FSPs: - The assets of the FSP (excluding goodwill, other intangible assets and investments in related parties) must exceed the FSP's liabilities (excluding loans validly subordinated in favor of all other creditors) by at least ZAR 3 million; - The FSP must maintain current assets which are at least sufficient to meet current liabilities; - The FSP must at all times maintain liquid assets equal to or greater than 13/52 weeks of annual expenditure. - Planned future reporting requirements for hedge fund managers: - Monthly reports to the Registrar on gross assets, net assets, short positions and leveraging of the hedge funds. - Identification of credit counterparties of the hedge funds. - Quarterly reports on the holdings of the hedge funds. - Annual reports to the Registrar. ### Disclosure to investors - Board Notice 571 (Hedge Fund FSP Risk Disclosures, 2008) requires hedge fund FSPs to disclose in writing to clients the risks and other characteristics of hedge funds as provided in the schedule of the Notice. - The schedule disclosures do not cover all risks; hedge fund FSPs must augment disclosures by describing other risks and characteristics peculiar to a specific hedge fund portfolio. - Hedge fund FSPs must ensure that clients understand the risk disclosures. - A hedge fund manager must furnish a written report to a client on request and at regular intervals which cannot exceed three months at a time, including: - Information that enables the client to determine the composition of the financial products comprising the investment and changes in them. - The market value of the financial products comprising the investment over the reporting period. *Source: _cr1557 - Section 114(3)(f) of CISCA provides that the Registrar may by notice in the Gazette* ### Section 6.3 of the Codes of Conduct for Administrative and Discretionary FSPs includes ### _cr1557 - Section 6.3 of the Codes of Conduct for Administrative and Discretionary FSPs includes ### Planned future requirements - Hedge fund managers intended to be required to comply with the initial and ongoing disclosure requirements of Sections 3 and 100 of CISCA. - Hedge fund manager would be expected to prepare a key investor information document to assist investors’ understanding of the investments being offered. - Required disclosures for hedge funds would include: - information pertaining to valuation methodology, positions and leverage exposure; - the name of the trustee; - information about the fund; - copies of its prospectus, annual reports and other practical information. - Key investor information documents would have to incorporate: - a risk and reward indicator indicating the levels of risk; and - a narrative explanation of the risk. ### Reporting, supervision and enforcement for hedge fund managers - Current status: - No regular reporting requirements for hedge fund managers beyond those imposed on them as FSPs (see Principles 30 and 31). - Information can be requested under Section 4(2) of the FAIS Act if there are concerns or complaints about a hedge fund manager. - Registrar’s power to conduct on-site visits and instruct an inspector to conduct an inspection is provided in Section 4(5) of the FAIS Act (see Principle 10). - On-site visit frequency and activity: - All hedge fund managers are subject to on-site visits at least once every two years. - High risk category hedge fund managers are visited every year. - Between January 2011 and March 2014, the FSB conducted 88 on-site visits of hedge fund managers. - On-site visit scope for hedge fund managers (in addition to standard FSP topics, see Principle 31): - Hedge fund investment approach and due diligence on the selection of funds and fund managers; - The controls over assets under management; - The relationship with the administrator, the independence of the administrator, the due diligence conducted on the systems and controls of the administrator, the accuracy of reports and ability to provide management information; - The fee structure, disclosures and calculations; - Mandate compliance and mandate monitoring; - Compliance monitoring by a hedge fund’s compliance officer and its effectiveness. - Review focus during on-site visits: - Various functional and support areas reviewed to determine existence of policies, procedures and controls, implementation, adequacy of control measures and level of adherence. - A risk-based methodology approach is adopted when conducting on-site visits: - Various risks, control measures and their adequacy are identified and discussed. - Firms are required to adopt an enterprise-wide risk management approach and to maintain a comprehensive risk management framework. - The compliance function and its independence and adequacy are assessed. - The valuation of investments and valuation methodologies is tested, especially if not outsourced to an external third party administrator. - Focus placed on valuation of OTC products. - Enforcement: - Contraventions of the FAIS Act by a hedge fund manager can be referred to the EC under the Protection of Funds Act. - There have not been any enforcement cases against hedge fund managers. ### Cooperation and exchange of information - FSB’s power to collect information on behalf of a foreign Regulator described in Principle 15. - Information sharing powers and arrangements described in Principle 14. ### Assessment - Assessment: Fully Implemented - Comments: - Assessment based on current regulatory framework. - Information on planned future framework included only for information/comparison and has not been assessed for compliance with Principle 28. - South African legislation currently requires the asset manager rather than the operator (CIS manager) of a hedge fund to be registered, complying with requirements of the IOSCO Assessment Methodology. - Since hedge fund managers are currently regulated under the FAIS Act rather than CISCA, the regulatory framework effectively complies with Principle 28 (see the assessment of Principles 29 and 31). ### Principles for Market Intermediaries — Principle 29: Regulation should provide for minimum entry standards for market intermediaries - Regulatory responsibilities: - The FSB and JSE share responsibility for initial licensing and on-going supervision of market intermediaries in South Africa. - Sections 7 and 8 of the FAIS Act require persons who furnish advice or render intermediary services to be licensed by the FSB. - JSE members are approved by the JSE and are exempt from licensing under the FAIS Act for activities carried on as members of the exchange. - FAIS Act licensing categories (from the Fit and Proper Notice): - Category I – an FSP that renders financial services other than the financial services mentioned in Categories II, IIA, III and IV. The giving of advice and rendering intermediary services in respect of each category of products are licensed separately. - Category II (Discretionary FSP) – an FSP that renders intermediary services of a discretionary nature regarding the choice of a particular financial product referred to in the definition of administrative FSP but without implementing any bulking. This is discretionary portfolio management for specific clients. - Category IIA (Hedge Fund FSP) – an FSP that renders discretionary or non-discretionary intermediary services in relation to a particular hedge fund or fund of hedge funds in connection with a particular financial product referred to in the definition of administrative FSP. A Hedge Fund FSP must also apply for a Category II license. - Category III (Administrative FSP) - an FSP that renders intermediary services in respect of specified financial products, on the instructions of a client or another FSP and through the method of bulking. These are also referred to as Linked Investment Service Providers (LISPs) or investment platforms. - Category IV (Assistance Business FSP) - an FSP that renders intermediary services in relation to the administration of assistance policies on behalf of an insurer to the extent agreed to in terms of a written mandate between the insurer and the Assistance Business FSP. - Organizational form and activities: - FSPs can be companies, trusts, partnerships, or individuals (sole proprietorships), although Category III FSPs are generally required to be companies. - Approvals are granted on a per service/product basis and any new activity or product requires a specific approval. - FSPs may be required to be registered in more than one category. - All of Categories I to III can buy or sell securities for their own account (proprietary trading). - Only Category I FSPs can give advice. - Individuals acting as representatives of FSPs are not directly licensed by the FSB; representatives must meet fit and proper requirements set out in the Fit and Proper Notice. The FSP must ensure they continue to meet these requirements and is responsible for their actions under section 13 of the FAIS Act. - FSB keeps a central register (available to the public) of appointed representatives and is notified of terminations. The FSB can directly bar individuals judged not to be fit and proper. - JSE membership categories: - Trading Service Provider (TSP): authorized to perform trading services on behalf of its clients or for its own account. - Custody Service Provider (CSP): authorized to perform custody services on behalf of its clients or other members and their clients. - Investment Service Provider (ISP): may apply to perform investment services only if it has applied to perform trading services also. Investment services include: - Exercising the discretion of the management of JSE authorized investments on behalf of clients; - Providing investment advice to a client in respect of JSE authorized investments; - Safeguarding JSE authorized investments (other than uncertified equity securities) and funds intended for the purchase of equity securities. - Specific requirements exist under Equities Rules, IRC Rules and Derivatives Rules to trade in those instruments. - Banks and other financial institutions: - May conduct securities and derivatives activities; such activities must be licensed under the FAIS Act and are subject to supervision by the FAIS Division of the FSB for those activities. - To trade in authorized investments on the JSE equities market, a financial institution must establish a separately capitalized subsidiary that meets JSE membership rules. - Management of CIS must be done through a separate subsidiary limited to CIS management. - Derivatives trading on the JSE derivatives market or OTC may be done by a bank directly. - Temporary exemption permits banks to carry on merchant banking activities without licensing under the FAIS Act, provided services are delivered only to specified sophisticated clients (other financial institutions, regulated entities such as FSPs, asset managers with substantial assets under management, central banks and high net worth companies). The exemption is not available if the client is a natural person (no matter how wealthy) or a pension fund. - A code of conduct to govern these activities is in development by the FSB; when final, the exemption from licensing will be withdrawn. ### Licensing process and fit and proper requirements (FAIS) - Under section 8 of the FAIS Act, all applicants must meet the “fit and proper” requirements set by the Registrar regarding: - Personal qualities of honesty and integrity; - Competence (experience, qualifications and regulatory examinations); - Operational ability; and - Financial soundness. - The first three requirements also apply to key individuals of the FSP (those responsible for managing or overseeing the firm’s activities relating to rendering any financial service) and the compliance officer (sections 8(2) and 6A FAIS Act). These individuals may be subject to continuing education requirements. - The FSP must ensure representatives acting for the firm meet the same fit and proper standards (section 13(2) FAIS Act). - Anyone holding more than 25 percent of the shares of the applicant firm is subject to an assessment to ensure suitability. - Each of these individuals is required to submit a detailed information form as part of the application process (see FSP Forms 3 – 6). - Competence requirements are tailored to type of services and products to be offered; required courses and length of prior experience vary by product and service. - Details of categories of firms and fit and proper requirements are set out in the Fit and Proper Notice. - Application process under Board Notice 60 of 2009 requires submission of specified forms relating to: - general business information; - directors, officers and substantial shareholders (over 25 percent); - representatives; - the compliance officer; - the firm’s operational ability; - financial soundness; and - its external auditor. - In practice, all applicants are expected to provide a copy of their business plan. *Source: _cr1557 - Section 6.3 of the Codes of Conduct for Administrative and Discretionary FSPs includes* ### Part IX of the Fit and Proper Notice sets out initial capital requirements that must be ### _cr1557 - Part IX of the Fit and Proper Notice sets out initial capital requirements that must be ### Initial capital requirements (FSPs) - Initial capital requirements must be met by FSP applicants and maintained at all times by FSPs. - Applicants applying for licensing in multiple categories must meet the highest requirements. - Certain FSPs only have to meet on-going solvency requirements (Fit and Proper Notice Part IX). ### Operational capacity and documentation (application-stage requirements) - All FSPs must provide specific information at the application stage regarding internal organizational, risk management, and supervisory systems. - The Fit and Proper Notice requires FSPs to have and maintain the operational ability to fulfill FAIS Act responsibilities, including: - A fixed business address; - Adequate access to communication facilities; - Adequate systems for the safekeeping of records and business communications; - A bank account; - Policies, procedures and systems to comply with FICA and other applicable anti-money laundering or terrorist financing legislation; - The internal controls structure, and procedures required to ensure: - Appropriate segregation of duties, roles and responsibilities from an operational risk mitigation perspective; - Access controls that are in place to ensure physical and data security; - Documented policies and procedures; - Disaster recovery and electronic data back-up procedures to ensure business continuity; and - Guarantees, professional indemnity or fidelity insurance cover in respect of the clients of the provider or representatives. - Application forms: - Financial soundness form: requires detailed financial statements to be attached. - Operational capacity form: list of yes/no questions about operational controls (Part VIII); applicants in Category II, IIA and III must provide evidence (copies of manuals etc.) and these are verified by on-site reviews before licensing. Applicants for Category I provide only yes/no answers and no additional details. ### Outsourcing, mandates and nominee use - Where the FSP is outsourcing substantial activities, the FSP must provide: - Specific information regarding outsourced functions, whether the outsourced entity is an approved FSP, the name of the outsourced entity, and whether the entity is an independent party, a related party or both. - Confirmation that a process exists to ensure only suitable providers are selected. - A written service level agreement that complies with requirements. - Category IIA and III firms (hedge fund managers and administrative FSPs) must meet additional requirements relating to the form and contents of discretionary client contracts; these mandates must be submitted for approval at application (Codes of Conduct for Administrative and Discretionary FSPs, Board Notice 79 of 2003). - Where nominee companies are used to register clients’ assets, the nominee company must have prior approval under the FSB’s nominee policy. ### JSE membership requirements, operational capacity and fit & proper - JSE Rules (Equities Rules sections 3 and 4, Derivatives Rules section 3, IRC Rules section 3) address fit and proper, operational capacities and financial requirements. - JSE Equities Rule 3.30: adjusted liquid capital must be held by members at all times; refers to Equities Directive DC for base and risk capital calculations. - Base amount determined by the higher of the prescribed minimum amount or operating expenses over a specified period (thirteen weeks). - Risk requirement determined by sum of amounts required to cover different risks undertaken. - Derivatives Rules exemption: banks are exempted from the requirement to file monthly capital adequacy reports (Rule 3.70.5). - Equities Rules and examples: - Rule 4.10 (Fit and proper requirements): JSE assesses persons holding in excess of 10 percent of issued shares, officers and non-executive directors. - Rule 4.60.1: primary place of business must be under the control of a stockbroker. - Rule 3.30 (Specific conditions of membership): adequate resources, procedures and systems required; employees must be suitable, adequately trained and properly supervised. - Rule 4.70: resources, procedures and technological systems necessary for effective conduct of business, including consumer protection, internal control and risk management; Rule 4.70.4 specifies risk management objectives to: - Identify, quantify, control and manage the risk exposures of the member; - Make timely and informed business decisions; - Monitor the performance and all aspects of the business of the member; - Monitor the capital of the member to ensure compliance with capital adequacy requirements; and - Monitor the quality of the member’s assets. - Applicants must file extensive materials, including policy and procedure manuals, fit and proper questionnaires. CSPs required to provide very extensive and detailed materials. JSE does not routinely do on-site reviews before membership is granted, but CSPs would be visited within their first year. - Specific requirements apply depending on services offered (e.g., approved nominee if holding client assets, Rule 3.50.3.2). Segregation of duties required (Equities Directive DN, DN 5). ### Licensing authority, disciplinary powers and fit & proper enforcement - The Registrar may grant an FSP license if satisfied that the applicant, its key individuals and compliance officer comply with FAIS Act requirements (section 8(3)); may refuse otherwise. - Licenses may be granted subject to terms, conditions and restrictions (section 8(4)); FAIS Division imposes standard conditions including obligation to report any material change within 15 days. - Registrar may suspend or withdraw registration if conditions in section 9 are met, including failure to meet fit and proper requirements or non-compliance with the Act, directives, or license conditions (section 9(1)). Licensee must be given notice and right to respond (section 9(2)). - FSB has authority to take action directly to bar individual representatives judged not fit and proper. - JSE has sole discretion to accept or reject membership or grant subject to conditions (Equities Rule 3.100.3); can suspend, revoke, impose terms and conditions or fines (Equities Rules 12.40 to 12.60). - Fit and proper disqualifications (Rule 4.10) include: - Insolvency; - Persons found liable for criminal or civil breaches involving fraud, theft or dishonesty; - Previously expelled from or declared a defaulter on any exchange. - Rule 4.20 prohibits employing persons refused approval as an FSP or representative, expelled members or officers of expelled members, or those convicted of a fidelity offence. ### Periodic updates and public disclosure - Under condition 2.1 of standard conditions (section 8(4)), FSP must inform Registrar of any change in business information submitted at licensing, specifically changes in shareholders, directors, representatives, auditor, compliance officer, foreign clearing firm or foreign exchange service provider, nominee company or independent custodian; notices must be in writing and delivered within 15 days of the change. - Under section 8A(1), authorized FSPs, key individuals and representatives must continue to comply with fit and proper requirements at all times; Registrar may suspend or withdraw license if non-compliance appears (section 9). - JSE notification requirements (immediate written notice) include: - Any change in name or address or telephone/facsimile/electronic mailing addresses; - Granting or revocation of any registration, authorization or license bearing on JSE business; - Prosecution or conviction for offences under specified legislation or for fraud or dishonesty; - Changes to appointment of compliance officer, settlement officer or alternate; any person becoming or ceasing to be a director; - Any person ceasing to be a registered securities trader of a member; - Change to appointment of person in control of a place of business; - Any change in name of a nominee company or use of a new nominee company; - Any event or circumstance bearing on whether an officer or shareholder holding in excess of 10 percent fails to meet fit and proper requirements (Rule 3.150). - Rule 3.20: all membership requirements must be in place on application and continue to be met thereafter; failure may lead to disciplinary action and withdrawal of membership. - Public information: - FSPs must display a certified copy of the license in all business premises; include reference to license in business documentation, advertisements and promotional material; ensure license available for production immediately or within a reasonable time. - FSB’s website contains a portal for public search on a licensee revealing status, authorized products, and persons authorized to act as representatives and key individuals. - Exchange publishes member information: name, contact details and type of approval; site does not include names of officers, directors or authorized representatives. ### Regulatory treatment of advisers - Advising not subject to a special regime in South Africa. Firms acting on behalf of clients or holding client securities are subject to similar rules with respect to capital, internal controls, record-keeping etc., whether or not they give advice. - JSE Rules do not impose lesser standards on advisers than on other members. ### Capital requirements details (FSP categories and JSE) - Fit and Proper Notice Part IX: FSP Minimum Capital Requirements table summary: - Categories considered: Category I (No client assets), Category I (Hold client assets), Category II and IV, Category IIA and III. - Positive Net Assets (assets* less liabilities**) requirement: - Category I (No client assets): Net assets must be greater than zero - Category I (Hold client assets): Net assets must be greater than zero - Category II and IV: Net assets must be greater than zero - Category IIA and III: Net assets must be greater than zero and Net assets must be greater than ZAR 3 million - Current assets at least equal to current liabilities: Yes across categories listed. - Amount of liquid assets^: - Category I (No client assets): None - Category I (Hold client assets): 4/52 weeks of annual expenditure^^ - Category II and IV: 8/52 weeks of annual expenditure - Category IIA and III: 13/52 weeks of annual expenditure - Definitions and notes preserved verbatim: - * Assets excludes good will, intangible assets or investments in and loans to clients and investments in and loans to related parties. - ** Liabilities excludes loans subordinated in favor of other creditors. - ^ Liquid assets means cash and other assets equivalent to cash that can be liquidated without realizing a loss on liquidation, provided that 25 percent of such assets must be capable of being liquidated in 7 days; a further 25 percent of such assets must be capable of being liquidated in 30 days; and the remaining 50 percent of such assets must be capable of being liquidated in 60 days. - ^^ Annual expenditure means the expenditure set out in the latest financial statements of the FSP, less staff bonuses; employees', directors', partners' or members' share in profits; emoluments of directors, members, partners or a sole proprietor; other appropriation of profits to directors, members and partners; 50 percent of the commissions or fees paid to representatives for the rendering of services that did not form part of their remuneration; depreciation; bad debts; and any loss resulting from the sale of assets. - Definitions of current assets and current liabilities are the usual accounting ones. - Only Category IIA and III firms are required to have substantial positive net assets. Other than liquid assets amounts, other capital requirements do not change based on the general risk of the firm. Minimum requirements do not vary whether or not an FSP does proprietary trading. - Under Fit and Proper Notice FSP must maintain adequate professional indemnity and fidelity insurance to cover risks of losses due to fraud, dishonesty or negligence, subject to specified minimum amounts: - Minimum requirements vary between ZAR 1 million and ZAR 5 million. - Except for Category II, no difference between coverage required for firms that hold client assets versus those that do not (Board Notice 123 of 2009). - In practice, firms expected to have higher coverage than minimum, particularly if they hold client assets; appropriateness assessed by FSB during on-site inspections. ### JSE capital framework and monitoring - JSE members must comply with initial and ongoing capital requirements similar to the EU first Capital Adequacy Directive. - On application, applicant must have “adequate financial resources to meet its business commitments and to withstand the risks to which its business is subject” (Equities Rule 3.30.3.1). - Equities Rules: - Base amount = greater of 13 weeks fixed expenditure or ZAR 400,000 (Rule 3.30.3.3). - Derivatives Rules initial capital: - ZAR 200,000 for members who do not hold client margins or assets; - ZAR 400,000 for those that do hold client margins or assets; - Clearing members must have own funds of ZAR 200 million (Derivatives Rules 4.20.6 – 4.20.7). - IRC Rules mirror Derivatives Rules (Rule 3.40). - Market risk, credit risk, FX and large exposure calculations set out in Equities Directive DC and DC3–DC11; operational risks in DC12 (FEBR) and DC13 (CSRR for CSPs). - The FEBR is designed for winding down the business of a member over a 13-week period. - JSE requires member firms to be certain they have adequate capital every day; monthly capital reports must be filed with the JSE 10 days after month end. *International Monetary Fund — South Africa country report excerpt* ### 1.3 require a member to keep its accounting records up to date at all times and to be ### _cr1557 - 1.3 require a member to keep its accounting records up to date at all times and to be ### Daily accounting, trade entry, and monitoring - Members are required to keep accounting records up to date at all times and to be able to calculate the its financial position at the close of business each day. - Firms must enter all cash trading and derivatives trading by 7:00 pm on each trading day. - The JSE relies on its on-line monitoring of equities member firms’ positions. - The JSE estimates that the majority of daily trading volume on the JSE is concentrated in the ten largest member firms. ### Systems integration and data flows - Listed derivative positions feed automatically into the JSE’s capital adequacy system from the derivatives clearing system. - JSE equity positions are captured directly by the Broker-Dealer Accounting (BDA) system (the JSE’s accounting system that is used by all equities members). - Members separately report their OTC derivative positions to the JSE via an electronic reporting system. - JSE internal systems prepare a daily report on equities member firms’ open risk positions and available liquid funds. ### Capital adequacy, risk calculation, and escalation - The JSE’s capital adequacy system calculates the member’s risk by netting the cash equity positions against the cash equivalent of their listed and OTC derivative positions to determine the member’s market exposure for each equity instrument. - If the internal report reflects that a firm may not meet the minimum requirements, JSE staff will contact the firm and obtain additional information in order to establish whether there is a real shortfall. - If a shortfall is confirmed, the firm is required to remedy the situation by either closing out risk positions or injecting additional capital. - If the JSE is of the view that a capital shortfall poses a threat to the market or a firm’s clients, an Urgent Issues Committee can suspend the firm from trading. If this Committee does not take action, the firm may continue to do business. ### Client asset custody and segregation - JSE Rules require member firms to hold client cash positions in a custodian account controlled by a JSE subsidiary. - While equity positions of the firm and its customers are contained in an omnibus account, JSE internal systems maintain segregated records. - JSE rules prohibit firms from borrowing customer securities. ### Reporting, review and early warning - An FSP must maintain full and proper accounting records on a continuous basis and these records must be brought up to date no less frequently than monthly (FAIS Act, *Source: _cr1557 - 1.3 require a member to keep its accounting records up to date at all times and to be* ### section 19). ### _cr1557 - section 19) ### Reporting, audits, and interim reporting - FSPs must submit audited financial statements to the Registrar within four months after their financial year-end. - Financial statements must be prepared in accordance with IFRS and audited in accordance with the ISA by an auditor registered under the APA and approved by the Registrar (FAIS Act, section 19(2)). - Certain sole proprietor FSPs that do not receive client funds or premiums may be exempt from the audit requirements. - The FAIS Act does not require auditors to provide specific assurance that the financial position of the FSP reflects the risks undertaken by that FSP. - The auditor of a FSP must submit an additional report to the Registrar providing assurance that clients’ funds were kept separate from that of the FSP (section 19(3)). - There are no routine interim capital reports required of FSPs. The Registrar may require the FSP to submit monthly management accounts within 15 days of the month end; this condition is routinely imposed on any FSP that has been exempted from any of the normal capital requirements. - No obligation exists to inform the FSB of a decline in financial soundness until the firm breaches minimum capital requirements; firms are not specifically required to notify the FSB if undercapitalized or under financial stress. ### Capital adequacy, supervision, and enforcement - FAIS Division reviews FSP capital levels on receipt of annual financial statements and as part of overall supervision; assessment feeds into the risk assessment model used for supervision. - Capital levels are reviewed during on-site reviews; key individuals and compliance officers are expected to manage and monitor compliance with financial soundness requirements. - JSE members must submit monthly reports to the JSE regarding capital adequacy for the previous month and compliance with capital requirements; these reports are due by the 10th of each month. - JSE has systems to monitor capital adequacy of equities members on a daily basis. - Under Derivatives Rules, banks are exempted from filing monthly capital adequacy reports (Rule 3.70.5); JSE defers to the SARB and its capital requirements for these firms. - South African banks are subject to the Basel III capital requirements. - Late reporting, failure to report, or inadequate capital are breaches of JSE Rules; JSE may suspend or withdraw membership, request additional capital, or direct positions be closed (see Equities Rules 12.40-12.60). - If a JSE member’s capital falls below minimum requirements and imminent danger exists of failing commitments, an Urgent Issues Committee may restrict member activities (Equities Rule 12.70, Derivatives Rule 3.305 and IRC Rule 4.70). ### Auditing requirements for JSE members and exchanges - FMA Board Notice 96 of 2013 requires members of exchanges to keep specified accounting records. - Chapter XI of the FMA deals with auditing and sets out functions of an auditor. Section 89 requires each member of an exchange to appoint an auditor. Section 90 requires accounting records and annual financial statements to be audited, as does Equities Directive DG 1.7. - Under the FMA, audited financial statements must be provided to the exchange, and on request to the Registrar. Directive DB 1.1 requires audited financial statements to be submitted to the JSE within three months of the year-end. - Board Notice 100 of 2013 sets out matters that must be reported on by an auditor of a regulated person, including confirmation that segregation of client assets requirements have been complied with. - A JSE member must be audited by an independent auditor registered to carry out public audits under the APA and approved by the JSE; auditor independence rules list specific disqualifying relationships (Equities Directive DG). ### Risks from related parties and off-balance-sheet exposures - FAIS Act provisions addressing exposure to FSPs from related parties or off-balance sheet exposures are very limited; FSB authority under FAIS Act generally extends only to the FSP, not related companies. - FSB may request any information at any time from an FSP; relationships are assessed during on-site visits. - Under FAIS capital requirements, firms must deduct 100 percent of any investment in or loan to a related party from their assets for calculating positive net asset requirements. - JSE stated off-balance sheet transactions are not widely used in the jurisdiction; any investment in an unlisted affiliate is discounted completely for capital adequacy purposes. - The maximum current exposure arising from guarantees given, or assets pledged to secure obligations of a third party, is deducted. - Listed company securities are not subject to special treatment if issuer is related to the member. ### Assessment — Partly Implemented - IOSCO Assessment Methodology requirements highlighted: - All market intermediaries should be subject to capital adequacy standards and other prudential requirements, periodic capital reporting, and delivery of audited financial statements to regulators. - Capital adequacy standards and reporting should: - Address/promote solvency and liquidity to support continued operation; - Give the regulator warning of potential failure to allow early intervention; - Protect investors’ assets from firm failure; - Prevent firm failure from disrupting orderly market operation; - Provide cushion of assets for orderly wind down. - Observed gaps and issues: - Capital formula under FAIS Act is not risk-based except at highest generality; varies only by category of intermediary services, not by nature of instruments or firm size. - Requirements do not generally take into account off-balance-sheet exposures; exposures to related parties are only deducted for some categories of FSPs. - Most FSPs report capital once per year via audited financial statements; requirement to keep financial records contemplates monthly updates but no interim reporting is required. - No obligation to report decline in financial position to regulator until minimum capital requirements breached. - Under JSE Rules, limited requirements on off-balance sheet or related company exposures; gap of no early warning requirement is less concerning for JSE members due to daily monitoring by the JSE. ### Organizational requirements, internal controls, and compliance (Principle 31) - FAIS Act requires management to ensure adherence to internal procedures; policies and procedures are prescribed and key individual(s) are accountable (Fit and Proper Notice, Part VIII). - Changes to business structure, staffing, contact details, governance structures (shareholding/directors/members) must be reported within 15 days of such change (Condition 1 of the standard licensing conditions). - FSPs must have adequate controls over execution of services, policies and procedures for access to data and financial controls, disaster recovery plans, and strict security and access control to data (Fit and Proper Notice, Part VIII). - Key individual role set out in Part I of the FAIS Act; one or more key individuals per FSP; subject to fit and proper requirements and approval process (Determination of Procedure for Approval of Key Individuals – Board Notice 122/2003). - Information to clients, public, and regulator is prescribed; management accountable for availability and reliability. Each FSP must submit periodic compliance reports (section 17) and audited financial statements (section 19). - Categories II, IIA and III FSPs must submit biannual compliance reports. ### Periodic evaluation of controls and risk management systems - Compliance function of an FSP is required to conduct periodic reviews and issue reports to management; periodic compliance report in prescribed form must be issued to regulator with frequency depending on firm category and whether compliance officer is internal or external (Board Notice 127 of 2010, BN 127). - Review frequency by category under BN 127: - Category I and IV FSPs: reviewed and monitored at least quarterly if external compliance officers; annually if internal. - Category II (discretionary), Category IIA (hedge funds), Category III (administrative FSPs/LISPs): reviewed and monitored at least monthly by external compliance officers and quarterly if internal. - Outsourced compliance firms are subject to initial approval and ongoing supervision by the FSB; must provide independent and objective compliance services (BN 127). - JSE rules do not specifically require all members to be subject to periodic, objective review of internal controls and risk management systems, but Equities Directive FK 1.1.3 requires members responsible for safeguarding client assets to have an appropriate internal audit function. - External auditor required to provide FSB an annual report on firm compliance with FMA requirements regarding segregation of client funds and securities (Board Notice 100 of 2013). - Under Equities Directive DG 1.7.2, the external auditor must report to JSE’s Director: Surveillance on agreed procedures results and any material matters relating to internal controls, record-keeping or non-compliance. ### Compliance function, responsibilities, and effectiveness - Virtually all firms operating in South Africa must have a compliance officer meeting fit and proper requirements specified by FSB or JSE. - FSPs with more than one employee in a regulated role must appoint compliance officers (FAIS Act, section 17). - FAIS Division performs on-site visits including review of compliance function; deficiencies are addressed with the business. - JSE Equities Rule 4.30 requirements: - Member must appoint a compliance officer to assist board in ensuring compliance with FMA, rules and directives. - Compliance officer must pass JSE compliance officer examination and maintain adequate knowledge of FMA, rules and directives when required. - Compliance officer must implement resources, systems and procedures to promote and monitor compliance; report breaches or irregularities to Director: Surveillance; ensure JSE Gazettes content is communicated to relevant employees. - JSE assesses effectiveness of compliance function during on-site examinations; remedial action is instructed if deficiencies identified. ### Conflicts of interest and conduct of business - General Code of Conduct applies to all FSPs; conflicts must be avoided or, if unavoidable, mitigated and disclosed. - General Code of Conduct addresses prohibition of incentives (section 3A) and management of conflicts (section 3(1)(b) and (c)). - Section 3A prohibits certain incentives and distinguishes incentives to external parties and representatives. - For securities products, FSPs may only receive a financial interest, other than an immaterial financial interest, if client specifically agrees in writing and can stop fee at any point. "Immaterial interest" is limited to ZAR 1,000 per year per representative or FSP. - Representatives may receive remuneration but it may not give preference to quantity of business over quality, a specific product supplier, or a particular product. - JSE Equities Rule 8 (conduct of business) requires members to avoid conflicts of interest and if unavoidable ensure fair treatment of clients by disclosure, confidentiality or declining to act (Rule 8.10.2.5); members must not unfairly place their interests above clients'. ### Direct market access - JSE Equities Rules allow for direct market access: order received electronically by a TSP from a client and submitted electronically to JSE equities trading system by an order entry application operated by the TSP, without intervention of a registered securities trader. - Equities Directive BT requires prior written approval of the JSE for order entry applications (BT9) and that member’s order entry application verify client’s capacity to settle a transaction before order submission (BT 10.3). ### Client asset protection and segregation - Under FAIS Act, specific controls and procedures must segregate client money and assets from firm assets; these controls must be audited and reported on annually. - Provider receiving or holding client financial products or funds must: - Provide receipts for funds and assets received; - Take reasonable steps to ensure assets or funds under its control are adequately safeguarded; - Open and maintain a separate account, designated for client funds, at a bank and pay any funds received for or from clients in that account within one business day of receipt; - Take reasonable steps to ensure: - At all times financial products or funds are dealt with strictly in accordance with mandate given to provider; - Client financial products or funds are readily discernible from private assets or funds of provider; - Subject to applicable contractual or statutory provisions, client has ready access to any amount paid into separate account, less authorized deductions, charges and fees required or authorized by law. - Obligations located in section 19 of FAIS Act and sections 10 - 12 of General Code of Conduct, section 5 of Administrative Code of Conduct and section 4 of Discretionary Code of Conduct. - Segregation and safekeeping requirements for JSE members: - Section 21 of FMA requires client funds to be held in a separate trust account and sets detailed operational requirements. - Section 22 of FMA requires segregation of securities held for own account from those held on behalf of clients; client assets must be held in one or more separate securities accounts. - Section 9 of JSE Equities Rules requires separation and identification of client and member assets; funds received from a client must be segregated from member’s own funds. - Members that assume responsibility for safeguarding client assets must meet specific criteria under Rule 3.70 to be authorized. - Nominee companies holding client assets must comply with nominee requirements of FSB and JSE. - External auditor required to confirm segregation of client assets in reports (Board Notice 100 of 2013, Equities Directive DG 1.7.2 reporting obligations). ### Client complaints and redress - Each FSP required to develop and implement a complaints policy and procedures with prescribed timeframes and escalation steps (General Code of Conduct, sections 16 – 19). - Clients have recourse to the FSB’s Ombud’s Office if dissatisfied with response; Ombud’s arrangements are prescribed in Chapter VI of the FAIS Act. *Source: _cr1557 - section 19).* ### Section 17(2)(t) of the FMA requires the exchange to have rules in place "for the ### _cr1557 - Section 17(2)(t) of the FMA requires the exchange to have rules in place "for the ### Complaints handling and client resolution - Section 17(2)(t) of the FMA requires the exchange to have rules in place "for the manner in which complaints against an authorized user or officer or employee of an authorized user must be investigated." - The JSE's client resolution scheme has been recognized under the Financial Services Ombudschemes Act under which an ombudsman addresses qualified client complaints. - JSE Equities Rule 11.20 requires each member to have internal complaint handling procedures designed to ensure that: - all complaints are handled fairly, effectively and promptly; - any recurring or systematic problems are identified, investigated and rectified; and - the number of unresolved complaints referred to the exchange is minimized. - Similar requirements exist in Section 17 of the Derivatives Rules and Section 5 of the IRC Rules. ### Know Your Client (KYC) and supervision under FICA and the FMA - Client identification requirements are prescribed in section 21 of FICA and apply to all accountable institutions, a term that includes managers of CIS other than participation bond, securities FSPs and members of the JSE. - The FSB is a Supervisory Body responsible for supervising the compliance of regulated entities with FICA. - Regulations under FICA provide a guideline of acceptable methods to establish and verify the identity of individuals and legal persons, including companies, close corporations, foreign companies, partnerships, trusts and other legal persons. - Under section 8(1)(j) of the FMA, the exchange is required to have made arrangements for the efficient and effective supervision of authorized users so as to ensure compliance with FICA. - The FMA further requires the exchange rules to make provision for the supervision by an exchange of compliance with the duties imposed on it and its authorized users by FICA (section 10(2)). - Relevant supervision rules are contained in the JSE Rules on Supervision and Enforcement (Section 12). - Under section 45(1) of FICA, the FSB is responsible for supervising compliance by the JSE members with sections 21 to 45 of FICA, which deal with client identification and reporting; the JSE assists the FSB through delegated supervisory powers under section 45(1B)(b). - JSE Equities Rule 8.60 requires members to obtain and maintain sufficient information on each client account and each account operated by the client to establish the identity of the client and specifies the information that must be obtained. ### Suitability requirements - Section 8 of the General Code of Conduct requires suitability information to be collected and assessed before a client is provided with advice. An FSP must: - Take reasonable steps to seek from the client appropriate and available information regarding the client’s financial situation, financial product experience and objectives to enable the provider to provide the client with appropriate advice; - Conduct an analysis, for purposes of the advice, based on the information obtained; and - Identify the financial product or products that will be appropriate to the client’s risk profile and financial needs, subject to the limitations imposed on the provider under the FAIS Act or any contractual arrangement. - JSE Equities Rules require that investment mandates must be entered into between members and their clients. Where discretion is exercised in the management of client assets, information as to the financial situation, investment experience and objectives of the client must be obtained. - An investment needs analysis must be undertaken by these members, which determines the client’s risk profile. Based on this information, the member may make appropriate investment decisions on behalf of the particular client (Rule 8.120). - A similar rule applies to derivatives and interest rate and currency market members. ### Contracts with clients and mandates - Written contracts or account agreements (called mandates) are specifically required for discretionary managers, hedge fund managers and LISPs (Administrator and Discretionary FSP Codes of Conduct, section 5). - Otherwise, client contracts are not routinely used and not required, though extensive other information must be provided to clients that would encompass general and specific terms of doing business. - JSE Equities Rule 8.120.1 says that if an ISP manages JSE authorized investments on behalf of clients, the arrangement must be recorded in a written mandate. ### Reporting to clients and investment disclosure - Section 3 of the General Code of Conduct obliges FSPs to adequately and transparently disclose certain information including fees, risks, past performance, costs, etc. when rendering financial services to clients, including potential instances of conflicts of interest and the steps taken to manage or deal with them. Similar requirements apply to members under the JSE Rules. - Under section 7 of the General Code of Conduct, FSPs must provide a reasonable and appropriate general explanation of the nature and material terms of the relevant contract or transaction and generally make full and frank disclosure of any information that would reasonably be expected to enable the client to make an informed decision and provide to the client any material contractual information and any material illustrations, projections or forecasts in the possession of the provider. - JSE Equities Rule 8.130 requires the member to take reasonable steps to ensure that the client understands the investment advice, the nature of the investment and the material terms and risks involved to enable the client to make an informed decision. - If the product is a new issue for which a prospectus or other disclosure document is available, this document must be made available to the purchaser or the firm must ensure the investor is aware of the contents of the prospectus. ### Client statements and reporting frequency - The Codes of Conduct require FSPs to report at least annually to their clients. Under section 7(4) of the General Code of Conduct, statements must contain details (on a product-by-product basis) of any ongoing monetary obligations of the clients with respect to the product, the value of the investment and any ongoing incentives etc. payable to the FSPs with respect to the product. - Under the Administrative and Discretionary Codes of Conduct, clients must be sent quarterly statements. Both Codes require more detailed information to be provided to clients on request (Administrative Code, section 10; Discretionary Code, section 6). - The JSE’s Equities Rules require a member to provide a written statement to a client that complies with Rules 8.180.3 and 8.180.4. Statements are to be provided to clients at regular intervals that may not exceed three months (or monthly if the client so requests). They must be provided monthly if the client’s portfolio as managed by the member includes any transactions or positions in derivative instruments. - Under the JSE’s Derivatives Rules, an investment manager must provide a written statement to a client on a monthly basis that complies with Rules 15.50.2 and 15.50.3. Similar provisions are contained in Rule 10.210 of the JSE’s IRC Rules. - The three sets of Rules set out detailed information that must be included in the client’s statement. - Information provided must be sufficient for the client to: - Produce a set of financial statements; - Determine the composition of the portfolio held and the changes thereto over the reporting period, if applicable; and - Determine the market value of the investments and the changes therein over the reporting period, if applicable. ### Fees and disclosure of charges - The General Code of Conduct (section 7) and the Codes of Conduct for Administrative and Discretionary FSPs (section 5(1)) require disclosure of any charges and fees to be paid by the client, including the basis of the fees and the manner they are levied (deduction from the amount of the financial product or otherwise) and disclosure of rebates or commissions paid by other FSPs or product suppliers for placing client funds. - JSE Equities Rule 8.10.3 requires members to disclose full and accurate information about the fees and other charges that may be levied on clients and reflect them in specific monetary terms. - Rule 8.70 of the JSE’s IRC Rules deals with trading, clearing and settlement fees and permits levying of fees in accordance with a published schedule of fees. No other fee may be charged to a client without the prior written agreement of the client recorded in the client agreement. - Rule 8.80 of the JSE’s Derivatives Rules deals with trading fees. Under Rule 16.10.4.2.1 of the JSE’s Derivatives Rules a member must disclose full and accurate information about the fees and any other charges that may be levied on clients. ### Standard of care - (Section heading present in source: "Standard of care") *Source: _cr1557 - Section 17(2)(t) of the FMA requires the exchange to have rules in place "for the (IMF content unit).* ### Section 2 of the General Code of Conduct requires the FSP at all times to render ### _cr1557 - Section 2 of the General Code of Conduct requires the FSP at all times to render ### General Code of Conduct and JSE Rule - Section 2 of the General Code of Conduct requires the FSP at all times to render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry. - JSE Equities Rule 8.10 (General standards of conduct): in general dealing with clients, members must act with due skill, care and diligence and in the interests of their clients. ### FAIS Supervision Department: approach and enhancements - Supervises FSPs using a risk-based approach (RiBS). - Recent enhancement: revision of the risk-based framework, risk elements, and implementation of an annual program to review FSPs’ profiles to sharpen focus on concentrated non-compliance areas and enable more proactive supervision. - Initial RiBS rating allocated at license approval based on application information; updated through on-site visits and inputs from complaints, profile changes, audit reports, financial statements and compliance reports. - Examples of problems identified in annual compliance reports: FSP does not have a documented risk management plan. - Training: all new analysts receive training to ensure consistent application of risk measurements; ad hoc training sessions and mandatory RiBS session in division induction program. ### Reporting requirements and electronic submission - FSP reporting obligations: - Annual financial statements, audit reports and compliance reports to the Registrar. - Frequency of compliance reporting depends on FSP’s category of registration and risk category. - Higher risk FSPs submit bi-annual compliance reports and, where required, monthly management accounts. - Auditors and compliance officers must file irregularity reports promptly when breaches detected. - Electronic submission system introduced in August 2012 to facilitate reporting. - Registrar uses these reports to monitor compliance levels and assess major risks continuously. ### Risk categorization of FSPs (impact categories and supervisory intensity) - Risk categories assigned to all FSPs: small, small-medium impact (SMI), medium impact, medium-high impact (MHI) and high impact. Supervision intensity differs by impact category. - Risk Categorization of securities FSPs (Category I to III) as at the date of the assessment mission (Source: FSB): - Category I: High Impact 51; MHI 256; Medium Impact 1,702; SMI 1,173; Small 1,454; Total 4,636 - Category II: High Impact 40; MHI 270; Medium Impact 50; SMI 140; Small 500 - Category IIA: High Impact 22; MHI 59; Medium Impact 13; SMI 21; Total 115 - Category III: Total 26 - Foreign FSPs (all categories): High Impact 8; MHI 38; Medium Impact 14; SMI 9; Total 69 - Total (aggregated): High Impact 139; MHI 593; Medium Impact 1,803; SMI 1,348; Small 1,463; Total 5,346 ### Supervision activities (FAIS) - Includes: - Desk-based review of all compliance reports, financial statements and irregularity reports; - Planned on-site visits at High Risk entities; - Planned management meetings with High Risk entities if regulatory concerns; - Ongoing quarterly meetings with compliance officers of FSP groups; - Participation in inter-regulatory supervisory colleges for banks and insurance groups; - Planned thematic reviews of certain types of FSPs; - Ad hoc reviews, usually resulting from complaints/tip-offs or authorization amendments (e.g., hedge funds Category IIA or Category III activities). - All reports filed by or about an FSP are reviewed; irregularity reports treated as priority items. ### Selection criteria and review cycle - Selection for on-site visits guided by risk-based approach: - High and MHI FSPs, including hedge funds, reviewed on a 24 month cycle; - All Category III FSPs (LISPs) reviewed annually; - All High Impact Groups reviewed on a 12 month cycle, alternating between a full on-site visit and a management meeting; - Medium Impact FSPs reviewed on a 3–5 year cycle; - All other FSPs reviewed on an ad hoc cycle; every firm is seen periodically. - Ad hoc review triggers: questions about solvency, adherence to Code of Conduct, irregularity reports, concerns from desk-top analysis of annual reports. ### FAIS on-site activity and resources - FAIS On-site Visits January 2011 – March 2014 (Source: FSB): - Instruction only FSPs (Category I): 1,173 - Discretionary FSPs (Category II): 358 - LISPs (Category III): 24 - Hedge Fund FSPs (Category IIA): 88 - Total: 1,643 - FAIS Supervision Department staffing and output: - 40 examiners who conduct between 500 and 550 full on-site visits a year. - In period January 2011–March 2014, conducted 317 management meetings. ### Review scope and focal elements - Reviews include elements of: - Corporate governance–legal structure; - Strategy, business scope, expansions, joint ventures, jurisdictional operations; - Contractual relations (corporate structure and third party relationships, contractual agreements with clients); - Customer relations, adherence to Codes of Conduct, Treating Customers Fairly; - Disclosures, needs analysis, suitability reviews, record of advice, risk disclosures, conflict of interest declarations; - Operational ability, including infrastructure and IT; - Financial soundness (solvency); - Segregation of business and client funds; - Compliance and legislative adherence; - Risk management; - Staff: controls, policies, procedures. - Risk assessment visits focus on internal systems for management and accounting of clients’ assets, segregation of firm and client assets, internal risk management controls and the compliance office operation. FSB staff sample customer files to confirm accuracy and consistency with investor preferences. ### JSE member supervision: systems and on-site program - JSE supervision comprises on-site and off-site reviews; off-site surveillance systems provide electronic access to members' financial records and client records. - Monitoring of capital adequacy and safeguarding of client assets is ongoing via surveillance systems; indicators of internal control weaknesses feed on-site review program. - On-site review focus: safeguarding of client assets, investment management and advisory practices, management and control of member firms, compliance with anti-money laundering legislation. - JSE On-site Reviews over past three years (Source: JSE): - Equities members: - Client assets: 2011 = 3; 2012 = 6; 2013 = 3 - Investment services: 2011 = 10; 2012 = 4; 2013 = (value not provided) - Anti-money laundering: 2011 = 17; 2012 = 10 - Management and control: 2011 = 18; 2012 = 10 - Derivatives members: - Client assets: 2011 = 5; 2012 = 12 - Investment services: 2011 = 11; 2012 = 5; 2013 = 12 - Anti-money laundering: 2011 = (value not provided); 2012 = 5; 2013 = 12 - Notes: figures reflect number of members subject to review in respect of each regulatory aspect; a single member may be reviewed across multiple aspects in a year. - Planned reviews: none over past three years were necessitated by complaints; no thematic reviews in last three years. ### JSE scope, limits, and coordination with FSB and SARB - JSE regulates equities members in respect of “JSE authorized investments,” including securities listed on other exchanges and local/foreign CIS, but only as to provision of services to clients (discretionary management, investment advice, safeguarding client assets). - JSE does not regulate activities outside JSE authorized investments (e.g., unlisted shares or OTC derivatives such as contracts for difference); equities members must obtain an FSP license for such activities and are regulated by the FSB under FAIS Act. - Equities Rules: dominant business activity of an equity member must be in activities in authorized investments (Rule 3.30.2.1); different treatment applies to derivatives or IRC members where banks or large asset managers may be direct members. - Information sharing: FSB does not routinely share results of its examinations with JSE when FSB examines issues relevant to FSB rules only; similar separation applies to prudential supervision of banks (primary responsibility of SARB). - JSE rules rewrite in progress to clarify applicability and supervisory remit. ### Assessment (implemented status and comments) - Assessment: Broadly Implemented. - Comments: - Requirements applying to FSPs generally comply with Assessment Methodology except for requirement of periodic, objective assessment of risk management and internal controls by someone sufficiently independent from the firm. - Auditor requirement to review annually firm’s compliance with client assets treatment exists, but does not extend to other controls. - Compliance officers must report on FSP’s compliance with laws, but no requirements ensuring independence of compliance function. - Division of supervision between FSB and JSE poses potential for regulatory gaps; routine sharing of inspection results between authorities could improve supervision of “shared firms.” - Assessment Methodology does not require written contracts for all clients; although extensive written disclosure is required in South Africa, requiring written contracts for all intermediaries might assist clients in comparing FSPs and understanding terms. ### Principle 32 — Procedure for failure of market intermediary: plans and powers - No written plan at FSB to address failure of an FSP, but FSB has extensive powers and practical experience. - Registrar's powers include: - Conduct on-site and compliance visits to establish contraventions and direct rectification within a specified time. - Require formal inspection by special team of inspectors; take action based on inspection outcome. - Apply to court for business to be placed under curatorship, liquidation or sequestration; with firm agreement, appoint a statutory manager (Protection of Funds Act, sections 5 and 5A and FMA, section 96). - Direct intermediary not to acquire new business subject to conditions; suspend license; withdraw approval. Orders may be subject to terms for client protection. Actions may be taken promptly and without prior notice in urgent circumstances. - Under General Code of Conduct, an FSP that ceases to operate must immediately inform clients and take reasonable steps to complete or transfer outstanding business (section 20(b)). - JSE: no written plan to address firm failure, though an exchange-wide contingency plan is in development. JSE authority: - Order suspension of operations if member defaults on trades or is below minimum capital adequacy. - Take over a defaulting member to ensure settlement of outstanding transactions and return of client assets. - JSE rules comprehensively set procedures when a member is suspended or declared a defaulter (e.g., Section 13 Equities Rules: default conduct 13.10; steps 13.20; settlement of open positions 13.30; provisional termination of membership on default; member must provide financial records and hand over control of client assets; client assets returned to clients or delivered to another member on agreement with client). - Participant Failure Manual prepared for Strate participants. ### Early warning, detection and monitoring - Registrar detection mechanisms: - Ad-hoc compliance visits; - Auditor and compliance officer must immediately notify Registrar of any material non-compliance (FAIS Act sections 17 and 19). - No obligation for firm, auditor or compliance officer to inform FSB of a general decline in financial soundness until minimum capital requirements are breached. - Registrar relies on complaints; complaint system records all complaints against FSPs or other regulated entities. - JSE early warning mechanisms: - Monitors solvency and capital adequacy via Equities Directive D and returns specified in directive DC to determine potential default and proceed under Section 13 (Default). - Internal systems provide detailed access to firm positions and open exposures, serving as effective early warning system. ### Insurance, guarantee funds and investor protection - No general investor protection/compensation fund for investor losses on intermediary failure in South Africa. - FAIS Act requires all FSPs to maintain adequate professional indemnity and fidelity insurance: - Professional indemnity cover: minimum of ZAR 1 million, calculated for scope of specific business; covers client claims for restitution due to professional action. - Fidelity insurance cover: minimum of ZAR 1 million for FSPs that collect premiums or manage client assets; covers losses from theft or dishonesty by employees. - FSB expects these policies to cover a substantial percentage of client losses in FSP failure. - JSE and SAFCOM guarantee/default funds: - JSE Guarantee Fund (Equities Rule 2.130): funded by members; pays claims arising from liabilities incurred prior to member default; Fund is a trust administered by trustees; JSE acts as secretary. - JSE Guarantee Fund minimum net assets: at all times at least ZAR 50 million or such other amount as the Registrar may determine after consultation with trustees. - Reimbursement cap: reimbursement of client losses may not exceed ZAR 500,000 per claimant. - If aggregate admissible claims exceed Fund net assets, liability distributed pro rata. - JSE indemnity insurance directive (DA 3) requires equities members to be covered by indemnity insurance for client protection against fraud, theft or dishonesty. - SAFCOM default fund (derivatives clearing house): total fund ZAR 500 million; JSE contributed ZAR 100 million; remaining ZAR 400 million funded by clearing members proportional to average initial margin with JSE over prior quarter; fund size updated quarterly; changes in increments of ZAR 50 million; recalculated and refunded within three trading days after use. - Daily reports allow SAFCOM Risk Management to monitor clearing members’ exposures and assess default fund adequacy. - Fidelity Fund for derivatives market: covers limited losses from fraud or default; applies to spot bond market defaults; maximum claim per default limited to the lower of five percent of the fund or ZAR 1 million. ### Recent experiences with failures - Suspensions and license withdrawals are imposed routinely without material client losses. - FAIS Division currently monitoring curatorship of five firms where client assets were put at risk; liquidations are orderly; expected client losses vary from very little (99 percent return expected) to much larger amounts. - JSE: no failure of an equities member for 15 years; one derivatives member failure in 2008 (no South African clients) — proprietary positions transferred to clearing member and closed out with no impact to other participants. ### Communications and cooperation arrangements - MOUs in place with other regulatory authorities facilitating local and international cooperation; FSB is signatory to SADC and IOSCO MMOU. - JSE authority to share information under FMA (section 73) and its rules (e.g., Equities Rule 12.20); entered arrangements with foreign exchanges to promote cooperation. - SRO Incidence Committee in place: representatives of JSE, Strate, FSB and SARB for incidents raising systemic risk; escalation possible to FSCF. - In practice, JSE communicates with FSB via established contacts; communication with foreign regulators typically via FSB’s cooperation arrangements. ### Assessment for Principle 32 (implemented status and comments) - Assessment: Broadly Implemented. - Comments: - FSB has extensive authority and experience to take action when an FSP is in financial trouble but lacks a specific written plan to address a failure and lacks early-warning mechanisms until capital requirements are breached. - Downgrade for missing early warning mechanism taken into account in Principle 30. - JSE lacks a specific early warning requirement but close capital monitoring mitigates concern for equity members; JSE and Strate have clear default rules and a written exchange-wide contingency plan is in development. ### Principles for Secondary Markets — Principle 33: trading systems authorization and oversight - Exchange defined in Section 1 of the FMA and required to be licensed (Section 7(1) FMA). A juristic person may apply for an exchange license for one or more types of securities (Section 7(2) FMA). - FMA includes general requirements for market infrastructures and specific requirements for exchanges. - JSE is currently the only licensed exchange in South Africa; license was granted under SSA and rules amended to comply with FMA (Section 110(2) FMA). - FMA does not recognize other trading systems explicitly; Registrar may apply proportionality via Section 6(3)(m) to grant exemptions where appropriate. ### Authorization and licensing requirements (Section 8(1) FMA and related) - Applicant/exchange must: - Have in South Africa assets and resources, including financial, management and human resources with appropriate experience to perform functions set out in the FMA; - Have clear and transparent governance arrangements that promote safety and efficiency of the exchange and support stability of broader financial system and public interest objectives; - Demonstrate fit and proper requirements for applicant/exchange, directors and senior management; - Make arrangements for efficient and effective surveillance of transactions and supervision of authorized users to identify market abuse and ensure compliance with exchange rules and FMA; - Make arrangements for monitoring compliance by issuers with listing requirements; - Implement arrangements to manage material risks associated with exchange operation; - Have arrangements for security and back-up procedures to ensure integrity of transaction records; - Have insurance, guarantee, compensation fund or other warranty to provide compensation to clients; - Make arrangements for efficient and effective clearing and settlement of exchange transactions and management of settlement risk; - Make arrangements for supervision of authorized users to ensure compliance with FICA; - Implement effective and reliable infrastructure to facilitate trading of listed securities. - Registrar may require applicant or exchange to furnish or verify information as necessary (Section 8(2) FMA). ### Exchange rules content (Section 17 FMA) - Exchange rules must be consistent with FMA and include requirements on: - Circumstances when a transaction in listed securities may be declared void by the exchange; - Approval of authorized user’s nominee holding securities in a securities account or central securities account; - Conditions under which officers/employees of authorized users may advise or conclude transactions and circumstances denying access; - Circumstances in which trading in any listed security may be suspended or halted; - Manner authorized users are generally required to conduct authorized securities services; - Operation of trust accounts by exchange or authorized user; - Recording of transactions, monitoring compliance by authorized users, and surveillance relevant to FMA, exchange rules and directives; - Complaints processes by authorized users against exchange and complaints investigations against authorized users; - Authority and process for issuing exchange directives for supervisory measures and enforcement of rules and directives; - Circumstances and manner in which exchange may limit or address revocation of settlement instructions, termination of transactions on commencement of insolvency proceedings, and administration of securities and funds under insolvency or default. ### Additional application and prudential requirements - Board Notice 104 of 2013 requires application to include: - Copy of proposed rules and listing requirements approved by controlling body; - Details of trading method/facility; - Range of securities proposed to be listed; - Range of expected local and foreign investors. - Section 15 FMA: exchange may impose a fee to administer and maintain insurance/guarantee/compensation fund; such funds are trust property under Protection of Funds Act. - Exchange rules must include requirements for insurance/guarantee/compensation fund: contributors, fee amounts, claim categories, claim restrictions, control/administration, ownership. - Applicant must provide proof of assets and resources in South Africa to perform functions; detailed requirements to be prescribed in Minister of Finance regulations. ### Clearing, settlement and depository arrangements - Section 10(2) FMA: licensed exchange must make provision for clearing and settlement of listed security transactions effected through the exchange. - Must consult with an appointed associated clearing house when making or amending rules for clearing (SAFCOM acts as associated clearing house for JSE). - If no clearing house appointed, exchange must establish infrastructure for clearing and manage clearing as determined in exchange rules. - Business plan for exchange license must include information on clearing, settlement and management of settlement risk. ### Market surveillance, member supervision, dispute resolution and technical standards - Application must include: - Plans to ensure market integrity and integrity of authorized users; - Surveillance procedures and resources to ensure compliance with rules, directives and FMA; - Procedures for disciplining authorized users for non-compliance; - Arrangements for monitoring issuer compliance with listing requirements and for surveillance to identify market abuse. - Technical system standards: business plan must address IT systems, management, maintenance, security, back-up and contingency controls; include auditor report that adequate systems and procedures are in operation; independent party report (agreed by Registrar) confirming adequate systems, business continuity plan, disaster recovery plan, service level agreements, off-site disaster recovery hardware and facilities. ### Disorderly trading and circuit breakers (JSE practice) - JSE Equities Rules allow market controller to pause, suspend, halt or close market/segments if a fair and realistic market does not exist (Paragraph 6.10.6). - Market controller may reduce or extend trading hours or pause/suspend without prior notice to ensure an orderly market. - Circuit breakers (Section 6.10.8 JSE Equities Rules): - Triggered when price movements exceed defined levels based on static and dynamic reference prices. - Each equity security allocated to a segment based on instrument type and liquidity. - Dynamic circuit breaker: either 5 percent or 10 percent, depending on segment. - Static circuit breaker: either 10 or 20 percent. - Dynamic reference price normally price of last order book trade; static reference price at beginning of trading day is previous trading day’s closing price, updated after each auction. - Director: Surveillance (or deputy), with CEO or Director: Issuer Services, may declare trading halt where activity suggests unpublished price sensitive information, manipulative/deceptive trading, or potential artificial price (Section 6.80). ### Record-keeping, outsourcing and application process - Applicant’s business plan must describe security procedures ensuring integrity of transaction recording systems, capacity relative to budgeted transactions and back-up resources for system failure. - Outsourcing (Section 68 FMA): market infrastructure may delegate/assign functions to internal committees/divisions or external parties subject to Registrar approval; infrastructure remains responsible for delegated functions and may withdraw delegation on reasonable notice. - Application for exchange license must: - Be made in manner and contain information prescribed by Registrar; - Show compliance with licensing requirements; - Be accompanied by: copy of proposed exchange rules; copy of proposed listing requirements; copy of founding documents; prescribed information about controlling body members; application fee prescribed by Registrar; - Be supplemented by additional information Registrar may reasonably require. *Source: FSB / JSE material as presented in the supplied content.* ### Section 7(4) of the FMA provides that the Registrar must publish a notice of an ### _cr1557 - Section 7(4) of the FMA provides that the Registrar must publish a notice of an ### Licensing and public notice requirements - Section 7(4) of the FMA: the Registrar must publish a notice of an application for an exchange license in two national newspapers at the expense of the applicant, and on the official website. - The notice must state: - the name of the applicant; - where the proposed exchange rules and listing requirements may be inspected by members of the public; - the period within and the process by which objections to the application may be lodged with the Registrar. - Registrar’s grant of an exchange license: - May consider objections received as a result of the notice; - May impose appropriate conditions; - May grant a license if the applicant complies with relevant FMA requirements and the objectives of the FMA will be furthered by granting the exchange license. - An exchange license must specify: - its terms and conditions; - the categories of securities that may be listed on that exchange; - the registered office of the exchange in South Africa; - the places where the exchange may be operated (Section 9 FMA). ### Admission of securities and market participant authorization - JSE Listing Requirements are approved by the Registrar; the Registrar approves rules governing admission of various types of securities to listing. - JSE internal new product approval process: - New products are considered by the JSE’s New Products Committee for suitability prior to formal approval by the JSE’s Executive Committee. - Exchange rules (subject to Registrar approval) must provide for equitable criteria for authorization of authorized users (see Section 17 of the FMA). ### Order routing, order execution, connectivity, and latency disclosure - JSE Client Connectivity Standards and Requirements describe connectivity options and requirements to the various JSE markets. - In practice, all JSE authorized users connect to the JSE equities trading system (Millennium) either using: - a dedicated Diginet line; or - a Telkom dial-up network. - Authorized users are responsible for ensuring connectivity to the exchange. - JSE has a point of presence in London to support distribution of JSE market data to clients in London and enable trading through a JSE member. - Colocation facility: - Opened on May 12, 2014. - After introduction of the colocation facility, the JSE plans to disclose the average latency experienced by all trading system users. Previously, the JSE only disclosed order execution response times to a market participant upon request. - JSE order execution rules described in rules, directives and user documentation (e.g., Trading and Information Overview). - The FSB does not review the trade matching algorithm; fairness remains the responsibility of the JSE. ### Direct Market Access (DMA) controls and TSP obligations - Directive B of the JSE’s Equities Directives includes requirements on direct market access provided by a TSP. - A TSP may not operate an order entry application (OEA) that provides DMA without JSE prior written approval. - OEA key objectives/requirements (must ensure at all times): - The OEA must ensure that orders are not submitted or left open if such orders could result in erroneous trades, a false appearance of trading activity or an artificial price for a security; - Adequate controls to ensure orders are within normal trading patterns of relevant clients; ability to limit life of an order and control order types; - Verify, before submission, the capacity of the client to settle trades via appropriate exposure limits for non-controlled clients and checks on availability of funds and securities for controlled clients; - Detect and react to various JSE defined trading sessions; - Identify the source of all order details and evidence maintenance of integrity of order details from receipt to submission to the JSE equities trading system; - All orders and resulting trades must comply with rules and directives; - Technical specifications must comply with JSE User Specification Documentation and ensure the application will not adversely impact market operation; access to application software and data must be strictly controlled to prevent undue manipulation. - Definitions: - controlled client: a client or account holder whose funds and uncertificated equity securities are under the control of a CSP or whose settlements take place via the CSD participant of a member. - non-controlled client: a client or account holder who has appointed his own CSD participant to settle transactions in equity securities on his behalf. - JSE may request information from a TSP to monitor OEA usage and assess effectiveness of member controls, but the JSE does not inspect the systems. - TSPs operating member trading applications or systems generating proprietary orders without trader intervention may be required to submit information to the JSE to demonstrate compliance with JSE Rules and Directives. - JSE allocates one or more trader identification numbers for systems that provide DMA or automatically generate proprietary orders to facilitate identification of orders processed by such systems. - Members requesting trader identification numbers may be required to provide information on how orders are generated by the application to help identify applications that may generate excessive orders. ### Access to trading information and data confidentiality - Members can subscribe to all order and trade data on a real-time basis. - JSE systems disclose only public data. - Private member data is available only to the JSE. - Confidential client data is available only to JSE market regulation staff. ### Market surveillance, staffing, and system renewals - Assessment status: Fully Implemented (Principle 34 header context). - JSE market surveillance: - Real-time market surveillance system. - Staffing: three for monitoring equities trading, two for derivatives trading, and three for bond trading. - BDA system identifies the first level client that trades through a member. - Surveillance system flags unusual trading patterns; JSE staff can immediately contact listed companies and authorized users for explanations. - Stricter surveillance applied to equities markets than to derivatives markets. - JSE is replacing some systems with more reliable and scalable systems; it recently renewed its trading system and is in the process of renewing its market surveillance system. - FSB market surveillance: - FSB does not conduct real-time market surveillance. - DMA staff meet every two weeks with the JSE Surveillance Department to discuss trading anomalies and possible market abuse requiring further investigation by the FSB. - During these meetings, an FSB employee examines trading in JSE shares during the past two weeks. - The FSB can access JSE surveillance systems at any time at the offices of the JSE. ### Member supervision and JSE investigative powers - JSE Equities Rules Section 12.10: Surveillance and investigations by JSE Surveillance Department. - JSE Surveillance Department systems and functions: - Monitor compliance by members with the FMA, the rules and the directives; - Surveillance of any matter relevant to the FMA, the rules and the directives; - Supervise compliance by members with FICA. - Director: Surveillance (and designees) may: - Investigate JSE-related activities of members or member employees; - Investigate compliance with the FMA, exchange rules, directives and FICA; - Investigate whether a member’s trading poses danger to meeting commitments to clients, members or a settlement system; - Investigate conduct detrimental to the JSE or its members; - Require persons under JSE jurisdiction to furnish information, produce records, appear for questioning, or provide data relevant to investigations. - Use and disclosure of information: - Information obtained may be used in disciplinary proceedings and furnished to other bodies with jurisdiction. - Contraventions by persons outside JSE jurisdiction may be referred to appropriate authorities. ### FSB supervision of the JSE: attendance, reporting, and formal requirements - Registrar attendance rights (Section 70 FMA): the Registrar or nominee may attend any meeting of the controlling body of a market infrastructure or its committees, may take part but may not vote. - In practice: - FSB staff attend all JSE Board and Board subcommittee meetings as observers. - The FSB Executive Officer normally represents the FSB at JSE Board meetings. - Past attendance at JSE Executive Committee meetings discontinued to avoid perception of regulatory capture and due to resource implications. - FSB staff attend JSE Advisory Committee meetings and ad hoc working groups and hold regular bilateral meetings with JSE staff. - FSB representatives prepare an internal report from each meeting attended. - Formal reporting under the FMA: - Within four months after the financial year end, a market infrastructure must submit to the Registrar an annual report containing prescribed details and its audited annual financial statements (Section 69 FMA). - Board Notice 101 of 2013 requires the annual report to contain: - A list of JSE Board and Executive Committee members and authorized users and any changes during the last financial year; - A report signed by the chairperson and Chief Executive Officer reviewing operations over the last financial year; - An auditor's report on the annual financial statements; - A summary of market information reflecting salient features of trading, settlement or other activities; - A report detailing JSE initiatives and plans to implement recommendations of the most recent King III Code; - A status report on JSE consumer education initiatives, if any; - A status report on JSE initiatives in the SADC region, if any; - A report on operational risk mitigation, operational integrity and related issues; - A list of securities services authorized and regulated by the JSE in respect of authorized users; - A report on the number, nature and status of complaints lodged against the JSE by authorized users under the exchange rules during the last financial year; - The results of the annual assessment of the market infrastructure. - Annual assessment requirement based on Section 62(b) of the FMA: market infrastructures must take necessary steps to avoid, eliminate, disclose and otherwise manage conflicts of interest between regulatory functions and commercial services, including implementation of appropriate arrangements and an annual assessment whose results must be published. - Board Notice 95 requires an exchange’s annual report to include a section on the regulatory and supervisory structure applicable to the exchange’s own listing, including: - A statement that, in the opinion of the controlling body, the exchange has complied with all its rules, listing requirements and procedures warranting continued listing of the exchange’s securities; - A confirmation that all complaints relating to a conflict of interest were referred to the Registrar during the year under review; - The results of its annual assessment under Section 62(b) of the FMA. - The JSE must furnish the Registrar with all notices, minutes and documents furnished to its Board or Board Committee members as if the Registrar were a member (Section 70(2) FMA). - JSE required to complete an annual self-assessment on a questionnaire prepared by the FSB (2013 self-assessment covered Board, Executive Committee, supervision of authorized users, supervision of issuers, supervision of market movements and market abuse). ### On-site visits, rule approval, and enforcement - Section 59 of the FMA requires the Registrar to annually assess whether a licensed market infrastructure complies with the FMA, directives, requests, conditions and requirements, its own rules, and whether it gives effect to Appeal Board decisions under Section 105 of the FMA. - In practice: - FSB conducts an annual on-site visit of the JSE focusing on issues identified through the self-assessment. - Historically one such review per year; during the current financial year, the FSB plans to conduct two such reviews. - Rule approval: - FSB approves the JSE rules and listing requirements. - FSB receives JSE Directives for comment but does not approve them. - Section 71 of the FMA describes the process for amending exchange rules by the exchange and the FSB, allowing market infrastructure rule amendments or suspensions in accordance with consultation processes; the Registrar may amend rules or issue an interim rule. - Enforcement by the FSB: - The Registrar has a range of powers to enforce FMA requirements vis-à-vis an exchange (general statement; specific powers described elsewhere in the FMA). *Source: _cr1557 - Section 7(4) of the FMA provides that the Registrar must publish a notice of an* ### Section 6(3)(h) of the FMA provides that the Registrar may impose conditions that are ### _cr1557 - Section 6(3)(h) of the FMA provides that the Registrar may impose conditions that are ### Registrar powers, directives and licensing enforcement - Section 6(3)(h) of the FMA: the Registrar may impose conditions that are consistent with the FMA in respect of any license, authorization, approval, consent or permission granted by the Registrar, and may amend or withdraw such conditions at any time. - Section 6(4)(a) of the FMA: the Registrar may issue a directive to the exchange to implement specific practices, procedures or processes, to take specific actions or measures, to desist from undertaking specific practices, procedures, processes, actions or measures, or to prohibit certain practices, procedures, processes, actions or measures in order to ensure implementation and administration of the FMA, compliance with the FMA or achievement of the objectives of the FMA. - Section 10(3)(a) FMA: the Registrar may assume responsibility for one or more of the regulatory or supervisory functions of a licensed exchange if necessary to achieve the objectives of the FMA. - License cancellation or suspension grounds: - The exchange has failed to comply with the FMA or its rules, comply with a directive, request, condition or requirement of the Registrar, or give effect to a decision of the Appeal Board; or - After an inspection, the Registrar is satisfied on reasonable grounds that the manner in which the exchange is operated is not in the best interests of authorized users and their clients or defeats the objectives of the FMA. - In practice none of the above enforcement measures have been applied to the JSE. - Assessment: Fully Implemented --- ### Principle 35 — Regulation should promote transparency of trading: Pre-trade transparency - Pre-trade transparency requirements for trading at the JSE are included in the JSE rules. - JSE Equities Rules (equities trading): - All transactions in equity securities by a member must be conducted through the central order book of the JSE equities trading system, unless the transaction meets criteria for an off-book trade. - Orders in the central order book are matched by: price, whether the order is visible to the market, and time of entry into the central order book. - Hidden limit order: - One order type not visible to the market: hidden limit order (no visible size). - Underlying quantity must be greater than or equal to a minimum reserve size at submission and must have a minimum execution size. - Minimum reserve size is determined by the market controller per equity security and published in the JSE Gazette. - Off order book trades within the exchange system (Section 6.30.5 JSE Equities Rules) — whether single member or two members and published: - Bookbuild Trade: Single member No, Two members Yes, Published Yes - Block Trade: Single member Yes, Two members Yes, Published Yes - Corporate Finance Transaction: Single member Yes, Two members Yes, Published Yes - Delta Trade: Single member No, Two members Yes, Published No - Exercise of Options: Single member Yes, Two members Yes, Published No - Exercise of Traded Options: Single member Yes, Two members Yes, Published No - Exercise of Warrants: Single member Yes, Two members Yes, Published No - Give-up Trade: Single member No, Two members Yes, Published No - Late Trade: Single member Yes, Two members No, Published Yes - Off Order Book Principal Trade: Single member Yes, Two members No, Published Yes - Portfolio Transaction: Single member Yes, Two members Yes, Published Yes - Next Day Cancellation of On Book Trade: Single member Yes, Two members Yes, Published Yes - Next Day Cancellation of a published Off Book Trade: Single member Yes, Two members Yes, Published Yes - Next Day Cancellation of a non-published Off Book Trade: Single member Yes, Two members Yes, Published No - Examples of conditions for certain off order book trade types: - Block trade: transaction in a single equity security with minimum value of ZAR 5 million and comprises at least twenty times exchange market size; - Corporate finance transaction: entered into in writing, requires public notification in the press and complies with relevant JSE Listing Requirements; - Off order book principal trade: transaction where member trades as principal in a single equity security where transaction has a minimum value of ZAR 500,000 and comprises at least six times the exchange market size, except where transaction is with a foreign professional market participant (no minimum value or quantity applies); - Portfolio transaction: transaction in a list of equity securities with minimum value of ZAR 15 million and comprises at least 10 different equity securities none of which exceeds 25 percent of the total value of the portfolio. - JSE reported proportion of order book trading: varies between 80 and 95 percent depending on the share in question. ### Principle 35 — Post-trade transparency and dark trading monitoring - No specific regulatory requirements regarding dissemination of post-trade information to market participants. - JSE trading system does not permit delayed publication of post-trade information, including for off order book trades. - Requirements for hidden limit order and off order book trade types are described in JSE Rules, Directives and documentation public on the JSE website. - JSE has access to all hidden orders entered into the order book and off order book trades; the FSB would have access upon request. - Assessment: Fully Implemented --- ### Principle 36 — Regulation should detect and deter manipulation and other unfair trading practices: Definitions and prohibitions - Inside information (Section 77 FMA): specific or precise information, which has not been made public and which is obtained or learned as an insider and which, if made public, would be likely to have a material effect on the price or value of any security listed on a regulated market. - Insider definition (Section 77 FMA): director, employee or shareholder of an issuer of securities listed on a regulated market to which the inside information relates, or a person with access by virtue of employment, office or profession; also a person who knows the direct or indirect source was such a person. - Insider trading and disclosure prohibition: Section 78 of the FMA prohibits insider trading in securities and derivatives listed on a regulated market to which the inside information relates or which are likely to be affected by it and disclosure of such information is prohibited in Section 78. - Market manipulation (Section 80 FMA): prohibited to knowingly directly or indirectly use or participate in any practice that has created or is likely to have the effect of creating an artificial price for a particular security or a false or deceptive appearance of demand, supply, or trading activity in a security. - False or misleading statements (Section 81 FMA): making or publishing false, misleading or deceptive statements, promises and forecasts in respect of securities traded on a regulated market or the past or future performance of a company whose securities are listed on a regulated market is prohibited. - Front running: - Front running prohibition applies to FSPs (see Principle 31). - No specific prohibition of front running applicable to JSE members. - JSE states insider trading prohibition would enable investigation of front running; FSB can enforce front running as insider trading if it proves trading on basis of non-public price sensitive information. ### Principle 36 — Monitoring and member obligations - Exchange license applicants required to have arrangements for efficient and effective surveillance of all transactions and supervision of authorized users to identify possible market abuse and ensure compliance with exchange rules, directives and the FMA. - JSE Equities Rules (Section 7.10) require members to prevent and detect market abuse: - Member must consider circumstances of client orders before entering them into the JSE equities trading system and take reasonable steps to satisfy that such orders and resultant trades will not breach Section 80 of the FMA. - Members must ensure employees familiar with market abuse provisions in Sections 77-80 FMA and receive adequate training and guidance. - Member’s compliance monitoring procedures must include monitoring orders entered into, and transactions executed on, the JSE equities trading system to identify and act on orders or trades that may constitute a breach of Sections 78-80 FMA. - Procedures should aim to detect activity which, to a reasonable person reviewing such activity, would constitute a blatant breach of Sections 78 and 80 of the FMA. - JSE’s market surveillance activities are described in Principle 34. ### Principle 36 — Enforcement: FSB administrative sanctions and criminal penalties - Administrative sanctions applicable to insider trading and disclosure of insider information (Section 82 FMA) can be at most: - The equivalent of the profit made or the loss avoided; - An amount of up to ZAR 1 million, to be adjusted by the Registrar annually to reflect the Consumer Price Index, as published by Statistics South Africa, plus three times the profit made or loss avoided; - Interest; and - Costs of the suit, including investigation costs, on such scale as determined by the EC. - FSB may make a compensation order under Section 82(4)-(7) FMA; amounts recovered from administrative proceedings must be deposited into a designated trust account. The FSB has a first charge against the trust account for reimbursement of expenses reasonably incurred in bringing proceedings and administering distributions. The balance is distributed by the claims officer to claimants complying with Section 82(5). - EC of the FSB may impose additional penalties under the Protection of Funds Act. - Administrative sanctions from market abuse cases investigated by the FSB (on the basis of referrals from the JSE) that led to an administrative sanction in 2011-2013: - Insider trading: 2011 1, 2012 1, 2013 4, Total 6 - Market manipulation: 2011 1, 2012 3, 2013 2, Total 6 - Misleading information: 2011 0, 2012 0, 2013 1, Total 1 - Source: FSB. - Total administrative sanctions imposed in the above cases: - Insider trading: total fines of ZAR 2,367,580 for six respondents - Market manipulation: total fines of ZAR 29,750,000 for nine respondents - Publication of misleading information: total fines of ZAR 965,000 for three respondents - Additional administrative sanctions in 2014: imposed in two market manipulation cases. - Criminal penalties (Section 109 FMA): a person who commits a criminal offence referred to in Sections 78, 80 or 81 FMA is liable on conviction to a fine not exceeding ZAR 50 million or to imprisonment for a period not exceeding 10 years, or to both such fine and such imprisonment. - There has been only one criminal sanction for market abuse (fraud) in South Africa. ### Principle 36 — Cross-market trading and information sharing - Trading in the JSE trading system is possible only through a local member. - Through the BDA system, the JSE has access to each member’s first level clients’ trading information; if clients are foreign, further investigation by the FSB can request information from foreign regulators under the IOSCO MMOU or relevant bilateral MOUs. - JSE Derivatives Rules: the clearing house may limit aggregate exposure arising from proprietary positions of a clearing member, positions of clients of the clearing member, positions of trading members with which the clearing member has clearing agreements and positions of clients of such trading members in relation to the net financial worth of the clearing member plus its suretyship as determined by the JSE. - Members must maintain records of trades with members and clients. - JSE may request trading members or clients to provide written statements in relation to agricultural derivative positions owned, controlled or carried; on receipt of request a trading member or client must within two business days furnish the JSE with a written statement in prescribed form, manner and content. Statements must include information necessary to enable the clearing house or authorized person/committee to determine whether the relevant position should be limited or reduced. - No trading member or client may hold or control positions separately or in combination, net long or net short for the purchase or sale of a commodity for future delivery or options on a commodity on a futures equivalent basis, in excess of limits set out in directives. ### Principle 36 — Assessment and comments - Assessment: Broadly Implemented - Comments: - JSE and FSB have been reasonably successful in detecting, investigating and sanctioning market abuse, but important to ensure that in addition to administrative enforcement, criminal enforcement is used to combat market abuse. - The FSB, the SAPS and the NPA have enhanced cooperation, but more work remains to ensure criminal enforcement becomes an effective additional deterrent. - The FMA prohibition of insider trading is limited to listed securities and derivatives. Therefore, insider trading in an unlisted derivative that has a listed security or derivative as an underlying instrument does not seem to be prohibited. - Authorities are encouraged to consider filling this gap in future FMA amendments (not required for compliance with Principle 36 but recommended). --- ### Principle 37 — Regulation should ensure proper management of large exposures, default risk and market disruption: Clearing and settlement - JSE equities trades: - Equity trades settle at T+5 at Strate through Strate’s South African Financial Instruments Real Time Electronic Settlement (SAFIRES) system. - JSE derivatives trades: - Clearing undertaken by SAFCOM. - SAFCOM has mandated the JSE (functionally the JSE Clearing and Settlement Division) to perform operational functions and risk management. - Clearing membership: - General clearing members (GCMs) clear for themselves, non-clearing members and investors. - Direct clearing members (DCMs) clear for themselves and investors. - Non-clearing members (trading members) appoint a GCM to clear for them. ### Principle 37 — Monitoring of large exposures - All JSE equities members’ trades in listed securities and listed derivatives are automatically entered into the JSE BDA system; members must separately report all OTC derivatives trades to the BDA system. - Entries identify the first level client of each trade, providing the JSE data on customer trading in cash equities that can be analyzed across more than one firm. - The BDA system enables the JSE to identify large customer positions, unusual trading patterns, and large open positions, long or short, allowing capacity to identify some beneficial owners trading large positions in the listed equity market. - JSE Surveillance Department monitors members’ large exposures daily; large exposures attract a higher capital requirement. - Section 11 of the JSE’s Equities Directives places obligation on a member to calculate its total Large Exposure Requirement (LER) arising from large exposures to third parties or groups of connected third parties. *Source: _cr1557 - Section 6(3)(h) of the FMA provides that the Registrar may impose conditions that are* ### Section 5 of the JSE’s Derivatives Directives and Rule AA5 of the JSE’s IRC Directives ### Section 5 of the JSE’s Derivatives Directives and Rule AA5 of the JSE’s IRC Directives ### Large exposure requirement - Section 5 of the JSE’s Derivatives Directives and Rule AA5 of the JSE’s IRC Directives stipulate a similar manner for calculating a member’s large exposure requirement. - Members not exempted (banks are automatically exempted) must include a declaration of their large exposure risk in their monthly capital adequacy return. - If members are unable to meet their capital adequacy requirements due to large exposures or any other reasons, the JSE has the power to compel the member to reduce its exposures or provide additional capital. - According to Section 4.20.9 of the JSE Derivatives Rules and Section 3.40.10 of the JSE IRC Rules, the JSE is entitled to suspend a member if there is a deficiency in the capital adequacy of the member. - Cross-reference: “See the discussion in Principle 30.” ### Managing risks from open positions — overview - Focus is on JSE equities and derivatives trading; bond trades are in practice only reported to the JSE system. - Risk management tools include margin requirements and suspension/compulsion powers where members cannot meet settlement obligations. ### Equities trading — margin and settlement triggers - The JSE as a Settlement Authority manages risk from open positions in equity trading through margin requirements when: - the trading member does not have the securities/funds available for settlement; or - a CSD participant of Strate has not committed to settle the client’s trade within a certain period after the trade day. - A JSE member is required to provide margin to the JSE in respect of its own or its clients’ unsettled transactions in equity securities before 12:00 pm on the fourth business day after the trade (T+4) when any of the following conditions apply by end of day on T+3: - Non-controlled client transaction: CSD participant of the non-controlled client has not committed to settle the transaction on behalf of that client. - Controlled client sale transaction: the controlled client: - Does not have sufficient equity securities in the custody of the member or the member’s CSP for the transaction to settle on settlement date; - Has not entered into a securities borrowing arrangement to facilitate the settlement of the sale on T+5, as reflected on the BDA system; or - Has not concluded a purchase transaction, which is due to settle on or before T+5 and which will provide sufficient equity securities for the sale to settle. - Controlled client purchase transaction: the controlled client: - Does not have sufficient funds in the custody of the member or the member’s CSP for the transaction to settle on T+5; or - Has not concluded a sale transaction which is due to settle on or before T+5 and which will provide sufficient funds for the purchase to settle. - Member’s own-account sale transaction: by end of day on T+3 the member: - Does not have sufficient equity securities available for the transaction to settle on T+5; - Has not entered into a securities borrowing arrangement to facilitate settlement of the sale on T+5, as reflected on the BDA system; or - Has not concluded a purchase transaction which is due to settle on or before T+5 and which will provide sufficient equity securities for the sale to settle. - Member’s own-account purchase transaction: the member has not concluded a sale transaction due to settle on T+5, which will provide sufficient funds for the purchase to settle on T+5. - Margin calculation: margin is calculated in accordance with the principles set out in JSE Directives. - Recovery and refund: - To the extent that margin payable by a member relates to transactions on a client’s account, the member may recover such margin from the client. - The member must refund the client forthwith upon the repayment of margin to the member by the JSE. ### Derivatives trading — initial and variation margin; marking-to-market - Risk from open positions in derivatives trading is managed through margin requirements. - JSE Derivatives Rules require initial margin to be paid to or by a member or client whenever the risk of loss, as determined by the JSE, changes with respect to the aggregate position of such member or client. - Variation margin must be paid as the result of the marking-to-market of a position to or by a member or client in whose name a position in an exchange contract is registered. - A clearing member may require a trading member to deposit additional margin for proprietary or client positions as agreed in the clearing agreement. - A member may require a resident client to deposit additional margin as agreed in the client agreement. - The same requirements are included in the JSE IRC Rules for futures and options contracts (JSE Derivatives Rules and JSE IRC Rules 8.50 and 8.60). - Timing of variation margin determination: The amount of variation margin to be paid is determined at 5 pm on each business day or at such other time as the JSE may determine by marking to market all members’ and their clients’ positions in each exchange contract. - Marking to market may also take place at any other time at the discretion of the JSE or SAFCOM. - Where a client of a derivative member or a non-clearing derivative member carrying on large positions is unable to fulfill obligations, the JSE can, acting through a clearing member for the non-clearing member and a non-clearing member for the client, require a reduction in exposures. - Limitation: The JSE does not have the power to directly compel clients of member firms to reduce exposures or post margins. ### Sharing of information - The JSE would be able to share information on common market participants with foreign market operators or foreign regulators through the FSB’s information sharing agreements with its international peers. - Section 73(2) of the FMA provides that a market infrastructure may disclose information relating to or arising from its functions to any market infrastructure or supervisory authority, whether domestic or foreign, if such disclosure will further one or more of the objectives of the FMA. ### Default procedures — equities market - Default procedures are included in Section 13 of the JSE Equities Rules. - A member will be in default if: - It is unable to meet its commitments to another member, the JSE, a JSE settlement system or a non-member arising out of a transaction or a JSE settlement system instruction; or - The JSE, in its sole discretion, considers that a member has defaulted. - Upon declaration of default: - Membership will be provisionally terminated and the member suspended from trading. - Any amount payable by the JSE to the member will be set off against any amount payable by the member. - The member must hand over to the JSE such financial records as the Director: Surveillance deems necessary to identify, protect and return client assets and to facilitate settlement and control of client assets. - Transaction closing and settlement steps: - The JSE will use its best endeavors to procure settlement of open transactions conducted in the central order book between the defaulting member and other members and non-members. - The JSE will require clients of the defaulting member to meet their settlement obligations in respect of all open transactions executed on their behalf. - Any funds or equity securities held by the defaulting member or its CSP on behalf of controlled clients or received subsequently from controlled clients required to effect settlement will be applied by the JSE to settle such transactions. - The JSE is entitled to buy in or sell out equity securities which cannot be delivered or paid for by the defaulting member or its client, where the Settlement Authority is able to and deems it appropriate to procure settlement by means of borrowing equity securities or funds. - If the JSE is unable to procure settlement of any open transactions, the failed trade procedures in Sections 10.110-10.130 of the JSE Equities Rules will be applied. - Failed trade procedures: - Can lead to cancellation of the original transaction between the failing party and a non-failing party and the non-failing party conducting a new transaction. - The JSE will compensate any financial prejudice suffered by the non-failing member utilizing the margin held in respect of the failing member. - Settlement support: - If a member will not be able to settle a sale transaction on settlement date, the Settlement Authority will endeavor to borrow, as agent, on behalf of the member as undisclosed principal, the equity securities required. - The Settlement Authority may lend to the member the funds required to settle a purchase transaction. ### Default procedures — derivatives market - Default procedures are included in Section 12 of the JSE Derivatives Rules. - A member will be in default if: - It fails to fulfill any of its obligations in terms of a trade or a position; - Its membership is terminated; or - The JSE, in its sole discretion, considers that it has defaulted. - Default by a trading member: - The trading member will be suspended from trading. - The trading member’s clearing member will close out the proprietary positions of the trading member by trading to transfer those positions to itself. - Any amount payable to the trading member as a result of close-out will be set off against any amount payable by the trading member; any remaining shortfall will be recovered from and any balance paid to the trading member. - The clearing member must contact the clients of the defaulting member immediately to inform them and make arrangements for transfer of client positions to the clearing division of the clearing member or to another trading member. - Default by a clearing member: - The clearing member will be suspended from trading. - The clearing house will open a separate trust account with a bank into which will be paid all margin due and payable and any other moneys or securities held by the clearing house in favor of, on behalf of or for the account of the clearing member. - The clearing house will manage the trust account and assume control of all assets held or administered by the clearing member on behalf of any member or client. - The clearing house will close out all the proprietary positions of the clearing member at the best price it can obtain and transfer all positions of clients and trading members cleared through the clearing member to another clearing member. - Within a period decided by the JSE, each trading member must conclude a clearing agreement with another clearing member. - Clients of the clearing member must enter into client agreements with other members and trade with the clearing house and such other members to transfer their positions to them, or trade with the clearing house to close out their positions. - Post-default financial handling: - After all liabilities of the defaulting clearing member have been settled, amounts paid by any surety will be refunded from any balance remaining in the trust account and any further balance remaining will be paid to the defaulting clearing member. - If there are insufficient funds to cover such liabilities, the clearing house will call on all clearing members for an equitable contribution on a voluntary basis to make good any shortfall. - If such contributions are insufficient, the funds of the Fidelity Fund will be applied. - The same principles apply under the IRC Rules. - Insolvency Act interaction: The Insolvency Act states that the liquidator is bound by the rules of the relevant exchange regarding the closing down of open positions. Exchange rules provide for the exchange to settle all trades with clients provided they can meet their settlement obligations. ### Short selling — reporting and monitoring - Section 10.20 of the JSE Equities Rules: a member must ensure settlement of all transactions in equity securities affected by it through the central order book of the JSE equities trading system and ensure settlement of all off book trades it entered into as agent or as principal with a client. - Naked short selling is not permitted under the JSE Equities Rules. - Conditions required before a member may enter a sell order or report a trade to the JSE equities trading system (member must have taken reasonable steps to satisfy itself): - The equity securities to be sold are held in uncertificated form by the member’s CSD participant in the case of a controlled client or proprietary transaction, or by the client’s CSD participant in the case of a non-controlled client transaction; - A controlled client has evidenced to a member that it owns the equity securities to be sold in uncertificated form and that such securities will be available for settlement on settlement date; - Another transaction has been concluded which provides for an equivalent amount of equity securities being available for settlement on the settlement date; - A satisfactory borrowing arrangement is in place which provides for an equivalent amount of equity securities being available for settlement on the settlement date; or - A corporate action provides for an equivalent amount of equity securities being available for settlement on the settlement date. - Settlement Authority powers under Section 10.40.2 of the JSE Equities Rules (selected): - Monitor the settlement obligations of members and their clients; - Ensure that the settlement obligations of members are met on the settlement date; - Monitor uncommitted settlements and take appropriate action; - Take action when settlement is unlikely to take place on settlement date; - Buy and sell equity securities through the JSE equities trading system to meet obligations arising from management of the settlement process; - Borrow as agent on behalf of a member as undisclosed principal equity securities from third parties to facilitate settlement; - Levy fees on members for the loan of equity securities to members to facilitate settlement; - Impose penalties on members for actions or omissions potentially disruptive to settlement; - Instruct a member or a client (via the member) to roll the settlement of a purchase or sale transaction; - Instruct a member or a client (via the member) to close a purchase or sale transaction; - Manage the settlement of off book trades where ring fencing has occurred. - Reporting and monitoring gaps: - There is no reporting requirement to the JSE, the FSB or the market on short selling, nor do they undertake any particular monitoring of short selling activities. - There are no specific short selling exceptions in place. ### Assessment and comments - Assessment: Broadly Implemented - Key comments: - The JSE has developed systems to monitor and manage the risk of open positions in its equities and derivatives trading systems that include margin requirements. - Default procedures are in place and disclosed to market participants through the JSE Rules. - Naked short selling is prohibited and covered short selling is defined in a relatively narrow manner, taking into account the need to control settlement risk arising from short selling. - Shortcoming: There is no general reporting requirement in place. As stated in the IOSCO Assessment Methodology, there should be a reporting regime in place that provides, at a minimum, timely short selling information to the market authorities (i.e. the JSE and/or the FSB). Preferably disclosure of short selling information should be extended to the market as a whole. - Additional IOSCO requirement: market authorities are required to undertake surveillance of short selling activities. *Source: Section 5 of the JSE’s Derivatives Directives and Rule AA5 of the JSE’s IRC Directives (extracted content).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1557.pdf_