FSCA COMMUNICATION 21 OF 2022 (CIS)

Exemption of Managers of Collective Investment Schemes from certain requirements of section 99(1) of CISCA

1. PURPOSE

The purpose of this Communication is to inform stakeholders that, today, the Financial Sector Conduct Authority (“FSCA”) published the following documents on its website for public comment:

1.1 the draft Exemption of Managers of Collective Investment Schemes from certain requirements of section 99(1) of the Collective Investment Scheme Control Act, 2002 (Act No. 45 of 2002 (“CISCA”); and

1.2 Comments Template.

2. BACKGROUND

2.1 Section 99 of CISCA provides, amongst others, that a collective investment scheme (“CIS”) of two or more CIS portfolios may not be amalgamated without the prior consent of investors. Also, the rights of the investors in a portfolio may not be ceded or transferred without the investors’ prior consent. Such investors must be holding a majority in value of participatory interests in each targeted CIS or portfolio.

2.2 During 2021, various CIS managers and other stakeholders approached the FSCA to consider issuing an interpretation ruling in respect of section 99 of CISCA as it has been subject to differing interpretations by industry stakeholders. Importantly, some stakeholders contended that section 99 could be interpreted to mean that only investors in the original scheme or portfolio are required to consent to an amalgamation and that investors in the target/receiving scheme or portfolio will be protected by receiving appropriate and accurate information on the proposed amalgamation to enable them to make an informed decision on the possible impact thereof on their investment and to exercise their rights. It was also contended that international practice does not prescribe that an investor in a targeted portfolio (also ‘receiving’ portfolio, i.e. the portfolio into which another portfolio will amalgamate, with subsequent closure of the amalgamated portfolio) must consent to the amalgamation.

2.3 The issue of section 99, however, has a long history where members of industry in various forums have highlighted the difficulties resulting from an FSCA interpretation that investors in the targeted or receiving portfolio must be balloted when amalgamating portfolios. The overall concern is that this requirement makes it difficult for a successful amalgamation, as the chances of the investors in the targeted portfolio being active and positive voters are very slim. This results in a waste of funds to attempt a ballot and with little chance of success. A second ballot is then required for any possibility of success, resulting in considerable expense with no guarantee of success. There are certainly sound reasons as to why non-viable or struggling portfolios should be amalgamated into other portfolios.

3. INTERPRETATION OF SECTION 99 OF CISCA

3.1 The FSCA notes the submissions made and the contention that section 99 of CISCA could potentially be interpreted in different ways. However, the FSCA is not convinced that a sufficient legal basis exists for alternative interpretations of section 99.

3.2 Section 99(1) provides that the portfolio amalgamation of CIS portfolios may not be done without prior consent of investors holding a majority in value of the participatory interest in the original scheme or portfolio or source portfolio. Although “original scheme or portfolio” is not “formally” defined, section 99(1) provides clarity regarding what an original scheme or portfolio is, i.e. an original scheme or portfolio is “each collective investment scheme or portfolio to which a proposed amalgamation, cession, transfer or take-over refers” (emphasis added). Therefore, an “original scheme or portfolio” captures both the transferring and receiving portfolio forming part of any transaction. Secondly, the Authority’s prior consent must be obtained, and such consent is subject to reasonable notification, no investor prejudice and that majority investors have not objected to the amalgamation or transfer.

3.3 In the FSCA’s opinion it is therefore clear that both investors in the original scheme or portfolio and targeted scheme or portfolio must be balloted. The views expressed by these investors may be relevant to the exercise of discretion by the FSCA as to whether or not to grant consent for the intended amalgamation. Accordingly, the challenges of balloting posed by the industry cannot be resolved simply by an interpretation notice as requested by them.

4. DRAFT EXEMPTION

4.1 Previously, based on the above position, the FSCA declined a specific request for an exemption from having to ballot the investors in the targeted portfolio as it did not see any other means of achieving the required outcome of investor protection as intended by CISCA. The FSCA’s view has been that investors in the targeted portfolio should not be deprived from having the opportunity to be heard in a ballot. There are inherent issues in not obtaining the consent of investors in the targeted portfolio. For example, it can be that a targeted portfolio can receive the assets or investors from another portfolio which is perhaps not of the same quality e.g. if a portfolio holding illiquid instruments are amalgamated into a portfolio with no such illiquid instruments, it may prejudice those investors in the targeted portfolio. The FSCA also opined that it should not be placed in a position to exempt a manager from section 99, effectively taking a decision on behalf of investors in the target portfolio.

4.2 However, although the FSCA maintains the position that section 99 requires that investors in an original scheme and targeted scheme must both be balloted, following the industry submissions made, we note that in some instances this could potentially lead to undesirable outcomes.

4.3 As a result, the FSCA considered alternative means to give effect to the intention of investor protection and proposes to exempt CIS Managers from certain requirements of section 99(1) of CISCA (“draft Exemption”) in order to address some of these issues, whilst potential risks emanating from the issuing of the exemption is intended to be mitigated through conditions imposed under the exemption. Investors are allowed the opportunity to object to the amalgamation, exit the portfolio or accept it, but an active ballot will no longer be required

4.4 In particular, the draft Exemption seeks to address the following concerns raised by industry:

4.4.1 the expensive costs of conducting a ballot and that it is prohibitive for a successful amalgamation, as the chances of the investors in the targeted portfolio being active and positive voters are very slim. This results in a waste of funds to attempt a ballot and with little chance of success. A second ballot is then required for any possibility of success, resulting in considerable expense with no guarantee of success;

4.4.2 there is a case for non-viable and/or struggling portfolios to be amalgamated into other portfolios and that reducing the number of funds and amalgamating non-viable funds is part of investor protection, preserving investment returns and management of costs; internationally, regulators have dispensed with the approval of the targeted portfolio subject to certain requirements, because it is too burdensome on the CIS managers to obtain and, similarly in South Africa, it is also too burdensome and costly to the CIS managers; and

4.4.3 that there are a number of good reasons why funds should amalgamate, e.g. reduce the proliferation of portfolios by amalgamating similar portfolios, portfolios that are no longer viable should be amalgamated into other portfolios to retain the benefit for the investors.

4.5 Paragraph 2.2 of the draft Exemption stipulates the proposed conditions of the exemption.

5. INVITATION TO COMMENT ON DRAFT EXEMPTION

5.1 The Exemption is available on the FSCA’s website at www.fsca.co.za.

5.2 Interested parties are invited to submit comments on the draft Exemption on the Comments Template published herewith, in Word format, on or before 8 August 2022 to FSCA.RFDStandards@fsca.co.za.

6. AVAILABILITY OF INFORMATION AND ENQUIRIES

For more information regarding the Exemption and/or this Communication, please contact the Regulatory Frameworks Department of the Authority by emailing marius.dejongh@fsca.co.za or andile.mjadu@fsca.co.za.

KATHERINE GIBSON
DEPUTY COMMISSIONER
FINCANCIAL SECTOR CONDUCT AUTHORITY

Date of publication: 11 July 2022