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Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002)

Codes of conduct for administrative and discretionary FSP's

Chapter II : Code of conduct for discretionary FSP’s

 

 

Part I : Introductory provisions

 

Object and application of Code

 

1) The object of this Code is to ensure that clients to whom financial services are rendered subject to the provisions of this Code will be able to make informed decisions, that their financial needs regarding financial products are appropriately and suitably satisfied and that for those purposes, discretionary FSP’s and their representatives are obliged to comply with the provisions of this Code.

 

Definitions

 

2.1) In this Code "the Act" means the Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002), any word or expression to which a meaning has been assigned in the Act shall have the meaning so assigned to it and, unless the context indicates otherwise-

 

"administrative FSP", "bulking", "discretionary FSP", "FSP", "netting" and "General Code"

have the respective meanings assigned thereto in section 2 of the Code of Conduct for Administrative FSP’s, 2002, contained in Chapter 1 of this Schedule;

 

"fund of hedge funds"

means a portfolio that, apart from assets in liquid form. consists of an interest, holding or investment in one or more other hedge funds;

 

"hedge"

in relation to a hedge fund, means to enter into transactions that protect against adverse price movements and limit exposures to specific risks;

 

"hedge fund"

means a portfolio which uses any strategy or takes any position which could result in the portfolio incurring losses greater than its aggregate market value at any point in time. and which strategies or positions include but are not limited to-

a) leverage: or
b) net short positions;

 

"hedge fund FSP"

means a financial services provider-

a) that renders intermediary services of a discretionary nature in relation to a particular hedge fund or fund of hedge funds in connection with a particular financial product referred to in the definition of 'administrative FSP' in subsection 2.1 of section 2 of Chapter 1 of this Schedule; and
b) acting for that purpose specifically in accordance with the provisions of the respective codes set out in this Chapter and Chapter Ill of this Schedule, read with the Act, the General Code of Conduct for Authorised Financial Services Providers,2002 (where applicable), and any other applicable law;

 

"leverage",

means-

a) any position in which the delta factor would be less than -1 or greater than 1 ; or
b) a position in which the nominal exposures to assets in the portfolio is less than nil or more than 100% of the market value of the portfolio;

 

"net short position"

means a condition in which a portfolio has a greater nominal exposure to short positions than long positions in any asset class or in aggregate across the portfolio, meaning that more capital (including collateral) supports short positions than is invested in long positions and which may in certain cases require additional capital to be invested in the portfolio over and above the initial capital investment;

 

"nominee company"

means a nominee company referred to in section 8;

 

"regulations"

means the Financial Advisory and Intermediary Services Regulations, 2002.

 

"short position"

means-

a) a position where an asset is sold by a seller for delivery at a future date or time, and the seller does not own such asset at the time of the sale; or
b) in the case of a derivative instrument, a position where -
i) a decrease in the price of the underlying asset has a positive impact on the value of the derivative instrument: or
ii) an increase in the price of the underlying asset has a negative impact on the value of the derivative" instrument.

 

2.2) In the case of any inconsistency or conflict between a provision of this Code and a provision of the General Code, the first mentioned provision shall prevail.

 

Part II : Operational Requirements

 

Prohibitions

 

3.1) A discretionary FSP may not directly or indirectly without the relevant client’s prior written approval-
a) sell to or provide a third party with a client’s details, unless obliged by, or in terms of, any law;
b) exercise a vote in a ballot conducted by a unit trust management company;
c) exercise voting rights on behalf of clients to gain control of a listed or unlisted company, except where such voting rights are exercised to protect the interests of clients on whose behalf the financial products involved are held as investments or on the instructions of such clients;

 

3.2) A discretionary FSP may not directly or indirectly engage in the netting of transactions.

 

3.3) A discretionary FSP may not directly or indirectly-
a) sell any financial products owned by the discretionary FSP to any client;
b) buy for own account any financial products owned by any client.

 

Duties of discretionary FSP

 

4) A discretionary FSP must-
a) provide to the client, on request in a comprehensible and timely manner, any reasonable information regarding the financial products of the client, market practices and the risks inherent in the different markets and products;
b) prior to entering into a written or electronic mandate with the client-
i) obtain information with regard to the client‘s financial circumstances, needs and objectives and such information that is necessary to enable the FSP to render suitable intermediary services to the client;
ii) identify the financial products that best suit the client's objectives, risk profile and needs, subject to the limitations and restrictions imposed on the FSP by its licence issued under the Act.

 

Mandates

 

5.1) A discretionary FSP must obtain a signed mandate from a client, before rendering any intermediary service to that client: Provided that the parties may agree to complete an electronic mandate in respect of which appropriate controls and personal identification procedures have been put in place that ensures security of information, and that the mandate records the arrangements made between the parties, and must-
a) authorise the discretionary FSP to act on behalf of the client, indicating whether the authorisation is given with full or specified limited discretion;
b) state the investment objectives of the client and whether there are any investment or jurisdiction restrictions that apply to the rendering of intermediary services in relation to the financial products involved;
c) contain a general statement pertaining to the risks associated with investing in local and foreign financial products, with particular reference to any currency risk;
d) stipulate in whose name the financial products are to be registered and whether they are, for example, to be registered in the name of-
i) the client or a nominee company nominated by the client;
ii) the nominee company of the discretionary FSP or a nominee company within the group of companies of which the discretionary FSP forms part;
iii) the nominee company of a product supplier;
iv) a nominee company of any depositary institution or central securities depository registered or licensed in terms of the Custody and Administration of Securities Act, 1992 (Act No. 85 of 1992), or of any bank registered or licensed in terms of the Banks Act, 1990 (Act No. 94 of 1990); or
v) an administrative FSP's independent nominee, in the case of a FSP who deals through an administrative FSP;
v) stipulate the bank account details of the trust account opened at a bank or other bank account opened in the name of the client in which the discretionary FSP must deposit and, where applicable, from which the discretionary FSP must withdraw moneys received in connection with the rendering of intermediary services;
e) stipulate, where applicable, at which intervals any cash accruals (including dividends and interest) which the discretionary FSP receives on behalf of a client, must be paid to the client;
f) stipulate the basis on which, the manner in which and the intervals at which the client will remunerate the discretionary FSP for the rendering of intermediary services on the client’s behalf: Provided that for the purposes of this paragraph it shall be deemed that the basis of the remuneration has not been stipulated if the remuneration must be calculated with reference to a source outside the mandate or if it is placed within the discretion of any person;
g) state whether the discretionary FSP receives commission, incentives, fee reductions or rebates from an administrative FSP or product supplier for placing a client‘s funds with them;
h) if the discretionary FSP is capable to do so, provide a client with the option to receive reports and statements in electronic or printed format;
i) empower either party to the mandate to terminate the mandate after notice in writing of not more than 60 calendar days;
j) stipulate whether the discretionary FSP may vote on behalf of its clients in respect of their financial products;
k) obtain and transmit to a client any information which a relevant product supplier must disclose in terms of any law, unless the client in writing specifically requested the discretionary FSP not to provide such information;
l) where applicable, obtain a statement .to the effect that the discretionary FSP may, in order to render an intermediary service to the client, utilise the services of its own staff or that of another approved FSP.

 

5.2) The mandate of a discretionary FSP must initially, be approved by the registrar, who may grant approval subject to such conditions as the registrar may determine. The initially approved mandate is hereinafter referred to as the "specimen mandate". The registrar may subsequent to approval require that specific amendments be made to the specimen mandate or that any other information be disclosed that is deemed necessary in the interest of the client.

 

5.3) A discretionary FSP may not amend the specimen mandate substantially, without the prior written approval of the registrar.

 

5.4) When the mandate of a discretionary FSP is terminated, such FSP must at once return all cash, financial products and documents of title to the client and must simultaneously provide the client with a detailed final statement of account. If the financial products and documents of title are in possession of a nominee company, the discretionary FSP must at once issue an instruction to such nominee company to return such financial products or documents of title to the client.

 

Reporting to clients

 

6.1) A discretionary FSP must furnish a written report to a client which complies with subsection 6.2-
a) on request; and
b) at regular intervals which may not exceed three months at a time, unless the client consents in writing not to receive the report because such client is able to access the information made available by the discretionary FSP through electronic means, such as the Internet or a facsimile service, on a continuous basis.

 

6.2) A report to a client must contain such information as is reasonably necessary to enable the client to-
a) produce a set of financial statements;
b) determine the composition of the financial products comprising the investment and the changes therein over the period reported on; and
c) determine the market value of the financial products comprising the investment and the charges therein over the period reported on.

 

6.3) Despite subsection 6.2, the a discretionary FSP must on request by a client, furnish detailed information about the following matters:
a) Original cost of financial products held, as well as the current market value thereof;
b) financial products purchased or sold during the period;
c) cash receipts and payments during the period;
d) income earned and expenditure incurred during the period;
e) non-cash transactions during the period including, without limiting the generality of the foregoing, capitalisation issues and scrip dividends and option expiries;
f) financial products received or delivered to a client or nominee company during the period;
g) profits and losses realised during the period;
h) with regard to foreign financial products-
i) the conditions in terms of which the rendering of intermediary services with regard to a financial product will take place;
ii) the manner in which such financial product may be acquired;
iii) the jurisdictions from which the financial products may be acquired;
iv) the specific licensed exchange or other exchange on which the financial products are listed or traded, if applicable;
v) the country in which the financial products are licensed or registered, if applicable;
vi) the name and address of the foreign FSP’s used, if applicable;
vii) the name and address of the foreign regulator regulating the foreign FSP and if such FSP is approved or registered by such regulator;
viii) the name and address of the foreign regulator under whose jurisdiction the rendering of intermediary services in relation to specific financial products falls.

 

Insurance

 

7) A discretionary FSP must if, and to the extent, required by the registrar, maintain in force suitable guarantees or professional indemnity or fidelity insurance cover.

 

Nominee companies

 

8) A discretionary FSP must establish a nominee company with the main object of being the registered holder and custodian of the investments of clients, subject to such conditions and restrictions as may be imposed by the Registrar under section 8(4) of the Act, and the applicable provisions of regulations made under the Act, and enter into a written agreement with the company, which provides for termination of the agreement by either party on written notice of not less than 90 days.

 

Part III : Duties of Hedge Fund FSP’s, Transitional Provision and Short title

 

8A. Duties of hedge fund FSPs

 

8A.1 The relevant requirements for discretionary FSPs apply to hedge fund FSPs and their clients as if they were originally enacted for that purpose, but subject to-
a) the necessary changes;
b) the provisions of this section, and provisions of the Act or any other law, which may render a particular provision applying to discretionary FSPs clearly inapplicable to a hedge fund FSP and its clients, in general or in a particular case.

 

8A.2 A hedge fund FSP must before rendering any intermediary services to a client who has clearly indicated to the FSP that the client requires intermediary services in connection with a financial product governed by the Act to be rendered specifically by a hedge fund FSP, provide a written disclosure to the client-
a) of the applicability in terms of subsection 8A.1 to the relationship between the client and the FSP of the requirements for discretionary FSPs referred to in that subsection; and
b) in the format from time to time determined by the registrar, on risks involved in hedge funds, and obtain from the client a written confirmation of receipt of such written disclosures.

 

8A.3 A hedge fund FSP must, after having complied with subsection 8A.2, with the introductory provisions of subsection 5.1 and with subsection 5.2, and before rendering any intermediary services to the client, obtain an additional signed mandate from the client, in accordance with the proviso to the introductory provisions of subsection 5.1 and subsection 5.2, which apply with the necessary changes.

 

8A.4 The mandate from a client must confirm the existence and contents of the first mandate, if applicable as contemplated by virtue of subsections 8A.1 and 8A.3, and in particular the utilisation of a hedge fund portfolio for purposes of executing the intermediary services required by the client, and must contain express confirmation by the client that the client-
a) approves of-
i) the clients investment objectives, guidelines and trading philosophy of the hedge fund FSP, as disclosed and stated in the mandate;
ii) utilisation by the hedge fund FSP of the process to be implemented in the form of strategies or positions (including leverage and/or net short positions, borrowing limits and risk management principles to be applied to mitigate interest rate, liquidity, and credit and derivative risk), risk profile and risk management (for instance a sensitivity analysis), as disclosed and stated in the mandate; and
b) takes note of the FSP's affirmation, as stated in the mandate, that the establishment of the relevant portfolio does not conflict with any law, and that the operation and management thereof continuously comply with any law that may be applicable thereto.

 

9) This Chapter is called the Code of Conduct for Discretionary FSP’s, 2003.