As has long been expected, the Minister of Finance recently exercised his powers under the Collective Investment Schemes Control Act ("CISCA") to declare hedge funds collective investment schemes from 1 April 2015 (Government Notice 141 of 2015).
As a result of the declaration, hedge funds which invite or permit "members of the public" (as defined in CISCA) to invest money or other assets must before the end of September 2015 lodge with the Registrar of Collective Investment Schemes an application for registration as a manager to operate a hedge fund.
In addition, in a companion notice (Board Notice 52 of 2015), the Registrar of Collective Investment Schemes published on 6 March 2015 certain further requirements which hedge funds that exist on 1 April 2015 must comply with before 31 March 2016, and all other hedge funds must comply with from the date of their registration by the Registrar of Collective Investment Schemes.
The licensing requirements under the Financial Advisory and Intermediary Act relating to the hedge fund financial services providers who manage hedge fund portfolios remain unchanged.
We set out below a selection of the practical implications for existing hedge funds which accept investments from "members of the public".
- The person conducting the business of the hedge fund – which in most instances will be the general partner of the applicable en commandite partnership housing the hedge fund – must (if the hedge fund will continue to exist) before the end of September 2015 apply for registration as a manager ("Manco") in terms of section 42 of CISCA (paragraph 5 of the declaration).
- It is possible for managers to establish platforms hosting different portfolios which are administered independently of each other (paragraph 18 of the Registrar's notice). Accordingly, hedge fund portfolios could be hosted by third party hedge fund Mancos.
- Hedge funds may be housed only in collective investment scheme trust arrangements formed under CISCA or in en commandite partnerships (paragraph 16 of the Registrar's notice). Hedge funds housed in other structures, such as bewind or vesting trusts, will have to be restructured before 31 March 2016.
- Each hedge fund will have to decide whether to apply for registration as a qualified investor fund or a retail fund. Qualified investor funds are hedge funds that only permit investment by investors who have "demonstrable knowledge and experience" in financial and business matters which would enable them to "assess the merits and risks of a hedge fund investment" (or are advised by a FSP having such knowledge) and who invest at least R1million. A retail fund does not have such restrictions. Generally speaking, retail funds must comply with more detailed regulatory requirements, including detailed prudential investment requirements.
- Qualified investor funds must appoint an approved custodian (currently only a small number of banks) or an independent fund administrator who must perform the duties contemplated in section 70(1) to 70(3) in CISCA, including compiling an annual report in respect of compliance by the hedge fund with CISCA and the founding documents of the hedge fund, and furnishing that report to the Registrar (paragraph 3 of the Registrar's notice). Retail funds must appoint an approved custodian to play this role (paragraph 16 of the Registrar's notice).
- Whereas previously, hedge funds enjoyed freedom of contract to agree most issues contractually with investors, going forward an array of matters will be regulated. These include repurchase/ redemption obligations; requirements around the posting and receipt of collateral; requirements in relation to derivative instrument counterparties; requirements in relation to valuation and pricing; disclosure and reporting requirements to investors; and prudential investment requirements for retail hedge funds.
In relation to the requirements for approval to become a Manco, the following should be noted (see Government Notice 910 of 2010):
- The Manco must be a South African company.
- The board of directors of the Manco must be comprised of at least four directors, 50% must be non-executive directors and the majority of the non-executive directors must be independent. The executive directors must reside in South Africa.
- The board must be comprised of individuals who can demonstrate collective investment scheme, legal and accounting expertise.
- The Manco will need to submit its memorandum of incorporation to the Registrar of Collective Investment Schemes. The Registrar requires that such memorandum of incorporation contain restrictive conditions and that the Manco be a "ringfenced" (RF) company.
- The Manco will have to meet certain capital requirements and must provide annual financial statements in respect of the previous three years.
- If any aspect of the administration of the hedge fund is outsourced or delegated by the Manco, the prior written consent of the Registrar of Collective Investment Schemes will be required to such outsourcing and the Manco will remain liable for the conduct of the service provider.
- The Manco will be required to have necessary control, compliance and risk management procedures in place, including, for example, documentation relating to business processes, policies and controls, a complaint resolution system procedure and a business continuity plan.