South African investors can count themselves lucky. If recent
newspaper reports are anything to by, the Financial Services Board
will soon publish for comment new laws which will regulate hedge
The initiatives for regulation are borne out by the financial
conundrum that the world markets have found themselves in for the
past two years. After the spectacular worldwide burst of the
financial markets bubble, Governments around the world called for
increased regulation of the financial sector. Lawmakers responded
with vigour and not many days go by without some country somewhere
in the world introducing some or other regulatory reform.
Compared to many Pan-European countries, South Africa is streets
ahead. A draft directive of the European Union has recently been
leaked before its official publication date dealing with proposals
for the regulation of alternative investment fund managers on a
pan-European basis. The draft directive applies only to managers of
alternative investments funds (hedge funds and private equity funds
not already regulated under the UCITS Directive). While it is
proposed that the directive should only apply to managers
exercising control over assets of significant value, it is quite
surprising to read simple inclusions in that directive, such as the
requirement for managers to obtain necessary authorisations from
their home state to market and manage a fund from and in the
European Union and to show suitable qualifications and expertise in
the management of the identified assets and instruments of the
funds. Investors in South Africa would have taken these
requirements for granted.
In South Africa hedge fund managers are regulated under the
Financial Advisory and Intermediary Services Act. This Act
regulates then rendering of advice and intermediary services in
relation to certain financial products to clients in South Africa.
Those who render advice and intermediary services to South Africans
must be registered with the Financial Services Board and must meet
certain fit and proper requirements. Hedge fund managers are also
required to have appropriate qualifications and to demonstrate to
the Financial Services Board that they have a suitable track record
in relation to the management of particular hedge fund strategies.
The existing requirements extend to demonstrating knowledge, skills
and competency in managing the instruments making up the fund
There are now moves afoot to increase the ambit of industry
regulation to the hedge funds themselves. The feeling among
industry insiders and regulators is that if effective regulation
can be accommodated under existing legislation, in particular the
Collective Investments Schemes Control Act, 2002 then this would be
the preferred regulatory route. If this is achieved in the next
while, South Africa will be the first country in the world to have
adopted laws regulating this industry, specifically the hedge funds
themselves. There are a number of options available to regulators
under the collective investments schemes legislation, the most
likely of which is to create a new separate category of collective
investment scheme relating to hedge funds in much the same way that
collective investments schemes in property, participation bonds and
securities have been dealt with.
Regulation under the Collective Investments Schemes Act or other
legislation would give investors welcome comfort. If hedge funds
are brought under the collective investments schemes legislation,
certain prudential requirements would be imposed on the hedge funds
themselves and the hedge fund managers. Reporting requirements
would be regularised and it is likely that additional disclosure
obligations would be imposed on managers and funds using highly
risky and highly leveraged investment strategies impacting on
liquidity of hedge funds.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Security in one form or another is given by people who transact with each other on a daily basis. The bigger the transaction, the greater the security required.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).