Collective investments schemes run foul of regulator

Gareth Stokes, FAnews Online Editor

Are you tired of reading about FAIS Ombudsman determinations against financial advisers? In their latest press release the Financial Services Board (FSB) announces punitive measures – by way of fines –against two of the country’s larger collective investment schemes. Where did these investment companies go wrong? In each case the transgressor contravened a technical aspect of the Collective Investment Schemes Control Act, No 45 of 2002.

The Act governs South Africa’s burgeoning Collective Investment Schemes industry, which houses millions of private and institutional savers. At 30 September 2009 industry assets topped R746bn in 901 funds. The bulk of this money remains invested in so-called domestic funds, which account for R706bn of total assets across 759 funds.

Too little liquid capital

The typical collective investment scheme (referred to more traditionally as a unit trust) has a fund manager and a trustee. It is the fund manager’s responsibility to ensure compliance with the various provisions of the Act. The first fund manager punished by the FSB Enforcement Committee is NewFunds (Pty) Limited. NewFunds, a joint venture between Absa Capital and Vunani Capital, was established in August 2007. In terms of the agreement the company launched an FSB approved collective investment scheme named the NewFunds Collective Investment Scheme. A number of exchange traded funds (ETFs) have since been launched under this structure.

Where did NewFunds go wrong? The Registrar of Collective Investment Schemes referred a case to the Enforcement Committee at the FSB after it emerged that NewFunds’ liquid capital position was insufficient. The capital position was ‘measured’ on 30 September 2009. The case is technical in nature and refers specifically to contraventions of section 88(1) of the Act. The appropriate level of liquid capital applicable at the time of the contravention was set out in Notice 2072 of 2003.

During the investigation a number of mitigating factors were raised. “The Registrar took into account that NewFunds co-operated fully during the investigation and [subsequent] enforcement action, the contravention was a bona fide oversight, no prejudice resulted from the contravention and NewFunds had not contravened the Act before.” The Registrar agreed to a penalty of R20 000, which was imposed by the Enforcement Committee on NewFunds on 2 December 2009. Although the fine isn’t particularly harsh, you should take comfort from the fact that regulatory oversight mechanisms are working in the CIS space.

Exceeding investment limits

The second company to receive a regulatory ‘slap on the wrist’ was Coris Capital Collective Investment Managers Limited. The Registrar referred Coris to the Enforcement Committee for being in contravention of “paragraph 3(4)(a) of Notice 1503 of 2005, issued in terms of sections 40, 46 and 85 of the Act.” In layman’s terms: “A manager may include in a portfolio, participatory interests in portfolios (‘underlying portfolio’) of collective investment schemes in securities or of foreign collective investment schemes to a maximum aggregate value of 20 per cent of the market value of the first-mentioned portfolio …”

It seems Gryphon Dividend Income Fund’s – on of the Coris capital stable – invested in Prudential Dividend Income Fund – in excess of this limit. The contravention occurred at 30 June 2009. The Enforcement Committee – as agreed to by the Registrar – levied a penalty of R10 000 on Coris Capital on 30 November 2009. The mitigating circumstances include: “that Coris Capital co-operated fully during the investigation and the enforcement action, that the non-compliance was rectified, that no prejudice resulted from the contravention, and that Coris Capital has not contravened the Act before.”

Editor’s thoughts: Neither of the cases mentioned in today’s newsletter resulted in any prejudice… No investors were compromised in what can be viewed as minor administrative oversights. We’re impressed with the FSB Enforcement Committee for pursuing the matter and hope this inspires all local CIS fund managers to tweak their administrative systems. Do you think the fines dished out to NewFunds and Coris are adequate to dissuade them (and others) from future contraventions of the Act? Add your comments below, or send them to gareth@fanews.co.za