New rules for Hedge Fund FSPs

Last year the FSB introduced new regulations in terms of the Financial Advisory and Intermediary Services Act (FAIS), to govern the conduct and registration of managers and intermediariesof hedge funds and fund of hedge funds.

Codes of Conduct have been prescribed by the Notice on Codes of Conduct for Adminstrative and Discretinary FSPs Amendment Notice, 2007 (Board Notice 89 of 2007). The revelant requirments for discretionary FSPs and their clients, subject to necessary changes.

Signed mandates

The Code of Conduct require hedge fund FSP's to provide prescribed written disclosures to clients and obtain signed mandates containing prescribed confirmations from clients.

Amongst others, it must contain an express confirmation by the client that the client approves of the investment objectives, guidelines, trading philosophy, and the utilisation 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.

The mandate must also contain an express confirmation by the client that the client takes note of the FSP's affirmation 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.

Fit and Proper

The FSB also issued a Determination of Fit and Proper Requirements for Financial Services Providers Amendment Determination, 2006 (Board Notice 87 of 2007). The Determination establishes a Category IIA FSP, which includes all persons who require licences as hedge fund FSP's.

Applications

The FSB further issued a Determination of Forms of Application for Authorisation as Financial Services Providers, 2003 (see Board Notice 88 of 2007) This prescribes the forms which must be completed by an applicant for a licence as a hedge fund FSP and be submitted to the FSB.

Hedge fund managers are advised to complete their applications as soon as possible. Note that in terms of section 36 of FAIS, any person who acts as an FSP, while not licensed do so, or who carries on business by rendering financial services to clients for or on behalf of any person who is not authorised as an FSP; or in any application, deliberately makes a misleading, false or deceptive statement, or conceals any material fact, is guilty of an offence and is on conviction liable to a fine not exceeding R1 000 000 or to imprisonment for a period not exceeding 10 years, or to both such fine and such imprisonment.