THE%20COLLECTIVE%20INVESTMENT%20SCHEMES%20CONTROL%20BILL,%202002

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THE COLLECTIVE INVESTMENT SCHEMES CONTROL BILL,
2002

• PRESENTATION TO THE PORTFOLIO COMMITTEE ON
  FINANCE
• 13 AUGUST 2002
• SAMANTHA ANDERSON
• DIRECTOR OF FINANCIAL MARKETS
• NATIONAL TREASURY

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THE COLLECTIVE INVESTMENT SCHEMES CONTROL BILL,
2002

• OVERVIEW
• 1. WHAT IS A COLLECTIVE INVESTMENT SCHEME?
• 2. HISTORY OF COLLECTIVE INVESTMENTS
• 3. PROFILE OF THE INDUSTRY
• 4. PROFILE OF INVESTORS
• 5. PRUDENTIAL AND OTHER MEASURES FOR INVESTOR
  PROTECTION
• 6. INTERFACE WITH OTHER INVESTOR PROTECTION
  MEASURES

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WHAT IS A COLLECTIVE INVESTMENT SCHEME?

• A SCHEME THAT ALLOWS INVESTORS WITH SIMILAR
  OBJECTIVES TO POOL THEIR FUNDS FOR INVESTMENT IN
  A SINGLE PORTFOLIO OF SECURITIES/ PROPERTY/
  PARTICIPATION BONDS THAT WILL BE ADMINISTERED BY
  PROFESSIONAL MANAGERS
• INVESTORS IN A PORTFOLIO DO NOT PURCHASE THE
  UNDERLYING ASSETS DIRECTLY.
• OWNERSHIP OF THE ASSETS IS DIVIDED INTO UNITS OF
  ENTITLEMENT OR A PARTICIPATORY INTEREST

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WHAT IS A COLLECTIVE INVESTMENT SCHEME?

• THE NUMBER AND VALUE OF THE PARTICIPATORY
  INTEREST ACQUIRED BY THE INVESTOR DEPENDS ON THE
  UNIT PURCHASE PRICE AT THE TIME THE INVESTMENT
  WAS MADE AND THE AMOUNT OF FUNDS INVESTED
• THE RETURN ON AN INVESTMENT IS USUALLY IN THE
  FORM OF DIVIDENDS AND CAPITAL APPRECIATION
  DERIVED FROM THE POOL OF ASSETS UNDERLYING THE
  FUND
• INVESTMENTS CAN BE MADE EITHER AS A LUMP SUM OR
  BY MONTHLY OR ANNUAL INSTALMENTS OR BOTH
• DEFINITION CONTAINED IN THE BILL SECTION 62
  DEALS WITH A DECLARED CIS

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HISTORY OF COLLECTIVE INVESTMENT SCHEMES

• 1. ORIGINS OF THE INDUSTRY
• CHANGE OF CLASSIFICATION FROM UNIT TRUST TO
  COLLECTIVE INVESTMENT.
• FIRST UNIT TRUSTS WERE ESTABLISHED IN THE 186Os
  IN LONDON FOR PURPOSES OF RAISING FUNDS FOR THE
  BRITISH COLONIAL GOVERNMENT - FOREIGN AND
  COLONIAL GOVERNMENT TRUST
• LAUNCHED IN THE US IN THE 1920s AND ONLY BECAME
  POPULAR IN THE UK IN THE 1930s. IN OTHER
  COUNTRIES COLLECTIVE INVESTMENT SCHEMES ONLY
  BECAME POPULAR INVESTMENT INSTRUMENTS AFTER THE
  1950S

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HISTORY OF COLLECTIVE INVESTMENT SCHEMES

• IN SOUTH AFRICA, FIRST UNIT TRUSTS LAUNCHED IN
  1965
• INDUSTRY GREW IN THE LATE 1960s. THEN THE 1969
  CRASH OF THE JSE SPARKED A DECADE OF BEAR MARKETS
  WHICH ONLY RECOVERED AGAIN IN THE LATE 1970s
• SINCE THE MID 1990s THE INDUSTRY HAS GROWN
  SUBSTANTIALLY
• COLLECTIVE INVESTMENTS, HOWEVER, HAVE A LONG
  HISTORY IN OUR CULTURE THROUGH THE PROLIFERATION
  OF STOKVELS
• ALTHOUGH STOKVELS ARE AIMED AT PROVIDING ACCESS
  TO A LUMP SUM OF CAPITAL, THE WAY IN WHICH THE
  CAPITAL IS RAISED IS VIA COLLECTIVE INVESTMENT IN
  A FUTURE RETURN

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PROFILE OF THE COLLECTIVE INVESTMENT SCHEMES
INDUSTRY

• 2. PROFILE OF INSTITUTIONS
• 2.1 CORPORATE/OWNERSHIP STRUCTURE
• THE MAJORITY OF CIS OPERATORS OR MANAGEMENT
  COMPANIES ARE EITHER INSURERS OR BANKS, OR OWNED
  BY INSURERS OR BANKS
• THE MARKET IS DOMINATED BY 3 OR 4 LARGE COMPANIES
  THAT HAVE THE LARGEST NUMBER OF MANAGEMENT
  COMPANIES UNDER THEIR CONTROL
• TOTAL ASSETS UNDER CONTROL BY ALL REGISTERED
  MANAGEMENT COMPANIES IS APPROX. R 176 billion

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PROFILE OF THE COLLECTIVE INVESTMENT SCHEMES
INDUSTRY

• 2. PROFILE OF INVESTORS
• RETAIL VERSUS INSTITUTIONAL - 21 INSTITUTIONAL
  79 RETAIL
• DATA FROM ALL MEDIA PRODUCT SURVEY 2001
  (AMPS) SHOWS THE FOLLOWING BREAKDOWN OF
  CONSUMERS OF UNIT TRUSTS
• By age 65yrs 8.03 By
  race White 19.7
• 50 - 64yrs 7.25
  Asian 9.52
• 35 - 49yrs 6.45
  Coloured 4.54
• 25 - 34yrs 4.62 Black 1.75
  16 - 24yrs 0.92

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PROFILE OF THE COLLECTIVE INVESTMENT SCHEMES
INDUSTRY

• 2. PROFILE OF INVESTORS (Contd.)
• OWNERSHIP ACCORDING TO HOUSEHOLD INCOME
• ( income per month)
• R 16 000 30.37
• R10 - R 16 000 19.99
• R5 - R 10 000 13.38
• R3 - R 5 000 5.98
• R2 - R 3 000 3.41
• gt R 2000 0.56
• SOURCE AMPS 2001

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PRUDENTIAL AND OTHER MEASURES FOR INVESTOR
PROTECTION

• 1. SEPARATION OF THE MANAGER OF A SCHEME FROM
  THE CUSTODIAN/TRUSTEE OF ASSETS
• EVERY SCHEME MUST APPOINT A MANAGER THAT IS
  RESPONSIBLE FOR THE ADMINISTRATION OF THE SCHEME
  AND THE INVESTMENT STRATERGY TO BE FOLLOWED.
  SECTIONS 2, 4 5 OF THE BILL EXPLAIN THE DUTIES
  OF THE MANAGER OF A SCHEME
• PART IX SECTIONS 68 - 72 GOVERN THE APPOINTMENT,
  QUALIFICATIONS, DUTIES LIABILITY OF THE
  CUSTODIAN/ TRUSTEE - SUFFICIENT FINANCIAL
  RESOURCES ALL OPERATIONAL ACCOUNTS OF A SCHEME
  ARE CONTROLLED BY THE TRUSTEE
• PART XII SECTIONS 104 105 EXPLAIN THE DETAIL
  OF THE SEPARATION OF INVESTOR FUNDS FROM THE
  MANAGER

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SCHEME STRUCTURE
SCHEME
PORTFOLIO
PORTFOLIO
TRUST DEED
TRUSTEE
PORTFOLIO
PORTFOLIO
UNDERLYING ASSETS
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PRUDENTIAL AND OTHER MEASURES FOR INVESTOR
PROTECTION

• 2. LIQUIDITY PROVISIONS
• RISK ASSOCIATED WITH THE SALE OF THE WHOLE OR
  PART OF A PARTICIPATORY INTEREST BY ONE OR MORE
  INVESTORS FOR THOSE REMAINING IN THE SCHEME
• THE MAIN PROVISIONS TO ASSIST WITH THE EFFECTIVE
  MANAGEMENT OF LIQUIDTY IN A SCHEME ARE
• 1. BORROWING BY MANAGERS OF A SCHEME AGAINST THE
  ASSETS
• UNDER MANAGEMENT (ALL TYPES OF
  CISs)
• 2. RING FENCING OF SALE ORDERS FOR SCHEMES IN
  SECURITIES
• AND
• 3. CAPITAL ADEQUACY OF THE MANAGER

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PRUDENTIAL AND OTHER MEASURES FOR INVESTOR
PROTECTION

• LIQUIDITY PROVISIONS 1. BORROWING
• IN TERMS OF SECTION 96 OF THE BILL BORROWING IS
  LIMITED TO 10 OF TOTAL VALUE OF ASSETS
  (EQUITIES) AND IS RESTRICTED FOR PURPOSES OF
  BRIDGING LIQUIDITY
• FOR A PROPERTY CIS, BORROWING OF UP TO 30 OF
  ASSETS UNDER MANAGEMENT IN THE SHORT-TERM
• SECTION 58 FOR PARTICIPATION BONDS THERE IS A
  MINIMUM INVESTMENT PERIOD OF 5 YRS. LIQUIDITY IS
  MANAGED IN THIS WAY
• REGULATIONS WILL DETERMINE ALL THE TERMS OF
  BORROWING FOR ALL TYPES OF CISs e.g. REPAYMENT
  SCHEDULES, INTEREST RATES ETC.

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PRUDENTIAL AND OTHER MEASURES FOR INVESTOR
PROTECTION

• LIQUIDITY PROVISIONS 2. RING FENCING OF ASSETS
• IN TERMS OF CONDITIONS DEFINED BY THE REGISTRAR,
  PROVIDED FOR IN SECTION 114 (f) OF THE BILL, A
  MECHANISM FOR THE RING FENCING OF ASSETS IS
  PROVIDED FOR
• THE RING FENCING PROVISIONS ARE NOT APPLICABLE
  TO INVESTORS WITH LESS THAN R50 000 IN A SCHEME
  INVESTED IN EQUITIES
• AN INVESTOR WITH MORE THAN R50 000 IN A SCHEME
  THAT WISHES TO SELL ITS PARTICIPATORY INTEREST
  MAY BE REQUIRED TO WAIT UP TO 20 BUSINESS DAYS
  FOR PAYMENT - PRICE DETERMINED ON EACH DAY DURING
  THE PERIOD OF SALE
• INVESTOR CAN CHOOSE TO CANCEL A SELL ORDER

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PRUDENTIAL AND OTHER MEASURES FOR INVESTOR
PROTECTION

• LIQUIDITY PROVISIONS 3. CAPITAL ADEQUACY
• CHANGES TO THE CAPITAL ADEQUACY REQUIREMENTS - NO
  LONGER THAT THE ASSETS ARE IN-FUND BUT ARE HELD
  BY THE MANAGEMENT COMPANY
• SECTION 88 90 CAPITAL REQUIREMENTS OF THE
  MANAGER AND ISSUES OF FINANCIAL RECORD KEEPING

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PRUDENTIAL AND OTHER MEASURES FOR INVESTOR
PROTECTION

• 4. INVESTMENT SPREAD
• THE MOST COMMON PRUDENTIAL MEASURE IS LIMITATIONS
  ON THE TYPES OF INVESTMENTS PERMISSABLE IN A
  PORTFOLIO e.g 5 IN A SINGLE SHARE OR 5 OF TOTAL
  VALUE OF MARKET CAP IN A SINGLE SHARE - VARIES
  BETWEEN DIFFERENT TYPES OF PORTFOLIOS
• SECTION 46 OF THE BILL MAKES PROVISION FOR
  CONDITIONS DEFINED BY THE REGISTRAR TO GOVERN
  THIS ASPECT OF THE BUSINESS OF A MANAGER
• AN EXAMPLE IS THE REGULATIONS PERTAINING TO THE
  USE OF DERIVATIVES IN A SCHEME - ALL EXPOSURES
  MUST BE COVERED

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PRUDENTIAL AND OTHER MEASURES FOR INVESTOR
PROTECTION

• 3. DISCLOSURE
• DISCLOUSURE IS THE MOST IMPORTANT NON-PRUDENTIAL
  INVESTOR PROTECTION MEASURE
• SECTION 3 OF THE BILL DEALS WITH DISCLOSURE OF
  INFORMATION
• SECTION 93 GOVERNS PERMISSIBLE DEDUCTIONS FROM A
  PORTFOLIO - NO HIDDEN COSTS, FEES OR COMMISSIONS
  TO THE INVESTOR
• ALL ADVERTISING AND PROMOTION MATERIAL
  DISTRIBUTED BY A MANAGER MUST BE LODGED WITH THE
  REGISTRAR AND CAN BE WITHDRAWN FROM PUBLIC
  CIRCULATION

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INTERFACE WITH OTHER INVESTOR PROTECTION MEASURES

• MOST IMPORTANT TO REMEMBER THE ROLE THAT THE FAIS
  BILL, 2002 WILL PLAY ONCE PROMULGATED
• PROVISIONS TO ENSURE THAT FRAUDULENT OR
  INAPPROPRIATE SCHEMES ARE NOT SOLD TO INVESTORS
  ARE CONTAINED IN THE FAIS BILL
• WITHIN THE CIS BILL, PROVISIONS FOR INDUSTRY
  ASSOCIATIONS AND THE INTERFACE WITH THE REGISTRAR
  PROVIDE TWO LEVELS OF SUPERVISION IN TERMS OF THE
  CONDUCT OF MANAGERS
• FOREIGN SCHEMES MAY ONLY OPERATE WITH PRIOIR
  LOCAL APPROVAL BY THE REGISTRAR
• SECURITY SERVICES BILL AND THE UNDERLYING
  STRUCTURE OF THE INVESTMENT MANAGEMENT INDUSTRY

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QUESTIONS?