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Asset management
in South Africa
Ten things to know
Asset management in South Africa
Asset management in South Africa
01 | Licensing of asset managers
04 | Minimum capital for asset managers
02 | Licensing of alternative fund managers
05 | Registration of foreign funds
South African asset managers must register as financial
service providers (FSPs) with the Financial Services Board
(FSB) under the Financial Advisory and Intermediary
Services Act (FAIS). Any person carrying on asset
management business in South Africa, or from abroad
directed at South African clients, whether in a discretionary
or non-discretionary capacity, must be licensed as an FSP
under FAIS.
A category of FSP licence tailored specifically for hedge fund
managers (category IIA) was introduced in 2007.
Fit and proper requirements under FAIS require different
categories of FSPs to maintain specified minimum levels
of capital. For example, category I FSPs (essentially, nondiscretionary FSPs) must maintain liquid assets equal to or
greater than 4/52 weeks of annual expenditure. An asset
manager appointed as a registered manager of a CIS under
CISCA is also required to maintain a certain minimum
amount of capital, which varies according to the type of CIS.
The FSB is now (September 2014) seeking to introduce a
category of FSP licence tailored specifically for private equity
managers. The preliminary draft of the Code of Conduct for
Private Equity Managers borrows a number of concepts from
the EU’s Alternative Investment Fund Managers Directive.
In particular, significant emphasis is placed on conflicts of
interest, as well as remuneration and reward of personnel.
There is also a proposed restriction on the leverage that can
be employed by private equity funds.
It is possible for foreign investment funds to register as
“foreign collective investment schemes” under CISCA.
A foreign investment fund which is so registered may be
marketed publicly in South Africa. In order to qualify for
South African registration, a foreign fund must have an
investment policy which is consistent with the requirements
set out under CISCA. However, CISCA has significantly more
restrictive prudential requirements than, for example, the
European UCITS regime. In particular, under CISCA a CIS
may only use derivatives for limited hedging purposes.
Consequently, many UCITS funds do not qualify for
registration in South Africa.
03 | Regulation of retail funds
06 | Alternative investment funds
South African retail investment funds are known as
“collective investment schemes” (CISs) and are regulated
under the Collective Investment Schemes Control Act
(CISCA). There are different types of collective investment
scheme, including a CIS in securities, a CIS in property
and a CIS in participation bonds. CISCA places significant
restrictions on the asset classes in which a CIS can invest as
well as concentration limits on CIS portfolio exposure. The
manager of a CIS must be approved and regulated as a CIS
manager under CISCA.
02 Norton Rose Fulbright
Alternative investment funds, including hedge funds and
private equity funds, are currently (September 2014)
unregulated in South Africa. Accordingly, such funds
need to be carefully structured to ensure that they are not
inadvertently regulated by CISCA’s broad provisions. The
FSB and the South African Treasury are seeking to introduce
a regulated regime for hedge funds in South Africa under
the auspices of CISCA and in April 2014 produced a draft
set of regulations for public comment. The new regime will
introduce two categories of regulated hedge funds, being
qualified investor hedge funds, which will be limited in their
membership to private arrangements amongst qualified
investors, and retail investor hedge funds, which may
be marketed to the public but will be subject to a stricter
regulatory regime.
Asset management in South Africa
07 | Marketing foreign funds
Comparatively, South Africa is an extremely restrictive
jurisdiction relative to the marketing of foreign investment
funds. In essence, fund promoters, both foreign and local
and whether or not they are registered as CIS managers
under CISCA, are not allowed to solicit investments in
funds which are not registered under CISCA from members
of the public in South Africa. As a concept, “members of
the public” is widely interpreted to include individuals,
parastatals and institutions and, unlike many other
jurisdictions, South Africa does not have a more permissive
private placement regime for sophisticated or high net worth
investors.
It is permissible for a South African investor to invest in
an unregulated foreign fund where the investor makes the
initial enquiry (a so called “reverse solicitation”).
08 | Exchange control and investments into Africa
Previously, South African private equity funds were required
to obtain exchange control approval from the South African
reserve Bank (SARB) on a case-by-case basis for investments
outside of South Africa. In late 2010, however, following
significant lobbying from the industry, the SARB introduced
a new exchange control dispensation for private equity
funds. Domestic private equity funds mandated to invest
into Africa are now able to apply for upfront exchange
control approval to invest all of their commitments. The
approval is usually issued subject to a number of ongoing
reporting requirements and, in some cases, requires renewal
every three years. The applicant fund is also required to
acquire at least 10% of the equity capital of each foreign
target company in which it invests.
09 | Tax residency of foreign investment funds
A South African asset manager of an offshore investment
fund faces a significant risk of dragging that fund onshore
i.e. of that fund being deemed to be resident in South
Africa for tax purposes. However, under the Income Tax
Act, certain services provided by a South African manager
to a foreign investment fund are now disregarded for the
purposes of determining whether that fund is tax resident.
The carve-out has a number of requirements and, most
notably, the offshore fund’s portfolio must comprise solely
of cash, government bonds, listed instruments and regularly
traded unlisted instruments. As a consequence, private
equity funds generally do not qualify for the carve-out. A
further requirement of the carve-out is that South African
residents may not directly or indirectly own more than 10%
of the value of the offshore fund.
10 | Pension fund investment into alternative
funds
Prudential rules for South African pension funds are set
out in Regulation 28 under the South African Pension
Funds Act. Regulation 28 was revised in February 2011
to introduce many new investment categories for pension
funds, including “private equity fund” and “hedge fund”
categories. Under the new Regulation 28 a pension fund can
now, subject to certain requirements, invest up to 15% of
its assets in hedge funds and private equity funds, whether
local or foreign.
Norton Rose Fulbright 03
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Contacts
For more information contact:
Lance Roderick
Director
Norton Rose Fulbright South Africa
(incorporated as Deneys Reitz Inc)
Tel +27 31 582 5654
lance.roderick@nortonrosefulbright.com
Gareth Weston
Director
Norton Rose Fulbright South Africa
(incorporated as Deneys Reitz Inc)
Tel +27 11 685 8550
gareth.weston@nortonrosefulbright.com
Louise Campion
Director
Norton Rose Fulbright South Africa
(incorporated as Deneys Reitz Inc)
Tel +27 11 685 8857
louise.campion@nortonrosefulbright.com
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