South Africa’s transition to a regulated hedge fund environment is moving at pace, and applicants should respond promptly to queries from the regulator, according to Udesh Naicker, head of hedge funds at South Africa’s Financial Services Board.
Naicker was speaking at the recent HedgeNews Africa Symposium in Cape Town.
The FSB had gone through almost all applications, received by September 30 last year, and applicants could expect to at least have been called for their first meeting as of the end of February.
“We call you in and discuss the shortcomings in your application and we give you the opportunity to rectify those issues. If for whatever reason we are not satisfied with the revised submission, we will inform you of the same in writing. You are then given a third attempt at submitting the required information. At this point, whatever you submit is what we use in making a decision about your application. There is no further communication and we do not allow any further amendments.”
The FSB has targeted the third quarter to have processed all applications.
“Somewhere in the third quarter we intend to be done with the applications. While the process is iterative, it can’t be endlessly iterative,” he said. “Largely, it is dependent on the manager’s ability to turn around those queries; how quickly you get to them and how well you address what we are looking for. So if you could pay some attention to that, it really would be helpful.”
While there had been some ongoing discussion about the nature of the regulations, he noted that they were final and were not going to change in the immediate future.
“We will let [the regulations] operate for a while and when we have the benefit of hindsight we will then re-look at where issues are cropping up,” he said. “Obviously, we are flexible enough to understand that we may have to change things so that we benefit the entire industry.”
He acknowledged that disclosure requirements under Section 27 were onerous and would be looked at, as well as other “bits and pieces”.
The FSB had received 21 applications from management companies (mancos) for 12 retail schemes and 18 qualified investor schemes. Assets under management for the qualified schemes were at R72 billion and R16 billion for retail schemes. The AUM figures may include some double counting for fund of funds.
On the sequence of applications, Naicker said the process was extensive before final go-ahead, and getting through to the licensing-committee stage did not mean one could publicise that they had been approved.
“You are only approved when we actually physically give you a letter saying that all is OK, and that happens after the licensing committee. We want you to then hand us back all of those executed deeds and supplementals. They have to be signed and lodged, and it’s only once those are done that we will issue that registration letter. Thereafter you have around 30 days to get all the other ancillary agreements signed and handed in. This really is a legal process, it’s a legal registration, so it’s important that these things are done in that order.”
The transitioning period only applies to existing funds, with a 12-month window allowed to migrate assets. Newly registered funds would need to be compliant from day one.
“The purpose of the transitioning provision was to prevent a fire-sale of assets. So there are portfolios that will probably be out of synch at date of registration. So we will give you 12 months to re-balance.”
Other parts of the legislation would need to be complied with from day one. “If there is a minor policy, HR for example, we are not going to be too fussy about it, we’ll give you the year to fix it. But risk management must get going from day one, [it is] of paramount importance.
“Where you are migrating portfolios and changing fund structure, from debenture to a trust for example, we’d like to understand that you have actually applied your mind to what it takes to transition. So we ask you for a transition plan. We need it to be detailed; we need you to demonstrate that you have considered all the issues and variables that are bound to crop up.”
One potential problem was if everybody was transitioning at the same time, Naicker noted, which meant administrators might face a bottleneck. “Just let the registrar know, keep us informed, and we will grant you extensions where necessary,” he said. “But it is not a foregone conclusion… what we want to prevent is you getting up on month 11 and telling us you don’t have the time to transition by month 12. That’s a scenario we are not going to tolerate.”
Naicker stressed that risk management was key.
“It’s a regulatory focus area, [and is] arguably the single most important aspect of the regulation. It will all boil down to your ability to manage the risk you face. The risk is not merely operational. It is operational and portfolio risk, and we expect you to separate it out.”
He said the minimum requirements were clearly laid out in Section 24 of the regulation.
“Another major issue is the capacity of your risk-management division and of the individuals that manage it. A lot of guys have come back and said they outsource [to a risk-management company]. But they are your content providers… they will hand you a report and somebody in your business is going to have to do something with it. That is where this gap sits. We don’t know what you are going to do with it, when you are going to do it, who does it, what they do. We need detail.”
He added that applicants would be visited within six months post-registration, and would be required to provide evidence of their risk-management processes.
“It would be wise to write your plans and processes in a manner that reflects your actual business operations. Don’t write it because you think it’s something that we want to read. It has to be representative of how your business operates because we will pick up those gaps and it’s going to be an uncomfortable situation down the line.”
He said while management fees were a business decision, disclosure was mandatory. “You have to be able to tell us how this entire thing is calculated. Use me as the litmus test. If I can’t understand it, chances are we are going to be asking you to give us more information. It’s got to be in a way that is understandable to the end-investor because that is ultimately the party that we focus on.”
He said there was a three-month notice period for changes to fee structure and managers were required to inform the regulator of any plans to effect such changes.
What did the FSB expect from the regulation? “People ask us how we expect this to pan out; the objective of it all. In a nutshell, we want to drive industry stability. We’d like to believe that over the long term we have a robust set of regulations that will ably protect the interests of managers and investors and keep out the kind of untoward behaviour that the regulations are intended to prevent. Obviously we want the industry to grow. It doesn’t serve us to stifle that growth, so we try and assist in any way that we can. It’s not our intention to shock the system. So if there is anything that we do change… it’s going to be a phased-in approach and we will always consult extensively with the industry because it is, after all, your interests that we need to serve as well.”
He stressed that the industry should feel free to communicate with his office, both at manco and individual fund level.
“I’d like to think that our office to date has been approachable. We treat all queries in an even-handed manner. We try to be as transparent as we possibly can… I’d like to think that if there is an issue, that you can pick up the phone or come to see us and we can find a solution that’s amicable to us both.”
He added that it was the manco, and not the manager, that was regulated, and queries could be channelled through the manco, but he was nevertheless open to hearing directly from managers.
“I’m not averse to anybody calling me. I am averse to people calling me having thought through a problem that they have had for the last two weeks and then expecting an answer over the telephone. Obviously we can’t do that. We don’t give you anything verbally, we do insist that it is sent to us in an email – and just give us the time to consult with our lawyers, inevitably, and we will come back to you. That’s the way we deal with it.” Copyright. HedgeNews Africa – March 2016.
