Kim Gibb, head of investor services and product, Prescient Fund Services
A management company (manager), as defined under the Collective Investments Control Act 45 of 2022 (CISCA), has an important role to play in how a unit trust, including both traditional and hedge fund portfolios, operates in today’s complex regulatory environment. Often the manager’s responsibility is regulatory oversight and creating a platform for investment managers.
Here we unpack the role a manager must play and how this is an advantage to the investment manager, allowing them to focus on their core activities of investment decision-making and managing portfolios.
A manager is required to be regulated by, and registered with, the Financial Sector Conduct Authority (FSCA) as a collective investment scheme management company. Whilst the manager is ultimately responsible for the management and control of the collective investment scheme, they must also ensure regulatory and mandate compliance of the portfolios and perform an independent risk-monitoring function.
A manager is responsible for the creation, maintenance and oversight of the policies required under any applicable law in respect of the scheme (eg: a collective investment scheme in security and for retail and qualified investor schemes). The manager is required to have a dedicated compliance officer who oversees all the regulatory reporting required, along with post-trade compliance monitoring. The compliance officer records and liaises with the investment manager if any breaches occur. The compliance officer reports all advertent regulatory breaches to the FSCA on a quarterly basis.
The compliance officer also ensures that the requirements under Board Notice 92 relating to marketing material, application forms and minimum disclosure documents have been complied with. After signing off on all marketing material, it is submitted to the FSCA. Similarly, the compliance function ensures compliance with other board notices, including Board Notice 90 that governs what a collective investment scheme in security can invest into.
The manager acts as a liaison with the FSCA and is subject to regular visits from the FSCA.
For hedge fund schemes, the manager is required to have a comprehensive risk-management function (separate from any of its fund administration functions). This risk manager is responsible for the implementation of effective risk-management policies and procedures to identify, measure, manage and monitor – on an ongoing basis – all risks relevant to the manager’s hedge fund schemes, including the investment strategies to which the underlying portfolios are or may be exposed. The manager must also employ the services of an outsourced external risk data provider, with whom the risk manager will work closely to analyse and determine any risk breaches in the underlying funds. The risk manager reports monthly (retail hedge funds) and quarterly (qualified hedge funds) to the FSCA, including any breaches of mandate or regulatory risk limits.
The manager is responsible for real-time risk measurement and analysis of fund positions, daily reporting and limit monitoring, as well as calculating and monitoring value-at-risk (VAR) and fund exposures to ensure regulatory and mandate levels are adhered to. The risk manager analyses counterparty, credit and liquidity limits to ensure the portfolio and the manager are not exposed to concentration risk. They ensure that the risk profile and investment activities of the underlying portfolios disclosed to investors are consistent with the risk limits that have been set out in the mandates. The risk limits set in the policy are monitored and the management executive committee notified when the underlying portfolios’ risk profile is inconsistent with these limits, or there is a material risk that the risk profile of the portfolio becomes inconsistent with these limits.
Valuation and fund administration services
In valuing assets, the manager ensures that an appropriate level of independent review is taken for each valuation, particularly any valuation that may be influenced by the manager or the appointed investment manager. This is evidenced using independent third-party administrators.
The manager ensures the appointed administrators document and maintain valuation policies. The consistent and accurate application of these policies is significant in the valuation process. Should the administrator use in-house models to value assets, comfort can also be placed by the manager on the ISAE3402 Report or Audit Report as an independent validation on such models. Any qualified opinions and recommendations issued by the respective independent auditor are evaluated by the manager.
Managers have to adopt the FSCA NAV Pricing Standard, in terms of its distribution policy, and apply this policy across the hedge portfolios. The manager must ensure that all income is distributed annually, and applies all deductible expenses to the distributable income on a pro- rata basis, calculated and tracked at a series level if series accounting methodology is applied, or at a class level if equalisation methodology is applied. The manager conducts a review each financial year-end and if a portfolio does not accrue enough income to constitute a positive income price, it may be deemed necessary to capitalise the negative income.
The manager is required to ensure that the portfolios are priced monthly, at the least. They check the accuracy of the calculation and accrual of management and performance fees, and thus the final closing net asset value and associated price. The manager facilitates the payment of any fees and other permissible fund expenses out of the portfolio.
Investor liability administration (i.e. transfer agency) services
The manager, via the appointed administrator, maintains an accurate investor register with respect to the units or participatory interests of the investors in the portfolio. The administrator arranges for the issue, subscription, purchase, repurchase, transfer, switch, redemption, series and equalisation consolidation of investor participatory interests in accordance with proper instructions, and enters such transactions into the investor register.
The manager is an accountable institution in terms of the Financial Intelligence Centre Act, 38 of 2001 (FICA). They are responsible for administering all FICA requirements for the portfolio’s investors as per the relevant FICA guidelines and practice notes. The portfolio’s investors are essentially the manager’s clients, and it is important for the manager to determine the ultimate beneficial owner of the investment along with the source of funds.
The manager must ensure that statements are issued to each investor, evidencing the investor’s participatory interest within a portfolio as well as consolidated investor statements for tax purposes. The manager provides information to the regulated intermediary and/or SARS where applicable for tax reporting purposes (whether for dividend withholding tax purposes or otherwise).
The manager administers the tax affairs of the portfolio. It will register the portfolio with the South African Revenue Service (SARS) and obtain a tax identification number. Annual tax returns are filed with SARS and the manager will deal with any SARS queries that may arise.
Oversight of service providers
The manager has the obligation to appoint all service providers to the scheme(s). The key service providers are the trustees, custodian, prime broker, administrator, risk provider and auditor. The manager must maintain a comprehensive outsourced service provider policy. This policy will include details on the upfront due diligence performed to contract with the service provider as well as the ongoing due diligence and monitoring. This policy includes regular and ongoing visits to all recorded prime brokers, administrators and risk providers as duly authorised by the regulator.
Any of the parties or contracted service providers providing valuation, risk, or other services to the fund portfolios should be provided full disclosure of all relevant information. All details pertaining to the investments and instruments of the portfolio will be provided in order that the service provider may fulfil their contractual obligations.
The manager must demonstrate to the FSCA that it has a process in place to perform initial due diligence and ongoing monitoring of the appointed investment managers of the portfolios.
The manager must prepare annual financial statements for the fund schemes. These are subject to an annual external audit. The manager appoints an external auditor and ensures that all information is provided to the auditor to complete the audit. After the financial statements are signed, they are used to prepare an abridged version which must be sent to all investors. The full version of the annual financial statements is then made available at the manager’s offices.
These functions and others are part of the important role of a management company, which is a vital cog in the effective functioning of fund portfolios in the regulated CISCA environment.
Kim Gibb is a qualified chartered accountant with more than 12 years’ experience in the financial services industry. She is on the executive committee of the Prescient Management Company and Head of Investor Services and Product at Prescient Fund Services. Previously she was a senior manager at KPMG and the COO at Catalyst Fund Managers.