The Financial Services Tribunal held, in May 2021, that a manager of a foreign collective investment scheme is not to be made subject to the limitations applied to a manager in terms of the Collective Investment Schemes Act of 2002 (CISCA), where an application is made to the Financial Sector Conduct Authority (FSCA) for permission to solicit investments in South African. The FSCA does not have an overriding discretion to determine which sections of CISCA apply to each permitted scheme.

A local or foreign collective investment scheme is a scheme in which the public are invited to invest in a portfolio, and in terms of which investors contribute money or other assets to and hold a participatory interest in the portfolio; and the investors share the risk and the benefit in proportion to their participatory interests.

The CISCA states that the FSCA may approve an application by the manager or operator of a foreign collective investment scheme to solicit investments in such scheme from South Africa.  Such applications must be made in terms of Board Notice 257 of 2013.

Accordingly, a qualified investor hedge fund applied to the FSCA for approval to market to investors in South Africa its foreign collective investment scheme.  Hedge funds have been declared to be collective investment schemes by Government Notice 141 of 2015.

The FSCA declined the application on the basis that it did not comply with section 95(1)(b) of CISCA.

In response to its application being declined, the hedge fund raised the following two questions in a reconsideration application to the Tribunal in relation to section 95(1) of CISCA, which prohibits a manager from lending or advancing any money: 1) whether the reference to “manager” applies to the manager of a foreign scheme; and 2) whether the prohibition of lending and advancing money applies to inter-company loans.

The hedge fund did not dispute that it was the manager, however argued that it was not a manager appointed in terms of CISCA.  As a manager of a foreign scheme, it argued that it was authorised to manage that scheme in terms of the applicable offshore legislation.

The Tribunal held that such a manager, authorised to manage a foreign scheme in terms of the appropriate offshore legislation, should be considered an “operator” for the purposes of CISCA.  This was based on the fact that an application was not made for permission to administer a collective investment scheme, but merely to solicit investments in a foreign scheme – which remained regulated by the offshore legislation.  This is further supported by the fact that CISCA does not require a manager to maintain a principal office in South Africa in respect of a foreign scheme.

The FSCA argued that paragraph 5(2) of Board Notice 257 afforded it a discretion to apply provisions of CISCA to foreign collective investment schemes and to determine under what conditions those funds may be marketed in South Africa.  In doing so, the FSCA argued that it had exercised its discretion in applying the prohibition of section 95(1) (i.e. that a manager may not lend or advance any money).

The Tribunal noted that the FSCA’s argument assumed that its regulations may be interpreted on the basis that they override the provisions of CISCA.  The Tribunal found that paragraph 5(2) of Board Notice 257 does not contemplate the FSCA categorising a scheme and then selecting the sections of CISCA which it thinks should apply to that scheme.

The Tribunal set aside the FSCA’s decision to decline the application for approval to market a foreign collective investment scheme based on an alleged failure to comply with section 95(1).

The decision of the Tribunal can be found here.