Marco Conceptual

During the financial crisis, privately pooled funds such as PEIs received adverse publicity due to the uncertainty around regulations and this created a challenging fundraising environment for

153

Loubser J, Viviers J & Minnaar A ‘The private equity review’ available at

http://www.ens.co.za/news/news_article.aspx?iID=1024&iType=4 (accessed 8 November 2014). 154

Section 10 South African Reserve Bank Act 90 of 1989. 155

Section 3(a) Financial Services Board Act 97 of 1990. 156

Loubser J, Viviers J & Minnaar A ‘The private equity review’ available at

http://www.ens.co.za/news/news_article.aspx?iID=1024&iType=4 (accessed 8 November 2014). 157 _{Bennet A & Loubser J ‘South Africa: The asset management review’ available at}

http://www.mondaq.com/x/209212/asset+finance/The+Asset+Management+Review+South+Africa (accessed 11 February 2014).

158

Financial Services Authority Discussion paper 06/06 ‘Private equity: a discussion of risk and regulatory engagement’ (2006) available at www.fsa.gov.uk/pubs/discussion/dp06_06pdf (accessed 18 February 2015). 159

Financial Services Authority Discussion paper 06/06 ‘Private equity: a discussion of risk and regulatory engagement’ (2006) available at www.fsa.gov.uk/pubs/discussion/dp06_06pdf (accessed 18 February 2015). 160

Financial Services Authority Discussion paper 06/06 ‘Private equity: a discussion of risk and regulatory engagement’ (2006) available at www.fsa.gov.uk/pubs/discussion/dp06_06pdf (accessed 18 February 2015).

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them. Policy makers, such as, the Group of 20 (G20) addressed these economic issues and financial threats that made the global and financial markets risky.161 In accordance with the recommendations made by the G20, the IOSCO published six principles which had to be followed by its Member States to reform the regulatory framework for private equity funds.162 SA, being a Member of IOSCO, followed the principles by re-enforcing the already existing; fund manager level focused FAIS Act and added an additional layer of the Fit and Proper requirements, late in 2008.163

Financial services in SA are regulated by the FAIS Act. Although there is no requirement that a private equity fund should be registered with a government agency, fund managers are generally required to register as financial services providers under the FAIS Act. Therefore, private equity fund managers ‘may not act or offer to act as financial services providers unless’ they are approved by the Registrar of Financial Services and have the required licence.164 The FAIS Act also imposes on the approved financial services providers, fiduciary duties that include the duty to provide ‘financial services honestly, fairly and with due care, skill and diligence.’165

By requiring fund managers to register, the FAIS Act subsequently makes a provision for the disclosure of information on their financial operations and funds. It is mandatory for financial services providers to keep and submit accounting records annually that cover the operations they are authorised to carry out.166 Financial services providers that are not covered by the Companies Act167 and the Close Corporations Act,168 such as private equity firms, are required to include ‘at least a balance sheet and notes thereon; an income statement and notes thereon; a statement of changes in equity and notes thereon or a cash flow statement in one of the official languages of SA’169

The regulations issued under the FAIS Act also state that any unauthorised fund manager

161 _{Head JW ‘The global financial crisis of 2008-2009 in context- reflections on international legal and institutional} failings, fixes and fundamentals’ (2011) 23 Pac McGeorge Global Bus & Dev LJ 53.

162 _{G20 G20 Working Group 1. Enhancing Sound Regulation and Strengthening Transparency (2009).} 163

Mqokiyana N The Regulation of Hedge Fund Managers in South Africa – An Impact Assessment (unpublished M Comm, University of Johannesburg, 2011) 84.

164

Section 8 FAIS Act 37 of 2002.

165 _{Loubser J, Viviers J & Minnaar A ‘The private equity review’ available at}

http://www.ens.co.za/news/news_article.aspx?iID=1024&iType=4 (accessed 8 November 2014). 166

Sections 19 (1) (a) and (b) FAIS Act 37 of 2002. 167

Act 71 of 2008. 168

Act 69 of 1984. 169

Sections 19 (1) (a) and (b) FAIS Act 37 of 2002.        

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may not in any manner or by any means put out ‘advertisements or announcements that are directed at clients or make use of any name, title or designation which would imply that such a person’ is an approved services provider.170

On 30 May 2014, the FSB made an additional requirement that inhibits the business practice of renting a licence. The provision ‘ensures that clients deal with the licensed fund manager even when it is a representative delivering the financial services.’171 Representatives who act on behalf of a registered adviser, including its officers, directors and control persons, are now also required to register in the relevant individual adviser category. In addition, there are regulatory examinations conducted by the FSB that individuals offering financial services are required to successfully complete.172 The authorised fund managers are also required by the FSB to comply with an annual fee schedule. A study carried out by Mkoyina173 indicated that fund managers viewed regulations, such as, the FAIS Act, as crucial, but that the cost associated with compliance was seen to be far higher than the benefits of regulation.

In comparison with listed companies, the FAIS Act places minimal financial requirements on fund managers of PEIs. Although, the FSB can request any information from its regulated entities,174 non-listed companies, such as, private equity funds, can select how and to what degree they can submit their financial records. Apart from the FAIS Act requirements, private equity fund managers could ‘potentially attract liability for contractual misconduct or delict due to fraud, non-performance or negligent misrepresentation arising from the contractual agreements with investors’.175 However, in SA, to date, ‘there is no well-developed body of case law dealing with contractual misconduct or the liability of delict’ with regards to PEIs.176 In sum,

170 _{Loubser J, Viviers J & Minnaar A ‘The private equity review’ available at}

http://www.ens.co.za/news/news_article.aspx?iID=1024&iType=4 (accessed 8 November 2014). 171

Sections 13(1) (c) FAIS Act 37 of 2002. 172 _{Section 8 (1) FAIS Act 37 of 2002.} 173

Mqokiyana N The Regulation of Hedge Fund Managers in South Africa – An Impact Assessment (unpublished M Comm, University of Johannesburg, 2011) 84.

174 _{Financial Stability Board ‘Progress in the Implementation of G20/FSB Recommendations for South}

Africa’ (2012) available at http://www.financialstabilityboard.org/wp-content/uploads/r_120619rr.pdf?page_moved=1 (accessed 11 April 2015).

175

Loubser J, Viviers J & Minnaar A ‘The private equity review’ available at

http://www.ens.co.za/news/news_article.aspx?iID=1024&iType=4 (accessed 8 November 2014). 176 _{Loubser J, Viviers J & Minnaar A ‘The private equity review’ available at}

http://www.ens.co.za/news/news_article.aspx?iID=1024&iType=4 (accessed 8 November 2015).  

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the FAIS Act was introduced to support good and proper professional practice in the financial services industry in SA and this includes private equity funds.