Regulation and Ethics

of the S.A. Financial Markets

by Karin van Wyk
CEO
SAIFM

© SAIFM February 2008

 Contents
1. Regulation and the Role of Various Regulators
Learning Outcome Statements 4
1.1 Introduction 4
1.2 Regulation in General 5
1.3 Regulation in South Africa 11
1.4 Financial Services Board (FSB) 11
1.5 Financial Intelligence Centre 17
1.6 Council for Overseeing Ombudsman Schemes 18
1.7 Self-test Questions 19
1.8 Activities 22
1.9 Measure your progress 22
2. The Securities Services Act, 2004 (SSA) 23
Learning Outcome Statements 23
2.1 Objects of the Act 23
2.2 Role players and other Important Definitions 24
2.3 The Exchanges 25
2.4 Authorised Users 30
2.5 Auditors and Accounting records 37
2.6 Restrictions and Prohibitions 40
2.7 Advertising and Publications 41
2.8 Market Abuse 41
2.9 Custody and Administration of Securities 44
2.10 Self-test Questions 48
2.11 Activities 52
2.12 Measure your progress 52
3. Enforcement 53
Learning Outcome Statements 53
3.1 Inspections, Investigations and Enforcement Actions 53
3.2 Inspections ito the Inspection of Financial Institutions Act 53
3.3 Enforcement Actions after the Inspection 55
3.4 Power of the Registrar to Impose penalties 55
3.5 Disqualifications 55
3.6 Enforcement Committee 56
3.7 Self-test Questions 56
3.8 Measure your progress 57
4. Financial Advisers and Other Intermediaries 58
Learning Outcome Statements 58
4.1 Role players, products and activities 58
4.2 Applying for a license as a financial services provider 61
4.3 Codes of Conduct: Requirements with regard to the operation of a FSPs 63
business
4.4 The Ombud 83
4.5 Self-test Questions 83
4.6 Measure your progress 85
5. Conflicts of Interest 86
Learning Outcome Statements 86
5.1 Soft Commissions 86
5.2 Financial Institutions (Protection of Funds Act) No 28 of 2001 88
5.3 Self-test Questions 88

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 5.4 Activities 89
5.5 Measure your progress 89
6. Ethics 90
Learning Outcome Statements 90
6.1 Main Principles 90
6.2 Integrity Principles 90
6.3 Skill, Care and Diligence 92
6.4 Full Accurate Information 93
6.5 Promotional Material 95
6.6 Activities 95
6.7 Self-test Questions 96
6.7 Measure your Progress 96
7. Bibliography 96

Learner Guidance: Assessment methodology:

Self-test questions (formative assessments) are designed to help you master the outcomes
specified in the beginning of each chapter. The summative assessment (exam) will take the
form of a multiple-choice set of questions that have been designed to assess whether you
have mastered the required outcomes. The format of the self-test questions therefore
differs from the format of multiple-choice questions and this should be kept in mind when
reading the material.

Each multiple-choice question contains a key (correct answer or statement/s) and certain
distracters (incorrect answers or statements). The drafter of multiple-choice questions
strives to make the distracters appear plausible i.e. they look correct to a person who did
not read the material properly, but they are actually incorrect. The average learner should
go through the material at least 3 times and do the self-test questions before attempting the
summative assessment (exam).

Activities are meant to enrich the learning process and to make it more meaningful. They are
entirely voluntary and can be skipped if a learner so wishes. Activities are recommended
however as they familiarise you with certain websites that serve as sources of information,
so that you learn how to research information on your own once you are a securities market
practitioner.

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 Chapter 1

Regulation and the Role of Various Regulators1

Learning Outcome Statements

When you have studied this chapter, you should be able to: –

1. Understand the philosophy underlying regulation and the rationale for imposing
regulatory measures on industries in general and the financial system in particular.
2. Know and understand the elements and objectives of regulation and how regulation
is influenced by rules of ethical behaviour.
3. Understand the regulatory regime in South Africa with reference to the general
principles of regulation and be able to describe how the regulatory fields of the
various regulators interrelate.
4. Understand the role, function and operations of the Financial Services Board (FSB)
and be able to describe the departments of the FSB, the legislation applicable to
each industry and the regulatory approach followed by the FSB.

1.1 Introduction

The economic policy of a country determines the philosophy underlying regulation. South
Africa follows a market-orientated approach with regard to the role and operation of the
economy. This implies minimum intervention by the authorities as the market mechanism is
assumed to achieve highest efficiency in terms of allocation of resources.

However, governments following this approach acknowledge that market imperfections do

occasionally arise and that intervention by the authorities by way of regulation is sometimes
justified. Thus regulatory legislation will be promulgated and regulatory authorities created
and authorised to influence the economy according to government policy.

Regulation does not, however, come without a cost. Authorities therefore must ensure that
the economy is not burdened with unnecessary costs and that the efficiency of the economy
is not adversely affected.

It follows therefore that not all sections of the economy are regulated. Not even all sections
of the financial markets are regulated. For example, while securities listed on the exchanges
are regulated, some instruments like certain options, forward contracts and money market
instruments trade over-the-counter (OTC), i.e. off-exchange. One of the reasons for not
regulating these parts of the financial markets in South Africa is that these instruments trade
on a wholesale basis, which means trades take place between knowledgeable persons
employed by large financial institutions. Regulation is therefore not strictly speaking
necessary. Instruments, which are trading on a retail basis, i.e. where members of the public
are involved, are regulated because it is deemed necessary for the protection of the
investors.

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The regulatory authority sometimes forms part of the government and sometimes it is an
independent government agency. Sometimes some of the regulatory functions are exercised
by self-regulatory organisations (SROs) under the supervision of the central regulator. The
advantage of SROs is that they may offer extensive expertise regarding market operations
and may be able to respond quicker to changing market conditions. Often they also have
requirements with regard to qualifications, experience and ethics that may exceed the
requirements of the central regulator. In South Africa the stock, futures and bond exchanges
operate as SROs.

All regulators should, however, be operationally independent of political or commercial

interference and accountable for the use of their own powers and resources. Independence
is enhanced by stable sources of funding. In South Africa, the FSB is funded by levies charged
to the regulated entities and users of their services while the exchanges are funded by
contributions from authorised users and their clients and income generated through
business activities, i.e. the providing of services regarding the trading of securities and the
selling of information.

Regulators are generally accountable to the Government and each SRO to its regulator.
Accountability may further be enhanced by dispute resolution and appeal procedures.

1.2 Regulation in general

1.2.1 The Elements of Regulation

Regulation includes the following elements: -

• Determining rules relating to a particular industry for example enactment of
legislation;
• Monitoring whether those rules are complied with; and
• Enforcing those rules, i.e. taking action against those persons not complying with the
rules.

Regulatory measures are set out in broad outline in legislation (Acts of parliament). They
usually provide for aspects such as authorisation of suppliers of financial services, initial and
ongoing capital requirements, dispute resolution, appeal procedures, disclosure
requirements, complaints procedures, the creation of an ombudsman and enforcement
measures. In South Africa there are separate Acts for each industry or even a part of an
industry, which is why the FSB administers so many different acts.

These Acts generally make provision for regulations, conditions, codes of conduct or other
pieces of subordinate legislation to be issued. In some cases the permission of the Minister
(of Finance in the FSB’s case) must be obtained, but in others the registrar of the particular
industry can issue subordinate legislation. Subordinate legislation contains detailed
provisions that apply to the industry concerned.

All legislation, whether it is an Act of parliament or subordinate legislation, is subject to a

comprehensive process of consultation with industry associations, consumer organisations
and other stakeholders. The drafting process will often include participation of regulated
firms to provide the necessary expertise with regard to the operation of the industry.

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Compliance with laws and other rules are monitored by the regulator by way of the analysis
of annual returns (documents containing certain prescribed information about the business
of the regulated firm) and audit reports, surveillance of securities markets (to establish
trading patterns that may indicate irregular activities such as insider trading) and routine
inspections. The regulator should also have the power to require such information about the
business of the regulated institution, as it may deem necessary. In some industries regulated
firms are required to appoint compliance officers that report directly to senior management
and submit compliance reports directly to the regulator. These measures not only prevent
breaches of the law but assist in the detection of breaches that will be subject to
enforcement action.

Regulators make use of some or all of the following enforcement options: referral for
criminal prosecution, withdrawals of authorisations or licences to do business and
consequent winding down of businesses, curatorships to take control of the business of the
regulated firm, judicial management, penalties, civil actions and orders to compensate
prejudiced consumers.

1.2.2 The Objectives of Regulation

The objectives of regulation are to protect consumers and investors, to ensure the solvency
and financial soundness of the country’s financial institutions, to promote fairness, efficiency
and transparency in the securities markets and to promote a stable financial system. While
regulation is necessary for the achievement of these objectives, inappropriate regulation can
inhibit market growth and development and stifle competition. Regulation should facilitate
capital formation (for new business ventures or the expansion of existing businesses) and
economic growth.

Generally regulation should comply with the following requirements to fulfil its objectives:
• Barriers to entry and exit from markets and products should be kept to a minimum
to ensure access for the widest possible range of participants;
• Regulatory measures should not be implemented if their impact and consequently
the cost to the economy have not been evaluated. The benefits of regulation should
at all times exceed the cost of regulation.
• Restrictions and requirements for participants offering the same product should be
equal, for example there should be no difference between the regulatory
requirements for banks and insurance companies if both wish to offer investment
management services.

Consumer or investor protection

In the financial markets consumers do not have as much information as the suppliers of
financial services. This makes them vulnerable to exploitation. Consequently full disclosure
must be made of information relevant to investors when they are making an investment
decision. Investors will consequently be in a better position to evaluate the potential risks
and rewards of the proposed investment and thereby be better able to protect their own
interests.

An important aspect of consumer protection is licensing requirements for suppliers of

financial services. The regulator will ensure that only fit and proper persons i.e. persons who
have no dishonesty in their past and who are properly qualified to render the service are
licensed or authorised to do so. Sometimes initial and ongoing capital requirements are part

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of the consumer protection initiatives of a regulator. The rationale for capital requirements
is to ensure that the financial institution remains financially sound and able to fulfil its
obligations towards the consumer.

Financial intermediaries (eg. brokers) must comply with minimum standards set out in rules
of business conduct. The particulars regarding the South African situation regarding these
codes of business rules will be discussed below.

Securities markets are very complex with the result that investors can be particularly
vulnerable to misconduct. Therefore securities laws must be enforced strictly and
appropriate action should be taken when a breach occurs. The issue of insider trading is
important in this regard.

Consumers should have access to dispute resolution mechanisms to compensate them if

they have been prejudiced through unlawful actions. In South Africa consumers have access
to complaint resolution mechanisms and access to a voluntary or statutory ombudsman.

Consumer education, especially in a country like South Africa, forms an important part of
consumer protection. Disclosure of information will not mean much if the consumer cannot
understand the information received. It is therefore part of the objectives of the FSB, in
partnership with industry bodies, to educate South African citizens in financial matters as
part of the FSB’s overall objective to promote consumer protection.

The advantage of consumer protection for the suppliers of financial services is that
consumers are more confident of making use of these services. Without confidence in the
products, the demand for financial products may decline. The suppliers of financial services
thus have an interest in ensuring that consumers are educated and that bad products and
suppliers are removed from the system, to prevent their own products from being tarnished.

Ensuring that Securities Markets are Fair, Efficient and Transparent

The securities and derivatives markets are essential for the growth and development of the
economy of a country. The securities market ensures the financing of business ventures
while derivatives are used to manage financial risk. In the primary market securities are
issued and listed to raise funds for corporate endeavours, while trading of already listed
securities takes place on the secondary market. The secondary market and the ease with
which securities may be bought and sold, ensure that the necessary confidence exists for
new issues in the primary market.

Proper regulation of the securities and derivatives markets to ensure fairness, efficiency and
transparency is therefore of the utmost importance. These markets have also now become
the cornerstone of individual wealth and retirement as individuals’ savings are more and
more often invested in collective investment schemes and retirement funds.

The fairness of securities markets impacts on investor protection. The regulator ensures fair
markets by approving the operators of each exchange and the rules in terms of which each
exchange operates. Market structures should not favour some market participants over
others and should prevent market manipulation and other unfair trading practices. Strict
action should be taken against anyone found guilty of these practices.

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Investors must be given fair access to market facilities and price information. Regulators
therefore need to stipulate market practices that ensure fair treatment of orders and a price
formation process that is transparent and reliable.

Regulation should promote efficiency in the market. Dissemination of information must be

timely and widespread to ensure that information is reflected in the price formation process,
for example when it is known that a company will be taken over at a higher than market
price, that fact should be known and reflected in the price.

Regulation should also promote transparency, i.e. the public availability of trading
information on an immediate basis. This applies to pre-trade information about the available
prices at which transactions may take place and post-trade information on trades that
actually took place.

Ensuring Safety and Soundness of Financial Institutions

The safety and soundness of financial institutions are important for the protection of
consumers as it is unlikely that they will always have sufficient information with regard to a
financial institution’s business at the time of contracting with that financial institution. Even
if consumers had the necessary information, the behaviour of the institution and the
institution’s financial position after contracting with the consumer may affect the value of
the contract, for example a consumer may take out a retirement annuity policy with a
financially sound life insurance company that goes insolvent 20 years later; too late for the
consumer to address the problem or save more for his or her retirement. A consumer’s
retirement annuity policy may also be affected by unwise investments (by the life insurance
company) that impact on the benefits he or she will receive at retirement. Even though the
life insurance company has remained financially secure, its behaviour subsequent to the
contract affects the value of the consumer’s investment.

The financial soundness of financial institutions is also relevant for the economy as a whole,
as the failure of just one institution may affect the stability of the whole financial system as
discussed below.

Prudential regulatory measures are used to achieve the objective of financial soundness of
financial institutions. Regulators will usually lay down requirements with regard to the
capitalisation of financial institutions to serve as a safeguard against risks. The amount of
capital required is usually related to the amount of risk assumed by the financial institution.

Requirements with regard to various risk factors such as market risk, credit risk, liquidity risk
and operational risk should be imposed by the use of various risk assessment models.

Directors and key staff members should be fit and proper i.e there should be no dishonesty
in their past while appropriate qualifications and experience in the relevant field should be
required.

Ensuring systemic stability

It is very important for any economy that risks to the financial system be reduced where
possible and where not possible, be properly managed by using regulatory tools and
interventions. Failure of a financial institution such as a bank can affect the financial system
by causing other banks to fail. This occurred on a small scale in South Africa when Saambou

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Bank failed. Many small banks in South Africa experienced massive withdrawals because
consumers distrusted not only Saambou, but all small banks.

Regulators therefore reduce the risk of failure of financial institutions by for example,
introducing capital and internal control requirements. Where a failure does occur, regulators
aim to reduce the impact of the failure and to isolate the failure to the particular institution.

However, as risk taking is a normal part of an active market, regulation should not stifle
legitimate risk taking, but rather promote sound risk management techniques that will allow
institutions to absorb some losses without failing or affecting other institutions.

Financial markets should not be subjected to shocks of their own making such as inefficient
trading, clearing and settlement systems, poor market infrastructure or low liquidity
(number of trades on an exchange on a particular day). The arrangements with regard to
defaults in the securities market (i.e. where a buyer or seller of securities defaults on a
trade) are very important for promoting systemic stability. Default arrangements such as the
guarantee fund operated by the JSE Ltd in South Africa should not only form part of the
securities law, but also apply in the case of the insolvency of a market intermediary.

As the markets have become globally more integrated, they are vulnerable to shocks from
other jurisdictions. Regulation has therefore become an international discipline where
regulators cooperate with each other and share information across borders. This can make
things difficult for financial criminals wishing to hide past crimes when establishing a
business in a new country. The FSB has often prohibited the operation of investment
management businesses by individuals pinpointed by overseas regulators as financial
criminals.

1.2.3 Ethics in the Financial Markets

Ethical conduct of business has come to the fore in recent years mainly because of scandals
like Enron, Parmalat and Arthur Andersen occurring all over the world. The King 2 Report on
Corporate Governance and the incorporation of some of those principles into the Listing
Requirements of the JSE Ltd clearly indicate that business and financial markets in particular
have entered a new paradigm. Reporting on the triple bottom line, where companies report
on the economic, social and environmental aspects of a company’s activities, is of particular
importance in South Africa with its huge challenge in terms of social upliftment.

Codes of ethical conduct often form part of the membership rules of various industry
associations. While the objectives of these associations are laudable and their contribution
to the promotion of ethical conduct and setting of standards is undeniable, they usually do
not have the resources to monitor and enforce compliance with these rules. Because there
is no legislative backing to these codes, enforcement is probably confined to expulsion as a
member. Industry associations are also varied and fragmented in South Africa, which means
not only that there are gaps i.e. industry participants belonging to no association, but there
is also no congruence in the codes of conduct laid down by each of them.

The globalisation of the financial markets also requires that principles of ethics be in line
with those principles applicable in overseas markets. Very few associations are
internationally affiliated or have had their codes of conduct reviewed and adjusted to
international norms.

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The FSB as the regulator in South Africa has therefore started to give legal effect to codes of
conduct by issuing them as subordinate legislation. In terms of the Financial Advisory and
Intermediary Services Act, 2002 (FAIS), several codes of conduct have been issued whose
main aim is the protection of consumers, including disclosure requirements and needs
analysis in certain cases (i.e. a financial adviser may not make recommendations that have
not taken the needs of the consumer into consideration). There is an all-encompassing
General Code of Conduct, with special codes, for example, for banks taking short-term
deposits, foreign exchange intermediaries, investment managers and advisers and insurance
intermediaries.

The FSB has also issued a Code of Conduct in terms of the Securities Services Act, 2004, in
line with the codes issued under the FAIS Act. Authorised users (previously called members)
of an exchange must in terms of the code render securities services honestly, fairly, with due
skill, care and diligence in the interests of clients and the integrity of the securities services
industry. Authorised users must exercise an independent professional judgment at all times,
and when advising clients, must conduct a needs analysis similar to the needs analysis
conducted by financial advisers and intermediaries in terms of the FAIS Act. Authorised users
must comply with disclosure requirements in the interests of investor protection and may
not give or receive inducements, subject to certain exceptions. Advertising and promotions
are subject to certain requirements to prevent fraudulent or misleading statements, which
may induce clients to trade based on erroneous information. Regular reporting to clients is
prescribed to ensure the proper evaluation of clients’ investments.

While there are differences between industries that should be taken into consideration
when laying down codes of conduct, the overall effect of these statutory codes is a coherent
ethical framework for the financial services industry as a whole.

1.3 Regulation in South Africa

The regulatory structure in South Africa is currently fragmented with different sections of
the financial markets being regulated by different institutions. Banks are regulated by the
Banking Supervision Department of the SA Reserve Bank in respect of their banking
activities(deposit-taking), Non-banking financial institutions are regulated by the FSB which
is independent from, but accountable to, the Department of Finance.(See section 1.4).
Registration of companies takes place at the office of the Registrar of Companies, which
forms part of the Department of Trade and Industry, while medical schemes are registered
by the office of the Registrar of Medical Aid Funds, which forms part of the Department of
Health.

The regulatory duties and powers of some industries are also split horizontally since some
functions are delegated to associations or SROs.

In terms of the Securities Services Act (SSA), the two licensed exchanges, namely the JSE Ltd
and the Bond Exchange of South Africa and the central securities depository (CSD), STRATE
Ltd operate as SROs. They regulate their own activities and those of authorised users
(members of exchanges) and participants (members of central securities depositories) in
terms of the provisions of the SSA.

In terms of the FAIS Act, certain of the licensing requirements are handled by industry
associations that are authorised for that purpose by the FSB. Applicants from certain
sections of the industry may therefore apply for approval to the association by which they

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are represented. Financial planners, for example, may apply to the Financial Planning
Institute for approval as a financial services provider in terms of the FAIS Act. These
authorised bodies’ powers and duties are however so narrowly circumscribed that they
cannot really be described as SROs. The Collective Investment Schemes Control Act, 2002
also allows for associations to act as SROs.

The Financial Intelligence Centre (FIC), an independent regulatory authority accountable to

the Minister of Finance, is responsible for the control of anti-money- laundering activities in
the economy. Supervisory bodies like the FSB and JSE Ltd must provide the FIC with any
information on money-laundering transactions that they may obtain as a result of their
supervisory functions. (See section 1.5)

The credit industry i.e. the granting of loans by banks, retailers and other money-lenders is
regulated by the National Credit Regulator (NCR). Mortgage loans, overdraft facilities, credit
cards, store cards, furniture finance accounts, clothing accounts, vehicle finance, personal
loans, micro loans and pawn transactions will be affected. The National Credit Act, 2005
aims to promote fairness in accessing consumer credit, consumer protection and
competitiveness in the credit industry. Credit providers, credit bureaux and debt counsellors
must be registered to operate legally. Interest and fees will be regulated on all transactions
and disclosure of certain information made compulsory.

The Council for Overseeing Recognised and Statutory Ombudsman Schemes regulates the
various ombudsmen created by industry or by statute. The FSB is however responsible for
the administration thereof. (See section 1.6).

1.4 Financial Services Board (FSB)

The FSB was established in terms of the Financial Services Board Act (No. 97 of 1990) and
became operational as such on 1 April 1991. Prior to that date, regulation was in the hands
of the Registrar of Financial Institutions, which formed part of the Department of Finance.
The various Acts administered by the FSB routinely empower the Registrar to exercise
various duties. Sometimes reference is made to the Registrar of Insurance or the Registrar of
Collective Investment Schemes depending on the industry that is served by the legislation. In
practice, the executive officer of the FSB exercises all of these offices as the Registrar. The
FSB’s mission is to ensure the fair treatment of both the users and providers of financial
products and services in South Africa.

The FSB’s mission is to develop an effective regulatory framework, ensure effective

supervision of regulated entities, facilitate consumer education, collaborate with other
government agencies, both locally and internationally, comply with international standards
and promote effective competition in its regulated industries.

The functions of the FSB in terms of the Financial Services Board Act, 1990 are to: -
• Supervise the compliance with laws regulating financial institutions and the
provision of financial services;
• Advise the Minister on matters concerning financial institutions and financial
services; and
• Promote consumer education programmes and initiatives by financial institutions
and bodies representing the financial services industry.

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Various advisory bodies consisting of industry representatives with expertise in the industry
they represent advise the FSB on matters of policy and new regulatory developments.

The FSB’s decisions are subject to appeal. Appeal boards serving the various industries
operate to hear appeals against the decisions of the Registrar.

The FSB exercises its regulatory, supervisory and enforcement duties mainly in departments
roughly corresponding with the various regulated industries each governed by its own
legislation.

1.4.1 Departments of the FSB

Financial Advisory and Intermediaries Services (FAIS) Department

The FAIS Department is divided into three departments being Registration, Supervision and
Enforcement.

The financial advisory and intermediary services industry is regulated in terms of the
Financial Advisory and Intermediary Services (FAIS) Act (Act No. 37 of 2002). In this industry,
the FSB concentrates on rules of market conduct for the protection of consumers since
prudential regulation of the individuals and smaller companies acting as advisers and
intermediaries is not deemed necessary. Businesses typically covered by this legislation are
investment managers, investment advisers, insurance brokers and advisers, foreign
exchange intermediaries (persons who trade foreign exchange for clients), financial planners
and advisers.

Intermediaries who are authorised users in terms of the Securities Services Act (SSA), 2004
(previously members of an exchange) are not covered under the FAIS Act Act to the extent
that they are regulated under the SSA.

The FAIS Act lays down a comprehensive regulatory framework applying to financial services
providers (FSPs) (the generic name used in the Act for the business or functions that are
regulated in terms of the Act). Some aspects covered in the Act are:

• Fit and proper persons (i.e. persons with no dishonesty in their past and who are
properly qualified with the requisite experience) only will be licensed to conduct the
business.
• A FSP must be solvent or, in the case of FSPs holding no funds or assets, able to
meet its financial liabilities.
• A FSP must comply with the operational requirements such as having a fixed address
and telephone, a bank account, storage and filing facilities and appropriate anti
money-laundering control systems.
• AFSP must have proper accounting records and be audited annually.
• A FSP must, in addition, submit a report by the auditor certifying the amount of cash
and market value of assets held on behalf of clients and whether such cash and
assets are held separately from its own cash and assets.
• A FSP must comply with the General Code of Conduct in addition to the special Code
of Conduct applicable to the industry concerned.
• The General Code lays down requirements with regard to disclosure to clients,
record-keeping, statements to clients, accounting, auditing, conflicts of interest,
procedures on furnishing advice and the suitability thereof, records of advice,

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 custody of funds and assets, risk management, internal controls, advertising and
complaint resolution.
• The establishment of a compliance function in certain cases.
• The establishment of the Ombud for Financial Services Providers to hear and
adjudicate complaints that cannot be resolved by the internal complaints resolution
mechanisms.

It is illegal for any financial adviser or other intermediary to conduct business without having
been licensed. A list of licensed FSPs is available on the website of the FSB for the benefit of
consumers.

Due to the diversity of risk relating to businesses regulated under this Act, the FSB follows a
risk-based supervisory framework to ensure high risk FSP’s receive more intensive regulatory
oversight.

For more detail please see Chapter 4.

Capital Markets Department

The Capital Markets Department of the FSB regulates the capital markets in South Africa in
terms of the SSA.

The Act was designed by the Capital Markets Department in conjunction with a drafting
team consisting of industry representatives and experts to bring South Africa’s securities
legislation in line with international regulatory best practice.

The SSA aims to provide a balance between investor protection and the international
competitiveness of the capital markets in South Africa and to promote confidence and
stability in securities services among South Africans as well as the international community.

The functions of an exchange in terms of the SSA are to establish, maintain and provide an
infrastructure to bring together buyers and sellers of securities and match their orders.
Securities include shares, stocks, depository receipts in public companies, notes, derivatives,
bonds, debentures, participatory interests in collective investment schemes (CIS) (local and
foreign), index-based instruments, foreign securities and rights in any of the above
securities, excluding money market instruments.

The SSA allows for the licensing of different types of exchange. The traditional type of
exchange is covered but electronic communications networks and alternative trading
systems may also be licensed.

An exchange must ensure compensation to prejudiced consumers by way of insurance, a

guarantee or compensation fund or other warranty.

The functions of an exchange, which may be taken over by the FSB if deemed necessary,
include issuing and enforcing rules, directives and listing requirements, ensuring compliance
with the rules by authorised users and listing requirements by the issuers of securities,
suspension of rules and listing requirements under certain circumstances, and facilitating
clearing and settlement of transactions.

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Off-market transactions in listed securities between certain financial institutions are allowed
on condition that they transact with each other as principals. These deals must be reported
to the Registrar who will disclose this information to the relevant exchange and the public at
large.

Central securities depositories as well as clearing houses must also be licensed and are
subject to the supervision of the FSB.

The SSA requires the Registrar (of Securities Services) to issue a code of conduct complying
with the principles laid down in the Act that will be binding on authorised users, their
officers, employees and clients.

The SSA establishes a Directorate of Market Abuse that is responsible for insider trading;
manipulative, improper, false or deceptive practices of trading; and false, misleading or
deceptive statements, promises and forecasts.

The SSA authorises price stabilising mechanisms to ensure an orderly secondary market
following a new issue of shares for a limited period of thirty days.

The SSA also makes provision for judicial management, curatorship, criminal offences and
penalties. A new development is the establishment of an enforcement committee that may
impose administrative penalties and make order for compensation.

The Capital Markets Department ensures compliance with international regulatory

standards with regard to the regulation and supervision of capital markets by participating in
the International Organization of Securities Commissions (IOSCO). IOSCO has laid down 30
Objectives and Principles of Securities Regulation, which South Africa intends to comply
with. An assessment methodology has been approved that may be used by member
countries to assess progress towards meeting the standards. Active participation in IOSCO
meetings ensures the exchange of information and cooperation between member countries
to ensure effective market surveillance and enforcement against offenders.

Regional cooperation takes place by way of meetings held by the Committee of Insurance,
Securities and Non-banking Financial authorities (CISNA), of which South Africa is a member.
Market developments in member countries, assessment of members’ regulatory
frameworks against the IOSCO principles and a risk-based supervisory approach towards the
regulation of capital markets are some of the aspects that this committee focus on.

For a more in-depth discussion please see Chapter 2.

The Insurance Division

The Insurance Division regulates and supervises the long- and short-term insurance industry
in terms of the Long-term Insurance Act of 1998 and the Short-term Insurance Act of 1998.

The Insurance Department is divided into three departments. The one concentrates on
policy and licensing requirements, the second on the financial soundness of insurance
companies and the third on compliance. The compliance department deals with
unregistered insurance business, policyholder complaints and market conduct matters.

14
The Long-term Insurance Act provides for the registration of long-term insurers and
regulates and controls the activities of the long-term insurance companies and
intermediaries. Every insurer must register for a specific class or classes of business namely
assistance, disability, fund, health, life and/or sinking fund business. Prudential regulation
safeguarding the financial soundness of insurance companies is particularly important
because of the liabilities to policyholders assumed by insurance companies. The method
whereby the value of the assets and liabilities of long-term insurance companies is
calculated was amended in 2003 by allowing the financial soundness valuation method as
the only method allowed for valuation purposes. The financial strength of an insurer may be
evaluated by the ration of surplus assets to the Capital Adequacy Requirement (CAR), the
value of 1 being the minimum acceptable benchmark.

Investor protection is certainly one of the objectives of the FSB’s insurance division.
However, the FSB has also issued Policy Holder Protection Rules in terms of the Long-term
Insurance Act that provide for extensive disclosure requirements. These enable consumers
to make informed decisions when taking out a policy or replacing an existing policy with a
new policy.

The Short-term Insurance Act provides for the registration of short-term insurers and for the
regulation and supervision of short-term insurers and intermediaries. Every insurer is
obliged to register for a specific class or classes of business namely accident and health,
engineering, guarantee, liability, miscellaneous, motor, property and/or transportation.
Policy protection rules have also been issued in terms of the Short-term Insurance Act for
the protection of consumers.

The Insurance Department conducts on-site visits to supervise solvency and investment risk,
general balance sheet risk management, underwriting risk, systems and operational risk,
market risk, financial reporting, corporate governance, external audits, strategic
management and general regulatory compliance.

The Insurance Department also ensures that regulatory standards comply with international
regulatory standards by participating in the activities of the International Association of
Insurance Supervisors (IAIS) and the Financial Stability Forum. The FSB also cooperates with
the Association of African Insurance Supervisory Authorities (AAISA).

Directorate for Market Abuse

The Directorate of Market Abuse (previously the Directorate of Insider Trading) is a

Department of the FSB that monitors insider trading as well as manipulative, improper, false
or deceptive practices of trading and false, misleading or deceptive statements, promises
and forecasts.

The Directorate’s members are appointed by the Minister and consist of representatives
from the FSB, the legal and accounting professions, the insurance, fund management and
banking industry, the Ministry of Finance, The S.A. Reserve Bank and the S.A. Shareholders’
Association. It reports to the FSB and the Minister regarding its activities. The Directorate is
empowered to investigate market abuse and take civil action against perpetrators. Amounts
collected from perpetrators are distributed to claimants.

15
Inspectorate Department

The Inspectorate Department operates in terms of the Inspection of Financial Institutions

Act (No. 80 of 1998)

The Registrar may at any time order an inspection of the affairs or part of the affairs of a
financial institution. If the Registrar has reason to believe that a person or organisation that
is not registered or approved is carrying on the business of a financial institution, he/she
may order an inspection of the affairs or part of the affairs of that person or organisation.

The Registrar must ensure that the inspector instructed will be able to report objectively and
impartially.

An inspector may, with regard to an institution: -

• Administer an oath or affirmation or examine any person who is or was a director,
servant, employee, partner, member or shareholder of a financial institution;
• Without prior notice enter and search the premises of the institution and require
the production of documents relating to the institution;
• Open any strong room, safe or other container in which he or she suspects any
documents are kept;
• Examine and make extracts from and copies of any documents, or against a receipt,
remove the above temporarily from the premises for that purpose;
• Against the issue of a receipt, seize any document which may afford evidence of an
irregularity;
• Retain such seized documents for as long as they may be required for any criminal or
other proceedings.

On completion of an inspection, the inspector must prepare a report and submit it to the
Registrar. The Registrar then submits a copy of the report to the person who was inspected.
Based on an inspection report, the Registrar may decide on enforcement action such as
applying to the High Court for a curator to be appointed.

For more details please see Chapter 3.

Retirement Funds and Friendly Societies Department

Retirement funds including employer sponsored pension and provident funds, preservation
funds and retirement annuities (personal pension plans) are registered in terms of the
Pension Funds Act (No. 24 of 1956). No retirement fund may operate without being
registered by the FSB.

Retirement funds have members that become entitled to benefits upon the occurrence of
certain events, such as resignation or retrenchment, death or retirement. Employer
sponsored funds normally require both the member (employee) and the employer to make
monthly contributions to the retirement fund.

The Act requires pension funds to be financially sound by adequately funding for their long-
term and short-term liabilities. Retirement funds use actuaries to do actuarial valuations and
to ensure that assets and liabilities are matched, i.e. that a retirement fund does not for

16
example have short-term assets (like bank deposits) to fund liabilities that may mature only
in thirty years’ time.

The Retirement Fund and Friendly Societies Department of the FSB is divided into four sub-
departments namely Licensing and Registration, Prudential Supervision (analysis of financial
statements), Surveillance and Enforcement (compliance visits and risk-based supervision)
and Research and Policy.

The FSB supervises retirement funds by: –

• Registering funds and approving their rules to ensure compliance with the guidelines
prescribed in the Act;
• Analysing the annual audited financial statements and ensuring that investments
comply with prudential investment guidelines;
• Analysing actuarial reports to ensure that funds will be able to meet their liabilities;
and
• Enforcing payment of contributions by employers to employer funded funds.

Specific consumer (member) protection measures that have been introduced include the
following:
• Members are legally entitled to be represented on the board of trustees of a
retirement fund, while in the past employers often appointed all the
representatives. This resulted in a situation where members’ interests were not
looked after for example excessively low interest rates on resignation benefits and
annual increases for pensioners below the inflation rate. The employer’s interests
were paramount;
• Compulsory annual benefit statements setting out a member’s entitlement in terms
of the rules based on his or her current salary must be sent to each member. This
ensures that a member may contact the member representative to complain if the
member is unhappy with the benefits provided;
• Internal complaints resolution mechanisms and access to the Pension Funds
Adjudicator (similar to an ombudsman) also assist members to be treated fairly;
• Members are by law allowed to share in pension fund surpluses that may have
accumulated because of high investment returns, withdrawal profits or excess
employer contributions. In the past, employers benefited exclusively by using these
surpluses to fund their retirement fund contributions. This is known as a
contribution holiday i.e. the employer stops contributing for a period of time.

Friendly societies are regulated in terms of the Friendly Societies Act (No. 25 of 1956). While
friendly societies may be established for various purposes, they mainly comprise burial
societies. They are usually funded by member contributions only.
The FSB supervises friendly societies by: -
• Registering funds and approving their rules to ensure compliance with the guidelines
prescribed in the Act;
• Analysing the annual audited financial statements and ensuring that investments
comply with prudential investment guidelines.

Collective Investment Schemes Department

Collective Investment Schemes in securities, property and participation bonds are

supervised in terms of the Collective Investment Schemes Control Act of 2002 (CISCA), which
came into operation on 3 March 2003.

17
Collective Investment Schemes (CIS) are regulated in the following manner: -
• Managers of CISs must be registered in terms of the Act;
• Managers of CISs must comply with capital requirements and provide seed capital
for each portfolio they administers (except in respect of exchange traded portfolios
listed on an exchange;
• Portfolios must comply with prudential investment guidelines;
• The prior approval of the Registrar is required for each new portfolio;
• Managers must comply with quarterly reporting requirements; and
• Investors must receive annual reports containing prescribed information.

The CISA Act makes provision for the licensing of associations to act as SROs for the industry
or parts of the industry.

1.5 Financial Intelligence Centre

In terms of section 4 of the Prevention of Organised Crime Act, money laundering is an

offence that involves concealing the nature of the proceeds of crime, avoiding prosecution
for money laundering or diminishing the proceeds of crime.

The Financial Intelligence Centre Act, 2001 (FICA) has also instituted control measures to
facilitate detection and investigation of money laundering based on three main principles: -
• Intermediaries in the financial system must know with whom they are doing
business, the so-called “know your client” principle;
• The paper trail of transactions through the financial system must be preserved; and
• Possible money laundering transactions must be reported.

The control measures introduced by FICA require that “accountable institutions” establish
and verify the identities of their clients, keep certain records and report certain information.
Accountable institutions include a long list of persons and institutions including authorised
users (members of exchanges) and financial services providers.

The regulatory authority responsible for the implementation of FICA is the Financial
Intelligence Centre. The centre’s regulatory anti-money laundering regime is intended to
stop organised crime from using the financial system to conceal their illegal profits. The
centre collects, processes, analyses and interprets information received in terms of the
various statutory reporting obligations. The Centre then advises law enforcement
authorities, supervisory bodies (like the FSB, JSE Ltd and the Banking Supervision Division of
the SA Reserve Bank) and the intelligence services and cooperates with these organisations
in the execution of their duties.

1.6 Council for Overseeing Recognised and Statutory Ombudsman Schemes

There are several ombudsman schemes currently operating in South Africa. The Pensions
Funds Adjudicator and the FAIS Ombudsman are statutory ombudsman schemes while the
ombudsman schemes for the long-term insurance, short-term insurance and banking
industries are voluntary.

The Financial Services Ombud Schemes Act, 2005 provides for the recognition of voluntary
ombudsman schemes provided they comply with certain requirements. It also provides for
complaints that fall outside of the jurisdiction of any recognised or statutory ombudsman

18
scheme to be heard by a statutory ombudsman scheme created for that purpose. The Act is
applicable to banks and the non-banking financial institutions regulated by the FSB.

An independent council reporting to the Minister is responsible for the regulation and
supervision of ombudsman schemes, including approving applications, coordinating the
activities of the ombudsman schemes and monitoring compliance with the provisions of the
Act. The FSB, however, funds its activities and is responsible for the administration of the
Act.

SROs such as the exchanges which have dispute resolution mechanisms in place will have to
ensure that these schemes also comply with the minimum criteria laid down for ombudsman
schemes to ensure coherence in the complaints resolution field in South Africa.

The objective of the Act is to ensure that consumers have easy and free access to an
ombudsman to submit complaints, which is another step forward in the important task of
protecting consumers in South Africa.

1.7 Self-test Questions

Questions Answers
1. In South Africa False. Regulation is used to combat the negative effects of
economic policy is based on market activity.
the philosophy that the
market ensures efficiency at
all times. True or false?
2. A regulator should do a cost- True, as unnecessary or burdensome regulation
benefit analysis of proposed may adversely affect the economy.
regulations. True or false?
3. Regulation may have adverse True.
consequences in the economy.
True or false?

4. Regulation consists of which The establishment of rules of behaviour; monitoring

three elements? (determining whether the rules have been complied with) and
enforcement (ensuring that the rules are followed).
5. What are the objectives of The objectives of regulation are: -
regulation? • Securing systemic stability in the economy;
• Ensuring that markets are fair, efficient and
transparent;
• Ensuring institutional safety and soundness; and
• Promoting consumer protection.
6. What additional function does Self-regulation
an exchange have in terms of
the legislation apart from its
normal function of conducting
a market?
7. Discuss how ethical rules of The FSB has started to give legal effect to codes of conduct by
behaviour have become issuing them as subordinate legislation eg. in terms of the
matters of law in South Africa Financial Advisory and Intermediary Services Act, 2002 (FAIS)
several codes of conduct have been issued whose main aim is
the protection of consumers. There is an all-encompassing
General Code of Conduct, with special codes for example for
specific sections of the industry

19
 The FSB has also issued a Code of Conduct in terms of the new
Securities Services Act, 2004 in line with the codes issued under
the FAIS Act. Authorised users (previously called members of
the exchange) must in terms of the code render securities
services honestly, fairly, with due skill, care and diligence in the
interests of clients and the integrity of the securities services
industry.
8. Explain how the regulatory In terms of the Securities Services Act (SSA), the two licensed
landscape is split horizontally in exchanges namely the JSE Ltd and the Bond Exchange of South
South Africa. Africa and the central securities depository (CSD), STRATE Ltd
operate as SROs, regulating their own activities and those of
authorised users (members of exchanges) and participants
(members of central securities depositories) in terms of the
provisions of the SSA.

In terms of the FAIS Act, certain of the licensing requirements

are handled by industry associations that are authorised for
that purpose by the FSB. These authorised bodies’ powers and
duties are however so narrowly circumscribed that they cannot
really be described as SROs.
9. The FAIS Act mainly makes use False. The FSB concentrates in this industry on rules of market
of prudential regulatory conduct for the protection of consumers since prudential
measures in regulating and regulation of the individuals and smaller companies acting as
supervising the activities of advisers and intermediaries is not deemed necessary.
financial advisers and
intermediaries. True or false?
10. What are the functions of an The functions of an exchange in terms of the SSA is to establish,
exchange in its capacity as an maintain and provide an infrastructure to bring together buyers
exchange and its capacity as a and sellers of securities and match their orders.
SRO?
As a SRO, an exchange must issue and enforce rules, directives
and listing requirements, ensure compliance with the rules by
authorised users and listing requirements by the issuers of
securities, suspend rules and listing requirements under certain
circumstances and facilitate clearing and settlement of
transactions.
11. What are the functions of the The Directorate of Market Abuse is responsible for
Directorate of Market Abuse? investigating insider trading in addition to manipulative,
improper, false or deceptive practices of trading as well as
false, misleading or deceptive statements, promises and
forecasts and taking civil action if necessary.
12. What new enforcement The establishment of an enforcement committee that may
measure has been introduced impose administrative penalties and make orders for
by the SSA? compensation.
13. Which international The International Organization of Securities Commissions
organisation has laid down 30 (IOSCO).
Objectives and Principles of
Securities Regulation, which
South Africa intends to comply
with?
14. What rules have been issued to Policyholder Protection Rules
protect consumers in the long-
term and short-term insurance
industries?
15. Name the aspects covered by The Insurance Department conducts on-site visits to supervise
on-site visits of FSB staff to solvency and investment risk, general balance sheet risk

20
 insurance companies? management, underwriting risk, systems and operational risk,
market risk, financial reporting, corporate governance, external
audits, strategic management and general regulatory
compliance.
16. Discuss the powers of an An inspector may with regard to an institution: -
inspector in terms of the • Administer an oath or affirmation or examine any
Inspection of Financial person who is or was a director, servant,
Institutions Act, 1998. employee, partner, member or shareholder of a
financial institution;
• Without prior notice enter and search the
premises of the institution and require the
production of documents relating to the
institution;
• Open any strong room, safe or other container in
which he or she suspects any documents are kept;
• Examine and make extracts from and copies of
any documents, or against a receipt, remove the
above temporarily from the premises for that
purpose;
• Against the issue of a receipt, seize any document
which may afford evidence of an irregularity; and
• Retain such seized documents for as long as they
may be required for any criminal or other
proceedings.
17. What are the functions of an Retirement funds use actuaries to do actuarial valuations and
actuary in a retirement fund? to ensure that assets and liabilities are matched.
18. Discuss the investor protection Specific consumer (member) protection measures that have
measures contained in the been
Pension Fund legislation. introduced include: –
• Member representatives on the Boards of Trustees;
• Benefit statements;
• Internal complaints resolution and access to the
Pension Funds Adjudicator (ombudsman); and
• Allowing members to share in pension fund surpluses.
19. Discuss the measures used to • Managers of CIS’s must be registered in terms of the
regulate collective investment Act.
schemes. • Managers of CIS’s must comply with capital
requirements and provide seed capital for each
portfolio they administer.
• Portfolios must comply with prudential investment
guidelines.
• The prior approval of the Registrar is required in
respect of each new portfolio.
• Managers must comply with quarterly reporting
requirements.
• Investors must receive annual reports containing
prescribed information.
20. Who regulates money- The regulatory authority responsible for the implementation of
laundering activities in South FICA is the Financial Intelligence Centre.
Africa?
21. Who is responsible for the An independent council reporting to the Minister
regulation and supervision of
ombudsman schemes?

21
1.8 Activities

Access the websites of the various regulators (Addresses in text and bibliography)

1.9 Measure Your Progress:

Score obtained for these questions without looking at the answers:

___ /21 = ___x 100 = ___%

22
 Chapter 2

The Securities Services Act, 2004 (SSA)

Learning Outcome Statements

When you have studied this Chapter, you should be able to: –

1. Know the objects of the SSA, the role players and important definitions.
2. Know how an exchange is licensed, managed and controlled and how
funding thereof takes place.
3. Know and understand the functions of an exchange.
4. Understand securities listings and under what circumstances removals and
suspensions may take place and what disclosure requirements should be
complied with.
5. Know and understand which issues must be addressed in the rules of an
exchange.
6. Understand the main provisions in the SSA relating to authorised users,
segregation of funds and assets, the code of conduct that they must comply
with and duties on cessation of business.
7. Explain the role of auditors and which accounting records regulated persons
must keep.
8. Understand restrictions on the business of buying and selling of securities as
well as prohibitions in this regard.
9. Understand the different forms of market abuse including insider trading,
prohibited trading practices and making false, misleading or deceptive
statements, promises and forecasts and the guidelines with regard to
advertising and publishing of price-sensitive information.
10. Understand the role, functions and duties of central securities depositories
and participants, what uncertificated securities are and the role played by
issuers.

The SSA not only consolidates the legislation applicable in the financial markets, but also
brings the regulation and supervision of the financial markets in line with international
developments and regulatory standards. The internationally recognised minimum regulatory
standards contained in the Objectives and Principles of Securities Regulation issued by the
International Organisation of Securities Commissions (IOSCO) were taken into consideration
in the drafting of the Act.

2.1 Objects of the Act

The objects of the Act are very important as it displays the authorities’ commitment to
adhering to international regulatory standards. The objects are to: -
• Increase confidence in the South African financial markets by: -
o Requiring that services be provided in a fair, efficient and transparent
manner;
o Contributing to the maintenance of a stable securities market environment;
• Promote the protection of regulated persons and clients;

23
 • Reduce systemic risk;
• Promote the international competitiveness of securities services.2

2.2 Role players and other important definitions

There are various role players that the Act seeks to regulate either directly through the FSB,
or indirectly through the SRO. An exchange and a central securities depository (CSD) have
the status of a SRO in terms of the Act.

Who are the role-players in terms of the SSA?3

Exchange A person (individual, company or association) that

provides the infrastructure for bringing together
buyers and sellers of securities and matching those
orders whereby they become transactions.
Clearing house A licensed clearing house providing clearing services
or settlement services or both.
Authorised user A person authorised in terms of the exchange rules
to perform securities services.
Central Securities Depository (CSD) A licensed CSD providing custody and administration
services.
Participant A person that holds in custody and administers
securities or an interest in securities and has been
accepted as a participant by the CSD.
Issuer An issuer of securities such as a company issuing
shares or a utility (such as Eskom) issuing debt
instruments.
Regulated person An exchange, authorised user, CSD, participant or
clearing house.

What are “securities services” in terms of the SSA?4

Buying and selling of securities.

Custody and administration of securities.
Management of securities by an authorised user.
Clearing of transactions in listed securities.
Settlement of transactions in listed securities.

What is “clearing” or “clear” in terms of the SSA?5

Before settlement, to determine and calculate the exact number and nominal value of the
securities of each kind to be transferred and the amount of money to be paid to ensure
settlement. This includes in some cases the process by which the performance of a
transaction is underwritten from the time of trade to the time of settlement.

24
What are “securities” in terms of the SSA?6

Shares, stocks and depository receipts in public companies and other equivalent equities.
Notes.
Derivative instruments (defined as any financial instrument or contract that creates rights
and obligations and that derives its value from the price or value, or the fluctuating value
that may vary depending on a change in the price or value, of some other particular product
or thing, like an index).
Bonds.
Debentures.
Participatory interests in a collective investment scheme as defined in the Collective
Investment Schemes Control Act, 2002(Act No.45 of 2002), and units or any other form of
participation in a foreign collective investment scheme approved by the Registrar.
Units or any other form of participation in a collective investment scheme licensed or
registered in a foreign country.
Instruments based on an index.
The securities that are listed on an external exchange.
An instrument similar to one or more of the securities listed above declared by the Registrar
by notice in the Gazette to be a security for purposes of this Act.
Rights in the securities referred to in the above list.
EXCLUDING:
• Money market instruments (except for purposes of the custody and administration
of securities); and
• Any security contemplated in the above list of securities specified by the Registrar by
notice in the Government Gazette.

2.3 The Exchanges

2.3.1 Licensing of an Exchange

Any person (including a company and an association of persons) may apply for an exchange
licence in respect of one or more types of security eg shares, derivatives, bonds etc. The
application must be in such format and be accompanied by such documents as determined
by the Registrar of Securities Services (the Registrar) for example, the proposed rules,
founding document, listing requirements and information about the controlling body.7 In the
past only an association of persons could apply. These new provisions enable an exchange to
become “demutualised” i.e. to become a company and even list on its own exchange. This is
the trend internationally as well.8 The JSE Ltd has listed on its own list in terms of conditions
laid down by the Registrar. The regulatory functions of the exchange with regard to its own
listed securities are taken over by the Registrar.

Different types of exchanges with different business models, such as traditional exchanges,
electronic communications networks and alternative trading systems may be granted a
licence, as the Registrar may determine to what extent compliance with the requirements
must take place.9

The requirements for an exchange licence include the following: An applicant must have
adequate financial resources, management and human resources with the necessary

25
experience and the necessary infrastructure to conduct an exchange. All transactions must
be supervised through surveillance systems to ensure compliance with exchange rules. The
integrity of records must be safeguarded through security back-up procedures. Adequate
clearing and settlement facilities and the proper management of settlement risk must be
provided for. Compensation to clients must be ensured by insurance, a guarantee or
compensation fund or some other warranty.10

The Registrar will issue an exchange licence only if the requirements have been complied
with to the extent decided by the Registrar and the issuance of the licence will promote the
objects of the Act. It follows that if the issue of an exchange licence may for example lead to
systemic risk, the Registrar will refuse the licence even if the applicant complies with the
requirements.11

The licence of an exchange expires on 31 December of every year. Application for renewal
must be made in the manner determined by the Registrar.12

2.3.2 Funding of an Exchange

An exchange may require its authorised users and their clients to contribute towards the
funds of the exchange for purposes of conducting the business of an exchange. A surplus
that may arise may be distributed to any person if proper provision has been made for
liabilities, the distribution is made in accordance with its founding document and the prior
written consent of the Registrar has been obtained.13

An exchange may impose a transaction levy to maintain the insurance, guarantee or

compensation fund or other warranty that an exchange must have in place for the
protection of investors making use of its trading facilities.14

2.3.3 Management and Control of an Exchange or other SRO

Each member of a controlling body of an exchange owes a fiduciary duty to the exchange.
This means that the members must act with the utmost good faith towards the exchange
and always put the interests of the exchange above their own. In addition they owe a duty of
care and skill towards the exchange. This means that they must act competently and without
negligence. (If the SRO is a company, a member will be a director and the controlling body
the board of directors.)15

No person who is precluded from becoming a director of a company in terms of the

Companies Act may be appointed as a member of the controlling body. The same applies to
anyone penalised for the contravention of the rules of a professional organisation, including
a SRO.16

No person may without the Registrar’s approval acquire shares or other interest in an
exchange or other SRO if the acquisition will enable such a person directly or indirectly and
with or without an associate to exercise control over an exchange or SRO.17

Exercising control means holding shares in an exchange or other SRO that exceeds 15% of
the nominal value of issued shares or 15% of the voting rights without the approval of the
Registrar. In addition, no person may have the power to determine the appointment or
removal of 15% or more of the directors of the exchange or other SRO without the approval
of the Registrar. 18

26
These provisions ensure that disreputable persons do not seize control of an exchange or
other SRO and thereby introducing systemic risk into the securities markets.

2.3.4 General Functions of an Exchange

An exchange provides the infrastructure for bringing together buyers and sellers of those
securities in respect of which a licence has been obtained and matching those orders to buy
or sell. Once matched, the orders become transactions. The exchange must also provide for
the clearing and settlement of transactions. A licensed clearing house may be used for these
purposes.19 In South Africa STRATE Ltd is licensed as a clearing house in addition to its
function as a CSD. All the exchanges make use of STRATE Ltd’s clearing services with the
exception of the derivatives market, which uses SAFCOM.

The SSA confers the status of a SRO on an exchange and imposes regulatory duties and
functions on the exchange for example: -
• Issuing directives in terms of its rules (Directives contains internal procedures that
do not effect clients);
• Enforcing the exchange’s rules and listing requirements;
• Supervising compliance by authorised users with the Act and the rules;
• Supervising compliance by issuers of listed securities with the Act, rules and listing
requirements; and
• Amending or suspending the rules and listing requirements.20

These duties are performed under the supervision of the Registrar. If the Registrar deems it
necessary to achieve the objects of the Act, the Registrar may take over these functions.21

Listing of Securities

An exchange must keep a list of securities that may be traded on the exchange.22 Issuers will
apply to the exchange for the listing of their securities. Such securities must comply with the
listing requirements of the exchange, which must prescribe the following: -
• The manner in which securities will be listed, suspended or removed from the list;
• The requirements that issuers and their agents must comply with;
• The standards of conduct that issuers, their agents, directors and officers must
comply with;
• The standards of disclosure and corporate governance that issuers must comply
with; and
• The disciplinary procedure in respect of the contravention of listing requirements,
including the penalties that may be imposed.23

An exchange may also impose conditions in respect of the listing when approving an
application for the listing of a security. 24

Provision may be made in the listing requirements that details with regard to the imposition
of a penalty may be published. The person guilty of a contravention may be ordered to pay
the costs of the investigation.25

The exchange may list its own securities subject to the approval of the Registrar and
compliance with such conditions as the Registrar may determine.26 In this instance the
exchange is thus both the issuer and the exchange. This clearly constitutes a conflict of

27
interest as the exchange’s objectivity in considering the listing is compromised. For that
reason the Registrar will retain the right to approve the listing and will take over the
exchange’s regulatory functions with regard to its own listed securities.

An exchange must, before refusing a listing application, inform the issuer of its decision
giving reasons for the refusal. The issuer must be given the opportunity within a stated time
period to provide reasons why the application should not be refused.27

Removals and suspensions

The exchange may remove a security from the list of securities or suspend trading in a
security if such removal would promote the objects of the Act.28

An exchange must before removing a security from the list or suspend trading, inform the
issuer of its decision giving reasons for the refusal. The issuer must be given the opportunity
within a stated time period to provide reasons why the security should not be removed from
the list or suspended.

An exchange may order an immediate suspension of a listed security for a period not
exceeding 30 days if the listing requirements, conditions or rules are contravened or other
circumstances arise that justify an immediate suspension of the security.29

Trades in suspended securities on the exchange will only be allowed to fulfil obligations
acquired before the suspension.30

An issuer requesting removal of its securities from the list, may only do so provided the
holders of its securities have approved the removal and the exchange is satisfied that the
interests of minority shareholders have been considered. The issuer must under these
circumstances also provide reasons for its request.31

An exchange refusing the listing of a security or suspending or removing a security must

immediately inform other exchanges on which the security is listed thereof and provide the
date of and reasons for the refusal, suspension or removal.32

If the refusal to list or removal from the list was due to any fraud or crime committed by the
issuer, or material misstatement of its financial position or non-disclosure of any material
fact, or to a failure to comply with listing requirements, no other exchange may within 6
months thereafter list the security or allow trade unless the refusal or removal was
withdrawn or set aside on appeal.33

New listing requirements

An exchange may also impose new listing requirements or conditions on existing listed
securities by notice in writing to the issuer. The new listing requirements or conditions will
take effect on a date determined by the exchange but not earlier than 1 month after the
notice to the issuer, except when special circumstances justify an earlier date. The exchange
may postpone the date on written request from the issuer. If the exchange refuses a request
for postponement, the issuer may make representations to the Registrar, who may, if
reasonable and after consultation with the exchange, postpone the date by not more than 3
months.34

28
Disclosure of information by issuers

An exchange may require an issuer to disclose any information about the securities or the
affairs of the issuer that may be necessary to achieve the objects of the Act. The exchange
may also require disclosure of the information to the holders of the securities within a
specified period. If such disclosure may affect the price of the securities, disclosure must be
made at the same time to the public. If the issuer refuses to make the necessary disclosure,
trade in that security may be suspended unless a court order has been obtained to allow
non-disclosure.35

The Rules of the Exchange

An exchange must make rules to govern their activities and operations. The Registrar must
approve the rules. The rules will be binding on the exchange, authorised users, issuers,
officers and employees and clients and must be consistent with the Act.36

The rules must make provision for the following aspects: -

• The criteria for authorisation of authorised users. These criteria must include the
following: -
o Requirements that authorised users must be of good character and high
business integrity or in the case of a corporate entity be managed by such
persons;
o Requirements that authorised users comply with certain standards of
training, experience or qualifications or in the case of a corporate entity, is
managed by such persons or employs such persons;
o Requirements in respect of capital adequacy, guarantee or risk
management. These requirements must be prudent but may differ among
different categories of authorised users or different activities of an
authorised user’s business.
• Restriction of the activities of different categories of authorised users.
• The efficient, honest, transparent or fair manner in which transactions must be made
whether for own account or for clients.
• The clearing and settlement of transactions, including when a licensed clearing house
has not been appointed.
• The circumstances under which transactions may be repudiated or declared void.
• The conditions on which an authorised user may undertake the management of
investments.
• A requirement that no authorised user may accept business from unapproved financial
services providers eg investment managers.
• The approval of nominees holding securities in a securities or central securities
repository.
• The conditions subject to which officers and employees of authorised users may advise
on or conclude transactions and when access to the exchange may be denied.
• The suspension or halting of trade in a listed security.
• The manner in which authorised users must conduct their business generally, including
the operation of a trust account, the recording of transactions, monitoring of
compliance and surveillance of activities relevant for the Act, the rules or directives and
the circumstances and manner in which an authorised user may advertise or canvass for
business.

29
• The resolution of disputes between authorised users and between authorised users and
their clients and the investigation of complaints against authorised users or their
employees.
• The investigation and disciplining of authorised users or their employees for
contravention of the Act, rules or directives, including the manner in which an
authorised user or its employee may be required to appear before an investigator to be
interrogated or to produce a document. A report of the proceedings must be provided
to the Registrar within 30 days thereafter.
• Persons who must contribute to the insurance or guarantee or compensation fund, the
amount of the levy, the different categories of claims and the restrictions thereon, the
administration and the ownership of the fund.
• The different categories of transactions will attract different fees and the disclosure of
fees to clients.
• The purpose for which directives may be issued.
• Supervision of compliance with the Financial Intelligence Centre Act, 2001 (FICA).37

2.4 Authorised users

An authorised user is a person (including a company and any other juristic entity) that has
been authorised by the exchange to render securities services eg the buying and selling of
securities or the management of securities.38 Previously authorised users were known as
members of the exchange.

An authorised user will only be authorised by the exchange if it: –

• Is of good character and high business integrity or in the case of a corporate entity is
managed by such persons; and
• Complies with certain standards of training, experience or qualifications or in the
case of a corporate entity is managed by such persons or employs such persons.39

An authorised user must comply with the requirements in respect of capital adequacy,
guarantee and risk management as prescribed in the rules.40

2.4.1 Segregation of Funds and Assets

Each authorised user must, in respect of clients’ money, open a separate trust account at a
bank or utilise the separate trust account opened by the exchange. These accounts may
contain client funds only.41

An authorised user must deposit the payment on the day of receipt of payment from a
client. If payment was received after hours or was made directly into the authorised user
account, it must be transferred to the authorised user’s trust account by the start of
business the following day.42

An authorised user does not have to make a deposit in the following circumstances: -
• If payment is made by the buyer against delivery of the securities;
• If payment is made by the buyer against such securities being marked or recorded as
the property of the buyer;
• If the payment is preceded by a payment made by the authorised user to a seller
against delivery of the securities to the authorised user;

30
 • If the payment is made to pay a debt due to the authorised user (Please note that a
debt arising from the purchase of listed securities which have not been marked as
the property of a buyer will not be regarded as a debt);
• If the payment is made in terms of any other law or exchange rule which specifically
provides for the payment to be made into some other account.43

The following funds constitute trust property as referred to in the Financial Institutions
(Protection of Funds) Act, No 28 of 2001: -
• Funds held in a trust account; and
• Funds not deposited in a trust account but identifiable as belonging to a specific
person.
These funds must be treated as set out in Chapter 5 par 5.2.44

Withdrawal from a trust account may only take place under the following circumstances: -
• To pay the person entitled to the payment; and
• To pay in terms of any other law or the rules.45

If a cheque, draft or other instrument deposited in the trust account is dishonoured after the
withdrawal, the authorised user must immediately pay the shortfall into the trust account.46

Bank charges in respect of a trust account are for the account of the authorised user except
bank charges in respect of a deposit or withdrawal of a specific person’s funds, in which case
they will be for that person’s account.47

Interest accruing on a trust account is due to the person entitled to the funds after payment
of fees due to the authorised user or exchange.48

The excess remaining in the trust account after payment of or provision for all claims of
persons whose funds have or should have been deposited in the account shall NOT be trust
property. 49

2.4.2 Marking of or recording details of securities

When a document of title comes into possession of the authorised user, it must be marked
and recorded and the necessary details stored so that the identity of the owner can be
readily ascertained.50

2.4.3 Restriction on borrowing, re-pledging and alienation

An authorised user may not borrow against pledged securities in an amount in exceeding the
outstanding balance of any amount that the authorised user may have lent the pledgor
against the pledged securities. An authorised user may also not re-pledge listed securities
without the consent of the pledgor.51

An authorised user may only alienate (sell) listed securities deposited with the authorised
user if the depositor has authorised it in writing.52

2.4.4 Code of Conduct

An authorised user must comply with a Code of Conduct issued by the Registrar in terms of
the Act.53

31
General Duties

The general duties that an authorised user and its employees must adhere to in conducting
its business are the following: -
• An authorised user must render securities services honestly, fairly, with due skill,
care and diligence, and in the interests of clients and the integrity of the securities
services industry;
• An authorised user must exercise independent professional judgement;
• An authorised user’s conduct must further the objects of the Act and may not bring
the securities services industry into disrepute; and
• An authorised user must maintain knowledge of and comply with all applicable laws,
rules and regulations governing his or her activities.54

Duties when advising clients

When advising a client, an authorised user must comply with the following duties: -
• The authorised user must take reasonable steps to seek information about the
client’s financial situation, investment experience, particular needs and objectives in
connection with the securities service required, to enable the authorised user to
provide the client with sound advice;55
• The authorised user must conduct an analysis, based on the information obtained,
for the purpose of advising the client and identify the securities that will suit the
client’s risk profile and financial needs, subject to any contractual arrangement;56
and
• The authorised user must take reasonable steps to ensure that the client
understands the advice and the risks involved and that the client is in a position to
make an informed decision.57

These duties do not apply if the client is a professional client being another authorised user,
a bank, a long-term or short-term insurer, an asset manager with more than 1 billion under
management, any corporate, state or parastatal client with a net asset value of more than
R20 million (i.e. excluding natural persons, pension funds, friendly societies and medical aid
funds) and a foreign authorised user, bank, long-term or short-term insurer.58

Duties when rendering a securities service

When rendering a securities service eg buying or selling securities or advising a client, an

authorised user must ensure that information and representations are factually correct and
made in plain language. It may not be misleading and must take the level of knowledge of
the client into consideration. Clients must have enough time to take a decision.
Consequently information should be provided timeously to enable clients to do so. Oral
communications must be confirmed in writing if the client so requests, while written
communications must be in clear and reasonable print size, spacing and format. Amounts,
values, charges and monetary obligations must be specific or if not possible, the basis of
calculation must be adequately described.59

Disclosure need not be duplicated or repeated to the same client unless material or
significant changes affecting that client occur, or the relevant securities service renders it
necessary, in which case a disclosure of the changes to the client must be made without
delay.60

32
General Duties and Prohibitions

An authorised user must also comply with the following duties and prohibitions: -
• An authorised user must disclose full and accurate information about fees and other
charges that may be levied on clients;
• An authorised user must provide best advice taking into account the desires and
circumstances of the client (not applicable to a professional client);
• An authorised user may not advise clients with the sole purpose of maximising its own
income;
• An authorised user may not disclose any confidential information of the client unless the
client has consented thereto or disclosure of the information is required in terms of a
law or to promote the objects of the Act;
• An authorised user must act promptly on and in accordance with the instructions and
must exercise any discretion responsibly;
• An authorised user must advise a client in advance of any restrictions or limitations that
may affect the access to his or her funds;
• An authorised user must provide a general explanation of the nature and material terms
and risks of a transaction (not necessary for professional clients); and
• An authorised user must disclose any personal interest or other actual or potential
conflict of interest and take all reasonable steps to ensure fair treatment of the client.61

Inducements

An authorised user must take reasonable steps to ensure that it and any person acting on its
behalf does not offer, give, solicit or accept any incentive, remuneration, consideration,
commission, fee or brokerage (“valuable consideration”) as an inducement if it is likely to
conflict with any duty that the authorised user owes to its clients in respect of securities
services provided to those clients or any duty that the recipient of the inducement owes to
its clients.62

Any valuable consideration offered, given, solicited or accepted as an inducement by an

authorised user in terms of an agreement with a third party or a client which relates to the
provision of securities services by the authorised user to one or more clients, and which
does not directly relate to and assist in the provision of such services to such clients or does
not otherwise directly benefit the clients of the recipient of such valuable consideration, is a
prohibited inducement.63

An authorised user who, in terms of an agreement with a third party, directly or indirectly
accepts any valuable consideration as an inducement in respect of a securities service
rendered to a client or for which the authorised user may become eligible, must disclose to
the client in writing before the rendering of such service, the existence of the agreement,
the nature, extent, value and frequency of receipt of such valuable consideration to the
extent that such information is known prior to the rendering of the service, and the identity
of the other person providing or offering the valuable consideration.64

Please see Chapter 5 par 5.1 for a discussion of soft commissions.

33
Record keeping

An authorised user must maintain proper, complete, accurate and secure records. An
authorised user must maintain appropriate procedures and systems to store and retrieve
instructions relating to a securities service rendered, including verbal instructions and the
documentation relating to the contractual arrangement. Records may be kept in electronic
or voice-recorded format. Instructions must be kept for 6 months after the date of
instruction, while contractual documentation must be kept for 5 years. An authorised user
may outsource the record-keeping function but must be able to produce the records within
7 days.65

Advertisements

Advertisements must provide accurate, complete and unambiguous information that

emphasises the risk of loss and uncertainty of future results and discern fact from opinion.
They may not be comparative in relation to another authorised user.66 They may not contain
any statement, promise or forecast that is fraudulent, untrue or misleading. 67

Advertisements that contain performance data (including awards and rankings) must include
references to their source and date. Advertisements that contain illustrations, forecasts or
hypothetical data must contain support in the form of clearly stated basic assumptions with
regard to performance, returns, costs and other matters with a reasonable prospect of being
met. It should be clear that the returns and performance are not guaranteed and provided
for illustrative purposes only. 68

Where returns or benefits depend on the performance of underlying assets or other variable
market factors, this should be stated clearly. Advertisements should prominently display a
warning statement about risks involved in buying or selling of securities. Where information
about past performance is included, the advertisement should include a warning that past
performances are not necessarily indicative of future performance. If the investment value
of a financial product mentioned is not guaranteed, the advertisement must contain a
warning that no guarantees are provided.69

Safekeeping and separation of funds and assets

An authorised user must provide the necessary resources and functionality to ensure that
clients are able to contact them easily and timely. An authorised user must make provision
for the separation and identification of own assets and client’s assets and properly account
for clients’ assets. Client’s assets may not be used to finance the authorised user’s business
activities.70

Client Statements

Professional clients must receive client statements at such intervals as may be agreed upon.
Other clients however must be treated as follows:
Client statements must be provided to clients at regular intervals not exceeding 3 months
unless the client has consented not to receive them because the information is available
continuously for example through the Internet. Client statements must be provided at the
intervals of less than three months at the request of the client but not more often than

34
monthly. If the client’s managed portfolio includes any open positions in listed derivative
instruments, monthly statements must be provided. 71

A client statement must contain such information as is reasonably necessary to enable the
client to: -
• Produce a set of financial statements;
• Determine the composition of the securities in the portfolio and the changes thereto
over the reporting period; and
• Determine the market value of the securities in the portfolio and the changes thereto
over the reporting period.72

A client statement must contain at least the following information as at the reporting date to
enable the client or the client’s agent to review the operation of their account and make
appropriate investment decisions: -
• The quantity, description and market value of each investment in the portfolio;
• The amount of funds held by the authorised user or which has been invested by the
authorised user on behalf of the client;
• If any of the securities are reflected in a foreign currency, the relevant currency
exchange rate;
• Securities purchased or sold;
• Receipts and payments of funds;
• Details of income earned and expenditure incurred;
• Non-cash transactions, including non-cash components of corporate actions and option
expiries;
• Securities transferred into and out of the portfolio;
• Identification of those securities which at the reporting date were loaned to any third
party;
• The quantity, description and market value of any securities or the amount of funds held
as collateral by the authorised user on behalf of the client in respect of any loans made
by the client;
• Identification of those securities or funds which were utilised to secure loans to the
client or borrowings made on behalf of the client;
• Identification of those securities or funds which were utilised as margin in respect of
open positions in any financial product;
• In respect of listed derivative instruments, a description of the underlying financial
product, index, commodity or thing, the expiry month and in the case of options, the
exercise or strike price; and
• If the statement reflects any investments or funds, which are not held by the authorised
user and for which the authorised user is not accountable to the client, it should clearly
indicate that fact.73

The information can be supplied in separate statements and may be supplied to the client,
the client’s agent or a nominated third party.74

Risk management and Internal Controls

An authorised user must employ the resources, procedures and technological systems
necessary for the effective conduct of its business.75

The internal control system of the authorised user must be designed to ensure that: -
• The business can be carried on in an orderly and efficient manner;

35
• Financial and other information used or provided by the authorised user is reliable;
• All transactions and financial commitments entered into are recorded and within the
scope of authority of the authorised user or the officer or employee acting on behalf of
the authorised user;
• There are procedures to safeguard the assets of the authorised user and assets
belonging to any other person for which the authorised user is accountable, and to
control liabilities; and
• There are measures to minimize the risk of loss to the authorised user or the clients of
the authorised user from any irregularity, fraud or error and to detect any irregularity,
fraud or error should they occur so that prompt remedial action may be taken.76

An authorised user shall as far as is reasonable adopt sound risk management principles and
procedures. 77

The principles and procedures of risk management shall be designed to ensure that the
records of the authorised user are maintained in such a manner as to promptly disclose
financial and business information that will enable the authorised user or the management
of the authorised user to: –
• Identify, quantify, control and manage the risk exposures of the authorised user;
• Make timely and informed business decisions;
• Monitor the performance and all aspects of the business of the authorised user; and
• Monitor the capital of the authorised user to ensure compliance with the capital
adequacy requirements imposed in terms of the rules.78

An authorised user must be able to describe and demonstrate the objectives and operation
of such systems, principles and procedures to its auditor, the exchange and the Registrar.79

Guarantees and insurance cover

An authorised user must, if, and to the extent required by the exchange, maintain
appropriate guarantees or professional indemnity or fidelity insurance cover to mitigate the
risks inherent in his or her business and to which clients are exposed.80

Waiver of rights

An authorised user may not request or induce a client to waive any right or benefit
conferred on the client by the Code of Conduct, or recognise, accept or act on any such
waiver by the client, and any such waiver is void.81

2.4.4 Cessation of business of an authorised user

An authorised user or participant that ceases business must attend to the following: -
• Notify the exchange or central securities depository of the intended or actual date of
cessation of business;
• Notify the clients for whom they hold assets or funds, in writing, of the intended or
actual date of cessation of business, provide those clients with statements reflecting the
assets and funds held on their behalf and indicate to which authorised user, participant
or other person authorised to deal in or hold custody of securities their assets and funds
will be delivered in the absence of an instruction from the client to the contrary; and
• Deliver the client assets and funds. 82

36
An authorised user that ceases business must maintain a record of funds or assets held in
trust until the transfer to a client or another person authorised to deal in or hold custody of
securities has been fully effected. 83

2.5 Auditors and Accounting Records

2.5.1 Appointment of the auditor

Every regulated person (ie an exchange, clearing house, participant, central securities
depository or authorised user) must appoint an auditor who engages in public practice. The
auditor must be independent i.e may not have a direct or indirect financial interest in the
business in respect of which the auditor is appointed. No auditor or member of an auditor
firm in which a regulated person or director, officer or employee of a regulated person has
any financial interest, may be appointed as auditor. The appointment of an auditor by a SRO
must be approved by the Registrar who may also withdraw the approval if necessary.84

2.5.2 Accounting records

A regulated person must maintain on a continual basis accounting records and prepare
annual financial statements that conform to generally accepted accounting practice (GAAP)
and contain the information prescribed by the Registrar. The financial statements must be
audited within 3 months after the financial year-end or such later period as the Registrar
may allow.85

The accounting records of a regulated person must show the transactions and financial
commitments of a regulated person, and transactions and payments relating to clients in
such a manner that they disclose with substantial accuracy the financial position,
performance and cash flows of the regulated person, and separately the position of clients
of the regulated person, at the close of business on any day. Accounts of clients must be
designated as such and must be clearly distinguishable from the business accounts of a
regulated person. A regulated person may keep computerised records provided that such
records are subject to acceptable backup and recovery procedures and can be reproduced in
printed form.86

There are differences in the specific requirements with regard to the accounting records of
an exchange, clearing house or central securities depository contained in the Notice:
“Accounting Records to be maintained by a Regulated Person” issued in terms of the SSA.
These fall outside the scope of this module, as our focus is on the authorised user
(previously member of the exchange). Interested learners can read the Notice on the FSB’s
website www.fsb.co.za.

An authorised user must keep the following accounting records: -

• A daily record of all sums of money received and expended;
• A record of funds held in trust;
• A record of all income and expenditure;
• A record of all assets and liabilities, including any provisions for financial commitments
and contingent liabilities;
• A record of all purchases and sales of securities which reflects the following: -
o Date and time of each transaction;

37
 o Person from whom securities were bought or to whom they were sold,
unless it was processed through an automated trading system recognised by
the relevant exchange;
o Name of the person on whose behalf the securities were bought or sold;
o Quantity and description of the securities which were bought or sold;
o Name of the issuer of the securities;
o Price per security and the total consideration;
o Brokerage;
o Taxes that are payable in respect of each transaction;
o Terms of the contract;
o Capacity (principal or agent) in which the transaction was entered into; and
o The following additional information in respect of transactions in options:

The reference number of the transaction and option number, where
applicable;

Whether the option is a put or call option;

The terms and conditions under which the option may be exercised,
including the type of option, the strike price or yield, the strike date
and time and the settlement date;

The identity of the writer of the option;

The quantity and description of the listed security to which the
option relates;

The option premium and settlement date; and

Whether the option was exercised or lapsed and the exercise date, if
applicable;
• A record of all securities and documents of title which are in the possession, safe
custody or under its control in which is reflected the: -
o Name of the issuer of the securities;
o Quantity and description of the securities;
o Identification numbers of the securities and documents of title, where
applicable;
o Name of the registered holder and if the registered holder is a nominee
controlled by the regulated person, the beneficial owner or owners;
o Person from whom the securities were received and to whom the securities
were delivered;
o Date of receipt and delivery;
o Location where the securities or documents of title are kept;
o Details of any charge to which the securities may be subject;
o Person on whose behalf securities or documents of title have been received
or delivered;
o Purpose for which the securities or documents of title are held.
• A record of securities held by the regulated person on behalf of its clients which
must be made available to its clients at least on a quarterly basis and which must
contain as a minimum: -
o The name of the client;
o The quantity and a description of securities held;
o A description of transaction movements within the securities accounts
during the period since the previous report; and
• A record of the reconciliation of the securities accounts maintained by a participant
and the central securities account maintained by the central securities depository.87

38
An authorised user or participant must reconcile balances with the exchanges, clearing
houses, central securities depositories and banks as frequently as is appropriate for the
volume of transactions on accounts. Any differences, other than differences in timing
between the records of the authorised user or participant and the exchanges, clearing
houses, central securities depositories or banks, as the case may be, must be investigated
and corrected as soon as is practicable. Authorised users must reconcile securities under
their control with the accounting records relating to securities held by the authorised user
on a daily basis. Correcting entries must be made immediately.88

The accounting records (which may be electronic) must be preserved in a safe place for at
least 5 years from the date of the last entry.89

2.5.3 Reports by the Auditor to the Exchange

The auditor of an authorised user must report to the exchange (as SRO) (or to the FSB at the
Registrar’s request) that the accounting records and the annual financial statements have
been examined in accordance with Generally Accepted Accounting Principles(GAAP) and
that they fairly present the financial position, cash flows and results of operations.90 The
report must also include: -
• Whether or not securities that have been entrusted to the regulated person or for
which the regulated person is accountable, are in the possession of the regulated
person or a custodian, and whether confirmations or statements of holdings have
been obtained from the persons who maintain the record of ownership of such
securities.
• Whether the authorised user complied with the SSA with regard to the operation and
maintenance of its trust account.
• Whether the authorised user complied with the capital adequacy requirements
determined by the rules of the exchange.91

Responsibility of Auditor upon cessation of business of an authorised user

The auditor of a regulated person must report, within 3 months of the date on which the
regulated person ceased to do business, on whether or not the regulated person has
complied with the record keeping requirements upon cessation of business.92

2.6 Restrictions and Prohibitions

Listed securities

The business of buying and selling listed securities may ONLY be conducted by the following
persons:
• An authorised user.
• A person effecting the transactions through an authorised user. (This will be a
person who is trading as a principal i.e. for own account. Agency trading i.e. trading
for clients, may only be conducted by authorised users authorised in terms of the
rules of the exchange or financial services providers authorised thereto by the FSB
under the FAIS Act. These financial services providers must also trade through an
authorised user.)
• A financial institution transacting with another financial institution on a principal
basis (This means that financial institutions may trade with each other off exchange
with their own funds and assets but not clients’ funds and assets). A financial

39
 institution for these purposes includes a pension fund, pension fund administrator,
friendly society, long-term and short-term insurer and a bank.)
• A person who buys or sells listed securities to give effect to: -
o A reconstruction of a company or group of companies by the issue or
reallocation of shares; or
o A takeover of one company by another; or
o An amalgamation of two or more companies; or
o A change in the control over management or the business of a company.93

Financial institutions trading off exchange (regardless whether they are conducting the
business of buying and selling securities) must report these transactions to the Registrar. The
Registrar may prescribe the information required from each transaction and prescribe the
manner and time within which the report must take place. The Registrar must then disclose
this information to the exchange and the public. The exchange may also publish this
information.94

Unlisted securities

The Registrar may prohibit a person from carrying on the business of buying and selling
unlisted securities if that person carries on the business in a way that defeats one or more
objects of the SSA. The Registrar may impose conditions for the carrying of such a business.
The Registrar may also prescribe conditions in terms of which specified types of unlisted
securities may be bought and sold.

A person who buys unlisted securities from or sells unlisted securities to a person who fails
to comply with the conditions laid down by the Registrar, may cancel the transaction.

Please keep in mind that these clauses in the SSA deal with principal trading. The moment a
person acts on behalf of a client, the transaction would fall under the FAIS Act.95

2.7 Advertising and Publications

No person except an authorised user or employee or officer of an authorised user

authorised by the rules to do so, may directly or indirectly advertise or canvass for the
business of an authorised user. If an advertisement or brochure is misleading or
objectionable, the Registrar may direct that the advertisement not be published, or stopped
or amended.96

Published written comment on the trading results of a public company or which may
influence the value of listed securities must be accompanied by the name of the person/s
who compiled it or the name of the person on the editorial staff of a newspaper or
periodical who compiled it. In addition the source from which it was obtained must be
disclosed.97

2.8 Market Abuse

2.8.1 Insider Trading

The offence of insider trading has been committed if the elements of column 1, 2 and 3 of
the table in any combination are present.98

40
1. The Insider (person) 2. The Offence (activity) 3. Insider Information

• A director, employee or • Dealing directly or Specific or precise information: -

shareholder of an issuer indirectly for own • That has not been made public,
of securities to which the account or for any other • That has been obtained or learned
inside information person (knowing that he as an insider and
relates. or she has inside • If made public is likely to have a
• An individual who has information) in securities material effect on the price or
access to inside listed on a regulated value of any security listed on a
information by virtue of exchange to which the regulated market.
his or her employment, information relates or “Made public” includes:
office or profession. that are likely to be • Publishing information by a
• An individual who knows affected thereby. regulated market to inform clients
that the direct or • Disclosing inside and professional advisers.
indirect source of the information to another • When information is contained in
inside information was person. records open to inspection by the
one of the two persons • Encouraging or causing public.
above. another person to deal or • When the information can easily
discouraging or stopping be obtained by those likely to
another person from trade in listed securities to which
dealing in securities listed the information relates or to the
on a regulated market to issuer of those securities.
which the information Information will still be regarded as
relates or that are likely public even though –
to be affected thereby. • It can only be acquired by persons
exercising diligence and
observation; or
• It can only be obtained on
payment of a fee; or
• Was published outside of SA.

Defences to Insider Trading

A person will however NOT be found guilty of the offence in the following circumstances and
these circumstances may therefore be raised as a defence:
• If he or she acted on the specific instructions of a client. (Except where the client
disclosed the insider information to him or her);
• If he or she became an insider after he or she had given the instruction to deal to an
authorised user and the instruction was not changed in any way;
• If he or she acted on behalf of the public sector in the pursuit of certain government
policies;
• If he or she was acting in pursuit of a take-over or merger;
• If he or she disclosed inside information because it was necessary for the purpose of the
proper performance of the functions of his or her employment, office or profession in
circumstances unrelated to dealing in any security listed on a regulated market and at
the same time disclosed that the information was inside information.99

41
Civil Liability in respect of Insider Trading Offences

Trading for own account

A person who knows that he or she has inside information and makes a profit or would have
made a profit if the securities were sold at any stage or avoided a loss through a direct or
indirect insider trade (the insider trader), shall be liable to pay to the Financial Services
Board the following amounts: -
• The amount of the profit or loss referred to above.
• A compensatory or punitive amount determined by the Court but not exceeding three
times the above-mentioned profit or loss.
• Interest.
• The costs of the suit.100

Trading for someone else, encouraging insider trading or disclosing insider

information

A person who knows that he or she has inside information who discloses the inside
information to the insider trader, encourages the insider trader to trade on the inside
information or trades directly or indirectly on behalf of the insider trader (like a
stockbroker), shall be jointly and severally (i.e. he or she can be held liable in lieu of the
insider trader) liable with the insider trader for the following amounts:
• The amount of the profit or amount of loss avoided by the insider trader.
• A sum determined by the court but not exceeding three times the profit made or loss
avoided.
• The commission or other consideration received.
• Interest.
• The costs of the suit.101

2.8.2 Prohibited Trading Practices

Knowingly using or participating in manipulative, improper, false or deceptive trading

practices in listed securities that may create a false or deceptive appearance of trading or an
artificial price for that security is an offence. Placing an order that may create a false or
deceptive appearance of trading or an artificial price for that security is also an offence. This
applies regardless whether trading took place directly or indirectly, for own account or
behalf of someone else. 102

The following will be deemed to be manipulative, improper, false or deceptive trading:

• Approving or entering an order to buy or sell a security without a change in beneficial
ownership;
• Approving or entering an order to buy or sell a security with the knowledge that an
opposite order/s of substantially the same size, at substantially the same time and price
with the intention of creating a false or deceptive appearance of trading or an artificial
price for that security;
• Approving or entering orders to buy a listed security at successively higher prices or
orders to sell at successively lower prices for the purpose of unduly or improperly
influencing the market price of such a security.

42
• Approving or entering an order to buy or sell a security at or near the close of the
market, the purpose of which is to change or maintain the closing price of a security;
• Approving or entering an order to buy or sell a security listed on that market during any
auctioning process or pre-opening session and cancelling that order immediately prior to
the market opening for the purpose of creating a false or deceptive appearance of
demand or supply for such security;
• Effecting or assisting in effecting a market corner. A market corner is where a person or
group of persons acting together have an arrangement, agreement, commitment or
understanding to acquire direct or indirect beneficial ownership of or exercising control
over or is able to influence the price of listed securities and where the effect thereof is
that the trading price reflected on the exchange is likely to be abnormally influenced or
arbitrarily dictated by such a person or group of persons in that the trading price
deviates materially or is likely to deviate materially from the trading price that would
otherwise have been reflected;
• Maintaining the price for dealing in listed securities at an artificial level;
• Employing any device, scheme or artifice to defraud any other person as a result of a
transaction effected through the exchange;
• Engaging in any act, practice or course of business in respect of dealings on the
exchange, which is deceptive or is likely to be deceptive;

BUT NOT the employment of price-stabilising mechanisms regulated in terms of the rules or
listing requirements of an exchange.103

2.8.3 False, misleading or deceptive statements, promises and forecasts

No one may make or publish a false, misleading or deceptive statement, promise or forecast
with regard to a material fact concerning listed securities or the past or future performance
of a public company while he or she knows or ought to have known that it is false,
misleading or deceptive. The same applies to an omission of facts having the same effect.
Such an action will be a criminal offence. When considering whether the offence took place,
it will be evaluated in the light of the circumstances prevalent when it took place.104

2.9 Custody and Administration of Securities

The SSA makes provision for the safe custody and record keeping of securities by central
securities depository (CSD) and participants of the CSD. Section 91A of the Companies Act
makes provision for dematerialisation of securities and issuing of uncertificated securities.

A CSD must be licensed by the FSB on an annual basis similar to the approach followed with
respect to the exchanges. A CSD operates in terms of its rules that must be approved by the
FSB.105

A participant in a CSD is a person (usually a bank) that holds securities on behalf of clients
and deposits them into the CSD in terms of its rules.106

A company must enter in its register of members the total number of securities held in
uncertificated form. A participant in a CSD must keep a sub register that will form part of the
register of members. The participant will be responsible for entering the information
required by the Companies Act and ensuring the correctness of transfers of uncertificated
securities made by the participant. Transfer of ownership takes place upon the debiting and
crediting, respectively, both of the account in the sub register from which the transfer is

43
made and the sub register to which transfer is made by the participant. 107

All securities except bearer and money market instruments and securities recorded in a sub
register in terms of section 91A of the Companies Act, must be registered in the name of the
central securities depository or a wholly owned subsidiary approved by the Registrar. The
CSD or its subsidiary does not however become the owner of securities.108

Where securities are deposited with a participant or CSD, the owner of the securities
becomes entitled to an interest as co-owner of all the securities of the same kind comprised
in the securities repository or central securities repository. The interest of a co-owner is
calculated by reference to the proportion that the number or nominal value of the securities
deposited bears to the total number or nominal value of the securities of that kind held in
the securities repository or central securities repository.109

A co-owner of an interest in securities in a participant or CSD is on withdrawal entitled to

receive a certificate or other instrument evidencing ownership of the same number or the
same nominal value and of the same kind as the interest in securities held, provided the co-
owner has a sufficient unencumbered credit balance of those securities in the securities
account or central securities account.110

Every client or participant depositing securities with a participant or CSD is deemed to

warrant that such person is entitled to deposit the securities and that the document or
instruction is genuine and correct. Should a claim be instituted against the participant or
CSD, the depositor must indemnify the participant or CSD against any loss arising out of such
loss or breach of warranty.111 A CSD is however not deemed to have given such an indemnity
or warrant.112

2.9.1 Duties and Functions of a CSD

A CSD may hold all securities of the same kind deposited by a participant collectively in a
separate central securities repository, i.e. a collection of securities of the same kind held by
a CSD.113

A CSD must maintain a central securities account with due regard to the interests of the
participant and its clients.114 A central securities account refers to an account kept by the
CSD for a participant that reflects the number or nominal value of securities of each kind
deposited and all entries made in respect thereof.115

For example:

XYZ Bank is a participant in the CSD that is holding the following securities:
5000 ABC Ltd shares for client X
6000 ABC Ltd shares for client Y
1000 Government Bonds for pension fund P

ABC Bank is a participant in the CSD that is holding the following securities:
4000 ABC Ltd shares for client S
4000 ABC Ltd shares for client T
1000 Government Bonds for pension fund Q

The central securities repositories in the CSD will show the holdings per kind of asset (i.e. the same
class and issuer in each category):

44
ABC Ltd shares
19000
Government Bonds
2000

The central securities accounts will hold all the securities combined (i.e. different kinds) per
participant:
XYZ Bank
11000 ABC Ltd shares
1000 Government Bonds

ABC Bank
8000 ABC Ltd shares
1000 Government Bonds for pension fund Q

A CSD must administer and maintain a record of all uncertificated securities deposited with
it.116

A CSD must supervise compliance with its rules by participants and enforce the depository
rules.117 Directives may be issued if necessary.118 A CSD may have access to the records of
uncertificated securities administered and maintained by its participants.119

A CSD must notify a participant in writing of all entries made in the participants’ central
securities account.120 Entries include an electronic recording of any deposit, withdrawal,
transfer, attachment, pledge, cession to secure a debt or other transaction in respect of
securities.121

The aggregate of the central securities accounts and the records of the relevant issuer must
be reconciled and balanced in respect of each kind of certificated security at least every six
months and in respect of uncertificated securities once a month if the aggregate has not
changed and if the aggregate has changed, on the business day after the change.122

A CSD must on request disclose to the Registrar information about the securities held by a
participant in the central securities account.123 The CSD must also on request disclose to
issuer information about the securities issued by that issuer and held by participants in
central securities accounts.124 A CSD must also disclose its fees and charges to participants
and issuers.125

If a participant ceases to be a participant, the CSD must notify the Registrar.126

A CSD’s business must be conducted in a prudent manner and with due regard to the rights
of participants, issuers and clients.127

2.9.2 Duties and Functions of a Participant

A participant must, unless expressly otherwise directed by a client, deposit securities

deposited with it with a central securities depository.128A participant must maintain a
securities account for each client in respect of securities deposited.129 A securities account
reflects the number or nominal value of securities of each kind deposited and all entries
made in respect of such securities.130 A record of all securities deposited must be
administered and maintained in accordance with the rules of the CSD.131 The participant
must record all the securities of the same kind in a sub register if so required by the rules of
the CSD.132

45
For example:

XYZ Bank is a participant in the CSD that is holding the following securities:
5000 ABC Ltd shares for client X
6000 ABC Ltd shares for client Y
1000 Government Bonds for pension fund P

The securities repositories in the participant will show the holdings per client and per kind of asset (i.e.
the same class and issuer):
ABC Ltd Shares
11000
Government Bonds
1000

The securities accounts in the participant will hold all the securities combined (i.e. different kinds) per
client:
Client X
5000 ABC Ltd shares
Pension Fund P
1000 Government Bonds
Client Y
6000 ABC Ltd shares

A participant must notify a client in writing or as otherwise agreed of an entry made in the
client’s securities account.133

A participant must on request disclose to the Registrar information about the securities
recorded in a securities account. The participant must also on request disclose to the issuer
information about the securities issued by that issuer and recorded in a securities
account.134 A participant must also disclose all its fees and charges to clients and issuers.135

A participant must have a central securities account with a central securities depository in
which it may deposit or withdraw securities. It may also transfer, cede or pledge an interest
through that central securities depository.136 A participant must exercise the rights in respect
of securities deposited by it with the central securities depository in its own name on behalf
of the client if instructed to do so.137

The participant must balance and reconcile the aggregate of the securities accounts with the
central securities accounts on a daily basis.138

2.9.3 Nominees

The SSA provides for the approval of nominees that act as the registered holders of
securities or an interest in securities on behalf of others. A nominee of an authorised user
must be approved in terms of the rules of the exchange. A nominee of a participant or the
nominee of a client of the participant must be approved by the CSD in terms of the
depository rules. Other nominees must be approved by the Registrar and comply with
requirements prescribed by the Registrar. The Registrar must maintain a list of approved
nominees.139

46
2.9.4 Uncertificated Securities

An uncertificated security is a security that is not evidenced by a certificate or written

instrument and are transferable by entry without a written instrument.140 The SSA provides
for the conversion of all kinds of securities into uncertificated securities regardless of any
other law, the common law, agreement, articles of association of an issuer, prospectus or
conditions applicable to the issuing of securities. An issuer, central securities depository and
participant must make arrangements in accordance with the depository rules for
uncertificated securities to be evidenced by way of entry. An issuer has the same obligation
towards uncertificated securities as certificated securities except that no certificate or
written instrument is issued in respect of uncertificated securities.141

Duties and Functions of an Issuer of Uncertificated securities

An issuer of uncertificated securities must record in its register the number or nominal value
of each kind of uncertificated security issued by it.142 This record must be balanced and
reconciled with the central securities depository at least once a month if the record is
unchanged and if the record has changed, on the business day after the change.143

Separate records must be maintained for each central securities depository, if applicable.144
The issuer must record the central securities depository or its wholly owned subsidiary as
the registered holder of the uncertificated securities except for bearer and money market
instruments and securities recorded in a sub register in terms of section 91A of the
Companies Act and the depository rules.145 An issuer must also comply with section 91A of
the Companies Act, if applicable.146

2.9.5 STRATE Ltd

STRATE Ltd is currently the only licensed central CSD in South Africa.

2.10 Self-test Questions

Questions Answers
1. What are the objects of the The objects are to-
Securities Services Act? • Increase confidence in the South African financial
markets by-
o Requiring that services be provided in a fair,
efficient and transparent manner;
o Contributing to the maintenance of a stable
securities market environment;
• Promote the protection of regulated persons and
clients;
• Reduce systemic risk;
• Promote the international competitiveness of
securities services
2. Jan Ndlovu has an electronic Yes, because his system complies with the definition of
system for bringing together “exchange” in the Securities Services Act.
buyers and sellers of
securities. The orders are
matched and then settled.
Must he apply for an
exchange license?
3. What is the function of a A licensed CSD provides custody and administration services.
central securities depository?

47
4. Does giving of advice Yes
regarding the buying and
selling of securities fall within
the definition of
“management of securities”?
5 Which financial instruments Money market instruments
are expressly excluded from
the definition of “securities”?
6. Can a public company apply Yes. Under the previous dispensation however only
for an exchange licence? associations of persons could apply.
7. What are the limitations The control of and shareholding of an exchange is limited. No
regarding ownership of an person may hold shares in an exchange that exceeds 15% of
exchange? the nominal value of issued shares or 15% of the voting rights
without the approval of the Registrar. In addition, no person
may have the power to determine the appointment of 15% or
more of the directors of the exchange without the approval of
the Registrar.

No person may without the Registrar’s approval acquire

shares or other interest in an exchange if the acquisition will
enable such a person directly or indirectly and with or without
an associate to exercise control over an exchange.

8. How is an exchange funded Contributions by authorised users and their clients.

apart from operational
profits?
9. How is a guarantee fund Transactional levies.
funded?
10. Who supervises the self- The Financial Services Board.
regulatory functions of the
exchange?
11. May an exchange list its own Yes, subject to the approval of the Registrar and if complying
shares? with such conditions as the Registrar may determine.
12. What steps must an exchange An exchange must before removing a security from the list,
take before removing a inform the issuer of its decision, giving reasons for the refusal.
security from a list? The issuer must be given the opportunity within a stated time
period to provide reasons why the security should not be
removed from the list.
13. What conditions must be • The holders of its securities must have approved the
complied with before removal; and
removing a security from a list • The exchange must be satisfied that the interests of
at the request of the issuer? minority shareholders have been considered.
14. What disclosure requirements An exchange may require an issuer to disclose any
may be imposed by an information about the securities or the affairs of the issuer
exchange on an issuer? that may be necessary to achieve the objects of the Act. The
exchange may also require disclosure of the information to
the holders of the securities within a specified period. If such
disclosure may affect the price of the securities, disclosure
must be made at the same time to the public. If the issuer
refuses to make the necessary disclosure, trade in that
security may be suspended unless a court order has been
obtained to allow non-disclosure.
15. What criteria for the These criteria must include the following:
authorisation of authorised • Requirements that authorised users must be of good
users must be included in the character and business integrity or in the case of a
rules of an exchange? corporate entity be managed by such persons;

48
 • Requirements that authorised users comply with
certain standards of training, experience or
qualifications or in the case of a corporate entity is
managed by such persons or employs such persons;
• Requirements in respect of capital adequacy,
guarantee or risk management. These requirements
must be prudent but may differ among different
categories of authorised users or different activities
of an authorised users business.
16. Define an authorised user. An authorised user is a person (including a company and any
other juristic entity) that has been authorised by the exchange
to render securities services eg the buying and selling of
securities or the management of securities. Previously
authorised users were known as members of the exchange.
17. Describe the duties of an An authorised user must deposit the payment on the day of
authorised user on receipt of a receipt of payment from a client. If payment was received after
cheque from a client? hours or was made directly into the authorised user’s account,
it must be transferred to the authorised user’s account by the
start of business the following day.
18. When may an authorised user If the depositor has authorised it in writing.
alienate (sell) listed securities
deposited with the authorised
user
19. What are the general • An authorised user must render securities services
principles underlying the Code honestly, fairly, with due skill, care and diligence, and
of Conduct that an authorised in the interests of clients and the integrity of the
user and its employees must securities services industry.
comply with? • An authorised user must exercise independent
professional judgement.
• An authorised user’s conduct must further the objects
of the Act and may not bring the securities services
industry into disrepute.
• An authorised user must maintain knowledge of and
comply with all applicable laws, rules and regulations
governing his or her activities.
20. What is the position regarding An authorised user may not directly or indirectly offer, solicit
inducements as set out in the or accept any material gift or inducement of a non-business
Code of Conduct? nature in respect of a security service rendered.
21. Complete this sentence: … produce a set of financial statements, determine the
“A client statement must composition of the securities in the portfolio and the changes
contain such information as is thereto over the reporting period and determine the market
reasonably necessary to enable value of the securities in the portfolio and the changes thereto
the client to -…” over the reporting period
22. Where information about past The advertisement should include a warning that past
performances is included in an performances are not necessarily indicative of future
advertisement, what warning performance.
must it contain?
23. What should an authorised An authorised user must have the resources, procedures and
user have in place to ensure technological systems to eliminate the risk of financial loss to
proper risk management? clients through theft, fraud, and other dishonest acts, poor
administration, negligence, professional misconduct or
culpable omissions. An authorised user’s internal control
procedures must be designed to ensure reasonable assurance
that the business can be conducted in an orderly and efficient
manner and the financial and other information is reliable. An
authorised user must have such guarantees or professional
indemnity and fidelity guarantee insurance as the exchange
may require.
24. What must an authorised user • Notify the exchange of the intended or actual date of

49
 do that ceases business? cessation of business;
• Notify the clients for whom it holds assets or funds, in
writing, of the intended or actual date of cessation of
business, provide those clients with statements
reflecting the assets and funds held on their behalf
and indicate to which authorised user or other person
authorised to deal in securities their assets and funds
will be delivered to in the absence of an instruction
from the client to the contrary; and
• Deliver the client’s assets and funds.
25. Who may NOT be appointed • Authorised users
as auditor of an authorised • Officer or employee of an authorised user
user or exchange? • Firm in which any of the aforementioned has a direct
or indirect financial interest
26. What must the accounting Its transactions and financial commitments and transactions
records of a regulated person and payments relating to clients, disclosing with substantial
show? accuracy the financial position, performance and cash flows of
the regulated person, and separately the position of clients of
the regulated person, at the close of business on any day.
27. Is it legal for certain financial Yes, but such transactions must be reported to the Financial
institution to transact with Services Board.
another financial institution on
a principal basis without
routing the transaction through
the exchange?
28. When may the Registrar If that person carries on the business in a way that defeats one
prohibit a person from or more objects of the SSA.
carrying on the business of
buying and selling unlisted
securities
29. Zandile sets up a business to Yes, if transactions will have to be routed through an
buy and sell securities on a authorised user.
principal basis. Zandile is not
an authorised user. Is this
legal?
30. If an advertisement or The Registrar may direct that the advertisement not be
brochure is misleading or published, or stopped or amended.
objectionable, what can the
Registrar do?
31. Written comment about It should be accompanied by the name of the person who
the trading results of a compiled it or the name of the person on the editorial staff of a
company may not be newspaper or periodical who in the opinion of the editor
published unless it is compiled it and the source from which the comment was
accompanied by what? obtained should be disclosed.

32. Susan’s husband is a director When the trading results of the ABC Ltd have been published.
of ABC Ltd. She owns 10000
shares and wishes to sell them
since she has heard her
husband discussing the bad
results of the company over
dinner. When will she be able
to sell her shares legally?
33. Peter is the financial director Yes, it does not matter whether the trade has an impact on the
of XYZ Ltd and owns 10 000 share price.
shares. The company has
been doing badly and he sold
his shares prior to the
financial results of the

50
 company having been
published. The share price
did not move as a result
of Peter’s sale. Is he guilty of
insider trading?
34. John initiates a buy order No, it amounts to market abuse and is prohibited.
during the pre-opening of the
market but cancels it ahead of
the opening of the market.
John was hoping to stimulate a
demand for the share as he
wants to sell and wants a good
price for his shares. Is this
legal?
35. How does the deposit of a The owner of the securities becomes entitled to an interest as
security into a participant co-owner of all the securities of the same kind comprised in
change the rights of the securities repository.
ownership?
36. If a security is sold, how does Transfer of ownership takes place upon the debiting and
transfer of ownership take crediting, respectively, both of the account in the sub register
place? from which the transfer is made and the sub register to which
transfer is made by the participant.
37. How is the interest of co- The interest of a co-owner is calculated by reference to the
owner calculated? proportion that the number or nominal value of the securities
deposited bears to the total number or nominal value of the
securities of that kind held in the securities repository or
central securities repository.
38. Who is responsible to The Registrar
maintain a list of approved
nominees?
39. Who administers the The participant, usually a bank.
sub register of a company that
records the details with regard
to the uncertificated
securities?
40. How many central securities One only. It is called STRATE Ltd.
depositories are there
currently in South Africa and
what are they called?

2.11 Activities

Access STRATE’s website at www.strate.co.za to learn more about the activities and history
of the central securities depository.

2.12 Measure Your Progress:

Score obtained for these questions without looking at the answers:

___ /40 = ___x100 = ___%

51
 Chapter 3

Enforcement

Learning Outcome Statements

After completing this chapter, you should be able to-

1. Know what the Registrar may do when receiving a complaint or
allegation that a contravention of or failure to comply with the
SSA took place.
2. Know which institutions are subject to inspections by the
Registrar;
3. Know and understand the powers of the inspectors;
4. Know which actions the Registrar may take to enforce the
legislation after the inspection has taken place, including the
imposition of penalties;
5. Know under which circumstances a court may declare a person
disqualified to conduct business or employ a position of trust;
6. Know the composition and purpose of the Enforcement
Committee.

3.1 Inspections, Investigations and Enforcement Actions

If the Registrar receives a complaint, charge or allegation that a regulated person (whether
authorised or licensed or not) is contravening or failing to comply with the SSA or if the
Registrar has reason to believe that such contravention or failure to comply takes place, the
Registrar may investigate the matter by directing the regulated person to provide any
information, document or record or to appear before the Registrar to answer questions.
Alternatively the Registrar may order an inspection in terms of the Inspection of Financial
Institutions Act, No 80 of 1998.147

3.2 Inspections in terms of the Inspection of Financial Institutions Act, No

80 of 1998

The Registrar may at any time order an inspection of the affairs or part of the affairs
of a financial institution or associated institution. If the Registrar has reason to believe
a person or organisation that is not registered or approved is carrying on the business
of a financial institution, he/she may order an inspection of the affairs or part of the
affairs of that person or organisation.148

A financial institution includes among others:

• An exchange;
• A clearing house;
• An authorised user;
• A financial services provider or representative in terms of the FAIS Act;
• A central securities depository or participant;
• A settling party;

52
 • A nominee; and
• Any other person who conducts the business of a financial institution149

An associated institution includes: -

• Any person (including legal persons) in which a financial institution or unregistered
person conducting the business of a financial institution, has a direct or indirect
interest.
• Any person that has a direct or indirect interest in the financial institution;
• A participating employer in a pension fund; and
• Any person that controls, manages or administers the affairs or part of the affairs of
a financial institution.150

The Registrar must ensure that the inspector instructed will be able to report objectively and
impartially.151

Powers of inspectors

Inspectors may with regard to an institution (i.e. a financial institution, an associated

institution and an unregistered person): -
• Administer an oath or affirmation or examine any person who is or was a director,
servant, employee, partner, member or shareholder of a financial institution;
• Without prior notice enter and search the premises of the institution and require
the production of documents relating to the affairs of the institution;
• Open any strong room, safe or other container in which he or she suspects any
documents are kept;
• Examine and make extracts from and copies of any documents, or against a receipt,
remove the document temporarily from the premises for that purpose;
• Against the issue of a receipt, seize any document which may afford evidence of an
irregularity;
• Retain such seized documents for as long as they may be required for any criminal or
other proceedings.152

An institution or authorised representative (like an attorney) may examine and make

extracts from any document seized under the supervision of the Registrar or the
inspector.153

An inspector may examine, administer an oath or affirmation with regard to any other
person that the inspector believes may have information relating to the inspection. On the
production of a warrant or with the consent of such other person, the inspector may,
without notice: -
• Enter any premises and require the production of any document relating to the
affairs of the institution under inspection;
• Enter and search the premises for any document relating to the affairs of the
institution;
• Open any strong room, safe or other container which he or she suspects contains
any document relating to the affairs of the institution under inspection;
• Examine and make extracts from and copy any document relating to the affairs of
the institution under inspection, or against a receipt, remove the document
temporarily from the premises for that purpose;
• Retain any seized document, as long it may be required for criminal or other
proceedings.154

53
The person whose documents were seized or his or her authorised representative (like an
attorney) may, under the supervision of the Registrar or the inspector, examine and make
extracts from any document seized.155

An inspector decides the time and place of the examination and who should be present. A
person being examined may have legal representation.156

3.3 Enforcement Actions after the Inspection

The Registrar may -

• Apply under section 346 of the Companies Act to the court for the winding up or
judicial management of the regulated person;
• Apply for the appointment of a curator in terms of the Financial Institutions
(Protection of Funds) Act;
• Direct the regulated person to take any steps or refrain from performing an act to
terminate or remedy any irregularity;
• Direct the regulated person to prohibit or restrict specified activities of a director,
executive, officer or employee if the Registrar believes that person is not fit and
proper to perform such activities;
• Refer the matter to the Enforcement Committee;
• Hand the matter over to the National Director of Public Prosecutions in the case of
an offence having been committed.157

(Please see Chapter 2 par 2.8 for details about enforcement relating to insider trading)

3.4 Power of the Registrar to impose Penalties

If a regulated person fails to submit to the Registrar a record, return, statement, report or
other document or information within the period prescribed by the SSA, the Registrar may
impose on him or her by way of notice in writing a fine not exceeding R1000 or such other
prescribed amount for every day during which such failure continues. Such person however
must first be afforded the opportunity to make representations to the Registrar as to the
reasons for the failure to submit the documentation. If the Registrar still wishes to impose
the fine after representations have been made, the regulated person may either pay the fine
or appeal to the Appeal Board of the FSB.158

3.5 Disqualifications

The court may declare an authorised user or officer or employee disqualified from carrying
on the business or to be employed in a position of trust if: -
• The court convicts the said authorised user or officer or employee of an offence of
which dishonesty is an element; or
• The court finds in proceedings in which the conduct of the authorised user or officer
or employee is called into question, that the authorised user or employee has acted
recklessly or dishonestly.159

3.6 The Enforcement Committee

The SSA creates an enforcement committee to deal with enforcement issues more
effectively and expeditiously than in the past and to impose administrative penalties. The

54
FSB appoints as members of the enforcement committee as many persons as it deems fit,
provided that a minimum of two members are qualified in law.160 A panel, consisting of the
chairperson or deputy chairperson and a minimum of two suitably qualified members of the
committee, considers a case assigned to them based on an investigation or inspection report
and other evidence.161 A regulated person must receive this report and other evidence and
particulars of the offences and contraventions and respond by way of affidavit.162 In
exceptional circumstances a person may be summoned to appear before the panel to be
questioned or to produce a document.163

The panel may impose an administrative penalty or direct the regulated person to take any
steps or refrain from performing an act or to terminate or remedy any irregularity. An
administrative penalty may however not be imposed if the regulated person has been
charged with a criminal offence on the same set of facts.164 The panel operates similar to a
court of law and can have its judgment declared a judgement of the court should the
respondent fail to comply with it. The panel may also require a respondent to pay a
compensatory amount to the FSB for insider trading-related contraventions.165

3.7 Self-test Questions

No Questions Answers
1. What may the Registrar do when The Registrar may investigate the matter by directing
receiving a complaint or allegation the regulated person to provide information and
that a contravention of or failure documentation or to appear before the Registrar.
to comply with the SSA took Alternatively the Registrar may order an inspection in
place? terms of the Inspection of Financial Institutions Act,
No 80 of 1998.
2. Name the institutions that are A financial institution, associated institution or other
subject to inspections by the person or organisation that the Registrar has reason
Registrar? to believe is carrying on the business of a financial
institution without being registered or approved.
3. An inspector entered the offices of Yes, a warrant is not required in respect of financial
XYZ investment managers without institutions, associated institutions and unregistered
prior notice and without a warrant persons.
and broke open their safe to
obtain certain documents relating
to the contravention of a law. Is
this legal in terms of the
Inspection of Financial Institutions
Act, No 80 of 1998?
4. What enforcement action can the The Registrar may -
Registrar take after an • Apply under the Companies Act to the court
investigation or inspection? for the winding up or judicial management of
the regulated person;
• Apply for the appointment of a curator;
• Direct the regulated person to take any steps
or refrain from performing an act, or to
terminate or remedy any irregularity;
• Direct the regulated person to prohibit or
restrict specified activities of a director,
executive, officer or employee if the
Registrar believes that person is not fit and
proper to perform such activities;
• Refer the matter to the Enforcement
Committee;

55
 • Hand the matter over to the National
Director of Public Prosecutions.
5. What is the purpose of the To deal with enforcement issues more effectively and
Enforcement Committee created expeditiously than in the past and impose
in terms of the SSA? administrative penalties.
6. When may a panel of the If the regulated person has been charged with a
Enforcement Committee NOT criminal offence on the same set of facts.
impose an administrative penalty?

3.8 Measure Your Progress:

Score obtained for these questions without looking at the answers:

___ /6 = ___x100 = ___%

56
 Chapter 4

Financial Advisors and other Intermediaries.

Learning Outcome Statements

After completing this chapter, you should be able to-

1. Define the role players, products and activities and understand how
the interaction between them leads to regulated activities and
different kinds of financial services providers (FSPs).
2. Know the characteristics that a financial services provider should
have to be successful in an application for approval.
3. Understand the general and specific duties of a FSP.
4. Describe the disclosure requirements regarding the FSP, product
suppliers, product suppliers acting as FSPs and financial services.
5. Understand the steps that must be taken by a FSP when providing
advice.
6. Know the provisions of the General Code relating to custody,
complaints, risk management, insurance, advertising and
termination.
7. Understand the provisions relating to discretionary FSPs (DFSP) and
where the requirements differ from the general Code.
8. Understand the provisions relating to FSPs conducting forex
business and where the requirements differ from the General Code.

The Financial Advisory and Intermediary Services Act, 2002 Act (FAIS) regulates intermediary
and advisory services in the financial services sector except in so far as an intermediary is a
member of the exchange and is regulated by the exchange. The financial services sector is
huge, covering intermediaries from insurance brokers on the one side of the spectrum to
investment managers on the other. While members of the exchange and their intermediary
services are regulated by the exchange, all other intermediaries and advisors are regulated
and must be licensed by the FSB under the FAIS Act.

4.1 Role players, products and activities

Financial products (FP’s)166

A participatory interest in a collective investment scheme
Unlisted and listed shares and other securities
Debentures
Securitised debt
Money market instruments
Derivative instruments including warrants
Bonds
Foreign currency denominated investment instrument, excluding a foreign currency deposit
Bank deposits not exceeding 12 months
Long-term and short-term insurance products
Pension fund/friendly society benefits
Health service benefits

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Any product combining any of the above
Any other product declared by the Registrar as a FP (Please see hedge funds and fund of
hedge funds in par 4.3.2A Code of Conduct for Hedge Fund FSPs)
Any FP similar to those above issued by a foreign product supplier

Financial services (regulated activities)167

1. Advice: Any recommendation, guidance or proposal for the:
• Purchase of a FP;
• Investment in a FP;
• Conclusion of any other transaction (including a loan or cession aimed at incurring a
liability or acquiring a right/benefit in respect of a FP);
• Variation of a term or condition of a FP or replacement/termination of the FP.
Excluding:
• Factual advice on the procedure for entering into a transaction; regarding the
description of the FP, in answer to routine administrative queries, in the form of
objective information about the FP or by the display/distribution of promotional
material;
• An analysis or report without any express or implied recommendation, guidance or
proposal that any particular transaction is appropriate to specific investment
objectives, financial situation or needs of a client;
• Advice by the board of a pension fund, friendly society or medical scheme to their
members regarding benefits;
• Any other exempted advisory activity.

(It is irrelevant whether the advice leads to a transaction or whether it forms part of
financial planning.

2. Intermediary service: Any other activity resulting in a transaction or offer to transact or

takes place with a view to any of the following activities:
• Buying, selling, discretionary and non-discretionary dealing, managing,
administering, keeping in safe custody, maintaining or servicing a client’s FP;
• Collecting or accounting for premiums or other moneys payable;
• Receiving, submitting or processing claims against a product supplier
Excluding
• Where a bank collects premiums on behalf of a third party, acting merely as a
conduit;
• Where a regulated financial institution (product supplier) renders an intermediary
service and the service is regulated in the law relating to the financial institution;
• Any other exemptions granted by the Registrar.

2. Any combination of 1 and 2

It is difficult to imagine any financial product or activity relating thereto that would be
excluded, except those activities expressly excluded by the Act. There are various role
players that the Act seeks to regulate, both individual and corporate. Each of these has a
specific name that must be kept in mind while reading the legislation. Some role players act
in more than one capacity, which may add to the confusion.

58
 FAIS role players168

Financial Services Provider (FSP) The person/company/other legal entity that is licensed to
provide advice and/or intermediary services in respect of
financial products. Examples: insurance broker or investment
manager.

Product supplier The company or other entity that issues a financial product.
Examples: insurance company, collective investment scheme,
a company issuing shares, bonds or debentures or the
government issuing bonds or treasury bills.

Representative The person/company/other legal entity that is authorised to

act on behalf of a FSP (employment or mandatory contact)
Excluding clerical, technical, administrative, legal or
accounting or other staff whose service does not require
judgment or leads to a specific transaction.

Key individual The person responsible for managing or overseeing the FSP
or representative (alone or with others).

Compliance officer A person appointed or designated by a FSP to monitor

compliance with the Act and liaise with the Registrar.

Authorised body An organisation approved by the FSB to receive and approve

FSP applications.

Direct marketer (DM) A FSP who in the normal course of business provides all or a
predominant part of the financial services by way of direct
marketing i.e. providing financial services by way of
telephone, internet, media insert, direct mail or electronic
mail.

Since the term “financial services provider” is so wide and the regulated activities so diverse,
ranging from relatively simple activities (selling a funeral policy) to very complex activities
(buying a derivative instrument to hedge a portfolio’s exposure), one set of requirements
would be inadequate. Consequently, categories of FSPs based on function were created to
enable the legislator to lay down requirements appropriate to each category. Within
categories there are also differences with regard to the different FP’s. It is therefore
important to distinguish between the different categories of FSPs to establish which
requirements would apply to which category:

Different kinds of financial services providers169

Category I FSP All FSPs that do not fall into any of the other two categories.
Example: financial advisors or investment managers who buy
and sell on instruction of the client ie no discretion and no

59
 bulking.

Category II FSP A FSP that renders intermediary services on a discretionary

(Discretionary FSPs) basis (i.e. the investment manager decides what to buy or sell
in terms of a mandate and actually buys or sells them) but
without bulking. Example: an investment manager that
manages a portfolio of investments for a client.

Category IIA A FSP that renders intermediary services of a discretionary

(Hedge Fund FSP) nature in relation to a specific hedge fund or fund of hedge
funds in relation to any financial product ( excluding short-term
insurance, health benefits and bank deposits)170

(Category III FSP) A FSP that renders intermediary services on instruction of the
(Administrative FSPs) client or another FSP and through bulking (aggregating clients’
funds and products when buying or selling FP’s and allocating
afterwards). Example: product factories previously known as
LISPS.

Having mapped out the different players, products and regulated activities in the Act and
subordinate legislation, the requirements for initial licensing, subsequent operating
requirements and some other issues could be considered.

4.2 Applying for a license as a financial services provider

4.2.1 What characteristics should an applicant have for a successful

application?

Good character and integrity171

An applicant and key individual (if the applicant is not an individual) must be of good
character and integrity. The Registrar will determine whether the applicant is of good
character and integrity based on the information supplied. However, the following will be a
prima facie indication that the applicant or key individual is NOT of good character and
integrity: -
• If, within five years preceding the application, the applicant: –
o Was found guilty in criminal or civil proceedings of dishonesty, fraud,
unprofessional conduct or breach of fiduciary duty;
o Was found guilty by or denied membership by a professional or financial
services industry body for dishonesty, mismanagement, negligence or
incompetence sufficiently serious to impugn the honesty and integrity of the
applicant; or
o Was found guilty by a regulatory or supervisory body or having had its
authorisation to carry on business refused, suspended or withdrawn
because of dishonesty, mismanagement, negligence or incompetence;
o Had any license granted by a regulatory or supervisory body suspended or
withdrawn because of dishonesty, mismanagement, negligence or
incompetence sufficiently serious to impugn the honesty and integrity of the
applicant;

60
 • If, at any time before the application, the applicant has been disqualified by a court
of law from taking part in the management of a company or statutory or regulated
body.

An applicant must be candid and disclose all information, which may be relevant to the
application.

Competency (Qualifications and Experience)

Competency requirements ie minimum qualifications and experience required differ

between Category I, II and III FSPs. In addition, different requirements are laid down in
respect of different products. This means that a financial services provider will have to
acquire the necessary minimum qualifications and experience for each category and each
product in respect of which he or she wishes to provide a service. These minimum
qualifications and experience are set out in Tables A, B, C and D of the Determination of Fit
and Proper Requirements for Financial Services Providers and are too extensive to
reproduce here. This information can be obtained from the FSB website at www.fsb.co.za.

Representatives are exempted from the experience requirements if they render services
under supervision until the required minimum experience has been attained. A supervisor
must conduct performance appraisals and progress assessments and must review and assess
the financial services rendered by the representative on an ongoing basis.172

Operational ability

An applicant must prove operational ability, which includes the following:

• A fixed business address from where business is conducted;
• Adequate communication facilities, including a full-time telephone number and
typing and document duplication facilities;
• Adequate storage and filing systems;
• A bank account (and trust account for client moneys if applicable);
• Appropriate money laundering control systems.173

Solvency

The applicant may not be an unrehabilitated insolvent or currently under liquidation or

provisional liquidation. The applicant must be solvent i.e. assets (excluding goodwill and
other intangible assets) must exceed liabilities (excluding loans validly subordinated). A
Category 1 FSP (insurance broker or financial adviser) that does not hold funds or assets on
behalf of clients is exempted from this requirement provided that it certifies to the Registrar
that it will be able to meet the financial liabilities relating to its business.174

4.2.2 The application procedure

Initial application for approval as a FSP

A FSP (but not a representative) must apply to the FSB to be licensed by first obtaining a FSP
number and then submitting an application for approval.175 Representatives need not apply
as FSPs accept responsibility for the actions of representatives and must ensure that
representatives comply with the competency and other requirements of the Act.176

61
Application takes place through the FSB directly or through an authorised body i.e. an
organisation that has been approved to handle the application procedure on behalf of the
FSB.177

An applicant must indicate in the application form which category of services or financial
product a licence is required. Application for the approval of key individuals (i.e. the
manager/s of the FSP) and compliance officer must accompany the application as well as a
questionnaire completed by the appointed auditor in cases of FSPs receiving client funds.
Full details with regard to operational ability, financial soundness, representatives and
nominee companies (if applicable) must be provided.178

Initial and subsequent application for approval of key individuals

An application for the approval of a FSP must be accompanied by an application for approval
of the key individual/s (Form FSP 4). The form requires the following:
• Full contact details of the key individual/s;
• Information proving good character and honesty;
• Full details with regard to qualifications and experience indicating how they will be
relevant to the financial services and products that will fall within the applicant’s
area of responsibility.179

Should a key individual be replaced or a new key individual be appointed subsequent to the
approval of the FSP, a similar application must be brought. If the circumstances of an
approved key individual change in such a way that he would no longer qualify as a key
individual, for example, where the key individual is found guilty of some dishonest act or
becomes insolvent, full details of the change in circumstances together with full details as to
the steps that will be taken to rectify the problem must be communicated to the FSB
without delay.180

Initial and subsequent application for approval of a compliance officer181

An application for the approval of a FSP must be accompanied by an application for approval
of the compliance officer (Form FSP 13). The form requires the following:
• Full contact details of the compliance officer/s;
• Information proving good character and honesty;
• Information as to how the compliance officer obtained the required knowledge of
the Act;
• Full details with regard to qualifications and experience indicating how they will be
relevant to the financial services and products that will fall within his area of
responsibility. (This applies only to a compliance officer that is NOT a sole
proprietor, member of a close corporation, trustee of a trust, partner, and director
of a company, company secretary, principal officer or auditor of a FSP that has been
appointed as compliance officer because only FSPs with more than one key person
and representatives need to appoint an independent compliance officer.)

If an application for approval of a compliance officer/s takes place subsequent to the

approval of the FSP, a reference number must be obtained prior to submitting the
application form. A sole proprietor, member of a close corporation, trustee of a trust,
partner, director of a company, company secretary, principal officer or auditor of the FSP
may be appointed as the compliance officer of a FSP without having to comply with the
competency requirements laid down by Notice (obtainable from www.fsb.co.za). However,

62
any other person who is appointed as a compliance officer must comply with such
requirements.

When considering the application for approval of a compliance officer, the Registrar must
give due regard to the following criteria and guidelines:
• An independent compliance function or a compliance function forming part of the
risk management function under the control of an approved compliance officer or
FSP must be established;
• The compliance function must be exercised with such diligence, care and degree of
competence as may reasonably be expected;
• Procedures must be established and maintained to ensure compliance with the Act.
• The proposed compliance officer must comply with the fit and proper requirements
and have appropriate knowledge of the Act;
• The FSP must make adequate resources available to ensure proper compliance
monitoring of the FSP and representatives and grant direct access to and
demonstrable support from senior management;
• The compliance function must be independent and objective;
• The internal structure of the business must be designed to ensure the avoidance of
actual and potential conflicts of interest;
• Proper records must be kept followed by a monthly written report to the FSP on
progress made with monitoring duties including recommendations, if any;
• The compliance officer will be responsible for liaison with the Registrar and
submission of the required compliance reports.

4.3 Codes of Conduct: Requirements with regard to the operation of a FSPs

business

The FAIS Act provides for the drafting of different codes of conduct that will be binding on
different categories of FSPs. The main aim of the codes of conduct is the protection of the
clients of FSPs. In particular, clients must be enabled to make informed decisions and their
needs must be met suitably. 182There are five codes, namely, the General Code, a Specific
Code for banks taking short-term deposits, a Code for Administrative FSPs, a Code for
Discretionary FSPs including a Code of Conduct for Hedge Fund FSP’s, a subcategory of
DFSPs) and a Code for Forex FSPs. The Specific Code for Administrative FSPs (LISPS) will not
be discussed as these aspects fall outside the scope of this chapter.

The General Code of Conduct applies to FSPs in conjunction with the Specific Codes. In case
of a discrepancy between the provisions of the General Code and the Specific Code, the
Specific Code will prevail. However, the Code for FSPs (banks) conducting short-term
deposit-taking business (i.e. deposits not exceeding 12 months) is an exception and stands
on its own.183

4.3.1 General Code of Conduct

General duties

A FSP must render financial services honestly, fairly, with due skill, care and diligence and in
the interests of clients and the integrity of the financial services industry.184

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Specific duties

Representations and information

• Representations and information must be in plain language, factually correct and

avoiding uncertainty and not be misleading.
• Information must be adequate and appropriate for a particular financial service and
take into account the client’s level of knowledge.
• Information must be provided timeously to ensure that the client has sufficient time
to make an informed decision.
• Information may be provided orally and confirmed in writing if required by the
client.
• Written information must be in a clear and readable print size, spacing and format.
• Information must be reflected in specific monetary terms with regard to all
amounts, sums, values, charges, fees, remuneration or monetary obligations
mentioned therein or if not reasonably pre-determinable, its basis of calculation
must be adequately described.
• Information need not be repeated for the same client unless material changes have
occurred.185

Conflicts of interest

The FSP or its representative must disclose the existence of any personal interest in the
financial service or any circumstance which gives rise to an actual or potential conflict of
interest, like non-cash incentives or other indirect consideration payable by another
provider. The FSP or its representative must take all reasonable steps to ensure fair
treatment of the client.186

Contract and instructions

The contract with the client must be adhered to and instructions must be executed as soon
as is reasonably possible and clients’ interests must enjoy priority over the FSPs interests.187

Accounting for transactions

Transactions must be accounted for accurately.188

Dealings based upon advance knowledge prohibited

The FSP or its representative may not deal in any financial product for his or her own benefit
on the basis of advance knowledge of pending transactions for or with clients or on any non-
public price-sensitive information.189

Procedures and systems

The FSP must have appropriate systems and procedures in place to record all verbal and
written instructions, store and retrieve such records and keep the client’s records safe.
Records must be kept for five years after termination of the product or rendering of the
service. Records may be held by a third party but must be available within seven days of the

64
Registrar requesting them to be available. Records may be kept electronically but must be
easily accessible and printable.190

Confidentiality of client information

A client’s confidential information may not be disclosed without the client’s written consent
unless disclosure is required in terms of the law or public interest.191

Duties when contacting clients

A FSP must act honourably, professionally and with due regard to the convenience of the
client in all communications and dealings with a client. At the commencement of any
contact, visit or call initiated by the FSP, he must explain the purpose thereof and at the
earliest opportunity, comply with the disclosure requirements.192

Duties when providing financial products from more than one product supplier

A FSP entitled to provide clients with financial services in respect of a choice of product
suppliers must exercise judgment objectively in the interests of the client.
The FSP may not, however, compare different financial products, product suppliers, FSPs or
representatives, unless the differing characteristics of each are made clear. The FSP may also
not make inaccurate, unfair or unsubstantiated criticisms of any financial product, product
supplier, FSP or representative.193

Signing of blank forms prohibited

A FSP or representative may not in the course of the rendering of a financial service request
any client to sign any written or printed form or document unless all details required to be
inserted thereon by the client or on behalf of the client have already been inserted.194

Statements of account

A FSP or representative must at the request of a client, provide the client with a statement
of account in connection with any financial service rendered to the client.195

Disclosure requirements regarding product suppliers

The FSP (other than a Direct Marketer (DM)) must as soon as possible provide the following
information or changes therein about the product supplier in writing or if supplied orally,
confirm such information in writing within 30 days thereafter:
• The name, place, and postal and telephonic contact details of the product supplier;
• The contractual relationship with the product supplier (if any), and whether there
are contractual relationships with other product suppliers as well;
• The name and contact details of the complaints or compliance departments of the
product supplier;
• Any conditions or restrictions that may exist with regard to the types of financial
products or services that may be provided by the FSP;
• Whether the FSP directly or indirectly holds more than 10% of the product supplier’s
shares, or has any equivalent substantial interest in the product supplier;
• Whether the FSP during the preceding 12-month period received more than 30% of
total remuneration, including commission, from the product supplier.196

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Disclosure requirements regarding product suppliers acting as FSPs

A product supplier that is also a FSP and has a contractual relationship with another FSP
must within a reasonable time after being requested to do so by such other FSP, provide it
with the necessary information to ensure compliance with the General Code of Conduct.197

Disclosure Requirements regarding FSPs

A FSP must as soon as possible provide the client with the following information in writing
or, if not in writing, confirm it in writing within 30 days:
• Full business and trade names, registration number (if any), postal and physical
addresses, telephone number and, where applicable, cellular telephone number,
internet and e-mail addresses as well as the names and contact details of
appropriate contact persons;
• Details of the legal and contractual status of the FSP with regard to the product
supplier (or in the case of a representative, as regards the relevant FSP and product
supplier), clarifying which entity accepts responsibility for the actions of the FSP or
representative and the extent to which the client will be obliged to accept such
responsibility;
• The name and contact details of the compliance department or, in the case of a
representative, such details concerning the FSP to which the representative is
contracted;
• The financial services which the provider is authorised to provide in terms of its
license and any conditions or restrictions that may apply;
• Whether the FSP or representative holds suitable guarantees or professional
indemnity or fidelity insurance cover;
• Whether a representative is rendering services under supervision as defined in the
Determination of Fit and Proper Requirements;
• Whether the Registrar has granted exemption with regard to any matter covered by
the Act.198

Disclosure requirements regarding the financial service

A FSP (other than a DM) must provide the following information:

• The nature and material terms of the transaction and such other information that
will enable the client to make an informed decision;
• When appropriate, any material contractual information and illustrations,
projections or forecasts in the possession of the FSP;
• The name, class or type of financial product concerned;
• The nature and extent of benefits to be provided, including details of the manner in
which such benefits are derived or calculated and the manner in which they will
accrue or be paid;
• Where the financial product is marketed or positioned as an investment or as having
an investment component: –
o Details of the manner in which the value of the investment is determined,
including details of any underlying assets or other financial instruments;
o Separate disclosure of any charges and fees to be levied against the product,
including the amount and frequency thereof;

66
 o Where the structure of the product entails other underlying financial
products, such details as will enable the client to determine the net
investment amount ultimately invested for the benefit of the client; and
o On request, information concerning the past investment performance of the
product over periods and at intervals which are reasonable with regard to
the type of product involved, including a warning that past performances
are not necessarily indicative of future performances.
• The nature and extent of monetary obligations assumed by the client in favour of
the product supplier, as well as the manner of payment or discharge thereof, the
frequency thereof, the consequences of non-compliance and anticipated or
contractual escalations, increases or additions;
• The nature and extent of monetary obligations assumed by the client in favour of
the FSP, as well as the manner of payment or discharge thereof, the consequences
of non-compliance;
• The nature, extent and frequency of any incentive, remuneration, consideration,
commission, fee or brokerages which may become payable to the FSP as a result of
rendering the financial service, by the product supplier or other person and the
identity of such product supplier or person, provided that where the maximum
amount is prescribed by law, the FSP may elect to disclose the actual amount or the
prescribed maximum amount.
• Details of any special terms or conditions, exclusions of liability, waiting periods,
loadings, penalties, excesses, restrictions or circumstances in which benefits will not
be provided;
• Any guaranteed minimum benefits or other guarantees;
• To what extent the product is readily realisable or the funds concerned are
accessible;
• Any restrictions on or penalties for early termination of the product or other
consequences, if any;
• Material tax considerations;
• Whether cooling-off rights are offered and, if so, procedures for the exercise of such
rights;
• Any material investment or other risks associated with the product;
• In the case of an insurance product, the amount of the increased premium, if any,
for the first five years and thereafter on a five-year basis but not exceeding 20 years;
• With regard to the completion or submission of any transaction requirement by a
client the following:
o A statement that all material facts must be accurately and properly
disclosed, and that the accuracy and completeness of all answers,
statements or other information provided by or on behalf of the client, are
the client’s own responsibility;
o A statement that if the FSP completes or submits any transaction
requirement on behalf of the client, the client should be satisfied as to the
accuracy and completeness of the details;
o A statement of the possible consequences of the misrepresentation or non-
disclosure of material facts or the inclusion of incorrect information; and
o Statements that the client must, on request, be supplied with a copy or
written or printed record of any transaction requirement within a
reasonable time.199

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Furnishing of advice

Suitability

Before providing advice to a client, a FSP (other than a DM) must fulfil the following duties:
• Take reasonable steps to seek appropriate and available information with regard to
the client’s financial situation, financial product experience and objectives to enable
the FSP to provide the client with suitable advice;
• Conduct an analysis based on the information obtained;
• Identify the financial product appropriate to the client’s risk profile and financial
needs, subject to legal or contractual limitations; and
• Where the financial product is to replace an existing financial product wholly or
partially held by the client, fully disclose to the client the actual and potential
financial implications, costs and consequences of such a replacement including
where applicable: –
o Fees and charges in respect of the replacement product;
o Special terms and conditions, exclusions of liability, waiting periods, load-
ings, penalties, excesses, restrictions or circumstances in which benefits will
not be provided;
o In the case of an insurance product, the impact of age and health changes
on the premium payable;
o Differences between tax implications of the replacement product;
o Material differences between the investment risk of the replacement
product and the terminated product;
o Penalties or unrecovered expenses deductible or payable due to
termination;
o To what extent the replacement product is realisable or the funds accessible
compared to the terminated product; and
o Vested rights, minimum guaranteed benefits or other guarantees or benefits
that will be lost as a result of the replacement.200

A FSP must take reasonable steps to ensure that the client understands the advice and will
be able to make an informed decision.201

A FSP advising a client to replace an existing long-term insurance contract or policy with any
other financial product must as soon as possible but not later than the date on which any
transaction requirement is submitted to the product supplier, notify the issuer of the long-
term insurance contract or policy of such advice.202

Where a needs analysis could not be done because the client did not provide all information
requested or there was insufficient time to do so, the FSP must inform the client that a full
needs analysis of the client could not be undertaken. Accordingly there may be limitations
on the appropriateness of the advice provided and the client should take particular care to
consider whether the advice is appropriate in the light of the client’s objectives, financial
situation and particular needs.203

Where the client elects a product different from the one recommended by the FSP or elects
not to follow the advice or receive information, or elects to receive more limited information
or advice than the FSP is able to provide, the FSP must advise the client of the risks involved
and to consider whether the advice is appropriate in the light of the client’s objectives,
financial situation and particular needs.204

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Record of advice

A FSP must keep a record of advice given, more particularly of the following:
• A brief summary of all information and material on which the advice was based;
• The financial products considered; and
• The financial products recommended with an explanation why the elected products
are likely to satisfy the client’s needs and objectives. (This will not be necessary if no
transaction was concluded.)
A FSP, excluding a DM, must provide the client with a copy of the Record of Advice.205

Custody of funds and financial products

Funds

A FSP who receives funds without the mediation of a bank, must issue a written receipt and
deposit such funds within one business day into a separate bank account designated for
client funds (trust account). The FSP is liable for bank charges except those charges directly
relating to a client’s deposit or withdrawal. Interest accruing in the trust account is for the
benefit of the owner of the funds. Such funds must be readily available for withdrawal
subject to the deduction of fees and charges allowed by law.206

Documents of title

When documents of title are lodged with a FSP, a written confirmation of receipt identifying
the documents must be issued immediately. The FSP must ensure that documents of title
held by it or by a third party on its behalf, are adequately safeguarded. In addition, the
documents of title must be readily discernable from the assets of the FSP itself.207

Original agreement

A transaction that has been recorded in writing must be delivered to the client for safe
custody.208

Risk management

A FSP must have the necessary resources, procedures and technological systems to
eliminate as far as possible the risk of financial loss to clients, product suppliers and other
FSPs or representatives through theft, fraud, other dishonest acts, poor administration,
negligence, professional misconduct or culpable omissions.209 The internal control measures
must provide reasonable assurance that the business can be carried on in an orderly and
efficient manner and that the financial and other information is reliable and that relevant
laws are complied with.210

Insurance

A FSP must maintain suitable guarantees or professional indemnity or fidelity guarantee

insurance if and to the extent required by the Registrar.211

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Advertising

Advertisements by FSPs may not contain fraudulent, untrue or misleading statements,

promises or forecasts. Performance data, including awards and rankings must include
references as to their source and date. Illustrations, forecasts or hypothetical data used in an
advertisement must disclose the basic assumptions on which they are based and must have
a reasonable prospect of being met. It should be made clear that they are provided for
illustrative purposes only and do not constitute a guarantee. Where returns and benefits are
dependent on the performance of underlying assets or other variable market factors, this
must be stated very clearly. A warning statement regarding the risks involved in buying and
selling a financial product must be prominently rendered or displayed. If information
regarding past performances is provided, a warning must be included that past
performances are not necessarily indicative of future performance. Investments that are not
guaranteed must contain a warning that they are not guaranteed.212

If financial services are advertised by telephone, an electronic voice logged record of all
communications must be kept. Where no transaction resulted from the advertisement, it
should be kept only for 45 days. A copy thereof must be provided to the client or the
Registrar on request. Only basic information such as the business name, telephone number
and address of the product supplier or FSP and their compliance departments must be
provided. However, if a transaction is concluded, full details about the product supplier or
FSP must be provided in writing within 30 days after the interaction. Radio advertisements
need only provide the business name of the FSP.213

Direct marketing

A DM must furnish a client with the following particulars when rendering a financial service:
-
• Business or trade name of the marketer, the telephone number and the telephone
number of the compliance department;
• Whether the DM is a licensed FSP and for which products;
• Whether the DM holds professional and indemnity insurance.

If the DM is a representative, the above information must be provided with regard to the
FSP to which the representative is contracted.214

A DM advising a client must as soon as possible enquire to establish whether the financial
product will be appropriate in the light of the client's risk profile, financial needs and
circumstances and furnish the client with the following particulars:
• Business name and legal status of product supplier and relationship with product
supplier;
• Name, class or type of financial product, nature and extent of benefits, manner in
which benefits are calculated or derived, with reference to underlying assets and
how the value thereof is determined;
• Monetary obligations of the client, cooling off rights, if any and material investment
and other risks;
• When the financial product replaces another product, information about actual and
potential financial implications, costs and consequences as prescribed in the
Code.215

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A DM must provide a client with the following information prior to or with conclusion of a
contract. Where the information was provided orally, it must be confirmed in writing within
30 days thereafter:
• Telephone number of compliance department of product supplier;
• To what extent the product is readily realisable or the funds accessible;
• Manner in which benefits will be paid;
• Restrictions on or penalties for early termination;
• Charges and fees and the net amount to be invested if the product has an
investment component;
• Commission or fees payable to the DM by the client, the product supplier or any
other person;
• On request, past performance of the product over periods and at intervals that are
reasonable with regard to the product concerned;
• Consequences of non-compliance with monetary obligations;
• Anticipated or contractual escalations, increases and additions;
• In the case of an insurance product, disclosures of contractual increases;
• Concise details of special terms and conditions, exclusions, waiting periods, loadings,
penalties, excesses, restrictions or circumstances under which benefits will not be
provided;
• Guaranteed minimum benefits or other guarantees;
• That recordings of telephone discussions will be made available to the client on
request216.

A DM must record all telephone conversations with clients. Records of advice need not be
reduced to writing but a copy of voice-logged records must be provided on request to the
client or the Registrar.217

Complaints

Complaints must be submitted in writing and promptly responded to and investigated. The
complaints must be handled in a timely and fair manner. The FSP must keep record of
complaints for five years. Where a complaint is not resolved to a client's satisfaction, the
client must be advised of further steps available in terms of the Act or the law.218

The FSP must maintain an internal complaint resolution system based on a comprehensive
complaints policy, transparency and visibility, accessibility of facilities and fairness.219

The internal complaints resolution system must be designed to ensure the following:
• Availability of adequate manpower and other resources;
• Adequate training of staff;
• That responsibilities and mandates are delegated to facilitate complaints resolution
of a routine nature;
• Escalation of non-routine serious complaints and the handling thereof by staff with
adequate expertise;
• Internal follow-ups to avoid occurrences giving rise to complaints or improve
services.220

The internal complaints resolution procedures, including any amendments or updates must
be in writing. Clients must have access to it at every branch or electronically and clients must
be made aware of the procedures by public press, electronic announcements or client
communications. The procedures must contain the duties of the FSP, the rights of the client

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as well as a summary of the Act relating to the pursuance of a claim after dismissal of a claim
by the provider through the Ombud. The contact details of the Ombud must also be
included.221

The procedure must stipulate the following:

• Complaints should, if possible be in writing and copies of relevant documentation
should be attached thereto;222
• Receipt of complaints should be acknowledged while communication details of staff
dealing with complaints should be provided;223
• Complaints must be properly recorded224
• After receiving and recording the complaint, the complaint must be forwarded to
the relevant staff member;
• The complaint must receive proper consideration;
• The consideration process must effectively be controlled;
• The client must be informed of the results of the consideration;225
• Where the outcome is not favourable to the client, full reasons must be provided
and the client advised that the complaint may be pursued through the Ombud
within six months and the Ombud's details must be provided.226

Where a complaint is resolved in favour of a client, full and appropriate redress should be
offered to the client without delay.227

Termination of business or agreement

Subject to the contractual obligations, a FSP must give immediate effect to a request for
termination of an agreement relating to a financial product or advice. Where the client
makes the request to terminate on the advice of the FSP, the FSP must ensure that the client
understands all the implications of the termination.228

If a FSP ceases to operate, it must notify all clients and take, where necessary in consultation
with clients and product suppliers, reasonable steps to ensure that outstanding business is
completed or transferred to another FSP. The same applies to a representative who may
transfer business to either the FSP or another representative.229

Waiver of rights

Any waiver of rights by a client is null and void.230

4.3.2 Code of Conduct for Discretionary FSPs

General duties of a Discretionary FSP (DFSP)

Providing and obtaining information

A DFSP must provide the client on request in a comprehensible and timely manner with
information regarding the financial products, market practices and the risks inherent in the
different markets and products.231

Before entering into a written or electronic mandate with the client, the DFSP must: -

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 • Obtain information about the client’s financial circumstances, needs and objectives
and such other information required for rendering suitable intermediary services;
and
• Identify the financial products most suitable to the client’s objectives, risk profile
and needs.232

Mandates

Before rendering intermediary services but after the necessary information has been
obtained, the FSP must obtain either a signed mandate or an electronic mandate that
records the arrangements between the client and the DFSP. Electronic mandates must be
subject to procedures ensuring personal identification and security of information.

The mandate must make provision for the following: -

• An authorisation to act on behalf of the client specifying full or specified limited
discretion;
• The investment objectives of the client and whether there are any investment or
jurisdiction restriction applicable;
• The risks associated with investing in local and foreign financial products, including
currency risk;
• A statement in whose name the financial products will be registered and whether
they are to be registered in the name of the client, a nominee company nominated
by the client or a nominee company used by the DFSP, the product supplier, a
participant in the central securities depository (bank), the central securities
depository (eg STRATE), a bank or the independent nominee of the administrative
FSP (LISP) if the FSP deals through an administrative FSP;
• The bank account details of the trust account of the DFSP;
• The intervals at which cash accruals (such as interest and dividends) must be paid to
the client;
• The basis on which, manner in which and intervals at which the DFSP will be
remunerated (Remuneration may not be determined with reference to an outside
source or in the discretion of anyone);
• A statement whether any commissions, incentives, fee reductions or rebates will be
received from Administrative FSPs or product suppliers for funds placed with them;
• An option to receive reports in electronic or printed format, subject to the capability
of the DFSP;
• Termination of the mandate on written notice not exceeding 60 calendar days;
• A statement whether voting rights may be exercised on behalf of the client;
• A statement that information that a product supplier must disclose by law will be
obtained and transmitted, unless otherwise instructed;
• A statement that the DFSP may utilise its own staff or another FSP to provide
intermediary services.233

Prior to entering into any mandate, the DFSP must apply for approval of a specimen
mandate. When drafting an actual mandate, no substantial amendment may be made to the
specimen without the approval of the Registrar. The Registrar may require amendments to a
specimen mandate after approval or that other information be disclosed that the Registrar
deems necessary in the interests of the client.234

On termination of a mandate, all cash, financial products and documents of title must be
returned to the client accompanied by a detailed statement of account.235

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Reporting to clients

Client reports must be furnished on request or at intervals not exceeding three months,
unless information is available continuously via electronic means and the client consents in
writing not to receive the report. The report must contain such information as will enable
the client to produce a set of financial statements, determine the composition and market
value of the investments and the changes therein over the reporting period.236

On request, a DFSP must also supply the following information: –

• The original cost of the financial product and the current market value thereof;
• Financial products bought or sold during the period;
• Cash receipts and payments during the period;
• Income earned and expenditure incurred during the period;
• Non-cash transactions such as capitalisation issues, scrip dividends and option
expiries during the period;
• Financial products received or delivered to a client or nominee company during the
period;
• Profits and losses realised during the period;
• With regard to foreign financial products: –
o The conditions in terms of which intermediary services will take place;
o The manner in which a foreign financial product may be acquired;
o The jurisdictions from where a foreign financial product may be acquired;
o The specific licensed exchange on which the financial product is listed or
trading, if any;
o The country in which the financial product is licensed or registered;
o The name and address of the foreign FSP, if applicable;
o The name and address of the foreign regulator responsible for the
regulation of the foreign FSP and whether the FSP is approved or registered
by the regulator;
o The name and address of the foreign regulator under whose jurisdiction
intermediary services relating to the specific financial product falls.237

Prohibitions

A DFSP may not without a client’s written approval sell or provide a client’s details to a third
party unless compelled to do so by law. Exercising voting rights in a ballot conducted by a
unit trust company is prohibited, as are exercising voting rights to obtain control of a
company. In the latter case, the only exception would be when the interests of the investor
are at stake or on the instruction of the investor. Netting of transactions is also not allowed
without the client’s approval.238

Selling to a client the FSPs own assets or buying from a client for own account ie acting as a
principal, is prohibited.239

Nominee companies

A DFSP may establish a nominee company with the sole object of acting as custodian for
clients’ investments and enter into a written agreement with it to act as custodian for
clients’ investments. The agreement must provide for the termination of the agreement on
notice of termination not exceeding 90 days. 240 Where a DFSP elects not to establish such a

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nominee company, an appropriate existing nominee company, approved by the registrar,
must be utilised by the discretionary FSP.241

The functions of a nominee company must be limited to its object of acting as a custodian
together with such ancillary functions as may be necessary for the fulfilment of that object.
The nominee company must enter into an irrevocable agreement with the FSP to pay all
expenses relating to its formation, activities, management and liquidation. The nominee
company is prohibited from incurring any liabilities except those relating to the assets of the
clients. Should such liabilities be incurred, the DFSP will be liable for them.

Should the DFSP prefer not to establish its own nominee company, it must use a nominee
company approved by the Registrar.

4.3.2 A Code of Conduct for Hedge Fund FSP’s

The Registrar declared hedge funds and funds of hedge funds Financial Products for
purposes of extending the licences of discretionary FSP to provide intermediary services for
these funds and created a new category of FSP i.e. Category IIA with effect from 29 August
2007.242 A Hedge Fund FSP is defined as a FSP that renders intermediary services of a
discretionary nature in relation to a specific hedge fund or fund of hedge funds in
connection with a particular Financial Product (excluding, short term insurance products,
health benefits and bank deposits) and acting for that purpose in accordance with the
Codes, the FAIS Act and any other law243

A hedge fund is defined as a portfolio that uses any strategy or takes any position that could
result in the portfolio incurring losses greater than its aggregate market value at any point in
time, which may include but are not limited to leverage and net short positions.244

Other relevant definitions include:

• A fund of hedge funds - a portfolio that, apart from liquid assets, consists of an
interest, holding or investment in one or more other hedge funds.
• Hedging - entering into transactions that protect against adverse price movements
and limit exposures to specific risks.
• Leverage - any position in which the delta factor would be less than -1 or more than
+1, or a position in which the nominal exposures to assets in the portfolio is less
than nil or more than 100% of the market value of the portfolio.
• Net short position – a condition in which a portfolio has a greater nominal exposure
to short positions than long positions in any asset class or in aggregate across the
portfolio, meaning that more capital (including collateral) supports short positions
than is invested in long positions and which may in certain cases require additional
capital to be invested in the portfolio over and above the initial capital investment.
• Short position
• a position where an asset is sold by a seller for delivery at a future date or time, and
the seller does not own such asset at the time of the sale; or
• in the case of a derivative instrument, a position where -
o a decrease in the price of the underlying asset has a positive impact on the
value of the of the derivative instrument; or
o an increase in the price of the underlying asset has a negative impact on the
price of the derivative instrument.245

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The requirements of discretionary FSP’s (DFSPs) apply to Hedge Fund FSP’s, subject to the
necessary changes, the provisions of section 8A in Part III of Chapter II of the Schedule to the
Notice or any other law which may render a particular provision clearly inapplicable to
hedge funds and their clients.246

Duties of a Hedge Fund FSP

Before rendering intermediary services to a client in respect of a hedge fund, a Hedge Fund
FSP must disclose in writing to the client –
• that the requirements for discretionary FSP’s apply to the relationship between the
Hedge Fund FSP and the client; and
• the risks involved in investing in hedge funds.
The client must provide written confirmation of receipt of these written disclosures.247

Additional Mandates with regard to Hedge Funds and Fund of Hedge Funds
Investments

A Hedge Fund FSP must have a specimen additional mandate approved by the Registrar,
who may grant approval subject to such conditions as the Registrar may determine. The
Registrar may also subsequent to the initial approval, require amendments to the specimen
additional mandate or require additional disclosures.248

Before rendering an intermediary service with regard to a hedge fund or fund of hedge fund,
the Hedge Fund FSP must, over and above the signed mandate with regard to discretionary
financial services, obtain an additional signed mandate from the client complying with the
requirements relating to mandates generally insofar as they are applicable and in which the
client must confirm -
• the existence and contents of the first mandate;
• the utilisation of a hedge fund portfolio for executing the intermediary services
required by the client;
• the approval by the client of the client’s objectives, guidelines and the trading
philosophy of the Hedge Fund FSP, as disclosed in the mandate;
• the approval by the client of the process to be implemented in the form of strategies
or positions(including leverage and/or net short positions), borrowing limits and risk
management principles to be applied to mitigate interest rate, credit and derivative
risk, risk profile and risk management (for instance a sensitivity analysis) as disclosed
in the mandate;
• that the client has noted the FSP’s affirmation in the mandate that the
establishment of the portfolio does not conflict with any law, and that the operation
and managements thereof continuously comply with any law that may be applicable
to it.249

4.3.3 Code of Conduct for FSPs (banks only) conducting short-term

deposit-taking business

This Code applies to banks when rendering the service of short-tem deposits ie deposits not
exceeding 12 months. 250

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General duties

The FSP must act fairly and reasonably with uncompromising integrity in order to promote
trust and confidence. The FSP must assist the client in selecting a deposit that meets the
client’s needs. Information must be made available in plain language and where appropriate
in other official languages. The FSP must ensure that the client understands the financial
implications of the deposit selected. Clients may not be requested to sign blank forms.
Clients must be made aware if services are offered in a different way, for example,
electronically. The FSP must advise clients how to obtain more information in that regard.
The FSP (bank) must also make copies of the Code available to clients. Adequate internal
complaints procedures must be maintained.251

The FSP must ensure that contractual terms and conditions are fair in substance and
distinguishable from promotional material. Reasonable enquiries must be made to establish
the client’s needs and objectives.252

Information to be provided

The FSP must provide the following information before the transaction or at the same time
or any time at the request of the client or if urgent, orally: –
• Key features of the deposit to enable the client to make an informed choice,
including applicable cooling-off periods;
• How the account will operate including information about withdrawal, earning and
payment of interest, difference between stop orders and debit orders and special
procedures and safeguards to ensure safe business;
• Full details about fees and charges and whether they are negotiable, including
additional interest or charges in case of early withdrawals or cancellations;
• Full details on the applicable interest rates, including deduction or payment of
interest and methods of calculation and possible changes thereto;
• Possible later changes to terms and conditions and how that may affect the deposit
adversely;
• How funds may be dealt with on maturity;
• Clients’ rights to access personal information held by the bank;
• Required client identification when opening an account and the use of PINS and
passwords;
• When account details may be passed to or checks made with credit reference
agencies, fraud prevention agencies and other entities;
• Closing of branches, outlets or ATM’s;
• Any possible set-off between a deposit and other business debt in its capacity as a
bank;
• Closing of deposit accounts of clients after reasonable notice to the last address
without prejudice to the client’s rights.253

Account operations

A FSP must provide statements to the client in the manner agreed i.e orally, in writing, or
through electronic banking and must inform the client as to the charges to be levied for such
statements. The client must also be made aware as to what procedure to follow when there
are statement errors or where an automatic rollover of a deposit may take place against the
wishes of the client. The client must also be informed regarding the procedure to be

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followed when changes in personal identification or address take place as well as safeguards
to be followed regarding telephone and electronic banking.254

Confidentiality

A FSP may not disclose a client’s personal information to a third person except when
required by law, if it is in the public interest or in the interest of the FSP or if made with the
client’s written consent. A FSP may not bring other deposit-taking services to the client’s
attention unless the client has consented thereto. Pressure on the client is also prohibited. If
telephone conversations are recorded, the client must be informed and reasons provided.255

Advertising, complaints and waiver of rights

The same rules relating to these aspects apply as the rules set out in the General Code.

4.3.4 Code of Conduct for FSPs conducting Forex Investment Business

Introduction

The reference to foreign currency denominated investments, excluding foreign currency

investments has been further defined in the Code as forex trading based on price
fluctuations in the forex market but excluding forex transactions of authorized dealers and
their agents.256

The regulations were also amended to include an application procedure whereby a Forex
Financial Services Provider (FFSP) must apply for approval of a clearing firm or a foreign
FFSP. The regulatory status of the foreign FFSP must be disclosed, while the regulatory
regime under which it operates must be to the satisfaction of the Registrar. The Registrar
may therefore decline to approve an application for approval of a clearing firm or foreign
FFSP on the grounds that the regulatory regime in the country of origin is not satisfactory.257

General Duties

A FFSP must: –
• Ensure that investment moneys reach the final destination stated in the mandate
without delay;
• Act in the interests of the client;
• Act in good faith and with due skill, care and diligence;
• Observe high standards of market conduct;
• Provide clients with information about the client’s investment, market practices and
risks inherent in the different products;
• Obtain from clients information about the client’s financial situation, investment
experience and investment objectives;
• Avoid conflicts of interest but if they arise, disclose them to the client or decline to
act for the client;
• Explain to a client how fees and other charges are calculated in sufficient detail to
enable the client to understand the method of calculation;
• Ensure that its staff and representatives are properly trained as required by the FAIS
Act;
• Apply for approval to the Registrar prior to appointing a clearing firm or foreign FFSP
in terms of the Regulations.258

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Disclosure Requirements

A FFSP must disclose the following to its client:

• If a foreign FFSP is involved and the extent of its powers over clients’ funds while
ensuring that client’s funds are kept separately;
• All fees and other charges, whether direct or indirect;
• Non-cash incentives or other indirect consideration payable by another FSP, product
supplier or other person;
• The name and address of the foreign FFSP or clearing firm, the foreign regulator and
whether the foreign FFSP or clearing firm is registered by the regulator;
• Whether the foreign FFSP or clearing firm has insurance cover against fraud,
dishonesty and negligence and the extent of the cover.259

Prohibitions

A FFSP may not directly or indirectly: –

• Induce a client to enter into a mandate or any other agreement relating to forex
investments by means of a misleading statement, promise, forecast or any other
action;
• Sell to or provide a third party with the client’s details without the client’s prior
written agreement;
• Charge a client termination fees except for accrued fees for services rendered
before termination;
• Receive, intermediate on or deal with funds not cleared under exchange control
laws;
• Advise a client to deal in a self-directed forex account (i.e. an account in which the
client has the discretionary dealing power) or in the case of a managed account, deal
on behalf of a client where the minimum leverage applied to the client will on a
regular basis exceed industry norms;
• Churn the client’s account (i.e. trade excessively to maximize commissions or
revenue to the FFSP);
• Quote hypothetical investment returns or real investment returns for a period
shorter than 12 months when promoting or advertising forex investments;
• State or imply in the promotion or advertising of forex investments that past
investment returns will be repeated. 260

Mandates

The FFSP must obtain either a signed mandate or an electronic mandate that records the
arrangements between the client and the FFSP before rendering intermediary services
regardless whether the client is opening a self-directed account or a managed account.
Electronic mandates must be subject to procedures ensuring personal identification and
security of information.261

The mandate must make provision for the following: -

• Whether the investment is self-directed or managed;
• The investment objectives;

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 • In the case of managed investments, investment or jurisdiction restrictions with
regard to regulatory environment, specific currency pairs, limitations on maximum
draw down (reduction in an account because of trades), limitations on leverage and
margin requirements and margin call rules;
• A statement of the risks inherent to forex investments including currency, event,
operational and leverage risk;
• In whose name the forex investments are to be made which could be the client, the
omnibus account holder controlled by the foreign FFSP or the omnibus account
holder controlled directly or indirectly by the FFSP;
• Bank details of the FFSP and foreign FFSP or clearing firm.
• The basis on which, the manner in which and the intervals at which cash accruals
received by the FFSP on behalf of the client must be paid over;
• Restrictions on withdrawals of principal amounts or profits, where applicable;
• The basis on which, the manner in which and the intervals at which the FFSP will be
remunerated. The basis may not consist of a reference to a source outside of the
mandate or place it within the discretion of any person;
• Whether the FFSP receives commission, incentives, fee reductions or rebates from a
foreign FFSP or any other institution for placing the funds with it;
• State that a report or statement by the foreign FFSP acting as clearing member
detailing transactions must be made available to the client within 24 hours of
receiving it by the FFSP or foreign FFSP;
• Empower either party to terminate the mandate on written notice of not exceeding
60 days;
• Details of insurance covering losses due to fraud, dishonesty and negligence.262

Prior to entering into any mandate, the FFSP must apply for approval of a specimen
mandate. When drafting an actual mandate, no substantial amendment may be made to the
specimen without the approval of the Registrar. 263

On termination of a mandate, all cash, financial products and documents of title must be
returned to the client accompanied by a detailed statement of account.264

Reporting to Clients

Written client reports or electronic reports if so desired by the client detailing investment
performance up to and including the last day of the previous calendar month, must be
furnished on request or in the case of managed accounts, on a monthly basis. The report
must contain such information as will enable the client to draw up a set of financial
statements, determine the changes in the market value of the investment and the charges
levied over the reporting period.265

On request, a FFSP must also supply the following information: -

• The original value of the forex investment and the current market value thereof;
• Currency pairs purchased and sold during the period;
• Cash receipts and payments during the period;
• Profits and losses realised during the period;
• The leverage employed during the reporting period.266

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Special Provisions for Forex Investment Advisors (FIA’s)

A FIA must, prior to referring a client to a forex intermediary, ascertain whether it is

authorised and if not, whether it should be authorised. If so, the FIA may not refer clients to
the intermediary.267

A FIA must commence its business relationship with a client with a written or electronic
application form recording the arrangement between the parties, including the intermediary
involved, and must disclose the following: -
• If the FIA deals with one or more intermediaries;
• If the client will deal directly with the intermediary or through the FIA;
• Whether the advice will relate to a managed account or a self-directed account;
• The contact details of the FIA, intermediary and the client;
• That the intermediary is an authorized FSP and the license number;
• Whether the investments in the case of managed forex accounts will be made in the
name of the client at the foreign FFSP acting as a clearing firm or in the name of an
omnibus account holder under direct or indirect control of the FFSP;
• Information on the applicable exchange control measures regarding the forex
investment;
• The amount of the investment and the term of the investment;
• Separately in respect of the FIA and the intermediary, the total fees and benefits to
be received by each, by way of a deduction from the investment or not, including
the initial fees or costs, ongoing fees or costs and any other benefit, fees or costs,
whether in cash or kind.268

The FIA must apply for approval of the application form from the Registrar. No substantial
amendment may be made to the specimen without the approval of the Registrar. 269

The FIA must enter into a written agreement with each forex intermediary, which records
the arrangements between them. It must also make provision for the provision of reporting
to the client by the intermediary and termination on written notice not exceeding 60 days.270

Records of Advice

In addition to the duties imposed by the FAIS Act, the FIA must maintain a record of advice
furnished to the client reflecting the basis on which advice was given, more particularly:
• A brief summary of the information and material on which the advice was based;
• The financial products considered;
• A description of the particular forex investment that was recommended and an
explanation of why a forex investment is likely to satisfy the client’s identified needs
and objectives.
• The investment of each client must be recorded individually.

The FIA must provide the client with a copy of the record of advice.271

4.3.5 Audit function

A FSP must maintain full and proper accounting records on a continuous basis and brought
up to date monthly and prepare annual financial statements in accordance with generally
accepted accounting practice. The financial statements must be audited and submitted to
the Registrar within six months after the financial year-end. The FSP must, in addition,

81
submit a report by the auditor certifying the amount of cash and market value of assets held
on behalf of clients and whether such cash and assets were held separately from its own
cash and assets.272

A Category 1 FSP that does not hold funds or assets on behalf of clients need not have the
annual financial statements audited, but must still submit them to the Registrar within the
required period.

4.3.6 Compliance function

A FSP with more than one key individual and one or more representatives must appoint one
or more compliance officers. The compliance officer may be the director, member, auditor,
trustee, principal officer, public officer or company secretary of the FSP or any other person
with suitable qualifications and experience determined by the Registrar by Notice in the
Government Gazette. The Registrar must approve the compliance officer.273

The FSP must establish an independent compliance function or establish it as part of the risk
management function and must be under the supervision of an approved compliance officer
of the FSP.274 Procedures must be laid down for the FSP and representatives to ensure
compliance with the Act.275

The compliance function must be exercised with such diligence, care and degree of
competency as may reasonably be expected from a person responsible for such a function.
The compliance officer must provide the FSP with written reports regarding the compliance
function and make recommendations regarding any aspect of compliance276

The compliance division/compliance officer or, in the absence of such an officer, the FSP is
responsible for monitoring compliance with the Act by the FSP and liasing with the
Registrar.277

Part of the liaison function involves the submission to the Registrar of prescribed report
providing information and assurances including instances where compliance did not take
place and the reasons for non-compliance. The report more specifically requires: –

In the case of all FSPs

• A list of all the key individuals and representatives as at the reporting date;
• Confirmation that: –
o A register was kept with all the details of key individuals and representatives
including categories in which they were competent to render financial
services;
o A certified copy of the FSPs license has been displayed prominently in every
business premises;
o All business documentation, advertisements and promotional material
contain a statement that the FSP holds a license;
o The license could be produced to any person on request;
o Each representative advises its clients that it has a service contract or other
mandatory agreement with the FSP and that the FSP accepts responsibility
for all activities performed within the scope of that agreement;
o Each representative and key individual of the representative complied with
the competency requirements and the applicable Code of Conduct;

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 o The FSP complied with all requirements relating to the compliance function;
o The FSP maintained all records required by the Act;
o The FSP complied with all conditions, restrictions and notice imposed by the
Registrar;
o Whether or not the FSP was involved in civil, criminal and Ombud
proceedings.

In the case of DFSPs

 A list of foreign FSP or authorised users managing clients’ foreign investments;

 Whether or not claims were instituted against the fidelity guarantee or professional
indemnity insurance;
 Whether any contravention of the Act, Regulations, Notices or Conditions took place
that is not specifically covered in the form;
 Confirmation that: –
o The mandates of a DFSP were inspected and complied with the applicable
Code of Conduct;
o Investments are held by the nominee company with which the FSP has an
agreement and that any conditions or restrictions are complied with;
o The amount of cash and investments at market value under management.

4.4 The Ombud

The FAIS Act establishes the Ombud for Financial Services Providers to consider and dispose
of complaints if the internal complaints procedure of the FSP was unsuccessful and the
complainant wants to pursue the matter. The Ombud must deal with complaints in a
procedurally fair, informal, economical and expeditious manner in terms of the Act and
having due regard to the contractual or other legal relationship between the complainant
and any other party to the complaint. The Ombud must also be independent and impartial
when investigating and making determinations. The rules relating to the proceedings of the
Ombud can be obtained from www.fsb.co.za . 278

4.5 Self-test Questions

No Question Answer
1. A financial services provider Yes, because a pension fund is a financial product in terms
(FSP) wishes to advise clients on of the Act.
investing in pension funds. Is he
obliged to register in terms of
the FAIS Act?
2. A FSP wishes to advise clients on Yes, because securitised debt is a financial product in terms
investing in securitised debt. Is of the Act.
he obliged to register in terms
of the FAIS Act?
3 A FSP wishes to advise clients on Yes, because health service benefits is a financial product in
health service benefits. Is he terms of the Act.
obliged to register in terms of
the FAIS Act
4 Doreen provides advice to No, the provision of factual advice on a procedure
clients in respect of the for entering into a transaction is excluded.
procedure for entering into a
life insurance policy. Is she
providing a financial service (i.e.

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 a regulated activity) in terms of
the FAIS Act?
5 Dube is an insurance broker and Yes, replacement of a financial product is a regulated
he replaces a client’s life activity.
insurance policy with another
one, because according to him
the first policy does not cater
for the needs of the client
anymore. Is he providing a
financial service (i.e. a regulated
activity) in terms of the FAIS
Act?
6. Give two examples of product Insurance company
suppliers. A company issuing shares
7. Name four characteristics that • Good character and integrity
an applicant for a financial • Competency (Qualifications and Experience)
services provider must possess? • Operational ability
• Solvency
8. Through which organisations The Financial Services Board
can applications for approval as An Authorised Body
a FSP take place?
9. What is a key individual? A person managing or overseeing the activities of the
financial services provider.
10. What criteria and guidelines will • An independent compliance function or a
be applicable when the compliance function forming part of the risk
Registrar considers an management function under the control of an
application for the approval of approved compliance officer or FSP alone must be
compliance officer? established.
• The compliance function must be exercised with
such diligence, care and degree of competence as
may reasonably be expected.
• Procedures must be established and maintained to
ensure compliance with the Act.
• The proposed compliance officer must comply with
the fit and proper requirements and have
appropriate knowledge of the Act.
• The FSP must make adequate resources available
to ensure proper compliance monitoring of the FSP
and representatives and grant direct access to and
demonstrable support from senior management.
• The compliance function must be independent and
objective.
• The internal structure of the business must be
designed to ensure the avoidance of actual and
potential conflicts of interest.
• Proper records must be kept followed by a monthly
written report to the FSP on progress made with
monitoring duties including recommendations, if
any.
• The compliance officer will be responsible for
liaison with the Registrar and submission of the
required compliance reports.
11. What are the purposes of the The protection of clients in particular, clients’ needs must be
Codes of Conduct that exist for met and they must be enabled to take informed decisions.
various kinds of FSPs?
12. Describe the requirements in The FSP or its representative must disclose the existence of

84
 respect of conflicts of interest in any personal interest in the financial service or any
the general Code of Conduct. circumstance which gives rise to an actual or potential
conflict of interest, like non-cash incentives or other indirect
consideration payable by another provider. The FSP or its
representative must take all reasonable steps to ensure fair
treatment of the client.
13. What are the duties of a FSP A FSP must act honourably, professionally and
when contacting clients? with due regard to the convenience of the client in
all communications and dealings with a client. At
the commencement of any contact, visit or call
initiated by the FSP, he must explain the purpose
thereof and at the earliest opportunity, comply
with the disclosure requirements
14. What should a FSP do prior to A needs analysis.
recommending a financial
product to a client?
15. Describe what the objectives of The internal complaints resolution system must be designed
an internal complaints to ensure -
resolution system of a FSP in • availability of adequate manpower and other resources
terms of the General Code of adequate training of staff
Conduct should be. • that responsibilities and mandates are delegated to
facilitate complaints resolution of a routine nature
• escalation of non-routine serious complaints
• internal follow-ups to avoid occurrences giving rise to
complaints or improve services.
16. What should a Discretionary FSP A mandate.
(DFSP) obtain from his/her
client before rendering
intermediary services but after
obtaining the necessary
information?
17. To which foreign currency Forex trading based on price fluctuations in the
denominated investments is the forex market but excluding forex transactions of
Code of Conduct for forex FSPs authorised dealers and their agents.
applicable?
18. What should a forex FSP do Apply for approval by the Registrar.
before appointing a foreign FFSP
or clearing firm?
19. What should a forex investment Ascertain if the forex intermediary is a licensed FSP and if
advisor do prior to referring a not, decline to refer the client.
client to a forex intermediary?
20. To whom can a client refer a The Ombud
complaint if the internal
complaints procedure was
unsatisfactory for a client?

7.5 Measure your progress:

Score obtained for this section: ___ /20 = ___x100 = ___%

85
 Chapter 5

Conflicts of Interest

Learning Outcomes

After completing this chapter, you should be able to-

1. Understand what soft commissions are locally as well as overseas and

the main points of criticism against soft commissions
2. Understand the prohibitions contained in the Financial Institutions
(Protection of Funds) Act.

5.1 Soft Commissions

All significant financial markets recognise conflicts of interest as a source of potential

detriment to investors. These markets usually have rules aiming to eliminate or control
conflicts to ensure investor protection and confidence. Acting as an authorised user or
financial services provider (like an investment manager) when there is an incentive other
than client reward represents such a conflict, unless this reward is fully disclosed and
consented to by the client.

Soft commissions are goods and services received by an intermediary - who manages
securities on behalf of a client - from an authorised user of an exchange in return for an
assurance that such intermediary will direct a minimum amount of business to that
authorised user, usually a multiple or conversion ratio to govern the value of goods and
services received. For example, a multiple of 1.5 means that for each R1,50 of commission
paid to the authorised user, R1 in goods or services will be provided to the investment
manager.

In some countries, for example the United States of America, the authorities allow managers
to pay brokerage higher than the lowest available brokerage in exchange for goods and
services (known as "paying up"). The possibility of client prejudice is clearly even higher in
this instance if it is not strictly regulated.

In some instances the goods and services are generated by third parties and paid for by the
authorised user.

The payment of soft commissions is a controversial issue worldwide and subject to severe
criticism. In fact, in certain countries the practice is prohibited. Soft commission agreements
may give an investment manager access to facilities (e.g. research), which may benefit its
clients, but there are clearly dangers to the client. Some of the main points of criticism are
the following:
• It represents income generated through the application of client funds, yet no
benefit is passed on to the client, for example by a lower commission charge to the
client.

86
 • The investment manager may be tied to a specific authorised user of an exchange,
even if the authorised user’s execution services are inferior. This aspect will
obviously restrict competition between authorised users.
• Soft commissions may be an inducement for an investment manager to overtrade so
as to generate commissions ("churning").
• Investment managers engaging in this practice have less incentive to negotiate
lower brokerage or seek the best execution services, but instead have an incentive
to negotiate to receive goods and services for themselves.
• Soft commissions are also regarded by some as a form of bribery or "kickback"
which benefits only the investment manager and not the client.
• The independence of a broker is even more compromised where an investment
manager has a soft commission agreement with an affiliated broker, that is, they do
not deal at arm's length.

In the United Kingdom, the report by Paul Myners on Institutional Investment in the United
Kingdom stated that soft commissions and bundling of services created an artificial bias for
fund managers to have services provided by the sell-side, distorting competition, since the
costs for these will not be scrutinised by the client and are not a direct charge to the fund
manager’s profit.

The Financial Services Authority (FSA) issued a Consultation Paper (CP176) proposing to limit
the goods and services apart from trade execution, which can be bought with commission. In
particular market pricing and information services such as dealing screens should be
excluded. In addition it was proposed that the cost of acquiring services in a package with
trade execution should not automatically be passed on to the client. Investment research in
particular was mentioned.

Following industry comment on the Consultation Paper, the FSA decided to allow industry to
develop a disclosure model on a trial basis. This should be done on a framework of limiting
fund managers' use of clients' commissions to the purchase of trade execution and
investment research. This would apply to soft commissions as well as to bundled brokerage
arrangements. Disclosure will therefore need to separate out the payments for execution
from those for research. (www.fsa.gov.uk)

The basic principle in South African common law is that a principal (the client) is entitled to
the benefit of the care and skill, which the agent (the investment manager) undertook to
exercise on his or her behalf. This right may be waived wholly or partially, but it must be
done freely after all material facts have been disclosed to the client. The agent must account
to the principal not only for a profit made or reward received, but also for any savings made.
It is not necessary that loss or harm or damage be proved on the part of the principal. A
secret profit may also not be made by using information obtained for the performance of
the duties under the agreement or otherwise obtained during the course of the agreement.

Should these requirements not be met, the principal may claim any profits from the agent
and terminate the relationship. An agent may also forfeit his or her commission in
connection with the transactions where he or she acted improperly.

The situation in South Africa has changed however when the Code of Conduct for authorised
users came into operation. Inducements are specifically dealt with in the code. Please see
par 2.4.4 under “Inducements” for a discussion.

87
5.2 Financial Institutions (Protection of Funds) Act, No 28 of 2001

A financial institution includes, for purposes of this Act, among others, an exchange,
authorised user, settling party, clearing house, central securities depository, authorised
financial services provider or representative (in terms of the FAIS Act).279

A director, member, partner, official, employee or agent of a financial institution or of a

nominee company controlled by a financial institution -
MUST observe the utmost good faith and exercise proper care and diligence when: -
• Making an investment,
• Holding funds or trust property in safe custody,
• Controlling or administering funds or trust property, and
• Selling of trust property and
MAY NOT sell, invest, pledge, hypothecate, or otherwise encumber the funds or trust
property, or make use of the funds or trust property; or furnish a guarantee in a manner
calculated to gain directly or indirectly any improper advantage for himself or herself or for
any other person at the expense of the institution, trust, beneficiary or principal
concerned.280

Any director, member, partner, official or employee or agent of a financial institution or of a

nominee company controlled by a financial institution who takes a decision or who takes
part in a decision to: -
• Invest in the shares in a company in which he or she has a direct or indirect interest;
or
• Grant a secured or unsecured loan to a company in which he or she has a direct or
indirect interest,
must declare the nature and extent of the interest before the investment or loan is made. (A
record of such declaration must be made in the minutes of a meeting of the governing body
of the institution at which the declaration is made.)281

Trust property that is administered under any instrument or agreement must be invested as
directed by the instrument or agreement. If there is no direction under the agreement or
instrument, trust property must be invested in the name of the client, the financial
institution in its capacity as administrator, trustee, curator or agent or a nominee
company.282

5.3 Self-Test Questions

No Questions Answers
1. John Tsidi is an investment manager. Yes, as there is an incentive other than normal client
CSC Stockbrokers offer overseas reward. He is not acting in the best interests of the
trips to the investment manager that client. Even if CSC Stockbrokers is not overcharging
refers the largest volume of business the client, the client may still be compromised by low
to them. John is keen to win the trip service levels.
and refers all his clients to CSC
Stockbrokers. The stock broking fee
that John’s clients must pay is in line
with market rates. Do John’s actions
constitute a conflict of interest?
2. What regulatory model on soft A disclosure model.
commissions is followed by the FSA
in the United Kingdom?

88
3. What is the position in South Africa The basic principle in South African common law is
regarding soft commissions? that a principal (the client) is entitled to the benefit of
the care and skill, which the agent (the investment
manager) undertook to exercise on his or her behalf.
This right may be waived wholly or partially, but it
must be done freely after all material facts have been
disclosed to the client. The agent must account to the
principal not only for a profit made or reward
received, but also for any savings made. It is not
necessary that loss or harm or damage be proved on
the part of the principal. A secret profit may also not
be made by using information obtained for the
performance of the duties under the agreement or
otherwise obtained during the course of the
agreement.

Should these requirements not be met, the principal

may claim any profits from the agent and terminate
the relationship. An agent may also forfeit his or her
commission in connection with the transactions
where he or she acted improperly. Provided adequate
disclosure is made and the necessary consent
obtained from the client, the receipt of incentives like
soft commissions may however be legal in terms of
common law.

4. What is the main purpose of the To ensure that directors and officers of financial
Financial Institutions (Protection of institutions observe the utmost good faith and care in
Funds) Act? making investments and holding or controlling trust
funds. They may not use trust funds to benefit
themselves and if they have an interest in any
investment, it must be declared.

5.4 Activities:

• Access the Financial Services Authority (FSA) website at www.fsa.gov.uk to look at

developments regarding soft commissions.
• Try the words “soft commissions” or “softing” or “soft dollars” in any good search
engine to read about the position elsewhere in the world.

5.5 Measure your progress without looking at the answers:

Score obtained for these questions:

___ /4 = ___x100 = ___%

89
 Chapter 6

Ethics as contained in the Code of Conduct of SAIFM

Learning Outcome

After completing this chapter, you should be able to understand and apply the
main principles for ethical conduct in the financial markets and how the
requirement of skill, care and diligence forms an integral part of ethical
behaviour.

6.1 Main principles

• A financial market participant shall conduct himself or herself with integrity and
dignity, and act in an ethical manner in his or her dealings with the public, clients,
employers, employees, dealers and fellow-financial market participants.
• A financial market participant shall act with proper skill, care and diligence, and
exercise independent professional judgement in the conduct of all professional
dealings.
• A financial market participant shall provide full and accurate information to clients
at all times.
• A financial market participant shall act with competence, and shall strive to maintain
and improve his or her competence and that of others in the profession.
• A financial market participant shall maintain knowledge of and comply with all
applicable laws, rules and regulations of a government, governmental agency and
regulatory organisation governing his or her professional, financial or business
activities.
• A financial market participant shall not knowingly participate in, assist, or withhold
knowledge of any acts in violation of any applicable law, rule or ethical code
governing his or her profession, financial or business activities.

6.2 Integrity Principles

6.2.1 Independence

Professional independence is the ability to act, and to be seen to act, with integrity and
objectivity. Independence is fundamental to the relationship of trust between the financial
market participant, the client and the public. A financial market participant shall continually
exercise good judgement to achieve and maintain such independence and objectivity. A
financial market participant may not claim that he or she is independent or impartial if he or
she is not, and must take reasonable care to ensure that any claim of independence or
impartiality adequately includes any limitation that there may be on either.

It is essential that conclusions, opinions and recommendations be made dispassionately,

without regard to personal bias or personal economic considerations.

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6.2.2 Inducements

A financial market participant may not solicit or accept any gift or inducement (whether by
way of direct or indirect benefit) of a kind which is designed to influence his or her actions,
or which may cause detriment to a client. This standard does not apply if the inducement is
remuneration, which is paid in money, in respect of a deal done pursuant to an agreement,
and which is disclosed to the client as required by the relevant regulations. A financial
market participant may not offer or give to another any gift or inducement of a kind which is
designed to influence the actions of the beneficiary, for personal gain, or which may directly
or indirectly be detrimental to a client.

6.2.3 Overcharging

A financial market participant’s charges must be fair in their incidence and reasonable in
their amount, having regard to all revealed circumstances. A financial market participant
may charge his or her clients no more than his or her rightful commission plus any bona fide
transaction costs and service charges.

6.2.4 Churning

A financial market participant may not -

• buy or sell contracts (both inter- and intra-portfolio) without the exercise of
discretion for any client; or
• advise a private investor to buy or sell contracts, with the primary intention of
maximising commission, or where the performance of the client’s portfolio is of
secondary consideration.

6.2.5 Insider trading

A financial market participant may not, with intent or through negligence, profit or seek to
profit from inside information, nor assist anyone with such unpublished price-sensitive
information to make a profit for the financial market participant or his or her client.

Should a financial market participant acquire such information as a result of a relationship

with a client, he or she shall not communicate the information (other than within the
relationship), or take investment action on the basis of such information.

Should a financial market participant acquire such information outside of a client

relationship, where the financial market participant knows, or should have known, that such
information was disclosed to him or her in a breach of duty or ethical conduct, the financial
market participant shall not communicate or act upon the inside information.

If a breach of duty or ethical conduct exists, the financial market participant must make
reasonable efforts to achieve public dissemination of such information.

6.2.6 Front-running

A financial market participant must conduct himself or herself in such a manner that
transactions for his or her customers, clients and employer have priority over personal
transactions, and so that his or her personal transactions do not operate adversely to their
interests. As such, a financial market participant may not place personal orders in advance of

91
client or institutional orders, with the foreknowledge that a movement in price may occur
from a large trade.

6.2.7 Preservation of confidentiality

A financial market participant must preserve the confidentiality of information

communicated by the client concerning matters within the scope of the confidential
relationship, except to disclose information regarding illegal activities.

6.2.8 Misrepresentation of services

A financial market participant shall not make any statements, orally or in writing, which
misrepresent any of the following:
• the services that the financial market participant is capable of performing for the
clients;
• the qualifications of the financial market participant;
• the investment performance that the financial market participant has accomplished
or can reasonably be expected to achieve for his or her clients; and
• the expected performance of any investment.

6.2.9 Conflict of Interest

A financial market participant must be vigilant in identifying actual or potential conflicts of

interest, and may not allow himself or herself to be placed in a position in which his or her
obligations to one client are, or are likely to be perceived as being in conflict with his or her
obligations to another client, or to his or her own personal or professional interests.

6.2.10 Professional Misconduct

A financial market participant may not commit a criminal act that upon conviction materially
reflects adversely on his or her honesty, trustworthiness, or fitness as a financial market
participant in other respects or engage in conduct involving dishonesty, fraud or
misrepresentation.

6.3 Skill, Care and Diligence

6.3.1 Standard of care

A financial market participant must in all professional dealings exercise care of the standard
of a bona fide person dealing with his or her own affairs.

6.3.2 Prompt and timely execution

A financial market participant must act promptly in accordance with instructions, unless he
or she has discretion as to timing and uses that discretion in a responsible way. Due to the
nature of financial markets, the success of any implementation of a client directive is directly
dependent on timing. A financial market participant should possess the appropriate level of
skill to enable him or her to carry out timely execution (in accordance with the ethical
principle of competence).

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6.3.3 Suitability

A financial market participant must seek from his or her clients, whenever it is appropriate
to do so, any information about their circumstances and investment objectives which the
financial market participant might reasonably expect to be relevant in enabling the financial
market participant to fulfil his or her duties to them.

In considering these matters, the financial market participant must take the following into
account: -
• The needs and circumstances of the client;
• The basic characteristics of the investment involved;
• The basic characteristics of the total portfolio; and
• The potential risks of loss involved.

The financial market participant must use reasonable judgement to determine the
applicable relevant factors.

The financial market participant must distinguish between fact and opinion in the
presentation of recommendations. The financial market participant must ensure that his or
her clients are properly informed about contracts envisaged, their implications, including
potential risks and returns, and other relevant facts.

6.3.4 Twisting

“Twisting” is the practice of shifting profits and losses between portfolios with the aim of
reporting unrealistic (usually optimistic) profits or portfolio performance to a client or
clients. Twisting may not intentionally be practised by financial market participants as it
amounts to a misrepresentation of fact.

6.3.5 Best execution

A financial market participant must take reasonable steps both to find and to deal on the
terms which are the best available for the client.

6.3.6 Standards of advice

The financial market participant must exercise diligence and thoroughness in offering
investment advice to others and in taking investment action for others. He or she must have
a reasonable and adequate basis for such advice and actions, supported by appropriate
research and investigation. He or she must make reasonable and diligent efforts to avoid
material misrepresentation in the presentation of any recommendations.

6.3.7 Financial resources

A financial market participant must ensure that he or she maintains adequate financial
resources to meet his or her business commitments and to withstand the risks to which his
or her profession is subject.

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6.4 Full Accurate Information

6.4.1 Access to funds and availability of fund manager

A financial market participant must inform his or her clients in advance of any restrictions or
limitations pertaining to the access of the client to the client’s funds. Similarly, the financial
market participant must ensure that the client understands the implications of making
illiquid investments. In the absence of such restrictions or limitations, the financial market
participant must ensure that a client who requests access to his or her funds obtains such
access within a reasonable period of time. A financial market participant must ensure that
his or her clients are able to contact the financial market participant timeously and with
ease.

6.4.2 Time to consider

A financial market participant must afford potential investors sufficient time to reach an
informed and well-considered decision. As such, a financial market participant may not use
high-pressure sales tactics, which are deemed unethical.

6.4.3 Statements and forecasts

A financial market participant must provide objective and truthful information relevant to
any investment decision. This includes information that adequately conveys all material facts
and the major factors likely to affect its performance. The financial market participant must
distinguish between fact and opinion in the presentation of recommendations

6.4.4 Risk disclosure

A financial market participant must accurately inform the client of all risks involved in any
investment decision.

When engaged in futures trading, pursuant to the rules the Derivatives Division of the JSE
Ltd (JSE) clients must sign a standardised risk disclosure document prior to entering into any
futures contract. This document serves as an acknowledgement that the client is aware of
the risks inherent in the trading medium, and of the nature and extent of his or her rights
and obligations.

6.4.5 Explanation of rights, obligations and costs

A financial market participant must inform his or her clients of all rights, obligations and
costs involved. The financial market participant must supply the client with a disclosure
document containing details of the various expenses, which may be charged to his or her
account, and the circumstances under which these charges would be incurred.

6.4.6 Complete and truthful accounting

A financial market participant must, as a matter of course, supply the following information
to the client:
• Where the client’s funds will be held;
• the type and frequency of regular accounting statements to be provided;
• details of any charges or fees incurred against the client’s account;

94
 • the financial performance of the JSE financial market participant with whom the
client is dealing, when engaged in futures trading;
• the name of the firm of auditors or chartered accountants responsible for auditing
the accounts of the JSE financial market participant, when engaged in futures
trading; and
• how the client may obtain interim information about his or her account.

Furthermore, the financial market participant must, on request, provide additional

information to the client regarding the current status and value of the client’s account and
when and how profits or losses were realised or incurred.

6.5 Promotional Material

6.5.1 Acceptable promotional material

Promotional material, in the form of oral, visual or documentary presentation directed at

the public through any medium of communication, is acceptable if the purpose of such
advertising is to call a potential client’s attention to an investment and to encourage the
potential client to obtain additional information about the investment.

6.5.2 General prohibition

A financial market participant may not make any communication with the public which is
fraudulent or deceitful, employs or is part of a high pressure approach or makes any
statement that futures trading is appropriate for all persons when engaged in futures
trading.

6.5.3 Content of promotional material

No Financial Markets practitioner may use promotional material which: -

• Is likely to deceive the public;
• Contains any material misstatement of fact, or omits a fact if the omission renders
the promotional material misleading;
• Mentions the possibility of profit unless accompanied by an equally prominent
statement of the risk of loss;
• Includes any reference to either hypothetical results or to the actual past trading
profits without mentioning that these hypothetical or past results are not
necessarily indicative of the future results; or
• Includes any specific numerical or statistical information about the past
performance of any actual accounts (including rate of return) unless such
information is, and can be demonstrated to be, representative of actual
performance for the same time period of all reasonably comparable accounts.

6.5.4 Statements of opinions

Statements of opinion included in the promotional material must be clearly identified as

such, and must have a reasonable basis of fact.

95
6.5.5 Unsolicited calls

“Unsolicited calls” refer to personal visits or oral communications made without express
invitation. Unsolicited calls are deemed to be as an undesirable practice.

6.6 Activities

Look at the websites of regulators in overseas countries for ethical rules to give you an
international perspective on ethical issues e.g. www.fsa.gov.uk or www.aimr.com.
Arrange a discussion with fellow students on ethical principles and whether South African
companies should be obliged appoint an ethics officer.

6.7 Self-test Questions

No Questions Answers
1. Mary is a trader. She becomes aware that her Report the matter to the exchange
colleagues are contravening legislation by concerned or the FSB.
manipulating the financial markets. What is
she obliged to do from an ethical point of
view?
2. Peter is a stockbroker who manages the No, it amounts to churning and is unethical.
portfolios of a couple of clients. Peter’s boss,
Lindiwe is unhappy with him because he does
not generate enough fees for the firm. Peter
decides to buy and sell more investments in
his clients’ portfolios to generate some
additional commission. Is this ethical in terms
of the Code of Conduct?
3. In terms of the Code of Ethics, what should a The following should be taken into
stockbroker who manages a client’s portfolio consideration:
take into consideration to establish the • the needs and circumstances of the
suitability of an investment? client;
• the basic characteristics of the
investment involved;
• the basic characteristics of the total
portfolio; and
• the potential risks of loss involved.
4. Describe the requirements for promotional No trader or investment manager may use
material as set out in the Code of Ethics. promotional material which-
• is likely to deceive the public;
• contains any material misstatement of
fact, or omits a fact if the omission
renders the promotional material
misleading;
• mentions the possibility of profit unless
accompanied by an equally prominent
statement of the risk of loss;
• includes any reference to either
hypothetical results or to the actual past
trading profits without mentioning that
these hypothetical or past results are
not necessarily indicative of the future
results; or
• includes any specific numerical or

96
 statistical information about the past
performance of any actual accounts
(including rate of return) unless such
information is, and can be demonstrated
to be, representative.

6.8 Measure your progress:

Score obtained for these questions without looking at the answer:

___ /4 = ___x100 = ___%

97
Bibliography

Falkena, H, Bamber, R, Llewellyn,D & Store T., 2001. Financial regulation in South Africa, 2nd
ed. 2001, SA Financial Services Forum.
Van Wyk K. The Regulation of the South African Financial Markets, October 2004 ed. (SAIFM)
Muller N. 2004, New Securities Services Act aligns South Africa with best international
regulatory practice, FSB Bulletin, Fourth Quarter, 2004
Financial Services Board Annual Report 2004
Financial Services Board Annual Report 2006
Wessels, L.2004. Financial Services Ombud Schemes Bill passed first stage in Parliament, FSB
Bulletin, Fourth Quarter.
Financial Services Board Annual Report 2007.
Brochure: National Credit Act and National Credit Regulator www.ncr.org.za
www.fsb.co.za
www.iosco.
www.fsa.org.uk

Other Websites with interesting information:

www.jse.co.za
www.bondex.co.za
www.finforum.co.za (Includes a dictionary of financial terms)
www.saifm.co.za
www.resbank.co.za
www.fic.gov.za
www.iaisweb.org
www.polity.co.za
www.acts.co.za
www.ncr.org.za

1
This chapter was written by the author for the book “Understanding Financial Markets” published by Van
Schaiks who kindly gave permission that it be used in this module. The book is available on Kalahari.net in .
2
Sec 2, Securities Services Act, No. 36 of 2004
3
See the definitions in Sec 1, Securities Services Act, No. 36 of 2004
4
See the definitions in Sec 1, Securities Services Act, No. 36 of 2004
5
See the definitions in Sec 1, Securities Services Act, No. 36 of 2004
6
See the definitions in Sec 1, Securities Services Act, No. 36 of 2004
7
Sec 8 and sec 12(6)(c) Securities Services Act, No. 36 of 2004
8
See Sec 53, Securities Services Act, No. 36 of 2004 as well
9
Sec 9, Securities Services Act, No. 36 of 2004
10
Sec 9, Securities Services Act, No. 36 of 2004
11
Sec 10, Securities Services Act, No. 36 of 2004
12
Sec 49(1), Securities Services Act, No. 36 of 2004
13
Sec 17, Securities Services Act, No. 36 of 2004
14
Sec 16, Securities Services Act, No. 36 of 2004
15
Sec 55, Securities Services Act, No. 36 of 2004
16
Sec 56(1), Securities Services Act, No. 36 of 2004
17
Sec 57(3) and (4) , Securities Services Act, No. 36 of 2004
18
Sec 57(2), Securities Services Act, No. 36 of 2004
19
Sec 1, 9 and 11 Securities Services Act, No. 36 of 2004
20
Sec 11(1), Securities Services Act, No. 36 of 2004
21
Sec 11(2), Securities Services Act, No. 36 of 2004
22
Sec 12(6), Securities Services Act, No. 36 of 2004
23
Sec 12(1), Securities Services Act, No. 36 of 2004
24
Sec 12(5), Securities Services Act, No. 36 of 2004

98
25
Sec 12(2)(a) and (b), Securities Services Act, No. 36 of 2004
26
Sec 12(6)(c), Securities Services Act, No. 36 of 2004
27
Sec 12(7), Securities Services Act, No. 36 of 2004
28
Sec 13(1), Securities Services Act, No. 36 of 2004
29
Sec 13(3), Securities Services Act, No. 36 of 2004
30
Sec 13(4), Securities Services Act, No. 36 of 2004
31
Sec 12(5), Securities Services Act, No. 36 of 2004
32
Sec 12(6)(a), Securities Services Act, No. 36 of 2004
33
Sec 12(6)(b), Securities Services Act, No. 36 of 2004
34
Sec 14, Securities Services Act, No. 36 of 2004
35
Sec 15, Securities Services Act, No. 36 of 2004
36
Sec 18(4), Securities Services Act, No. 36 of 2004
37
Sec 18(2), Securities Services Act, No. 36 of 2004
38
Sec 1, Securities Services Act, No. 36 of 2004
39
Sec 18(2), Securities Services Act, No. 36 of 2004
40
Sec 18(2), Securities Services Act, No. 36 of 2004
41
Sec27 (1), Securities Services Act, No. 36 of 2004
42
Sec27 (1), Securities Services Act, No. 36 of 2004
43
Sec27 (2), Securities Services Act, No. 36 of 2004
44
Sec27 (3), Securities Services Act, No. 36 of 2004
45
Sec27 (4), Securities Services Act, No. 36 of 2004
46
Sec27 (4), Securities Services Act, No. 36 of 2004
47
Sec27 (5), Securities Services Act, No. 36 of 2004
48
Sec27 (6), Securities Services Act, No. 36 of 2004
49
Sec27 (7), Securities Services Act, No. 36 of 2004
50
Sec25, Securities Services Act, No. 36 of 2004
51
Sec24, Securities Services Act, No. 36 of 2004
52
Sec26, Securities Services Act, No. 36 of 2004
53
Sec 70 (2) Securities Services Act, No. 36 of 2004
54
Par 2 of the Code of Conduct, Notice 20 of 2005.
55
Par 3(1) (a) of the Code of Conduct, Notice 20 of 2005
56
Par 3(1) (b) and (c) of the Code of Conduct, Notice 20 of 2005
57
Par 3(2) of the Code of Conduct, Notice 20 of 2005
58
Par 1 and 13 of the Code of Conduct, Notice 20 of 2005
59
Par 4(1) of the Code of Conduct, Notice 20 of 2005
60
Par 4(1) of the Code of Conduct, Notice 20 of 2005
61
Par 4(2) of the Code of Conduct, Notice 20 of 2005
62
Par 6(1) of the Code of Conduct, Notice 20 of 2005
63
Par 6(2) of the Code of Conduct, Notice 20 of 2005
64
Par 6(3) of the Code of Conduct, Notice 20 of 2005
65
Par 5 of the Code of Conduct, Notice 20 of 2005
66
Par 7(1) of the Code of Conduct, Notice 20 of 2005
67
Par 7(2)(a) of the Code of Conduct, Notice 20 of 2005
68
Par 7(2)(b) of the Code of Conduct, Notice 20 of 2005
69
Par 7(2)(b) and (c) of the Code of Conduct, Notice 20 of 2005
70
Par 8 of the Code of Conduct, Notice 20 of 2005
71
Par 9(1) and (2) of the Code of Conduct, Notice 20 of 2005
72
Par 9(3) of the Code of Conduct, Notice 20 of 2005
73
Par 9(4) of the Code of Conduct, Notice 20 of 2005
74
Par 9(5) and (6) of the Code of Conduct, Notice 20 of 2005
75
Par 10(1) of the Code of Conduct, Notice 20 of 2005
76
Par 10(2) of the Code of Conduct, Notice 20 of 2005
77
Par 10(3) of the Code of Conduct, Notice 20 of 2005
78
Par 10(4) of the Code of Conduct, Notice 20 of 2005
79
Par 10(5) of the Code of Conduct, Notice 20 of 2005
80
Par 11 of the Code of Conduct, Notice 20 of 2005
81
Par 12 of the Code of Conduct, Notice 20 of 2005
82
Par 8(2) of the Notice: Accounting Records to be maintained by a Regulated Person.
83
Par 8(1) of the Notice: Accounting Records to be maintained by a Regulated Person.
84
Sec 88 Securities Services Act, No. 36 of 2004
85
Sec 89 Securities Services Act, No. 36 of 2004
86
Par 2 of the Notice: Accounting Records to be maintained by a Regulated Person.

99
87
Par 6(1) of the Notice: Accounting Records to be maintained by a Regulated Person.
88
Par 6(2) of the Notice: Accounting Records to be maintained by a Regulated Person.
89
Sec 89 Securities Services Act, No. 36 of 2004
90
Sec 90(2) Securities Services Act, No. 36 of 2004
91
Par 2 and 3, Notice: Matters to be reported on by Auditor of Regulated person
92
Par 5, Notice: Matters to be reported on by Auditor of Regulated person
93
Sec 1 and 19 Securities Services Act, No. 36 of 2004
94
Sec 21 Securities Services Act, No. 36 of 2004
95
Sec 20 Securities Services Act, No. 36 of 2004
96
Sec 22 Securities Services Act, No. 36 of 2004
97
Sec 23 Securities Services Act, No. 36 of 2004
98
Sec 72 and 73 Securities Services Act, No. 36 of 2004
99
Sec 73 Securities Services Act, No. 36 of 2004
100
Sec 77(1) Securities Services Act, No. 36 of 2004
101
Sec 77(2),(3) and (4) Securities Services Act, No. 36 of 2004
102
Sec 75(1) and (2) Securities Services Act, No. 36 of 2004
103
Sec 72 and 75 (3) Securities Services Act, No. 36 of 2004
104
Sec 76 Securities Services Act, No. 36 of 2004
105
Sec 32 and 49 Securities Services Act, No. 36 of 2004
106
Sec 1 Securities Services Act, No. 36 of 2004
107
Sec 91A, Companies Act.
108
Sec 40(1) and (2) Securities Services Act, No. 36 of 2004
109
Sec 41(1) and (3) Securities Services Act, No. 36 of 2004
110
Sec 44 Securities Services Act, No. 36 of 2004
111
Sec 46(1) Securities Services Act, No. 36 of 2004
112
Sec 46(2) Securities Services Act, No. 36 of 2004
113
Sec 33(e) Securities Services Act, No. 36 of 2004
114
Sec 29 Securities Services Act, No. 36 of 2004
115
Sec 33(f) Securities Services Act, No. 36 of 2004
116
Sec 33(i) Securities Services Act, No. 36 of 2004
117
Sec 33(a) en (c) Securities Services Act, No. 36 of 2004
118
Sec 33(d) Securities Services Act, No. 36 of 2004
119
Sec 33(j) Securities Services Act, No. 36 of 2004
120
Sec 33(g) Securities Services Act, No. 36 of 2004
121
Sec 29 Securities Services Act, No. 36 of 2004
122
Sec 33(h) Securities Services Act, No. 36 of 2004
123
Sec 33(m) Securities Services Act, No. 36 of 2004
124
Sec 33(m) Securities Services Act, No. 36 of 2004
125
Sec 33(l) Securities Services Act, No. 36 of 2004
126
Sec 33(n) Securities Services Act, No. 36 of 2004
127
Sec 33(o) Securities Services Act, No. 36 of 2004
128
Sec 35(a) Securities Services Act, No. 36 of 2004
129
Sec 35(b) Securities Services Act, No. 36 of 2004
130
Sec 35(c) Securities Services Act, No. 36 of 2004
131
Sec 35(d) Securities Services Act, No. 36 of 2004
132
Sec 35(e) Securities Services Act, No. 36 of 2004
133
Sec 35(g) Securities Services Act, No. 36 of 2004
134
Sec 35(h) Securities Services Act, No. 36 of 2004
135
Sec 35(f) Securities Services Act, No. 36 of 2004
136
Sec 35(i) Securities Services Act, No. 36 of 2004
137
Sec 35(j) Securities Services Act, No. 36 of 2004
138
Sec 35(k) Securities Services Act, No. 36 of 2004
139
Sec 36 Securities Services Act, No. 36 of 2004
140
Sec 29 Securities Services Act, No. 36 of 2004
141
Sec 37 Securities Services Act, No. 36 of 2004
142
Sec 38(a) Securities Services Act, No. 36 of 2004
143
Sec 38(d) Securities Services Act, No. 36 of 2004
144
Sec 38(b) Securities Services Act, No. 36 of 2004
145
Sec 38(c) and 40(1) Securities Services Act, No. 36 of 2004
146
Sec 38(e) Securities Services Act, No. 36 of 2004
147
Sec 93(1) Securities Services Act, No. 36 of 2004
148
Sec 3 Inspection of the Inspection of Financial Institutions Act, 1998

100
149
Sec 1 Inspection of the Inspection of Financial Institutions Act, 1998 and Sec 1 Financial Services Board Act,
1990
150
Sec 1, Inspection of the Inspection of Financial Institutions Act, 1998
151
Sec 3(4), Inspection of the Inspection of Financial Institutions Act, 1998
152
Sec 4(1), Inspection of the Inspection of Financial Institutions Act, 1998
153
Sec 4(2), Inspection of the Inspection of Financial Institutions Act, 1998
154
Sec 5, Inspection of the Inspection of Financial Institutions Act, 1998
155
Sec 5 (3) Inspection of the Inspection of Financial Institutions Act, 1998
156
Sec 6, Inspection of the Inspection of Financial Institutions Act, 1998
157
Sec 94(1), Securities Services Act, No. 36 of 2004
158
Sec 95, Securities Services Act, No. 36 of 2004
159
Sec 96(1), Securities Services Act, No. 36 of 2004
160
Sec 98(1), Securities Services Act, No. 36 of 2004
161
Sec 100(1) and 102(1), Securities Services Act, No. 36 of 2004
162
Sec 102(2), Securities Services Act, No. 36 of 2004
163
Sec 102(4) Securities Services Act, No. 36 of 2004
164
Sec 104, Securities Services Act, No. 36 of 2004
165
Sec 105, Securities Services Act, No. 36 of 2004
166
Sec 1(1) and 1(4), Financial Advisory and Intermediary Services Act, 2002
167
Sec 1(1) and 1(2), Financial Advisory and Intermediary Services Act, 2002
168
Sec 1(1) and 6(3), Financial Advisory and Intermediary Services Act, 2002
169
Par 1, Determination of Fit and Proper Requirements for Financial Services Providers; Par 2.1 Code of Conduct
for Discretionary FSPs read with Par 2.1 Code of Conduct for Administrative FSPs.
170
Section 2.1 Chapter II Notice on Codes of Conduct for Administrative and Discretionary FSP’s, 2003 as
amended by the Notice on Codes of Conduct for Administrative and Discretionary FSP’s Amendment Notice,
2007 Government Notice 30228 dated 29 August 2007
171
Par 2, Determination of Fit and Proper Requirements for Financial Services Providers
172
Exemption of Financial Services Providers as regards Representatives, Board Notice 95 of 2003
173
Par 4, Determination of Fit and Proper Requirements for Financial Services Providers
174
Par 5, Determination of Fit and Proper Requirements for Financial Services Providers
175
Sec 8(1), Financial Advisory and Intermediary Services Act, 2002
176
Sec 13(1), Financial Advisory and Intermediary Services Act, 2002
177
Sec 8(1) and 6(3) and (4), Financial Advisory and Intermediary Services Act, 2002g
178
FSB Application Form
179
Sec 2, Determination of the Procedure for Approval of Key Individuals
180
Sec 8(4)(b), Financial Advisory and Intermediary Services Act, 2002 and Par 2, Determination of the Procedure
for Approval of Key Individuals
181
Sec 17, Financial Advisory and Intermediary Services Act, 2002; Chapter IV of Regulations13 June 2004 and
Par 2, Criteria and Guidelines for the Approval of Compliance Officers.
182
Sec 15 and 16, Financial Advisory and Intermediary Services Act, 2002
183
Par 1(2), General Code of Conduct
184
Par 2, General Code of Conduct
185
Par 3(1)(a), General Code of Conduct
186
Par 3(1)(b) and (c), General Code of Conduct
187
Par 3(1)(d), General Code of Conduct
188
Par 3(1)(e), General Code of Conduct
189
Par 3(1)(f), General Code of Conduct
190
Par 3(2), General Code of Conduct
191
Par 3(3), General Code of Conduct
192
Par 6, General Code of Conduct
193
Par 4(3) and (4), General Code of Conduct
194
Par 7(2), General Code of Conduct
195
Par 7(3), General Code of Conduct
196
Par 4(1), General Code of Conduct
197
Par 4(1), General Code of Conduct
198
Par 5, General Code of Conduct
199
Par 7(1), General Code of Conduct
200
Par 8(1), General Code of Conduct
201
Par 8(2), General Code of Conduct
202
Par 8(3), General Code of Conduct
203
Par 8(4)(a), General Code of Conduct
204
Par 8(4)(b), General Code of Conduct

101
205
Par 9, General Code of Conduct
206
Par 10(1), General Code of Conduct
207
Par 10(1), General Code of Conduct
208
Par 10(3g), General Code of Conduct
209
Par 11, General Code of Conduct
210
Par 12, General Code of Conduct
211
Par 13, General Code of Conduct
212
Par 14(1), General Code of Conduct
213
Par 14(2) and (3), General Code of Conduct
214
Par 15(1), General Code of Conduct
215
Par 15(2), General Code of Conduct
216
Par 15(3), General Code of Conduct
217
Par 15(5), General Code of Conduct
218
Par 16(2), General Code of Conduct
219
Par 17, General Code of Conduct
220
Par 18, General Code of Conduct
221
Par 19(1)(a), General Code of Conduct
222
Par 19(1)(b), General Code of Conduct
223
Par 19(1)(c), General Code of Conduct
224
Par 19(1)(c), General Code of Conduct
225
Par 19(1)(d), General Code of Conduct
226
Par 19(1)(d), General Code of Conduct
227
Par 19(2), General Code of Conduct
228
Par 20(a), General Code of Conduct
229
Par 20(b and (c), General Code of Conduct
230
Par 21, General Code of Conduct
231
Par 4(a), Code of Conduct for Discretionary FSPs
232
Par 4(b), Code of Conduct for Discretionary FSPs
233
Par 5(1), Code of Conduct for Discretionary FSPs
234
Par 5(2) and (3), Code of Conduct for Discretionary FSPs
235
Par 5(4), Code of Conduct for Discretionary FSPs
236
Par 6(1) and (2), Code of Conduct for Discretionary FSPs
237
Par 6(3), Code of Conduct for Discretionary FSPs
238
Par 3(1) and (2), Code of Conduct for Discretionary FSPs
239
Par 3(3), Code of Conduct for Discretionary FSPs
240
Par 8, Code of Conduct for Discretionary FSPs
241
Par 8, Code of Conduct for Discretionary FSPs
242
Section 2.1 Chapter II Notice on Codes of Conduct for Administrative and Discretionary FSP’s, 2003 as
amended by the Notice on Codes of Conduct for Administrative and Discretionary FSP’s Amendment Notice,
2007 Government Notice 30228 dated 29 August 2007
243
Section 2.1, Chapter II Notice on Codes of Conduct for Administrative and Discretionary FSP’s, 2003 as
amended by the Notice on Codes of Conduct for Administrative and Discretionary FSP’s Amendment Notice,
2007 Government Notice 30228 dated 29 August 2007
244
Section 2.1 Chapter II Notice on Codes of Conduct for Administrative and Discretionary FSP’s, 2003 as
amended by the Notice on Codes of Conduct for Administrative and Discretionary FSP’s Amendment Notice,
2007 Government Notice 30228 dated 29 August 2007
245
Section 2.1 Chapter II Notice on Codes of Conduct for Administrative and Discretionary FSP’s, 2003 as
amended by the Notice on Codes of Conduct for Administrative and Discretionary FSP’s Amendment Notice,
2007 Government Notice 30228 dated 29 August 2007
246
Section 8A.1 Part III, Chapter II Notice on Codes of Conduct for Administrative and Discretionary FSP’s, 2003 as
amended by the Notice on Codes of Conduct for Administrative and Discretionary FSP’s Amendment Notice,
2007 Government Notice 30228 dated 29 August 2007
247
Section 8A.3 read with section 5.2 of Chapter II Notice on Codes of Conduct for Administrative and
Discretionary FSP’s, 2003 as amended by the Notice on Codes of Conduct for Administrative and Discretionary
FSP’s Amendment Notice, 2007 Government Notice 30228 dated 29 August 2007

102
248
Section 8A.3 read with section 5.2 of Chapter II Notice on Codes of Conduct for Administrative and
Discretionary FSP’s, 2003 as amended by the Notice on Codes of Conduct for Administrative and Discretionary
FSP’s Amendment Notice, 2007 Government Notice 30228 dated 29 August 2007
249
Section 8A.3 and 8A.4 of Part III, Chapter II Notice on Codes of Conduct for Administrative and Discretionary
FSP’s, 2003 as amended by the Notice on Codes of Conduct for Administrative and Discretionary FSP’s
Amendment Notice, 2007 Government Notice 30228 dated 29 August 2007
250
Par 1, Specific Code of Conduct for FSPs and Representatives conducting Short-term Deposit-Taking Business
251
Par 6, Specific Code of Conduct for FSPs and Representatives conducting Short-term Deposit-Taking Business
252
Par 7(a) and (b), Specific Code of Conduct for FSPs and Representatives conducting Short-term Deposit-Taking
Business
253
Par 7(c), Specific Code of Conduct for FSPs and Representatives conducting Short-term Deposit-Taking
Business
254
Par 8, Specific Code of Conduct for FSPs and Representatives conducting Short-term Deposit-Taking Business
255
Par 9, Specific Code of Conduct for FSPs and Representatives conducting Short-term Deposit-Taking Business
256
Par 1, Code of Conduct for FSPs involved in Forex Investment Business Notice 37 of 2002
257
Chapter VI, Regulations
258
Sec 3, Financial Institutions (Protection of Funds) Act, No 28 of 2001
259
Sec 3, Financial Institutions (Protection of Funds) Act, No 28 of 2001
260
Sec 2, Financial Institutions (Protection of Funds) Act, No 28 of 2001
261
Sec 5(1), Financial Institutions (Protection of Funds) Act, No 28 of 2001
262
Sec 5(1), Financial Institutions (Protection of Funds) Act, No 28 of 2001
263
Sec 5(2) and (3), Financial Institutions (Protection of Funds) Act, No 28 of 2001
264
Sec 5(4), Financial Institutions (Protection of Funds) Act, No 28 of 2001
265
Sec 6(1) and (2), Financial Institutions (Protection of Funds) Act, No 28 of 2001
266
Sec 6(3), Financial Institutions (Protection of Funds) Act, No 28 of 2001
267
Sec 8(1), Financial Institutions (Protection of Funds) Act, No 28 of 2001
268
Sec 9(1), Financial Institutions (Protection of Funds) Act, No 28 of 2001
269
Sec 9(2), Financial Institutions (Protection of Funds) Act, No 28 of 2001
270
Sec 9(6), Financial Institutions (Protection of Funds) Act, No 28 of 2001
271
Sec 10, Financial Institutions (Protection of Funds) Act, No 28 of 2001
272
Sec 19(1), (2) and (3), Financial Advisory and Intermediary Services Act, 2002
273
Sec 17(1) and (2), Financial Advisory and Intermediary Services Act, 2002
274
Sec 17(3), Financial Advisory and Intermediary Services Act, 2002
275
Reg 5(1) of the Regulations
276
Reg 5(2) and (3) of the Regulations
277
Sec 17(1), Financial Advisory and Intermediary Services Act, 2002
278
Sec 20, Financial Advisory and Intermediary Services Act, 2002
279
Sec 1, Financial Institutions (Protection of Funds) Act, No 28 of 2001
280
Sec 2, Financial Institutions (Protection of Funds) Act, No 28 of 2001
281
Sec 3, Financial Institutions (Protection of Funds) Act, No 28 of 2001
282
Sec 4 (1), Financial Institutions (Protection of Funds) Act, No 28 of 2001

103