Key Individual Categories II and IIA

Key Individual Categories II and IIA

MODULE 2

The role of the independent nominee

This chapter covers the following criteria:

KNOWLEDGE CRITERIA
Describe the obligations and requirements regarding the use of nominee companies.
Explain the purpose of the Nominee Company.
Describe the duties the Nominee Company is responsible for.
SKILLS CRITERIA
Verify that there are processes in place to check that the Independent Nominee Company executes its responsibilities towards the Category II and IIA FSP’s.
Confirm that the Independent Nominee complies with its duties.
Check that any nominee companies used have been approved by the FSP in terms of the nominee policy.
Confirm that the reports concerning the nominee company are provided timeously to the FSB.

In terms of FAIS and subordinate legislation thereto, a Discretionary and/or Hedge Fund FSP may only act in that capacity if approved by the Registrar. The subordinate legislation goes further to prescribe that approval can only be granted by the Registrar if the applicant (being the proposed FSP) has a nominee. The purpose of this section is to look at the qualifying criteria that have to be satisfied in order for an FSP to have its Nominee approved.

2.1 PURPOSE OF INDEPENDENT NOMINEE

1.1.1Nature and function

In terms of Chapter V of the Regulations to FAIS (“the Regulations”) the concept of the post-FAIS Independent Nominee Company (“the Nominee”) was introduced for Discretionary FSP’s. Section 6 of the Regulations prescribes that:

1)The functions of the nominee of a Discretionary FSP must be limited to its object and to such other functions as may be necessary to achieve the said object. The object of a nominee is to hold assets on behalf of investors so that any risks associated with the Discretionary FSP are withheld from those assets. In essence, it is a ring-fencing mechanism that allows for the protection of investor’s assets in the event of the Discretionary FSP falling into financial difficulties.

2)A Discretionary FSP must, prior to obtaining authorisation, apply to the Registrar for approval of its nominee. Hence the Discretionary FSP may not exist without its duly approved nominee.

3)The memorandum and articles of association of the nominee company must preclude it from incurring any liabilities other than those to persons on whose behalf it holds assets and, if any other liabilities are incurred in the name of the nominee company, the Discretionary FSP shall be liable to meet them.

The nominee must enter into an agreement with the Discretionary FSP in terms of which the provider must pay all expenses for and incidental to its formation, activities, management and liquidation, unless the memorandum and articles of association of the nominee already provide for such an obligation.

The Registrar published Board Notice 63 of 2007 (“BN63”) on 25 May 2007. BN63 prescribes the requirements imposed by the FSB for nominees to operate in South Africa in respect of:

1. the Registrar of Pension Funds;
2. the Registrar of Long-term Insurance;
3. the Registrar of Short-term Insurance;
4. the Registrar of Security Services Act; and
5. the Registrar of Financial Services Providers.

Section 1 of BN63 reiterates the principles laid down in the Regulations in that nominees who wish to register or hold any assets of long-term insurers, short-term insurers or pension funds, the independent nominee of an administrative and discretionary financial services provider who wishes to hold assets on behalf of long-term insurers, short-term insurers, pension funds or hold clients’ securities in the Strate environment, or any other independent nominee that wishes to hold securities in terms of Section 36(2) of the Securities Services Act, 2004 (Act No 36 of 2004) require the prior written approval of the Registrar of Long-term insurance, the Registrar of Short-term Insurance, the Registrar of Pension Funds, the Registrar of Financial Services Providers or the Registrar of Securities Services, as the case may be.

As stated above the executive officer and deputy executive officer of the FSB are appointed as these Registrars and therefore any approval will be administered by the FSB. It is important to note that BN63 prescribes specific requirements for those Nominees wanting to hold assets on behalf of investors in the Strate environment. BN 63 prescribes further requirements that independent nominees have to satisfy in order to operate in the capacity as independent nominees in South Africa.

2.1.2Independent Nominee Requirements (BN63)

A nominee must –

1. be a registered company under the Companies Act, 1973 (Act No 61 of 1973);
2. be wholly-owned by a holding company. In practice this holding company is most often the Discretionary FSP although the requirements are not prescriptive in this regard provided that the holding company qualifies with the criteria stipulated in BN63 (as detailed in 1-8 below). What is required is that it be wholly-owned by a holding company and not have natural persons as shareholders;
3. have adequate insurance against loss through fire, theft and other disasters in place for trust assets held by the independent nominee as well as fidelity guarantee cover. (It is the responsibility of the holding company to put this in place); and
4. conclude a written agreement with each pension fund, short-term insurer, and long-term insurer whose assets it will hold and the agreement should comply with the minimum requirements as required by the Registrar concerned.

2.1.3Holding Company Requirements

As stated above, the independent nominee may not have a natural person as a shareholder. The Nominee must be wholly-owned by –

1. a long-term or short-term insurer as defined in Section 1 of the Long-term Insurance Act, 1998 (Act No 52 of 1998) and Section 1 of the Short-term Insurance Act, 1998 (Act No 53 of 1998) respectively; or
2. an authorised user in terms of the Securities Services Act, 2004 (Act No 36 of 2004) ; or
3. a bank or a bank controlling company as defined in Section 1 of the Banks Act, 1990 (Act No 94 of 1990); or
4. a Discretionary or Administrative FSP as approved in terms of Section 7 of FAIS; or
5. an administrator registered in terms of Section 13B of the Pension Funds Act, 1956 (Act No 24 of 1956) where the exclusive object of its Nominee is the holding of pension fund assets; or
6. a participant of a Central Securities Depository licensed in terms of the Securities Services Act, 2004 (Act No 36 of 2004); or
7. a central securities depository licensed in terms of the Securities Services Act, 2004 (Act No36 of 2004) ; or
8. an exchange licensed in terms of the Securities Services Act, 2004 (Act No 36 of 2004).

The holding company must also, to the satisfaction of the Registrar concerned, demonstrate that it –

a)is fit and proper to own an independent nominee for purposes of taking title of assets on behalf of long-term insurers, short-term insurers, pension funds or others and hold such assets in trust and in safe custody on their behalf;

b)has a culture and operational structure which evidence a commitment to effective control by executive management and the board of directors over all aspects of the business of the independent nominee and that demonstrates a zero tolerance to management override of controls;

c)has evidence of a commitment to the employment and retention of adequate numbers of suitably qualified personnel of integrity and the ongoing education of staff in relevant disciplines;

d)has evidence of a documented system of internal controls which ensures that its independent nominee is effectively run, that the assets of clients are safeguarded and segregated and the records of the independent nominee accurately reflect the information which they purport to present;

e)has evidence of appropriately documented procedures to exclude unauthorised access to critical systems, the thorough testing of all new proprietary systems and the continuity of operations of all critical applications of its independent nominee, including disaster recovery and a business continuity plan;

f)has adequate and prospective financial resources represented by a minimum of R3 million equity capital which shall be maintained at all times; and

g)has an appropriate documented system of risk management to provide substantial assurance of continuity of the business of its independent nominee for the foreseeable future.

Where the holding company has outsourced the control over the operation of the Nominee register to another company, that outsourced company must, to the satisfaction of the Registrar, demonstrate that it has met the requirements listed in (a) to (g) above.Where the maintenance of the register has been outsourced, the Independent Nominee has the obligation to advise the clients of the outsourcing arrangement.

2.2 DUTIES OF INDEPENDENT NOMINEE

2.2.1 Independent Nominee Definition (BN63)

The Securities Services Act, 2004 (Act No 36 of 2004), defines a nominee to mean “a person that acts as the registered holder of securities or an interest in securities on behalf of other persons”.

In all instances detailed in this publication, a nominee refers to any entity that holds assets in its own name on behalf of the beneficial owner (i.e. the nominee is not the beneficial owner of these assets). The main duties of the independent nominee are therefore to hold the assets on behalf of the beneficial owners and to protect the assets from claims by creditors of the FSP.

2.2.2Ongoing obligations

Approved independent nominees shall annually submit to the FSB:

1. audited financial statements; and
2. an audit report, within six months of the financial year-end of the company to the FSB, setting forth whether any assets held on behalf of any other person in safe custody are in possession of the nominee and properly accounted for.

Should the nominee fail to submit the above and, before the expiry of that period, also not apply in writing for an extension of time within which to submit the statements, the FSB may withdraw its approval with immediate effect on the conditions as prescribed by the Registrar concerned.

A declaration by the holding company of the independent nominee in the format as prescribed in Clause 12 of BB 63 must accompany the annual financial statements of the independent nominee.

The FSB retains the right to withdraw an approval at any time should the independent nominee, its holding company or the company to which the control over the nominee register has been outsourced fail to comply with the FSB and Strate requirements.

Members of the JSE, BESA, participants and their independent nominees need only to comply with clause 7 of the requirements imposed by the FSB for independent nominees to operate in South Africa if they hold securities on behalf of either pension funds or long and short-term insurers.

Summary

In this chapter we dealt with the relevance and importance of the nominee in the FSP’s context.

In this and the previous chapter we explained that the FSP could not act in the capacity as FSP unless prior approval is granted by the Registrar.

We considered the definition and requirements of nomineesas contained in BN63 and the Regulations to FAIS.

We also considered the duties and obligations of the nominee.

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