South Africa: Financial Sector Assessment Program-Detailed Assessment of Implementation on the IOSCO Objectives and Principles of Securities Regulation

International Monetary Fund. Monetary and Capital Markets Department

doi:10.5089/9781498390866.002.A001

South Africa

Financial Sector Assessment Program-Detailed Assessment of Implementation on the IOSCO Objectives and Principles of Securities Regulation

Author: International Monetary Fund. Monetary and Capital Markets Department

Publication Date:: 03 Mar 2015

eISBN:: 9781498390866

Language:: English

Keywords:: ISCR; CR; hedge fund; The JSE; executive officer; JSE rule; market infrastructure; material information; financial year; money market; insider trading; target company

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This paper discusses findings of the Detailed Assessment of Implementation on the IOSCO (International Organization of Securities Commissions) Objectives and Principles of Securities Regulation in South Africa. Although South Africa’s level of implementation of the IOSCO principles is complete in several areas, there is room for enhancement. The legal framework is robust and provides the authorities with broad supervisory, investigative, and enforcement powers. There are arrangements for on-site and off-site monitoring of regulated entities. The powers to cooperate with domestic and foreign counterparts are extensive. Accounting and auditing standards are high, as is the disclosure regime that applies to listed companies in practice.

Abstract

Introduction

1. An assessment of the level of implementation of the IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles) was conducted in South Africa from May 6 to 23, 2014. The assessment was made as part of the IMF FSAP by Eija Holttinen, Monetary and Capital Markets Department, IMF and Tanis MacLaren, external expert working for the IMF. The previous IOSCO assessment of South Africa was conducted in 2010.

Information and Methodology Used for Assessment

2. The assessment was made on the basis of the IOSCO Principles approved in 2010 and the Assessment Methodology adopted in 2011. As has been the standard practice, Principle 38 was not assessed due to the existence of separate standards for securities settlement systems and central counterparties.

3. The IOSCO Assessment Methodology requires that assessors not only look at the legal and regulatory framework in place, but also at how it has been implemented in practice. The ongoing global financial crisis has reinforced the need for assessors to make a judgment about supervisory and other operational practices and to determine whether they are sufficiently effective. Among other things, such a judgment involves a review of the inspection programs for different types of supervised entities, the cycle, scope and quality of inspections, as well as how the relevant authorities follow up on findings, including by using enforcement actions.

4. The assessment was based on several sources. These comprise (i) a self-assessment and additional written responses prepared by the authorities; (ii) reviews of the relevant legislation and regulations; (iii) meetings with the management and staff of the FSB, the Company and Intellectual Property Commission (CIPC), the IRBA, the National Prosecuting Authority (NPA) and the South Africa Police Services (SAPS); and (iv) meetings with market infrastructures and market participants, including the Johannesburg Stock Exchange (JSE), Strate (Pty) Ltd (Strate), the Association for Savings and Investment South Africa (ASISA), the Financial Intermediaries Association of Southern Africa, securities brokers, fund management companies, asset managers, issuers, an audit firm, and a credit rating agency (CRA).

5. The assessors want to thank the South African authorities and market participants for their cooperation and willingness to share information. The views of authorities and market participants on the current status and the best way forward for the regulation and supervision of the South African securities markets provided an essential input to the conclusions of the mission. In the organizational side, our particular thanks go to Annah Manganyi of the FSB.

Institutional and Market Structure—Overview

A. Regulatory Structure

6. The securities regulatory and supervisory responsibilities in South Africa are divided among several public authorities and market infrastructures. While the FSB is responsible for supervising collective investment scheme (CIS) managers and exchanges, the supervisory responsibility for market intermediaries is divided between the FSB and the Johannesburg Stock Exchange (JSE). The FSB has no role in issuer supervision, which is undertaken by the JSE for listed companies and by the Department of Trade and Industry’s (DTI) CIPC for unlisted companies. Audit oversight is the responsibility of IRBA. The functions and powers of the FSB and the Registrar are set out in the Financial Services Board Act (FSB Act) and in various sectoral Acts, such as the Financial Markets Act (FMA) and the Collective Investment Schemes Control Act (CISCA). In his capacity as the Executive Officer of the FSB, the Executive Officer acts as the Registrar of CIS, Securities Services, Credit Rating Agencies and Financial Services Providers under the respective sectoral Acts.

7. In addition to the JSE, other market infrastructures are also obliged to undertake certain self-regulatory responsibilities under the FMA. Strate, the South African central securities depository (CSD) for listed equity securities and government and corporate debt securities, is a market infrastructure licensed under the FMA. Two clearing houses have been licensed by the FSB: Strate (for bonds) and Safex Clearing Company (Pty) Ltd (SAFCOM) (for derivatives). The self-regulatory responsibilities of Strate are more limited than those of the JSE, and relate to monitoring and disciplining its participants’ compliance with the FMA and its own rules and directives.¹

8. The CIPC and JSE share the responsibility for issuer regulation, supervision and enforcement. The CIPC is responsible for the incorporation and registration of all companies (including listed and non-listed public companies) in South Africa. It is also responsible for monitoring public companies’ compliance with the Companies Act disclosure requirements. The JSE through its Listing Requirements regulates initial and periodic disclosure requirements for listed issuers. The Takeover Regulation Panel (TRP), created by the Companies Act, has the authority to enforce South African laws concerning mergers, acquisitions and changes in corporate control. Under the Companies Act, the TRP is a separate body from the DTI with specified responsibilities.

9. The South African Reserve Bank (SARB) has limited securities supervisory responsibilities. Banks have to be authorized as financial services providers (FSPs), if they provide financial services requiring a license under the Financial Advisory and Intermediary Services Act (FAIS Act). In such cases the supervisory responsibilities are divided between the FSB and SARB, with the FSB being responsible for supervising and enforcing compliance with the FAIS Act. Investment banks’ merchant banking services to clients other than pension funds and natural persons have been exempted from the FAIS Act; as such, the SARB has regulatory responsibility for such exempted functions.

New legislation

10. Since the last IOSCO assessment, two new relevant Acts have come into force. On June 3, 2013, the FMA replaced the Securities Services Act (SSA). The FMA primarily focuses on the licensing and regulation of market infrastructures (exchanges, CSDs, clearing houses and trade repositories) and on the prohibition of insider trading and other market abuses. Further, the FMA provides a framework for regulating over-the-counter (OTC) derivatives in South Africa under regulations that can be issued by the Minister of Finance. The Credit Rating Services Act (CRSA) came into effect on April 15, 2013. This Act introduced a framework for the registration and supervision of credit rating agencies in South Africa.

11. The General Amendment Act,² which came into force on February 28, 2014 also introduced some relevant regulatory changes by amending all the Acts applicable to the FSB activities. Among other changes, it aligned the supervisory powers of the Registrar, provided for enhanced protection of information and sharing of information provisions, clarified and extended the consumer education and protection mandate of the FSB, and extended the Registrar’s powers to act swiftly to prevent the failure of any financial institution.

B. Market Structure

Market infrastructures

12. The JSE is the only securities exchange in South Africa. It is a public company listed on the JSE main list.³ SAFCOM, a wholly-owned subsidiary of the JSE, clears JSE derivatives transactions. The JSE manages the pre-settlement process for equities trades and can require margin to cover open positions. Settlement of equity and bond trades takes place at Strate that is also the CSD for both markets. Strate is jointly owned by the JSE (44.6 percent) and the four largest South African banks each owning 12–15 percent.⁴

13. Key market information on the most important products traded on the JSE is provided in the following table:

Table 1.

Key Market Information

Sources: FSB and JSE.

Table 1.

Key Market Information

	12/2011	12/2012	12/2013
Shares
Number of listed shares	406	402	389
Market capitalization (billion USD)	1,175	988	1,015
Market capitalization as percent of GDP	191.3	267.09	291.97
Market capitalization of top 10 issuers (billion USD)	414	474	546
New listings	16	14	13
Annual turnover (billion USD)	454	419	409
Annual turnover of top 10 issuers (billion USD)	229	198	186
Average daily trading volume (number of shares)	287,019,977	247,374,883	255,567,541
Average daily turnover (million USD)	1,823	1,674	1,635
Bonds
Number of listed bonds	135	152	133
Market capitalization (billion USD)	184	221	188
Market capitalization as percent of GDP	50.71	59.60	54.10
New listings	732	896	815
Annual turnover (billion USD)	2,883	2,801	2,001
Average daily turnover (million USD)	11,579	11,203	8,002
Equity derivatives
Annual turnover (billion USD)	598	515	520
Average daily trading volume (number of contracts)	597,682	547 894	869,886
Average daily turnover (million USD)	2,400	2,061	2,078
Number of exchange members	126	126	120
Interest rate and currency derivatives
Annual turnover (billion USD)	43	55	78
Average daily trading volume (number of contracts)	60,681	77,631	152,835
Average daily turnover (million USD)	171	220	314
Commodity derivatives
Annual turnover (billion USD)	55	62	50
Average daily trading volume (number of contracts)	11,513	11,998	11,153
Average daily turnover (million USD)	219	249	201

Sources: FSB and JSE.

Table 1.

Key Market Information

	12/2011	12/2012	12/2013
Shares
Number of listed shares	406	402	389
Market capitalization (billion USD)	1,175	988	1,015
Market capitalization as percent of GDP	191.3	267.09	291.97
Market capitalization of top 10 issuers (billion USD)	414	474	546
New listings	16	14	13
Annual turnover (billion USD)	454	419	409
Annual turnover of top 10 issuers (billion USD)	229	198	186
Average daily trading volume (number of shares)	287,019,977	247,374,883	255,567,541
Average daily turnover (million USD)	1,823	1,674	1,635
Bonds
Number of listed bonds	135	152	133
Market capitalization (billion USD)	184	221	188
Market capitalization as percent of GDP	50.71	59.60	54.10
New listings	732	896	815
Annual turnover (billion USD)	2,883	2,801	2,001
Average daily turnover (million USD)	11,579	11,203	8,002
Equity derivatives
Annual turnover (billion USD)	598	515	520
Average daily trading volume (number of contracts)	597,682	547 894	869,886
Average daily turnover (million USD)	2,400	2,061	2,078
Number of exchange members	126	126	120
Interest rate and currency derivatives
Annual turnover (billion USD)	43	55	78
Average daily trading volume (number of contracts)	60,681	77,631	152,835
Average daily turnover (million USD)	171	220	314
Commodity derivatives
Annual turnover (billion USD)	55	62	50
Average daily trading volume (number of contracts)	11,513	11,998	11,153
Average daily turnover (million USD)	219	249	201

Sources: FSB and JSE.

JSE members

14. The number of JSE members has remained stable over the past three years. While the JSE Equities Rules limit the activities of equity members principally to trading on that market, the derivatives rules allow a broader range of members, including banks, asset managers and end-users.

Table 2.

Number of JSE Members by Market

Source: JSE.Note: Number of clearing members in each category shown in brackets; there are no clearing members on the Equities Market.

Table 2.

Number of JSE Members by Market

	2011	2012	2013
Equities	63	61	62
Equity Derivatives	126 (9)	126 (9)	120 (10)
Interest Rate and Currency Derivatives	98 (6)	98 (6)	102 (6)
Commodity	100 (5)	100 (5)	92 (5)
Derivatives
Bonds	46	47	49

Source: JSE.Note: Number of clearing members in each category shown in brackets; there are no clearing members on the Equities Market.

Table 2.

Number of JSE Members by Market

	2011	2012	2013
Equities	63	61	62
Equity Derivatives	126 (9)	126 (9)	120 (10)
Interest Rate and Currency Derivatives	98 (6)	98 (6)	102 (6)
Commodity	100 (5)	100 (5)	92 (5)
Derivatives
Bonds	46	47	49

Source: JSE.Note: Number of clearing members in each category shown in brackets; there are no clearing members on the Equities Market.

15. Cross-border activities are limited. Direct membership by foreign firms on the JSE is prohibited, but the most active equities trading members are subsidiaries of foreign investment banks. Foreign subsidiaries of member firms are not regulated by the JSE, so it does not have routine access to information on these activities. Local members do not appear to have significant operations abroad.

16. The percentage of firms owned domestically other than by financial institutions is higher than in many jurisdictions. Domestic private or listed companies own almost half the firms (48 percent). Only 25 percent are owned by domestic banks or insurance companies and 27 percent are owned by foreign banks or investment firms.

Table 3.

Ownership of JSE Equity Firms

Source: JSE.

Table 3.

Ownership of JSE Equity Firms

Ownership of JSE Equity Firms	Percentage of Firms
Local banking groups	19
Local listed companies	8
Local insurance groups	6
Local private ownership	40
Foreign banking groups	19
Foreign investment firms	8

Source: JSE.

Table 3.

Ownership of JSE Equity Firms

Ownership of JSE Equity Firms	Percentage of Firms
Local banking groups	19
Local listed companies	8
Local insurance groups	6
Local private ownership	40
Foreign banking groups	19
Foreign investment firms	8

Source: JSE.

Other intermediaries

17. The number of FSPs licensed under the FAIS Act has been stable over the past four years. The only category where there has been any substantive change is Category I FSPs (chiefly advisers and financial planners), where the decline can be ascribed to consolidation and increasing costs of compliance.

Table 4.

Financial Services Providers Licensed under the FAIS Act (By Category)

Source: FSB.

Table 4.

Financial Services Providers Licensed under the FAIS Act (By Category)

Category of Firm	Number of Firms as of March 31
	2011	2012	2013	2014
Category I (Advisers and others)	11,322	10,333	10,164	10,152
Category II (Discretionary)	551	561	585	613
Category IIA (Hedge Fund)	117	118	117	113
Category III (Administrative)	23	22	24	27
Category IV	38	56	68	87
Total number of authorized firms	12,051	10,790	10,958	10,992

Source: FSB.

Table 4.

Financial Services Providers Licensed under the FAIS Act (By Category)

Category of Firm	Number of Firms as of March 31
	2011	2012	2013	2014
Category I (Advisers and others)	11,322	10,333	10,164	10,152
Category II (Discretionary)	551	561	585	613
Category IIA (Hedge Fund)	117	118	117	113
Category III (Administrative)	23	22	24	27
Category IV	38	56	68	87
Total number of authorized firms	12,051	10,790	10,958	10,992

Source: FSB.

CIS

18. The fund management industry is significant with assets under management (AUM) reaching ZAR 1.5 trillion (USD 161 billion) at the end of 2013. These AUM were managed by 48 fund managers in a total of 1,084 portfolios.⁵ Money market funds (MMFs) play an important role at 17 percent of total AUM in local CIS. In addition, unregulated hedge funds manage approximately USD 10 billion of assets, primarily in trusts and partnerships. The development of the AUM of the South African regulated CIS in the past three years is presented in the following table.

Table 5.

Assets under Management in South African Collective Investment Schemes (Billion ZAR)

Source: ASISA.

Table 5.

Assets under Management in South African Collective Investment Schemes (Billion ZAR)

		2011	2012	2013
South African Funds⁶		956	1,160	1,373
	Equity	214	253	297
	Multi-asset	283	394	627
	Real Estate	32	47	48
	Money Market	253	245	257
	Other Interest	173	221	143
	Bearing
Other Funds		55	70	126
Total		1,011	1,230	1,499

Source: ASISA.

Table 5.

Assets under Management in South African Collective Investment Schemes (Billion ZAR)

		2011	2012	2013
South African Funds⁶		956	1,160	1,373
	Equity	214	253	297
	Multi-asset	283	394	627
	Real Estate	32	47	48
	Money Market	253	245	257
	Other Interest	173	221	143
	Bearing
Other Funds		55	70	126
Total		1,011	1,230	1,499

Source: ASISA.

Preconditions for Effective Securities Regulation

19. The preconditions for effective securities regulation appear to be in place in South Africa. Foreign issuers can access the markets under similar conditions to domestic issuers, although this is infrequently done. The authorization process does not distinguish between domestic and foreign intermediaries that want to provide investment services.

20. The companies legislation is modern and includes provisions pertaining to the management of the company, rights of shareholders, duties of directors and officers, preparation and audit of company accounts and proceedings of shareholder meetings. Public companies, whether listed or unlisted, are subject to additional requirements in many areas, such as the accounting standards that must be used. The companies legislation contains detailed rules governing takeovers and related significant transactions. These have the force of law and are administered by the TRP. It also governs the liquidation, winding up and restructuring of insolvent companies. New provisions were introduced in the companies legislation that are designed to facilitate restructuring the finances and operations of companies thereby avoiding liquidation. The Insolvency Act⁷ is old, but has been updated to address issues such as the protection of customers’ assets held by intermediaries and giving the exchange and clearing systems the ability to close out or unwind incomplete transactions on the insolvency of a market participant.

21. There are dedicated independent tribunals and courts to deal with securities related matters. The judiciary’s independence is protected by the Constitution. There are specialized tribunals to facilitate the resolution of disputes, particularly over the exercise of regulatory powers. There is also a specialized commercial crimes court in place.

22. The accounting and auditing standards are of a high and internationally acceptable quality. All public companies, whether listed or unlisted, are required to prepare their financial statements in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board (IAASB) have been officially adopted.

Main Findings

23. Principles for the regulator. The securities regulatory and supervisory responsibilities are defined in various Acts and allocated to several authorities and market infrastructures. This applies also within the FSB, where different Divisions led by Deputy Registrars operate fairly independently. The complex division of responsibilities may lead to regulatory gaps and inconsistencies. Supervisory cooperation is intended to reduce the risks from the current fragmented model, and includes monitoring systemic risk and assessing the regulatory perimeter. However, optimal structures are not yet in place. The FSB has sufficient powers, authority and funding to meet its responsibilities; ensuring sufficient staff expertise in the transition to the new twin peaks structure is a challenge. There may be, at a minimum, an appearance of undue political or commercial influence in the FSB decision-making due to the current ministerial appointment process and certain governance arrangements. Some FSB internal policies and practices require strengthening and harmonizing across the organization. There are requirements in place to address conflicts of interest of supervised entities.

24. Principles for self-regulation. The JSE and Strate are under statutory obligations to undertake certain important self-regulatory responsibilities. Intermediary activities covered by their supervision are exempt from supervision by the FSB. The FSB assesses their self-regulatory capacity and arrangements upon licensing and on an ongoing basis. Conflicts of interest between the JSE’s and Strate’s commercial and self-regulatory functions must be managed in a manner satisfactory to the FSB.

25. Principles for enforcement. The FSB has broad powers to inspect, investigate and conduct surveillance of securities markets and activities. It has comprehensive powers to take action against anyone who breaches the laws it administers. The FSB’s risk-based system drives its supervisory program, which consists of off-site supervision and on-site inspections including full reviews, thematic reviews, and ad-hoc visits. The FSB’s Enforcement Committee (EC) has wide powers to impose sanctions and has obtained significant monetary sanctions. All sanctions imposed by the EC are published as are most others imposed by the Registrars. Criminal cases have been referred for investigation and prosecution, but very few have led to convictions. The record-keeping requirements under CISCA are minimal and the depth of CIS supervisory activities could be enhanced.

26. Principles for cooperation. The FSB has the ability and capacity to share information and cooperate with other authorities domestically and internationally. It is a signatory to many Memoranda of Understanding (MOUs), including the IOSCO Multilateral MOU (MMOU) and a number of bilateral MOUs with its international counterparts, and has a record of active cooperation. It participates in several domestic supervisory colleges involving financial groups. It does not require the permission of any outside authority to share or obtain information, nor does it require an independent interest in the matter to assist.

27. Principles for issuers. The initial disclosure requirements for securities to be listed on the JSE are satisfactory, as are most of the continuous disclosure requirements. There are significant gaps in both the initial and continuous disclosure requirements applicable to unlisted public companies, such as no requirement to provide public disclosure of material changes or prepare interim financial statements. The reporting deadlines for financial statements are slow by international standards, although in practice JSE issuers report more promptly. Public company shareholders are treated equitably with respect to voting and the ability to participate in any takeover bid. Full information must be provided for any takeover bid and the price paid to shareholders must be equivalent. There are extensive disclosure requirements for substantial shareholders, directors and other parties. All public companies in South Africa are required to prepare their financial statements in accordance with the IFRS as issued by the IASB. There are processes in place to review their financial statements to ensure standards are met.

28. Principles for auditors, credit rating agencies, and other information service providers. IRBA supervises auditors of public companies. Its responsibilities include the registration, inspection, and discipline of auditors. IRBA’s independence could be enhanced by a broadened funding model and limitations on the participation of auditors on its governance bodies. There are extensive requirements for auditors to be independent of the entities they audit; these requirements are enforced by IRBA. The financial statements of public companies must be audited in accordance with the ISA as issued by the IAASB. The regulatory framework for CRAs complies with international standards and the FSB is currently launching its CRA supervisory program. Analytical or evaluative service providers are not relied on and are not required to be authorized.

29. Principles for collective investment schemes. Regulatory requirements apply to registration of CIS managers and trustees and approval of the CIS deed. Regulation of conflicts of interest, record-keeping and conduct of business is insufficiently granular. The FSB’s intensity of supervision on CIS managers and trustees would benefit from enhancement. CIS are subject to investment limits and restrictions and managers are required to segregate client assets and funds. Related party custody is prohibited in practice. Limited public disclosure requirements apply to CIS and accounting standards for CIS are not specified. Valuation of CIS assets is largely regulated in a very general manner, leaving significant room for discretion and placing the responsibility on appropriate valuations on trustees. MMFs apply constant net asset value (NAV), and permit longer maturity investments than recommended by IOSCO. Hedge fund regulation complies with IOSCO minimum requirements through requirements imposed on the hedge fund manager as an FSP.

30. Principles for market intermediaries. A framework is in place at the FSB and JSE for licensing and applying on-going requirements on market intermediaries. License applicants are subject to a detailed review process to ensure they are fit and proper. There are initial and ongoing capital requirements for all types of intermediaries. The JSE’s capital formula is risk-based and timely reporting requirements apply. The JSE also directly monitors members’ capital daily. While certain categories of FSPs are subject to higher minimum capital amounts, the capital formula that applies to FSPs is not sensitive to the full range of risks and focuses on solvency and liquidity. Routine reporting by these firms is limited. Market intermediaries are required to have risk management and internal control systems in place, but there is no requirement that these systems be reviewed on behalf of the firm by an objective party. Regulations address proper protection of clients, including requirements for business conduct and segregation of clients’ assets. There is no written plan in place at the FSB or JSE for dealing with a firm failure, but each has extensive powers to intervene to protect clients and the market.

31. Principles for secondary markets. Exchanges are subject to comprehensive regulatory requirements as a condition for licensing and on an ongoing basis. The JSE, as the only exchange, is responsible for market surveillance and supervision of its members. The FSB performs detailed supervision of the JSE, conscious of the potential for regulatory capture arising from such close involvement. Sufficient pre- and post-trade transparency requirements apply under the JSE Rules. Insider trading, market manipulation and disclosure of false and misleading information are prohibited and subject to both administrative and criminal sanctions. Monitoring, investigations and enforcement require cooperation between several authorities. There has been only one criminal conviction for market abuse (fraud). The JSE closely monitors open positions in equity and derivatives markets and can take prompt action when needed. Covered short selling is permitted, but there are no disclosure requirements to the regulator or the market.

Summary Implementation of the IOSCO Principles

Table 6.

Summary Implementation of the IOSCO Principles—Detailed Assessments

Table 6.

Summary Implementation of the IOSCO Principles—Detailed Assessments

Principle	Grade	Findings
Principle 1. The responsibilities of the Regulator should be clear and objectively stated.	PI	The FSB’s and the Registrar’s regulatory and supervisory responsibilities are set out in the FSB Act, the Protection of Funds Act, the Inspection Act and the various sectoral Acts. Legislation also assigns specific responsibilities to the FSB Directorate of Market Abuse (DMA) and EC. Under the FMA, market infrastructures (the JSE and Strate) have important self-regulatory responsibilities. The Registrar has a wide exemption power both generally and in relation to specific entities and activities; the exercise of this power is not uniformly transparent across the FSB. The regulatory treatment of economically equivalent products has until recently been subject to limited regulatory attention. Responsibilities for certain sectors—in particular market intermediaries and issuers—are assigned to multiple authorities, creating a complex regulatory system with potential for gaps and inconsistencies. Cooperation arrangements aim at ensuring coordination.
Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers.	PI	The Minister of Finance has extensive powers to appoint and remove the FSB Board, Appeal Board and DMA members and the majority of the Executive Committee members. The current appointment process may create, at a minimum, the appearance of indirect political influence in the FSB decision-making. Similar issues relate to industry representation in some of the Board Committees. The FSB is subject to sufficient accountability to the Parliament and the Minister of Finance. It publishes an annual report, but there is no FSB wide approach to the publication of supervisory and enforcement measures. The FSB is funded through fees and levies from supervised entities, and its budget is approved by its Board. However, the Minister of Finance approves the fees of the FAIS Registrar, constituting an important part of the overall FSB budget. There are immunity provisions in the FSB Act to protect the FSB and its staff. Appropriate administrative procedures are applied to supervisory and enforcement duties.
Principle 3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.	BI	The FSB has sufficient powers, authority and funding to meet its responsibilities. While its staffing level is appropriate for its current functions, attracting and maintaining sufficient expertise in certain areas has been a challenge. The sectoral legislation assigns most of the decision-making powers to the Registrar. These powers are largely delegated to the Deputy Registrars and the Divisions managed by them, which has been conducive to a siloed approach to decision-making. Board Committees advise the Divisions in regulatory, enforcement and licensing decisions. The FSB is active in investor education.
Principle 4. The Regulator should adopt clear and consistent regulatory processes.	BI	Currently the sectoral Acts apply different requirements to the rulemaking processes, even though in practice approaches across Divisions have largely converged. A new framework governing the FSB’s rule-making process, including stakeholder consultation and publication, is under preparation. Both the FSB and market infrastructures apply appropriate consultation practices in their regulatory processes. The public access to legislation and FSB regulatory measures is incomplete, due to the need to subscribe to a commercial service for full access and the structure of the FSB website.
Principle 5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality.	BI	The FSB Staff Code of Conduct provides a framework for dealing with staff conflicts of interest. Under their contracts of employment, FSB employees must not hold or trade the shares of regulated entities. The Staff Code of Conduct is less restrictive in this regard, and it does not apply to the FSB Board, Board Committee and DMA members. The Code of Conduct is enforced. Strict confidentiality provisions apply to the FSB staff and management.
Principle 6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate.	PI	The FMA assigns specific responsibilities to the Registrar and the relevant market infrastructures for systemic risk monitoring and cooperation between the relevant authorities. Similar obligations are not included in the other Acts. The processes to monitor, mitigate and manage systemic risk are currently being established and enhanced. They include bilateral cooperation between the FSB and SARB and the multilateral activities of the Financial Sector Contingency Forum (FSCF). This forum includes representation from the public sector and market infrastructures and participants. So far there have been limited discussions on systemic risk possibly arising from securities markets beyond trading and post-trading systems.
Principle 7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly.	BI	Reflecting the FSB’s sectoral approach, the Divisions have primarily concentrated on their respective sectors when policing the regulatory perimeter. Lately, joint projects both within the FSB and between various authorities have been increasingly organized. However, the authorities are lacking a holistic process for reviewing the regulatory perimeter in relation to all products, entities and activities.
Principle 8. The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed.	BI	There are processes and requirements in place to address conflicts of interest and misalignment of incentives. The FSPs, JSE and JSE members, and Strate and Strate participants are subject to requirements on the avoidance, mitigation, management and disclosure of conflicts of interest.
Principle 9. Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.	FI	The FMA assigns wide self-regulatory responsibilities to market infrastructures. As the JSE and Strate undertake these responsibilities, their members and participants are largely exempted from direct FSB supervision. The FSB assesses market infrastructures’ self-regulatory capacity and arrangements, including through rule approval, reporting requirements, review of the JSE and Strate self-assessments and on-site visits. The JSE and Strate are subject to similar professional standards and procedural requirements as the FSB. There are specific requirements for managing the conflicts of interest between their commercial and self-regulatory functions.
Principle 10. The Regulator should have comprehensive inspection, investigation and surveillance powers.	BI	The FSB has broad powers to inspect, investigate and conduct surveillance of securities markets and activities. The record-keeping requirements under CISCA are minimal.
Principle 11. The Regulator should have comprehensive enforcement powers.	FI	The FSB has comprehensive powers to investigate and take action against anyone who breaches the legislation it administers. It also has powers to take action against FSPs for non-compliance with other laws.
Principle 12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.	BI	The FSB has a risk-based supervisory program, which consists of off-site supervision and on-site inspections including full reviews, thematic reviews, and ad-hoc visits. The EC has wide powers to impose sanctions and has proved successful in obtaining monetary sanctions, largely through settlements. All sanctions imposed by the EC are published as are most others imposed by the Registrars. Some criminal matters have been referred for investigation and prosecution, but very few have led to convictions.
Principle 13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts.	FI	The FSB has the ability and capacity to share information and cooperate with other authorities domestically and internationally. It can share confidential information with any other authority and has a record of active cooperation.
Principle 14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and nonpublic information with their domestic and foreign counterparts.	FI	The FSB is a signatory to many MOUs, including the IOSCO MMOU and a number of bilateral MOUs with its international counterparts. It participates in several domestic supervisory colleges involving financial groups.
Principle 15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries in the discharge of their functions and exercise of their powers.	FI	The FSB has shared information under the IOSCO MMOU. It does not require the permission of any outside authority to share or obtain information, nor does it require an independent interest in the matter to assist.
Principle 16. There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions.	PI	The initial disclosure requirements for a public offer of securities to be listed on the JSE are satisfactory, as are most of the continuous disclosure requirements thereafter. There are significant gaps in both the initial and continuous disclosure requirements applicable to unlisted public companies, such as no requirement to provide interim financial statements or make public disclosure of material changes. Unlisted entities (other than companies and CIS) offering their securities to the public do not appear to be required to make any disclosure, either initially or thereafter. The reporting deadlines for public company financial statements are slow by international standards, although in practice JSE issuers report more promptly.
Principle 17. Holders of securities in a company should be treated in a fair and equitable manner.	FI	Public company shareholders are treated equitably with respect to voting and the ability to participate in any takeover bid. Full information must be provided for any takeover bid and the price paid to shareholders must be equivalent. There are extensive disclosure requirements for substantial shareholders, directors and other parties.
Principle 18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.	FI	All public companies in South Africa are required to prepare IFRS compliant financial statements. The JSE has a process in place to review the listed company financial statements to ensure accounting standards are met. The CIPC has started a similar program for unlisted public companies. The IRBA also conducts periodic reviews.
Principle 19. Auditors should be subject to adequate levels of oversight.	PI	Auditors of public companies are subject to appropriate oversight. Auditors must register with the IRBA, a statutory body. Its responsibilities include registration, inspection, and discipline of auditors, as well as setting standards of professional competence, ethics, and conduct. Its independence from the profession could be strengthened. The resources at IRBA are not sufficient for the tasks assigned.
Principle 20. Auditors should be independent of the issuing entity that they audit.	BI	There are extensive requirements for auditors to be independent of the entities they audit. These requirements are enforced by IRBA. However, the obligations to disclose promptly a change of auditor are incomplete.
Principle 21. Audit standards should be of a high and internationally acceptable quality.	FI	The financial statements of public companies must be audited in accordance with the ISA as issued by the IAASB.
Principle 22. Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision.	BI	Credit ratings used for regulatory purposes must be issued or endorsed by authorized domestic or foreign CRAs. The CRSA and the Credit Rating Agency Rules implement the IOSCO Code of Conduct Fundamentals for CRAs. Four CRAs have been registered in South Africa, the last two in early May 2014. The FSB is implementing its supervisory plan.
Principle 23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them.	BI	Analytical or evaluative service providers are not relied upon to any significant degree. Research reports generally are issued only by JSE member firms, have limited circulation and limited impact in the jurisdiction. The provision of research alone would not constitute ‘advice’ under the FAIS Act or JSE Rules and therefore would not require specific authorization.
Principle 24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a CIS.	PI	CIS managers and trustees have to be registered under CISCA, and the Registrar verifies that CIS asset managers have been authorized under the FAIS Act. The registration of the CIS manager is conditional on the Registrar approving the CIS deed and any supplemental deeds. The FSB’s powers to supervise delegated activities were recently enhanced. Regulation of conflicts of interest, record-keeping and conduct of business is insufficiently granular. While CIS managers are subject to regular on-site visits, the depth of the reviews is not comparable to those applied to other FSB supervised entities. The FSB has not conducted on-site reviews of trustee activities.
Principle 25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.	BI	CISCA does not require any particular legal form for a CIS, but in practice all of them are unit trusts. Any changes to the deed are notified to investors as part of the requirement to obtain approvals for deed amendments. CIS are subject to investment limits and restrictions. CISCA includes segregation requirements for client assets and funds. The Registrar does not in practice permit a CIS manager’s related party to act as the trustee of its CIS, although CISCA does not appear to extend the prohibition beyond the manager’s parent company and subsidiaries. There are no specific requirements on the use of sub-custodians beyond the trustee maintaining full responsibility for delegated activities.
Principle 26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a CIS for a particular investor and the value of the investor’s interest in the scheme.	NI	There are very limited disclosure requirements for other CIS than CIS in property that are all listed and subject to the JSE requirements. For others, the deed provides some information required under Principle 26 following a standard template, but it is not required to be publicly disclosed. For non-listed CIS, there is currently no requirement for an offering document or equivalent, and managers of CIS in securities have been exempted from the CISCA content requirements for advertisements and the need to lodge advertisements with the Registrar. No specific accounting standards apply to CIS. Investors are required to receive an annual portfolio report.
Principle 27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a CIS.	NI	The requirements for valuing CIS assets are largely very general, and do not sufficiently address a situation where liquid market prices are not available. The deed is required to include only very limited provisions on how the CIS assets are to be valued. The trustee is obliged to ensure that unit prices are calculated in accordance with CISCA and the deed. MMF assets are valued at amortized cost, and the maximum maturities permitted for MMF assets are longer than recommended by IOSCO. CISCA requires CIS units to be subscribed and redeemed at unit NAV, and the circumstances enabling the suspension of redemptions are prescribed. There are no regulatory requirements on pricing errors.
Principle 28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight.	FI	The regulation of hedge funds currently relies on requiring the hedge fund asset manager to be authorized as an FSP. This complies with the IOSCO minimum requirement, although the hedge funds themselves are not regulated and there are no specific requirements on hedge fund administration. As FSPs, hedge fund managers are subject to sufficient prudential, conflict of interest and client asset protection requirements. They are supervised following the general risk-based approach to FSP supervision. Hedge fund investor disclosure requirements are prescribed.
Principle 29. Regulation should provide for minimum entry standards for market intermediaries.	FI	A framework is in place at the FSB for licensing and to apply on-going requirements for market intermediaries under the FAIS Act. Applicants are subject to detailed off-site reviews before licensing. On-site visits are routinely performed as part of the authorization process for the higher risk categories. The JSE has similar processes and standards in place for applicants and members.
Principle 30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.	PI	There are initial and ongoing capital requirements for all types of intermediaries. The capital formula that applies to JSE members is based on the EU Capital Adequacy Directive and extensive timely reporting requirements apply. The JSE also directly monitors equities members’ capital daily. The capital formula for FSPs is insufficiently risk-sensitive and focuses on solvency and liquidity. Certain categories of FSPs are subject to higher minimum amounts but these amounts do not vary based on the nature or size of positions. Routine reporting by these firms is limited.
Principle 31. Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters.	BI	Market intermediaries are required to have risk management and internal control systems. FSPs and JSE members’ auditors are required to report annually on the treatment of client assets at the firm. Otherwise there is no compulsory review on behalf of the firm of the internal controls by an objective party. There are regulations for proper protection of clients, including requirements for segregation of clients’ assets and business conduct rules, such as know your client and suitability. The rules regarding conflicts of interest and protection of client assets are extensive.
Principle 32. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.	BI	There is no written plan at the FSB for dealing with a failure of an FSP. However, the FSB has extensive powers to restrain conduct, to ensure clients’ assets are properly managed and to obtain relevant information. It has the authority to go to court to expeditiously appoint a curator for the insolvent firm. It has used these powers in practice. The JSE has no plan, but has extensive powers to deal with a failure. There are guarantee funds available in the event of losses at JSE member firms, but not for FSPs. FSPs are required to maintain professional indemnity and fidelity insurance. Where a failure has cross-border implications, information sharing MOUs are in place.
Principle 33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.	FI	Exchanges are required to be licensed, and the licensing criteria and process are set in detail in the FMA and a Board Notice. The only licensed exchange is the JSE, but the Registrar is analyzing some trading platforms operated by public companies making a market in their own shares to determine whether they should be licensed.
Principle 34. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.	FI	The JSE is responsible for market surveillance and supervising its members’ compliance with the FMA, the JSE Rules and the JSE Directives. The FSB itself does not conduct real-time market surveillance, but regularly reviews trading in JSE shares. It investigates improper market conduct referred by the JSE. The FSB attends all JSE Board, Board Committee and Advisory Committee meetings and reviews documents, reports and the JSE yearly self-assessment. On-site visits are also conducted. The FSB is conscious of the potential for regulatory capture arising from its close involvement with the JSE.
Principle 35. Regulation should promote transparency of trading.	FI	Sufficient pre- and post-trade transparency is required by the JSE Equities Rules. The rules contain limited exceptions on pre-trade transparency for hidden orders and certain off-order book trade types that comply with specific conditions. According to the JSE, most equities trading is undertaken through the central order book. All trades, including off order book ones, are subject to immediate post-trade transparency.
Principle 36. Regulation should be designed to detect and deter manipulation and other unfair trading practices.	BI	Insider trading, market manipulation and disclosure of false or misleading information are prohibited in the FMA. A front running prohibition applies to FSPs, whereas front running by exchange members is not specifically addressed. Market abuse is subject to both administrative and criminal sanctions. The potential for market abuse is monitored by the JSE that refers any suspicious activity to the FSB. Decisions on investigations and administrative enforcement actions are taken by the DMA and EC, respectively. Administrative sanctions have been imposed, but there has been only one criminal conviction for market abuse.
Principle 37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.	BI	The JSE closely monitors open positions in both equity and derivatives markets, and can take various actions, if a member is not able to meet its settlement obligations or post required margin. Default procedures are in place and disclosed through the JSE rules. Naked short selling is prohibited, and covered short selling is defined narrowly. There are no reporting requirements to the JSE, FSB or the market on short selling, and the JSE and the FSB do not undertake any particular surveillance of short selling.
Fully Implemented (FI), Broadly Implemented (BI), Partly Implemented (PI), Not Implemented (NI), Not Applicable (NA)

Table 6.

Summary Implementation of the IOSCO Principles—Detailed Assessments

Principle	Grade	Findings
Principle 1. The responsibilities of the Regulator should be clear and objectively stated.	PI	The FSB’s and the Registrar’s regulatory and supervisory responsibilities are set out in the FSB Act, the Protection of Funds Act, the Inspection Act and the various sectoral Acts. Legislation also assigns specific responsibilities to the FSB Directorate of Market Abuse (DMA) and EC. Under the FMA, market infrastructures (the JSE and Strate) have important self-regulatory responsibilities. The Registrar has a wide exemption power both generally and in relation to specific entities and activities; the exercise of this power is not uniformly transparent across the FSB. The regulatory treatment of economically equivalent products has until recently been subject to limited regulatory attention. Responsibilities for certain sectors—in particular market intermediaries and issuers—are assigned to multiple authorities, creating a complex regulatory system with potential for gaps and inconsistencies. Cooperation arrangements aim at ensuring coordination.
Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers.	PI	The Minister of Finance has extensive powers to appoint and remove the FSB Board, Appeal Board and DMA members and the majority of the Executive Committee members. The current appointment process may create, at a minimum, the appearance of indirect political influence in the FSB decision-making. Similar issues relate to industry representation in some of the Board Committees. The FSB is subject to sufficient accountability to the Parliament and the Minister of Finance. It publishes an annual report, but there is no FSB wide approach to the publication of supervisory and enforcement measures. The FSB is funded through fees and levies from supervised entities, and its budget is approved by its Board. However, the Minister of Finance approves the fees of the FAIS Registrar, constituting an important part of the overall FSB budget. There are immunity provisions in the FSB Act to protect the FSB and its staff. Appropriate administrative procedures are applied to supervisory and enforcement duties.
Principle 3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.	BI	The FSB has sufficient powers, authority and funding to meet its responsibilities. While its staffing level is appropriate for its current functions, attracting and maintaining sufficient expertise in certain areas has been a challenge. The sectoral legislation assigns most of the decision-making powers to the Registrar. These powers are largely delegated to the Deputy Registrars and the Divisions managed by them, which has been conducive to a siloed approach to decision-making. Board Committees advise the Divisions in regulatory, enforcement and licensing decisions. The FSB is active in investor education.
Principle 4. The Regulator should adopt clear and consistent regulatory processes.	BI	Currently the sectoral Acts apply different requirements to the rulemaking processes, even though in practice approaches across Divisions have largely converged. A new framework governing the FSB’s rule-making process, including stakeholder consultation and publication, is under preparation. Both the FSB and market infrastructures apply appropriate consultation practices in their regulatory processes. The public access to legislation and FSB regulatory measures is incomplete, due to the need to subscribe to a commercial service for full access and the structure of the FSB website.
Principle 5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality.	BI	The FSB Staff Code of Conduct provides a framework for dealing with staff conflicts of interest. Under their contracts of employment, FSB employees must not hold or trade the shares of regulated entities. The Staff Code of Conduct is less restrictive in this regard, and it does not apply to the FSB Board, Board Committee and DMA members. The Code of Conduct is enforced. Strict confidentiality provisions apply to the FSB staff and management.
Principle 6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate.	PI	The FMA assigns specific responsibilities to the Registrar and the relevant market infrastructures for systemic risk monitoring and cooperation between the relevant authorities. Similar obligations are not included in the other Acts. The processes to monitor, mitigate and manage systemic risk are currently being established and enhanced. They include bilateral cooperation between the FSB and SARB and the multilateral activities of the Financial Sector Contingency Forum (FSCF). This forum includes representation from the public sector and market infrastructures and participants. So far there have been limited discussions on systemic risk possibly arising from securities markets beyond trading and post-trading systems.
Principle 7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly.	BI	Reflecting the FSB’s sectoral approach, the Divisions have primarily concentrated on their respective sectors when policing the regulatory perimeter. Lately, joint projects both within the FSB and between various authorities have been increasingly organized. However, the authorities are lacking a holistic process for reviewing the regulatory perimeter in relation to all products, entities and activities.
Principle 8. The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed.	BI	There are processes and requirements in place to address conflicts of interest and misalignment of incentives. The FSPs, JSE and JSE members, and Strate and Strate participants are subject to requirements on the avoidance, mitigation, management and disclosure of conflicts of interest.
Principle 9. Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.	FI	The FMA assigns wide self-regulatory responsibilities to market infrastructures. As the JSE and Strate undertake these responsibilities, their members and participants are largely exempted from direct FSB supervision. The FSB assesses market infrastructures’ self-regulatory capacity and arrangements, including through rule approval, reporting requirements, review of the JSE and Strate self-assessments and on-site visits. The JSE and Strate are subject to similar professional standards and procedural requirements as the FSB. There are specific requirements for managing the conflicts of interest between their commercial and self-regulatory functions.
Principle 10. The Regulator should have comprehensive inspection, investigation and surveillance powers.	BI	The FSB has broad powers to inspect, investigate and conduct surveillance of securities markets and activities. The record-keeping requirements under CISCA are minimal.
Principle 11. The Regulator should have comprehensive enforcement powers.	FI	The FSB has comprehensive powers to investigate and take action against anyone who breaches the legislation it administers. It also has powers to take action against FSPs for non-compliance with other laws.
Principle 12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.	BI	The FSB has a risk-based supervisory program, which consists of off-site supervision and on-site inspections including full reviews, thematic reviews, and ad-hoc visits. The EC has wide powers to impose sanctions and has proved successful in obtaining monetary sanctions, largely through settlements. All sanctions imposed by the EC are published as are most others imposed by the Registrars. Some criminal matters have been referred for investigation and prosecution, but very few have led to convictions.
Principle 13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts.	FI	The FSB has the ability and capacity to share information and cooperate with other authorities domestically and internationally. It can share confidential information with any other authority and has a record of active cooperation.
Principle 14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and nonpublic information with their domestic and foreign counterparts.	FI	The FSB is a signatory to many MOUs, including the IOSCO MMOU and a number of bilateral MOUs with its international counterparts. It participates in several domestic supervisory colleges involving financial groups.
Principle 15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries in the discharge of their functions and exercise of their powers.	FI	The FSB has shared information under the IOSCO MMOU. It does not require the permission of any outside authority to share or obtain information, nor does it require an independent interest in the matter to assist.
Principle 16. There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions.	PI	The initial disclosure requirements for a public offer of securities to be listed on the JSE are satisfactory, as are most of the continuous disclosure requirements thereafter. There are significant gaps in both the initial and continuous disclosure requirements applicable to unlisted public companies, such as no requirement to provide interim financial statements or make public disclosure of material changes. Unlisted entities (other than companies and CIS) offering their securities to the public do not appear to be required to make any disclosure, either initially or thereafter. The reporting deadlines for public company financial statements are slow by international standards, although in practice JSE issuers report more promptly.
Principle 17. Holders of securities in a company should be treated in a fair and equitable manner.	FI	Public company shareholders are treated equitably with respect to voting and the ability to participate in any takeover bid. Full information must be provided for any takeover bid and the price paid to shareholders must be equivalent. There are extensive disclosure requirements for substantial shareholders, directors and other parties.
Principle 18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.	FI	All public companies in South Africa are required to prepare IFRS compliant financial statements. The JSE has a process in place to review the listed company financial statements to ensure accounting standards are met. The CIPC has started a similar program for unlisted public companies. The IRBA also conducts periodic reviews.
Principle 19. Auditors should be subject to adequate levels of oversight.	PI	Auditors of public companies are subject to appropriate oversight. Auditors must register with the IRBA, a statutory body. Its responsibilities include registration, inspection, and discipline of auditors, as well as setting standards of professional competence, ethics, and conduct. Its independence from the profession could be strengthened. The resources at IRBA are not sufficient for the tasks assigned.
Principle 20. Auditors should be independent of the issuing entity that they audit.	BI	There are extensive requirements for auditors to be independent of the entities they audit. These requirements are enforced by IRBA. However, the obligations to disclose promptly a change of auditor are incomplete.
Principle 21. Audit standards should be of a high and internationally acceptable quality.	FI	The financial statements of public companies must be audited in accordance with the ISA as issued by the IAASB.
Principle 22. Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision.	BI	Credit ratings used for regulatory purposes must be issued or endorsed by authorized domestic or foreign CRAs. The CRSA and the Credit Rating Agency Rules implement the IOSCO Code of Conduct Fundamentals for CRAs. Four CRAs have been registered in South Africa, the last two in early May 2014. The FSB is implementing its supervisory plan.
Principle 23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them.	BI	Analytical or evaluative service providers are not relied upon to any significant degree. Research reports generally are issued only by JSE member firms, have limited circulation and limited impact in the jurisdiction. The provision of research alone would not constitute ‘advice’ under the FAIS Act or JSE Rules and therefore would not require specific authorization.
Principle 24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a CIS.	PI	CIS managers and trustees have to be registered under CISCA, and the Registrar verifies that CIS asset managers have been authorized under the FAIS Act. The registration of the CIS manager is conditional on the Registrar approving the CIS deed and any supplemental deeds. The FSB’s powers to supervise delegated activities were recently enhanced. Regulation of conflicts of interest, record-keeping and conduct of business is insufficiently granular. While CIS managers are subject to regular on-site visits, the depth of the reviews is not comparable to those applied to other FSB supervised entities. The FSB has not conducted on-site reviews of trustee activities.
Principle 25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.	BI	CISCA does not require any particular legal form for a CIS, but in practice all of them are unit trusts. Any changes to the deed are notified to investors as part of the requirement to obtain approvals for deed amendments. CIS are subject to investment limits and restrictions. CISCA includes segregation requirements for client assets and funds. The Registrar does not in practice permit a CIS manager’s related party to act as the trustee of its CIS, although CISCA does not appear to extend the prohibition beyond the manager’s parent company and subsidiaries. There are no specific requirements on the use of sub-custodians beyond the trustee maintaining full responsibility for delegated activities.
Principle 26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a CIS for a particular investor and the value of the investor’s interest in the scheme.	NI	There are very limited disclosure requirements for other CIS than CIS in property that are all listed and subject to the JSE requirements. For others, the deed provides some information required under Principle 26 following a standard template, but it is not required to be publicly disclosed. For non-listed CIS, there is currently no requirement for an offering document or equivalent, and managers of CIS in securities have been exempted from the CISCA content requirements for advertisements and the need to lodge advertisements with the Registrar. No specific accounting standards apply to CIS. Investors are required to receive an annual portfolio report.
Principle 27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a CIS.	NI	The requirements for valuing CIS assets are largely very general, and do not sufficiently address a situation where liquid market prices are not available. The deed is required to include only very limited provisions on how the CIS assets are to be valued. The trustee is obliged to ensure that unit prices are calculated in accordance with CISCA and the deed. MMF assets are valued at amortized cost, and the maximum maturities permitted for MMF assets are longer than recommended by IOSCO. CISCA requires CIS units to be subscribed and redeemed at unit NAV, and the circumstances enabling the suspension of redemptions are prescribed. There are no regulatory requirements on pricing errors.
Principle 28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight.	FI	The regulation of hedge funds currently relies on requiring the hedge fund asset manager to be authorized as an FSP. This complies with the IOSCO minimum requirement, although the hedge funds themselves are not regulated and there are no specific requirements on hedge fund administration. As FSPs, hedge fund managers are subject to sufficient prudential, conflict of interest and client asset protection requirements. They are supervised following the general risk-based approach to FSP supervision. Hedge fund investor disclosure requirements are prescribed.
Principle 29. Regulation should provide for minimum entry standards for market intermediaries.	FI	A framework is in place at the FSB for licensing and to apply on-going requirements for market intermediaries under the FAIS Act. Applicants are subject to detailed off-site reviews before licensing. On-site visits are routinely performed as part of the authorization process for the higher risk categories. The JSE has similar processes and standards in place for applicants and members.
Principle 30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.	PI	There are initial and ongoing capital requirements for all types of intermediaries. The capital formula that applies to JSE members is based on the EU Capital Adequacy Directive and extensive timely reporting requirements apply. The JSE also directly monitors equities members’ capital daily. The capital formula for FSPs is insufficiently risk-sensitive and focuses on solvency and liquidity. Certain categories of FSPs are subject to higher minimum amounts but these amounts do not vary based on the nature or size of positions. Routine reporting by these firms is limited.
Principle 31. Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters.	BI	Market intermediaries are required to have risk management and internal control systems. FSPs and JSE members’ auditors are required to report annually on the treatment of client assets at the firm. Otherwise there is no compulsory review on behalf of the firm of the internal controls by an objective party. There are regulations for proper protection of clients, including requirements for segregation of clients’ assets and business conduct rules, such as know your client and suitability. The rules regarding conflicts of interest and protection of client assets are extensive.
Principle 32. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.	BI	There is no written plan at the FSB for dealing with a failure of an FSP. However, the FSB has extensive powers to restrain conduct, to ensure clients’ assets are properly managed and to obtain relevant information. It has the authority to go to court to expeditiously appoint a curator for the insolvent firm. It has used these powers in practice. The JSE has no plan, but has extensive powers to deal with a failure. There are guarantee funds available in the event of losses at JSE member firms, but not for FSPs. FSPs are required to maintain professional indemnity and fidelity insurance. Where a failure has cross-border implications, information sharing MOUs are in place.
Principle 33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.	FI	Exchanges are required to be licensed, and the licensing criteria and process are set in detail in the FMA and a Board Notice. The only licensed exchange is the JSE, but the Registrar is analyzing some trading platforms operated by public companies making a market in their own shares to determine whether they should be licensed.
Principle 34. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.	FI	The JSE is responsible for market surveillance and supervising its members’ compliance with the FMA, the JSE Rules and the JSE Directives. The FSB itself does not conduct real-time market surveillance, but regularly reviews trading in JSE shares. It investigates improper market conduct referred by the JSE. The FSB attends all JSE Board, Board Committee and Advisory Committee meetings and reviews documents, reports and the JSE yearly self-assessment. On-site visits are also conducted. The FSB is conscious of the potential for regulatory capture arising from its close involvement with the JSE.
Principle 35. Regulation should promote transparency of trading.	FI	Sufficient pre- and post-trade transparency is required by the JSE Equities Rules. The rules contain limited exceptions on pre-trade transparency for hidden orders and certain off-order book trade types that comply with specific conditions. According to the JSE, most equities trading is undertaken through the central order book. All trades, including off order book ones, are subject to immediate post-trade transparency.
Principle 36. Regulation should be designed to detect and deter manipulation and other unfair trading practices.	BI	Insider trading, market manipulation and disclosure of false or misleading information are prohibited in the FMA. A front running prohibition applies to FSPs, whereas front running by exchange members is not specifically addressed. Market abuse is subject to both administrative and criminal sanctions. The potential for market abuse is monitored by the JSE that refers any suspicious activity to the FSB. Decisions on investigations and administrative enforcement actions are taken by the DMA and EC, respectively. Administrative sanctions have been imposed, but there has been only one criminal conviction for market abuse.
Principle 37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.	BI	The JSE closely monitors open positions in both equity and derivatives markets, and can take various actions, if a member is not able to meet its settlement obligations or post required margin. Default procedures are in place and disclosed through the JSE rules. Naked short selling is prohibited, and covered short selling is defined narrowly. There are no reporting requirements to the JSE, FSB or the market on short selling, and the JSE and the FSB do not undertake any particular surveillance of short selling.
Fully Implemented (FI), Broadly Implemented (BI), Partly Implemented (PI), Not Implemented (NI), Not Applicable (NA)

Recommended Action Plan and Authorities’ Response

Table 7.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

Table 7.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

Principle	Recommended Action
Principle 1	• The authorities should ensure that the future legislation applicable to the new twin peaks structure harmonizes the regulatory, supervisory and enforcement responsibilities and powers across the sectors. The consistent implementation of these powers and responsibilities should be supported by an appropriate organizational structure and processes. • The FSB should ensure that sufficiently harmonized regulatory requirements are applied to economically equivalent products. • The FSB should make information on all the exemptions granted available on the official website, as required by Section 21 of the FSB Act.
Principle 2	• The authorities should ensure that the upcoming twin peaks legislation and the governance arrangements of the conduct and prudential authorities provide sufficient political and commercial independence to them. This includes introducing clear limitations on the reasons for the removal of the members of the authorities’ relevant governance bodies. • The government should remove the requirement for the Minister of Finance to approve the fees charged under the FAIS Act. • The FSB should develop an FSB wide policy for the publication of supervisory and enforcement measures.
Principle 3	• The authorities should ensure that the future twin peaks legislation and its implementation within the conduct authority support a more coordinated approach to supervision and decision making than currently. • The FSB should seek to maintain and attract sufficient expertise to the authority.
Principle 4	• The authorities should ensure that the code of norms and standards under section 18(3) of the FSB Act is finalized and published as soon as possible. • The authorities should harmonize the current requirements for the FSB’s rule-making processes across the various sectors. The processes should include appropriate, harmonized approaches to assessing the cost of compliance with regulation. • The FSB should improve public access to legislation and to its own regulatory measures by posting copies on the FSB website in an easily identifiable location and removing the need to subscribe to a commercial service.
Principle 5	• The FSB should align the requirements for the holding of and trading in securities in the contract of employment and Staff Code of Conduct and ensure that the restrictions apply to all securities, not only shares. • The FSB should apply appropriate securities holding and trading restrictions to all persons that may have access to confidential supervisory information, such as the FSB Board, Board Committee and DMA members.
Principle 6	• The FSB should develop holistic, organization wide arrangements for monitoring, mitigating and managing systemic risk possibly arising from securities markets, ensuring that the approach extends beyond the current focus on trading and post-trading systems. • The FSCF, FSOC and any dedicated macroprudential function to be established in the future should ensure that they adopt and maintain a broad approach to analyzing systemic risks, ensuring that those possibly arising from securities markets are sufficiently covered.
Principles 7, 8 and 23	• The authorities should ensure that that there is a sufficiently holistic process in place to ensure that products, entities and activities do not inadvertently fall outside the regulatory perimeter as a result of the current complex division of regulatory and supervisory responsibilities. • The FSB should consider putting in place an FSB-wide pro-active process to survey the marketplace to ensure issues of concern, such as emerging conflicts of interest, are identified and addressed early. • The FSB should ensure that the role of analysts and providers of other evaluative services is part of the overall perimeter of regulation review process.
Principle 10	• The authorities should consider imposing more detailed record-keeping requirements for CIS managers. • The CIS Registrar should have the same authority to demand any information from CIS managers as is in place under the FMA and FAIS Act, and CISCA should be amended accordingly.
Principle 11	• The FSB should ensure that the sanction publication practices of the CIS Division are aligned with those of other Divisions.
Principles 12 and 24	• The FSB, and particularly its Enforcement Unit, should continue to work on building cooperative arrangements with the criminal enforcement authorities. • The Registrar of CIS should enhance the depth of the on-site visits in CIS managers to align the approach with the processes applied by other Registrars and conduct on-site visits in CIS trustees.
Principles 16, 18 and 20	• The government should amend the Companies Act provisions to shorten the deadline for publishing audited annual financial statements to 120 days or less. The Companies Act should also be amended to require publication of interim financial statements at least semi-annually, within a reasonable period after the period end. • The government should amend the Companies Act to require public companies to make prompt public disclosure of material changes, including a change in auditor. • The JSE is encouraged to make the de facto 90-day deadline for audited financial statements a firm requirement. It should consider whether the Alt^x issuers should adhere to the same time frame or be given somewhat longer. • The JSE should also consider shortening the reporting period for interim statements of JSE companies; 60 days or less is a more common period for main listings on major exchanges.
Principle 19	• The government should expand the IRBA’s authority to share information, particularly on a proactive basis with other regulators. • The government should consider enhancing the independence of IRBA by amending its funding model to include additional sources, such as levying a fee on public companies. • The authorities should consider reducing the participation of registered auditors (RAs) on IRBA committees responsible for investigations and disciplinary matters. • The government should include provisions permitting the IRBA to indemnify directors and staff for their legal costs.
Principle 22	• The FSB should fully implement its supervisory plan, by conducting sufficient on-site visits and other ongoing supervision of credit rating agencies.
Principle 24	• The FSB should significantly enhance the conflict of interest, record-keeping and conduct of business requirements applicable to CIS managers, in line with the requirements of the IOSCO Assessment Methodology and those that apply to other sectors.
Principle 25	• The government should clarify the drafting of the prohibition of related party custody to ensure that all related companies are excluded from providing trustee services to a CIS manager. • The authorities should consider the need to enhance the requirements for the use of sub-custodians.
Principle 26	• The authorities should expeditiously: • Require an offering document for all CIS; • Require CIS accounts to be prepared in accordance with high quality, internationally acceptable accounting standards; • Require the use of standard formats for CIS initial and periodic disclosures to investors; and • Ensure they apply sufficient requirements to be able to identify inaccurate, false or misleading advertisements.
Principle 27	• The authorities should significantly enhance the regulatory requirements on the valuation of all types of CIS assets and determine the high quality accounting standards to be used in such valuations. • The FSB should consider, whether constant NAV MMFs may be converted to floating/variable NAV funds. Alternatively, the FSB should introduce additional safeguards as recommended by IOSCO to continue to permit the use of constant NAV. • The authorities should ensure that there are sufficient regulatory requirements for the disclosure of CIS unit prices and the frequency of calculating the CIS NAV. Treatment of pricing errors should be subject to explicit regulatory requirements.
Principle 30	• The FSB should adopt a more risk-sensitive capital formula for FSPs that varies directly based on the risks undertaken by the firm, with riskier activities and securities and larger positions attracting higher initial and on-going capital requirements, regardless of the FSP’s licensing category. Exposures to all related companies should be deducted when calculating capital. • The FSB should require FSPs to update their accounting records on a more timely basis. More frequent capital reporting should be required of all FSPs, except those that only carry on limited activities, such as advising only. • The FSB should consider including a new early warning obligation on FSPs to give immediate notice to the FSB when the firm’s capital has declined below an early warning threshold, such as 10 percent over the minimum required, or there has been any other material adverse change in or threat to its financial position. • The JSE should consider amending its capital requirements to address exposures of the firm to off-balance sheet transactions and to any related company.
Principle 31	• The FSB and JSE should require FSPs and members to have a periodic review of their internal controls and risk management conducted by someone who can render an independent assessment, preferably an external expert such as an auditor. • The FSB and JSE should examine the division of responsibility for the supervision of JSE members that are also FSPs to ensure there is a common understanding of their respective responsibilities and that there are no gaps in or duplication of efforts in that supervision. • The FSB and JSE should routinely share inspection reports regarding firms that are JSE members and FSPs. • The FSB and JSE should consider requiring firms to put in place written account agreements for all accounts.
Principle 32	• Each of the FSB and JSE should have written plans in place outlining what actions will be taken (and by whom), if and when one of their respective regulated entities is in financial difficulty.
Principle 36	• The FSB, the SAPS and the NPA should continue to work towards the objective to enhance the use of criminal enforcement to combat market abuse. • The government is encouraged to consider extending the prohibition of insider trading to unlisted derivatives that have a listed security or derivative as an underlying instrument.
Principle 37	• The JSE and/or the FSB should introduce a short selling reporting regime and increase the monitoring of short selling activities.

Table 7.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

Principle	Recommended Action
Principle 1	• The authorities should ensure that the future legislation applicable to the new twin peaks structure harmonizes the regulatory, supervisory and enforcement responsibilities and powers across the sectors. The consistent implementation of these powers and responsibilities should be supported by an appropriate organizational structure and processes. • The FSB should ensure that sufficiently harmonized regulatory requirements are applied to economically equivalent products. • The FSB should make information on all the exemptions granted available on the official website, as required by Section 21 of the FSB Act.
Principle 2	• The authorities should ensure that the upcoming twin peaks legislation and the governance arrangements of the conduct and prudential authorities provide sufficient political and commercial independence to them. This includes introducing clear limitations on the reasons for the removal of the members of the authorities’ relevant governance bodies. • The government should remove the requirement for the Minister of Finance to approve the fees charged under the FAIS Act. • The FSB should develop an FSB wide policy for the publication of supervisory and enforcement measures.
Principle 3	• The authorities should ensure that the future twin peaks legislation and its implementation within the conduct authority support a more coordinated approach to supervision and decision making than currently. • The FSB should seek to maintain and attract sufficient expertise to the authority.
Principle 4	• The authorities should ensure that the code of norms and standards under section 18(3) of the FSB Act is finalized and published as soon as possible. • The authorities should harmonize the current requirements for the FSB’s rule-making processes across the various sectors. The processes should include appropriate, harmonized approaches to assessing the cost of compliance with regulation. • The FSB should improve public access to legislation and to its own regulatory measures by posting copies on the FSB website in an easily identifiable location and removing the need to subscribe to a commercial service.
Principle 5	• The FSB should align the requirements for the holding of and trading in securities in the contract of employment and Staff Code of Conduct and ensure that the restrictions apply to all securities, not only shares. • The FSB should apply appropriate securities holding and trading restrictions to all persons that may have access to confidential supervisory information, such as the FSB Board, Board Committee and DMA members.
Principle 6	• The FSB should develop holistic, organization wide arrangements for monitoring, mitigating and managing systemic risk possibly arising from securities markets, ensuring that the approach extends beyond the current focus on trading and post-trading systems. • The FSCF, FSOC and any dedicated macroprudential function to be established in the future should ensure that they adopt and maintain a broad approach to analyzing systemic risks, ensuring that those possibly arising from securities markets are sufficiently covered.
Principles 7, 8 and 23	• The authorities should ensure that that there is a sufficiently holistic process in place to ensure that products, entities and activities do not inadvertently fall outside the regulatory perimeter as a result of the current complex division of regulatory and supervisory responsibilities. • The FSB should consider putting in place an FSB-wide pro-active process to survey the marketplace to ensure issues of concern, such as emerging conflicts of interest, are identified and addressed early. • The FSB should ensure that the role of analysts and providers of other evaluative services is part of the overall perimeter of regulation review process.
Principle 10	• The authorities should consider imposing more detailed record-keeping requirements for CIS managers. • The CIS Registrar should have the same authority to demand any information from CIS managers as is in place under the FMA and FAIS Act, and CISCA should be amended accordingly.
Principle 11	• The FSB should ensure that the sanction publication practices of the CIS Division are aligned with those of other Divisions.
Principles 12 and 24	• The FSB, and particularly its Enforcement Unit, should continue to work on building cooperative arrangements with the criminal enforcement authorities. • The Registrar of CIS should enhance the depth of the on-site visits in CIS managers to align the approach with the processes applied by other Registrars and conduct on-site visits in CIS trustees.
Principles 16, 18 and 20	• The government should amend the Companies Act provisions to shorten the deadline for publishing audited annual financial statements to 120 days or less. The Companies Act should also be amended to require publication of interim financial statements at least semi-annually, within a reasonable period after the period end. • The government should amend the Companies Act to require public companies to make prompt public disclosure of material changes, including a change in auditor. • The JSE is encouraged to make the de facto 90-day deadline for audited financial statements a firm requirement. It should consider whether the Alt^x issuers should adhere to the same time frame or be given somewhat longer. • The JSE should also consider shortening the reporting period for interim statements of JSE companies; 60 days or less is a more common period for main listings on major exchanges.
Principle 19	• The government should expand the IRBA’s authority to share information, particularly on a proactive basis with other regulators. • The government should consider enhancing the independence of IRBA by amending its funding model to include additional sources, such as levying a fee on public companies. • The authorities should consider reducing the participation of registered auditors (RAs) on IRBA committees responsible for investigations and disciplinary matters. • The government should include provisions permitting the IRBA to indemnify directors and staff for their legal costs.
Principle 22	• The FSB should fully implement its supervisory plan, by conducting sufficient on-site visits and other ongoing supervision of credit rating agencies.
Principle 24	• The FSB should significantly enhance the conflict of interest, record-keeping and conduct of business requirements applicable to CIS managers, in line with the requirements of the IOSCO Assessment Methodology and those that apply to other sectors.
Principle 25	• The government should clarify the drafting of the prohibition of related party custody to ensure that all related companies are excluded from providing trustee services to a CIS manager. • The authorities should consider the need to enhance the requirements for the use of sub-custodians.
Principle 26	• The authorities should expeditiously: • Require an offering document for all CIS; • Require CIS accounts to be prepared in accordance with high quality, internationally acceptable accounting standards; • Require the use of standard formats for CIS initial and periodic disclosures to investors; and • Ensure they apply sufficient requirements to be able to identify inaccurate, false or misleading advertisements.
Principle 27	• The authorities should significantly enhance the regulatory requirements on the valuation of all types of CIS assets and determine the high quality accounting standards to be used in such valuations. • The FSB should consider, whether constant NAV MMFs may be converted to floating/variable NAV funds. Alternatively, the FSB should introduce additional safeguards as recommended by IOSCO to continue to permit the use of constant NAV. • The authorities should ensure that there are sufficient regulatory requirements for the disclosure of CIS unit prices and the frequency of calculating the CIS NAV. Treatment of pricing errors should be subject to explicit regulatory requirements.
Principle 30	• The FSB should adopt a more risk-sensitive capital formula for FSPs that varies directly based on the risks undertaken by the firm, with riskier activities and securities and larger positions attracting higher initial and on-going capital requirements, regardless of the FSP’s licensing category. Exposures to all related companies should be deducted when calculating capital. • The FSB should require FSPs to update their accounting records on a more timely basis. More frequent capital reporting should be required of all FSPs, except those that only carry on limited activities, such as advising only. • The FSB should consider including a new early warning obligation on FSPs to give immediate notice to the FSB when the firm’s capital has declined below an early warning threshold, such as 10 percent over the minimum required, or there has been any other material adverse change in or threat to its financial position. • The JSE should consider amending its capital requirements to address exposures of the firm to off-balance sheet transactions and to any related company.
Principle 31	• The FSB and JSE should require FSPs and members to have a periodic review of their internal controls and risk management conducted by someone who can render an independent assessment, preferably an external expert such as an auditor. • The FSB and JSE should examine the division of responsibility for the supervision of JSE members that are also FSPs to ensure there is a common understanding of their respective responsibilities and that there are no gaps in or duplication of efforts in that supervision. • The FSB and JSE should routinely share inspection reports regarding firms that are JSE members and FSPs. • The FSB and JSE should consider requiring firms to put in place written account agreements for all accounts.
Principle 32	• Each of the FSB and JSE should have written plans in place outlining what actions will be taken (and by whom), if and when one of their respective regulated entities is in financial difficulty.
Principle 36	• The FSB, the SAPS and the NPA should continue to work towards the objective to enhance the use of criminal enforcement to combat market abuse. • The government is encouraged to consider extending the prohibition of insider trading to unlisted derivatives that have a listed security or derivative as an underlying instrument.
Principle 37	• The JSE and/or the FSB should introduce a short selling reporting regime and increase the monitoring of short selling activities.

A. Authorities’ Response to the Assessment

32. National Treasury would like to express its appreciation for the report on the detailed assessment of the IOSCO objectives and principles of securities regulation. South Africa finds the report very comprehensive and believes it displays a good understanding of the FSB and other regulators and market infrastructure responses. In our view the report is balanced, constructive and contains sections that are useful for purposes of future improvements on the areas that have been identified for enhancement. Of course the enhancement measures may take various other forms not necessarily mentioned in the report. South Africa has not questioned any of the ratings, but has provided comments for consideration on certain principles. Our supervisor, the FSB has raised with the FSAP team concerns about possible lack of consistency in the assessment methodology of principles between the 2008 and 2014 FSAPs. In particular, the document makes specific reference to the CIS assessments, where there had been downgrades even though neither the principles nor the legislation and practice changed over the 6 year period. It could be argued that had the grading in 2008 been similar to 2014, measures would have been put in place to address the shortcomings.

Detailed Assessment

33. The purpose of the assessment is primarily to ascertain whether the legal and regulatory securities markets requirements of the country and the operations of the securities regulatory authorities in implementing and enforcing these requirements in practice meet the standards set out in the IOSCO Principles. The assessment is to be a means of identifying potential gaps, inconsistencies, weaknesses and areas where further powers and/or better implementation of the existing framework may be necessary and used as a basis for establishing priorities for improvements to the current regulatory scheme.

34. The assessment of the country’s observance of each individual Principle is made by assigning to it one of the following assessment categories: fully implemented, broadly implemented, partly implemented, not implemented and not applicable. The IOSCO assessment methodology provides a set of assessment criteria to be met in respect of each Principle to achieve the designated benchmarks. The methodology recognizes that the means of implementation may vary depending on the domestic context, structure, and stage of development of the country’s capital market and acknowledges that regulatory authorities may implement the Principles in many different ways.

A Principle is considered fully implemented when all assessment criteria specified for that Principle are generally met without any significant deficiencies.
A Principle is considered broadly implemented when the exceptions to meeting the assessment criteria specified for that Principle are limited to those specified under the broadly implemented benchmark for that Principle and do not substantially affect the overall adequacy of the regulation that the Principle is intended to address.
A Principle is considered partly implemented when the assessment criteria specified under the partly implemented benchmark for that Principle are generally met without any significant deficiencies.
A Principle is considered not implemented when major shortcomings (as specified in the not implemented benchmark for that Principle) are found in adhering to the assessment criteria specified for that Principle.
A Principle is considered not applicable when it does not apply because of the nature of the country’s securities market and relevant structural, legal and institutional considerations.

Table 8.

Detailed Assessment of Implementation of the IOSCO Principles

Table 8.

Detailed Assessment of Implementation of the IOSCO Principles

Principles for the Regulator

Principle 1.

The responsibilities of the regulator should be clear and objectively stated.

Description

Responsibilities and powers

As described in the introduction, the FSB is the main supervisory authority in South Africa in the areas covered by the IOSCO Principles. Therefore the discussion in Principles 1-5 focuses on the FSB.⁸

The functions of the FSB are defined in Section 3 of the FSB Act as follows:

Supervise and enforce compliance with laws regulating financial institutions and the provision of financial services;
Advise the Minister of Finance on matters concerning financial institutions and financial services, either of its own accord or at the request of the Minister of Finance; and
Provide, promote or otherwise support financial education, awareness and confidence regarding financial products, institutions and services.

Certain additional, specific powers of the FSB are included in Section 19 of the FSB Act, Section 26 of the FAIS Act and Section 24 of the CRSA (in relation to rule making) as well as Section 84 of the FMA (in relation to market abuse supervision and investigations). However, most of the responsibilities and powers are not assigned to the FSB as an institution, but either to the relevant Registrar under each sectoral Act or the special bodies established under the Acts applicable to the FSB’s activities.

In its functions, the FSB is assisted by an Executive Officer, one or more Deputy Executive Officers and a Chief Actuary; persons appointed by the FSB; and officers and employees placed at the disposal of the FSB. The Executive Officer performs the functions entrusted to him/her in the FSB Act or any other Act. (Section 13 FSB Act). On the basis of the various sectoral Acts, the Executive Officer also acts in the capacity of Registrar as follows (as relevant for the scope of the IOSCO Principles):

Registrar of Financial Services Providers (Section 2(1) FAIS Act);
Registrar of Collective Investment Schemes (Section 7(1) CISCA);
Registrar of Securities Services (Section 6(1) FMA; and
Registrar of Credit Rating Agencies (Section 21 CRSA).

The powers and functions of the Registrar are set out in the above-mentioned sectoral Acts (see in particular Section 4 FAIS Act, Sections 14-23 CISCA, Sections 6 and 94-97 FMA, and Sections 23-28 CRSA). In addition, the power of the Registrar to conduct on-site visits and to instruct an inspector to conduct an inspection are stipulated in Chapter 1A of the Financial Institutions (Protection of Funds) Act 28 of 2001 (Protection of Funds Act) and Inspection of Financial Institutions Act 80 of 1998 (Inspection Act), respectively.

Section 10(3) of the FSB Act requires the establishment of an EC to be responsible for hearing matters and issuing sanctions for the purposes of enforcing compliance with the laws regulating financial institutions and the provision of financial services. In addition, Chapter 2 of the Protection of Funds Act provides the Registrar with wide enforcement powers, including referral to the Enforcement Committee, vis-à-vis all financial institutions (see Principle 11).⁹

In addition, the DMA exercises certain powers to investigate and institute proceedings under Section 85 of the FMA (see Principles 11, 12 and 36).

Functional Structure of the FSB

Source: FSB.

The organization of the FSB reflects the legislative structure and the assignment of powers to the Registrar. More specifically, the Collective Investment Schemes Division in practice undertakes the responsibilities of the Registrar of CIS and the Financial Intermediary and Advisory Services and Consumer Education Division is in charge of those assigned to the Registrar of FSPs. The Capital Markets Department undertakes the functions of the Registrar of Securities Services, while those of the Registrar of Credit Rating Agencies are the responsibility of the Credit Rating Agency Unit. The Market Abuse Department provides support to the DMA.

Interpretation of authority

The South African constitution includes the principle of legality, which requires that powers are exercised in accordance with the statutory powers provided. In instances where laws provide for the exercise of discretionary powers, the FSB often formulates circulars or guidance notes on the interpretation of the statutory provisions. The FSB provides the industry an opportunity to comment on the draft circulars and guidance notes before they are published.

The Minister of Finance or the Registrar has the power to exempt certain persons or categories of persons from the application of the FAIS Act (Section 44), CISCA (Section 22), FMA (Section 6(3)(m)) and CRSA (Section 27). The Registrar can also exempt regulated entities from certain specific requirements, as provided in the various Acts. Under all the above-mentioned sectoral Acts, the Registrar may also issue directives that apply either generally or are limited in their application to a particular person or service or to a category of persons or services.¹⁰

Section 6(5) of the FMA includes a specific requirement for the Registrar to publish its directives¹¹ in the Gazette and on the official website and to table a copy of the published exemptions or directives in the Parliament, if they apply to all persons, regulated persons or securities services generally. A similar requirement applies under Section 27(4) of the CRSA, which requires the Registrar to publish an exemption that applies generally or to a type of registered CRA in the Gazette and through any other media that the Registrar deems appropriate. Under Section 26(5) of the CRSA, the Registrar must also publish a directive in the same manner, if it is issued to ensure the protection of investors, potential investors or the public in general. Copies of the published directives and exemptions must be submitted to the Parliament. Under Section 44(4)(a) of the FAIS Act, the Registrar may on reasonable grounds, on application or on the Registrar’s own initiative by notice on the official web site, exempt any person or category of persons from any provision of the Act. CISCA also enables the Registrar to provide various exemptions, only some of which have to be published in the Gazette.

Section 21 of the FSB Act requires that the annual report of the Board includes a list of all directives and exemptions issued under the FSB legislation¹² during the reporting period and that the directives and exemptions must be available on the official web site. Since this requirement was introduced only in the General Amendment Act, no such list has yet been published. Neither has the requirement to have all exemptions available on the official website been applied to all the CISCA exemptions.

Consistency of regulation

The FSB is working to align the conduct requirements prescribed for different regulated entities, e.g., the proposed draft codes of conduct for authorized users regulated under the FMA and the financial services providers (FSPs) regulated under the FAIS Act. A similar approach has not been applied to product regulation, i.e., the regulatory frameworks for substantially similar products have not been coordinated. This reflects the fact that the product regulatory responsibilities are divided between several authorities, including the FSB, CIPC and JSE (see below). Within the FSB, different Registrars are also responsible for regulating different financial products that may be similar in economic terms (such as a CIS and a unit linked insurance plan).

Division of responsibilities between the FSB, the SARB and market infrastructures

FSB and SARB

Banks have to be authorized as FSPs, if they provide financial services requiring authorization under the FAIS Act (see Principle 29).¹³ In such cases the supervisory responsibility is divided between the FSB and the SARB. Investment banks’ merchant banking services to clients other than pension funds and natural persons have been exempted from the FAIS Act. As such, the SARB has sole regulatory responsibility for such exempted services.

FSB and market infrastructures

The FAIS Act does not apply to authorized users (exchange members), CSD participants and clearing members (Section 45(1)(a)(i) FAIS Act). The responsibility for their regulation, supervision and enforcement has been assigned to the exchanges, CSDs and independent clearing houses in the FMA.

The JSE is responsible for authorizing its members, as well as regulating, supervising and enforcing their compliance with the exchange rules and directives (See Principles 9 and 29-31). If a JSE member conducts activities under the FAIS Act that are not covered by the JSE Rules, the FSB is responsible for supervising those activities.¹⁴ As a licensed CSD, Strate is responsible for authorizing its participants and supervising their compliance with its rules and directives.¹⁵ Since SAFCOM is an associated (rather than independent) clearing house and all its clearing members are JSE members, it does not have any supervisory and enforcement responsibilities in the manner an independent clearing house would have (see Principle 9). These responsibilities are undertaken by the JSE.

The JSE is solely in charge of supervising listed issuers’ compliance with the JSE disclosure requirements (the FSB performs this role for JSE shares) (see Principle 16). The JSE also has primary responsibility for ongoing market surveillance (except for the trading in its own shares, which is the responsibility of the FSB), while the FSB is responsible for investigating and enforcing market abuse violations (see Principles 11, 12, and 36).

Communication and cooperation

Statutory requirements

The FSB’s power to cooperate and share information is provided in Section 22(3) of the FSB Act, according to which the Executive Officer or a Deputy Executive Officer may:

Liaise with any regulatory authority on matters of common interest;
Participate in the proceedings of any regulatory authority;
Advise or receive advice from any regulatory authority;
Prior to taking any material regulatory action against a financial institution, inform any regulatory authorities¹⁶ having a material interest in that financial institution of the pending regulatory action, or where not possible, inform the relevant regulatory authorities as soon as possible after taking the regulatory action; and
Negotiate and enter into bilateral or multilateral cooperation agreements, including MOUs, with regulatory authorities to, among other issues:
- Coordinate and harmonize the reporting and other obligations of financial institutions and issuers;
- Provide mechanisms for the exchange of information;
- Provide procedures for the coordination of supervisory activities to facilitate the monitoring of financial institutions or issuers on an ongoing basis; and
- Assist any domestic regulatory authority in regulating and enforcing any laws of that regulatory authority that are similar to the FSB legislation.

Section 6(3)(o) of the FMA includes a specific obligation on the Registrar of Securities Services to make adequate arrangements for effective cooperation with the Governor of the SARB in respect of monitoring and mitigating systemic risk.

Cooperation in practice

The FSB has signed an MOU with the SARB and the Financial Intelligence Centre (FIC) of South Africa for exchanging information and streamlining supervision and enforcement.

In the FSB-SARB MOU, the parties agree that there will be regular liaison at officer and senior executive level on operational and policy matters of mutual interest, in particular concerning financial conglomerates. Such liaison includes supervisory processes, audit/inspection strategies, analysis of relevant statistical information, market intelligence on the financial condition of the financial conglomerate members, participation in training programs, and other matters concerning general regulatory and supervisory issues or participation in forums where common issues are addressed. The MOU also includes specific guidelines on the supervision of financial conglomerates. To implement the cooperation requirement of the FMA, the FSB and SARB have formed a Systemic Risk Committee (see Principle 6). The FSB and SARB also organize standing bilateral discussions at senior management level, where overlapping supervisory issues relating in particular to conglomerate supervision are shared. Sometimes they conduct joint on-site visits and share information on entities and issues of joint supervisory interest.

The FSB also participates in the FSCF and the Financial Stability Oversight Committee (FSOC) together with other authorities, market infrastructures and market participants (see Principle 6).

Since the FSB does not have any regulatory responsibilities vis-à-vis issuers, the need for cooperation between the FSB and CIPC is limited to enforcement in case of misleading disclosures (see Principles 12 and 16).

There is close cooperation between the FSB and the market infrastructures. Under Section 70 of the FMA, the Registrar or a person nominated by him/her may attend any meeting of the controlling body (Board) of a market infrastructure or a Board committee and may take part, but may not vote, in all the proceedings at such meeting. As such, the FSB is represented in all the important meetings of the JSE and Strate and meets with their representatives on a regular basis to discuss issues of mutual interest (see Principles 9 and 34).

Assessment

Partly Implemented

Comments

The responsibilities, powers and authority of the FSB and the Registrar are set out in several Acts. The FSB Act, the Inspection Act and the Protection of Funds Act apply across all FSB functions. The sectoral Acts may assign somewhat different powers to their respective Registrars. Therefore, even though within a particular Act the responsibilities, powers and authority of the respective Registrar may be clearly delineated, the current structure has led to some differences of approach between various FSB divisions and departments that in practice execute the powers assigned to each Registrar.

The fact that the responsibilities for the supervision of market intermediaries—exchange members and FSPs—have been divided between the FSB and JSE has a potential of leading to regulatory gaps. The reason for this is that the JSE carries the primary responsibility for the supervision of exchange members, but it is focused only on the business that is covered by the JSE Rules. Exchange members can however also provide other services that are not covered by these Rules. For these activities the members are to be licensed as FSPs. Under the JSE Rules, they may also provide the same services that are provided by FSPs under the FAIS Act, such as investment management. Care must be taken in approving the JSE Rules to ensure the two regulatory frameworks do not diverge, leading to an unlevel playing field. Also, there is a risk that differences in the understanding of their respective responsibilities by the JSE and FSB may lead to gaps or duplication in the supervision applied to JSE members’ activities.

The sectoral Acts provide certain exemptive powers to the Registrar. To promote transparency and to provide a tool for market participants and the public to verify the equality of treatment, it is important to implement the publication requirement of Section 21 of the FSB Act in a uniform manner across the Registrars.

As a result of the current sectoral legislation and the division of responsibilities both within the FSB and between the FSB and the other authorities, substantially the same type of products are currently not subject to consistent regulatory requirements. As part of their current efforts to ensure fair treatment of financial services customers across various sectors, the FSB and the other authorities are encouraged to focus also on harmonizing the regulatory framework for the products themselves.

Principle 2.

The regulator should be operationally independent and accountable in the exercise of its functions and powers.

Description

Political independence and accountability

Appointment and removal of FSB Board members and senior management

The requirements for the constitution of the FSB Board are in Section 4 of the FSB Act. It provides the Minister of Finance with the discretion to appoint as many Board members as he/she deems necessary, with due regard to the interests of the users of financial services and the suppliers of financial services, including financial intermediaries, and the public interest. The Minister of Finance may appoint an alternate member for every Board member. He also appoints one Board member as the chairperson and another member as the deputy chairperson.

Section 5 of the FSB Act includes criteria that disqualify a person from being appointed as an FSB Board member or alternate member:

He¹⁷ is not a citizen of, and permanently resident in, South Africa;
In the opinion of the Minister of Finance, he/she is actually engaged in the business of a financial institution or actually engaged in the rendering of a financial service, subject to the possibility of the Minister of Finance to disregard this requirement on the basis of consultation with the recognized association or organization of the relevant financial institution or financial service in which such person is actually engaged;
He is an unrehabilitated insolvent;
He/she has at any time been convicted (whether in South Africa or elsewhere) of theft, fraud, forgery or uttering a forged document, perjury, any offence under the Prevention of Corruption Act, 1958, the Corruption Act, 1992, certain provisions of Chapter 2 of the Prevention and Combating of Corrupt Activities Act, 2004, or any offence involving dishonesty, and has been sentenced to imprisonment without the option of a fine or to a fine exceeding ZAR 100; or
He is of unsound mind.

The FSB Board Charter (which has not been formally approved by the Minister of Finance) limits the Minister’s choice in appointing the Board chairperson and deputy chairperson to independent Board members. The Charter further notes that the Board must reflect an appropriate balance of power and authority to enable effective decision-making. The composition of the Board must reflect the appropriate demographics and mixture of skills. According to the Charter, the Board will implement continuous professional development programs to ensure that its members receive regular briefings on changes to risks, laws and the regulatory environment. Board members also serve in various Board Committees, including those that deal with regulatory, supervisory and enforcement decisions (see Principle 4).

The current FSB Board includes one SARB representative and one Ministry of Finance representative. The other members have varying backgrounds, but none of them appears to be currently directly engaged in the provision of financial services.

A member or alternate member of the Board must vacate his/her office, if he/she becomes subject to one of the above disqualifications or if he/she has been absent for more than two consecutive Board meetings without leave of the Chairman. In addition, the Minister of Finance may at any time terminate the membership of any Board member or alternate member, if in the opinion of the Minister of Finance sufficient reasons exist for it (Section 6 FSB Act). However, in his/her decisions the Minister is bound by the principle of legality included in the South African Constitution. According to the FSB, the decision to terminate a Board member’s appointment is also subject to Section 3 of the Promotion of Administrative Justice Act 3 of 2000 (PAJA), which requires an administrative action that materially and adversely affects the rights or legitimate expectation of any person to be materially fair.

The term of a Board member and alternate member is determined by the Minister of Finance at the time of appointment, and cannot exceed three years. However, the term of office of not more than 50 percent of the members or alternate members can expire within any calendar year. If a Board member or alternate member vacates his/her office, another person may be appointed to act in the place of such member or alternate member for the unexpired period of the term of office. Any person whose term of office has expired is eligible for reappointment. There are currently no limitations on the number of terms that a Board member can serve, and some FSB Board members have served in their position since the 1990s.

The Minister of Finance also appoints the members of the FSB Appeal Board established under Section 26A of the FSB Act (see below for the responsibilities of the Appeal Board). Office bearers of any political party, members of Parliament or provincial legislature, or municipal councillors cannot be appointed to the Appeal Board. A member of the Appeal Board is appointed for a maximum period of three years, and may be reappointed. The Minister of Finance appoints the chairperson and deputy chairperson from the members of the Appeal Board. There are currently 12 members in the Appeal Board, including five attorneys, two advocates and four members that are active in the accounting field. The chair of the Appeal Board is a retired judge. The Minister of Finance must remove an Appeal Board member from office, if he/she no longer meets the criteria stipulated in Section 26A(3) of the FSB Act.¹⁸ The Minister of Finance may also, after affording the member a reasonable opportunity to be heard, terminate his/her period of office for unsatisfactory performance or inability to perform the functions of the office effectively. If the performance of the Appeal Board is unsatisfactory, the Minister of Finance may terminate the period of office of all the members of the Appeal Board.

The Minister of Finance determines the remuneration and allowances to be paid to a member and an alternate member of the Board, Appeal Board and any Board Committee, if they are not in the full-time employment of the State.

Under Section 9 of the FSB Act, the FSB is required to have an Executive,¹⁹ which must perform the functions of the FSB between Board meetings, in accordance with the Board’s policy and instructions. The Executive Committee consists of the Executive Officer, the Deputy Executive Officers, the Chief Actuary and such other officers or employees of the FSB as the FSB may from time to time appoint on such conditions as it deems fit. The Minister of Finance appoints the Executive Officer, the Deputy Executive Officers and the Chief Actuary, after consultation with the Board (Section 13(1)(a) FSB Act). At the moment the FSB Executive Committee consists of ten members, including the Executive Officer, five Deputy Executive Officers, the Chief Actuary, the Chief Financial Officer, the Chief Information Officer and the Chief Operations Officer (see the organization chart in Principle 1). Therefore, seven out of ten Executive Committee members have been appointed by the Minister of Finance. The Minister’s power to remove the Executive Committee members is not specifically addressed in the FSB Act, but in practice the Minister would have the discretion to remove them as officials appointed by him/her. However, the above-mentioned principle of Section 3 of PAJA would also apply in this case.

The Minister of Finance appoints the chairperson, other members and alternate members of the DMA. A member and an alternate member hold office for a period not exceeding three years as the Minister may determine and is eligible for reappointment upon the expiry of his/her term of office. The Minister may remove the chairperson from his/her office or terminate the membership of any other member on good cause shown and after having given the member sufficient opportunity to show why he/she should not be removed or why his/her membership should not be terminated.

The Minister of Finance also appoints the DMA members as follows:

The Executive Officer and/or his/her deputy;
One person and an alternate from the JSE;
One person of appropriate experience and an alternate from each of the following categories;
- Accountant;
- Insurance industry;
- Banking industry;
- Fund management industry;
- Any organization that represents shareholders’ rights or any other similar organization chosen by the Minister of Finance;
One person of appropriate experience and an alternate nominated by the SARB; and
Two other persons of appropriate experience and their alternates.

According to the FSB, no DMA members are currently active market participants.

Consultation of Minister of Finance

According to Section 18(2) of the FSB Act, the FSB and its Executive Committee members must consult with the Minister of Finance on any matter relating to the exercise of such of their powers and the performance of such of their duties under the FSB Act or any other law as the Minister of Finance may determine. According to the FSB, the Minister of Finance has not issued any such determination any such matters, and such consultation does not therefore take place.

Section 71(4)(b)(i) requires the Registrar to inform the Minister of any amendment he/she has made to the rules of a market infrastructure, giving reasons for the amendment and explaining the urgent imperative under exceptional circumstances that required him/her to amend the rules. However, there is no requirement to consult the Minister before making such amendments.

Minister’s regulations

The various sectoral Acts empower the Minister of Finance to make regulations. There are differences in the way this power is formulated and the extent to which the Registrar’s views have to be heard in the process. The FAIS Act requires the Minister of Finance to consult the Registrar before making regulations, whereas CISCA and CRSA do not include a similar requirement. The FMA requires the Minister of Finance to consider any recommendations from the Registrar prior to the publication of draft regulations. Section 107(1) of the FMA includes a specific requirement that, in making regulations, the Minister of Finance must maintain the operational independence of the Registrar. The Minister of Finance must submit the draft regulations made under the FMA and the CRSA (but not under the FAIS Act and CISCA) to Parliament, while it is in session, for parliamentary scrutiny at least one month before promulgation. After promulgating the regulations, a copy of the promulgated regulations must be tabled in the Parliament.

FSB measures

The FSB has the power to make rules under Section 19 of the FSB Act, Section 26 of the FAIS Act and Section 24 of the CRSA. In addition, the Registrar may issue notices (Board Notices) in the Gazette and/or on the official website under some sectoral Acts that can be of general application. Similarly, as of February 28, 2014 the Registrar may issue directives under all the sectoral Acts that can apply either generally or only to a specific person or service. The Registrar can also prescribe a range of other binding subordinate measures such as fit and proper requirements, codes of conduct, etc. When formulating these, the Registrar is not required to consult or seek the approval of the Minister of Finance or other government authority.

Independence from commercial or other sectoral interests

It appears that none of the FSB Board members currently work for a FSB regulated entity. A few appear to be engaged in investment activities. In addition, the Licensing Committee of the Board includes three industry representatives (see Principle 3). The Board is increasingly informed of the FSB’s supervisory and enforcement activities, and the Licensing Committee is consulted in every FSB licensing decision.

Political and public accountability

The FSB Act includes a reference to the FSB annual report in Section 21. Even though this provision includes only an implicit requirement to prepare an annual report, in practice the FSB has always prepared one after the end of its financial year (March). The FSB Annual Report includes a description of its activities and its audited financial statements audited by the Auditor General (that in practice outsources the audit work to a professional audit firm). The FSB Annual Report is also submitted to the Parliament, and the FSB is expected to present it to the relevant portfolio committee of the Parliament. The Annual Report is also published on its website.

Some Registrars have a specific requirement to prepare an annual report (for each calendar year). In relation to the scope of the IOSCO Principles, this requirement applies only to the Registrar of Collective Investment Schemes. Section 23 of CISCA requires the Registrar to submit to the Minister of Finance an annual report concerning his/her activities in relation to CISCA, the activities of all managers and associations, and all matters relating to the administration of CIS and analogous schemes. This report must also be tabled in the Parliament within 14 days of its publication, if the Parliament is in session, or otherwise within 14 days of the commencement of its next session.

All FSB subordinate measures must be published either in the Gazette or on the official website (see Principle 4). In practice, the FSB always publishes such measures also on its website, even if the official requirement would be limited to publication in the Gazette. For the most part, the same legal obligation applies to the Minister’s regulations (with the exception of the regulations issued under CISCA²⁰). However, the structure of the FSB website, where the regulatory measures are published under the various divisions or departments following a non-harmonized structure makes identifying the up-to-date, binding measures very challenging.

The FSB publishes most of its supervisory and enforcement actions. In some cases this is specifically required in the relevant legislation. For example, Section 14A of the FAIS Act refers to the right of the Registrar to publish a debarment of a person and the reasons for it, or the lifting of a debarment, by notice on the official website or by means of any other appropriate public media. Section 6G of the Protection of Funds Act requires the Registrar and the DMA to make public an EC determination in a manner they deem appropriate. However, there are no uniform requirements for the publication of supervisory and enforcement measures, and the practices of the Registrars are somewhat different in this regard.

Stability and continuity of funding

According to Section 16 of the FSB Act, the funds of the FSB consist of service fees and levies imposed on financial institutions, money borrowed and money accruing from any other source. The FSB may impose by notice in the Gazette the levies on financial institutions (Section 15A FSB Act). Before imposing such levies, the Board must publish the proposed levies, together with a statement that representations about the proposed levies may be made within a specified time. Before imposing the final levies, the Board must have regard to any such representations. The FSB fees to be charged under the FAIS Act (but not other Acts) are determined by the Minister of Finance, after consultation with the Registrar, by notice in the Gazette (Section 41 FAIS Act).

In addition to fees and levies, the FSB may ask for an order from the appropriate adjudicatory body to be compensated for the costs of an investigation on a regulatory breach (see Principle 11). If violators are ordered to return any profits from a violation or ordered to pay a monetary penalty, the FSB places these funds into a segregated account to compensate victims and to pay for its investor education programs.

The FSB’s annual budgetary process aims at reaching a zero balance at the end of the financial year. When surplus funds are collected, the FSB explores ways to refund excess levies in the form of rebates to the specific industries.

Bona fide legal protection

Legal protection to the FSB and its staff is provided in Section 23 of the FSB Act, according to which no person will be liable for any loss sustained by or damage caused to any other person as a result of anything done or omitted by that person in the bona fide exercise of any power or the carrying out of any duty or the performance of any function under the FSB Act, the relevant sectoral Acts, the Inspection Act or the Protection of Funds Act. The Act does not provide that the FSB will indemnify these persons for the costs of defending themselves against suits. However, the FSB has an insurance policy to cover its and its management’s and employees’ legal costs in case of a suit.

In practice, several actions for civil damages have been instituted against the FSB (see e.g., the FSB 2012/2013 Annual Report).

Accountability for decisions

The South African Constitution and PAJA require that all administrative decisions affecting the rights of persons must be lawful, reasonable and procedurally fair. PAJA gives effect to this constitutional principle of administrative justice and ensures the legality of all administrative action. The FMA (Section 6(3)(f)) includes a specific requirement for the Registrar to act in accordance with PAJA. Despite the lack of specific references in the other Acts, all actions taken by the FSB and Registrars are subject to PAJA, since they are covered by the definition of administrator in PAJA.

In addition, the Protection of Funds Act includes detailed requirements on the procedures to be applied in referrals to the EC and in the EC proceedings. Similarly, the FSB Act sets the process to be followed in the Appeal Board proceedings.

The sectoral Acts include various procedural requirements applicable to the FSB decisions, including on whether reasons need to be provided. Examples of such requirements include:

Section 9(2)(a)(ii) of the FAIS Act requires that, before suspending or withdrawing any license, the Registrar must inform the licensee of the intention to suspend or withdraw the license and the grounds for it and must give the licensee a reasonable opportunity to make a submission in response thereto;
Section 60(2) of the FMA requires that the Registrar, before cancelling or suspending a license, informs the market infrastructure of the Registrar’s intention to cancel or suspend, gives the market infrastructure the reasons for the intended cancellation or suspension, and calls upon the market infrastructure to show cause within a period specified by the Registrar why its license should not be cancelled or suspended;
Section 16(2) of CISCA requires that the Registrar may not cancel or suspend the registration of a manager, unless he/she has notified the manager of his/her intention and of the grounds upon which he/she proposes to do so, has allowed the manager to make representations, and afforded the manager a reasonable opportunity to rectify or eliminate the defect, irregularity or undesirable practice; and
Section 18(2) of CISCA requires that the Registrar must, before imposing a fine, by written notice to the manager or third party inform it of his/her intention to impose a fine, specify the particulars of the alleged failure, set out the reasons for the intended imposition of a fine, specify the amount of the fine intended to be imposed, and call upon the manager or third party to show cause within a period specified by the Registrar why the fine should not be imposed.

Under Section 6D(4)(a) of the Protection of Funds Act, a determination of an EC panel must be in writing and state the reasons for the determination.

Section 3 of PAJA contains general procedural fairness requirements. It requires that administrative action which materially and adversely affects the rights or legitimate expectations of any person must be procedurally fair. An administrator must give an affected person:

Adequate notice of the nature and purpose of the proposed administrative action;
A reasonable opportunity to make representations;
A clear statement of the administrative action;
Adequate notice of any right of review or internal appeal, where applicable; and
Adequate notice of the right to request reasons.

Under PAJA there is therefore no specific requirement to include reasons in the original decision, but they can be requested and provided afterwards. More specifically, Section 5 of PAJA provides that any person whose rights have been materially and adversely affected by administrative action and who has not been given reasons for the action may, within 90 days after the date on which that person became aware of the action or might reasonably have been expected to have become aware of the action, request that the administrator concerned furnish written reasons for the action. The administrator must, within 90 days after receiving the request, give the requesting person adequate reasons in writing for the administrative action. An administrator may depart from the requirement to furnish adequate reasons, if it is reasonable and justifiable in the circumstances, and must forthwith inform the person making the request of such departure.

In order to promote an efficient administration, the Minister (the Cabinet member responsible for the administration of justice) may, at the request of an administrator, by notice in the Gazette publish a list specifying any administrative action or a group or class of administrative actions in respect of which the administrator concerned will automatically furnish reasons to a person whose rights are adversely affected by such actions, without such person having to request reasons. The Minister must, within 14 days after the receipt of such request and at the cost of the relevant administrator, publish such list. This process has not been applied to FSB actions. As noted, the requirement to provide reasons is already included in many legal provisions applicable to the FSB’s administrative actions. In practice, the FSB gives reasons for all substantive decisions where a person’s rights are affected, such as licensing decisions.

Appeal to the FSB Appeal Board

According to Section 26 of the FSB Act, a person who is aggrieved by a decision of a decision maker (as defined in the relevant Acts) may appeal that decision to the FSB Appeal Board established under Section 26A of the FSB Act. An appeal must be lodged within 30 days of the person becoming aware of, or ought to have become aware of a decision, in the manner and on payment of the fees prescribed by the Minister of Finance. An appeal does not suspend any decision pending the outcome of the appeal, unless the chairperson or a deputy chairperson of the Appeal Board, on application by a party, directs otherwise.

The chairperson or deputy chairperson of the Appeal Board must assign each appeal to a panel consisting of at least three suitably qualified Appeal Board members. The chairperson of a panel hearing must be an advocate, attorney or judge. Any party to an appeal may be represented by a legal representative. An appeal is decided on the written evidence, factual information and documentation submitted to the decision maker before the decision was taken. Unless the chairperson grants an exemption, no oral or written evidence, factual information or documentation other than what was made available to the decision maker, may be submitted to the panel by a party to the appeal. If further evidence, information or documentation is allowed, the matter must revert to the decision maker for reconsideration and the appeal is deferred pending the final decision of the decision maker. The decision of the majority of the panel members is the decision of the Appeal Board. The decision must be in writing and a copy must be furnished to every party to the appeal within a reasonable period. The Appeal Board may confirm, set aside or vary the decision under appeal, and order that the Appeal Board decision be given effect to, or remit the matter for reconsideration by the decision maker. An Appeal Board order has legal force and may be enforced as if it were issued in civil proceedings in a division of the High Court within whose area of jurisdiction the Appeal Board held its sitting. The decision of the Appeal Board must be made public.

The Appeal Board’s power extends beyond the decisions of the FSB and the Registrar. Under Section 105 of the FMA, the Appeal Board also hears appeals on the decisions of an exchange, CSD and independent clearing house authorized under the FMA. Similarly, it also hears appeals on the decisions of the Ombud under Section 39 of the FAIS Act.

The appeal body for the EC decisions is the High Court (Section 6F Protection of Funds Act). The launching of such appeal proceedings does not suspend the operation or execution of a determination, unless the chairperson of the EC that dealt with the matter directs otherwise.

Judicial review

Section 7 of PAJA sets out the procedure for judicial review. A court or tribunal is not permitted to review an administrative action under PAJA unless any internal remedy provided for in any other law has first been exhausted. The FSB Appeal Board process constitutes such an internal remedy. Any proceedings for judicial review must be instituted without unreasonable delay, and no later than 180 days after the date on which the appeal proceedings at the Appeal Board have been concluded.

Section 6 of PAJA provides that any person may institute proceedings in a court or tribunal for the judicial review of an administrative action. A court or tribunal has the power to review an administrative action if:

The administrator who took it was not authorized to take the action or acted under a delegation of power which was not authorized by the empowering provision or was biased or reasonably suspected of bias;
A mandatory and material procedure or condition prescribed by an empowering provision was not complied with;
The action was procedurally unfair;
The action was materially influenced by an error of law;
The action was taken for a reason not authorized by the empowering provision, for an ulterior purpose or motive, because irrelevant considerations were taken into account or relevant considerations were not considered, because of the unauthorized or unwarranted dictates of another person or body, in bad faith, or arbitrarily or capriciously;
The action itself contravenes a law or is not authorized by the empowering provision or is not rationally connected to the purpose for which it was taken, the purpose of the empowering provision, the information before the administrator, or the reasons given for it by the administrator;
The action concerned consists of a failure to take a decision;
The exercise of the power or the performance of the function authorized by the empowering provision, in pursuance of which the administrative action was purportedly taken, is so unreasonable that no reasonable person could have so exercised the power or performed the function; or
The action is otherwise unconstitutional or unlawful.

Section 8 of PAJA provides the remedies in judicial review proceedings. The court or tribunal may grant any order that is just and equitable, including orders:

Directing the administrator to give reasons or to act in the manner the court or tribunal requires;
Prohibiting the administrator from acting in a particular manner;
Setting aside the administrative action and:
- Remitting the matter for reconsideration by the administrator, with or without directions; or
- In exceptional cases substituting or varying the administrative action, correcting a defect resulting from the administrative action or directing the administrator or any other party to the proceedings to pay compensation;
Declaring the rights of the parties in respect of any matter to which the administrative action relates;
Granting a temporary interdict or other temporary relief; or
As to costs.

Market infrastructures

Section 11(9) of the FMA requires an exchange, before refusing an application to include securities in the list, to inform the issuer of its intention to refuse the application, give the issuer the reasons for the intended refusal, and call upon the issuer to show cause within a period specified by the exchange why the application should not be refused. The same requirements apply when an exchange intends to remove from listing or suspend a security.

The market infrastructure rules also include certain procedural fairness requirements:

According to Section 3.100 of the JSE Equities Rules, the JSE has the sole discretion to accept or reject an application for membership, or to accept it subject to certain conditions. The JSE must notify the applicant in writing of its decision and of any conditions that are required to be met. A person aggrieved by a JSE decision to reject a membership application may appeal to the FSB Appeal Board. Similar provisions are in the JSE Interest Rate and Currency (IRC) and Derivatives Rules;
According to Section 3.7 of Strate Rules, the controlling body may, after examining an applicant’s compliance with the participation criteria and the information submitted in accordance with the Strate Rules and Directives, decide, after consultation with the applicant, either to admit the participant or to reject the application. Where the controlling body has determined that an application should be rejected, it must, within a reasonable time, provide notice of its intended decision, together with the reasons for that decision, to the applicant. The applicant then has the right, within five business days, to state its case, in either written or oral form, to the controlling body as to why its application should not be rejected. After considering any representations made, or in the absence of any representations being submitted within the prescribed period, the controlling body must make its final decision on the matter. The possibility to appeal to the FSB Appeal Board applies also in this case.

There are also structures and processes built into the JSE and Strate rules that follow the requirements of procedural fairness when dealing with disciplinary matters.

Assessment

Partly Implemented

Comments

The Minister of Finance has the power to appoint and remove the members of the FSB Board, the Appeal Board, the DMA, and the majority of the FSB Executive Committee. Very few limitations are placed on that power. Even though the Board’s direct involvement in day-to-day regulatory, supervisory and enforcement decisions at the Board level is officially limited to oversight, three Board Committees (see Principle 3) are consulted by the FSB on regulatory, licensing and enforcement decisions. Some of these Committees also include industry representatives. At a minimum, this may create the perception of undue political or industry influence in the FSB decision making processes. The DMA, that does not include any active market participants, is a suitable model.

The upcoming twin peaks legislation should include clear procedures for the appointment of the head and members of the governing bodies of the conduct and prudential authorities, and most importantly, clear limitations on the reasons for their removal (Key Question 5 of the IOSCO Assessment Methodology). Consideration should also be given on the role industry representatives play in the governance of the authority.

The FSB is financed through fees and levies from supervised entities. The fees charged under the FAIS Act are determined by the Minister of Finance. Since this is not the case for the other Acts, this may be viewed as undermining the FSB’s independence with respect to the supervision of FSPs. It is recommended this requirement be removed.

There is currently no uniform FSB wide policy on the publication of supervisory and enforcement measures. It is important that the FSB have such a policy, to ensure that market participants and the public receive sufficient, consistent information on the FSB actions that affect them.

Principle 3.

The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

Description

Powers

The FSB’s powers and authorities are sufficient to meet the responsibilities assigned to it under the various Acts referred to in Principle 1.

Funding

The FSB’s budget over the past three financial years and its estimated budget development over the next four financial years are presented in the following table:

The FSB’s budget has grown on average by 11.4 percent/year between the financial years 2010/2011 and 2012/2013 and is projected to grow on average by further 5.4 percent/year from the current financial year to the financial year 2016/2017.

The FSB Board has the final responsibility to approve the FSB’s budget, including the departmental breakdown.

FSB Budget Development (ZAR Thousand)

	2010/	2011/	2012/	2013/	2014/	2015/	2016/
	2011^/1	2012	2013	2014	2015	2016	2017
Administration	137,197	166,449	178,870	194,061	200,578	212,566	224,766
Financial advisory and intermediary supervision^/2	105,257	112,908	121,785	119,064	124,837	131,951	139,527
Insurance supervision	44,518	67,911	76,188	95,327	99,866	105,812	112,112
Pension fund supervision	88,826	93,915	106,843	107,306	112,515	118,508	125,508
CIS supervision Market	15,078	18,772	18,267	19,212	20,149	21,408	22,723
Infrastructure supervision	8,371	20,685	10,554	11,394	11,960	12,693	13,477
DMA	8,452	14,235	10,482	13,906	14,572	15,457	16,397
CRA regulation	−	−	−	3,046	3,300	3,619	3,983
Hedge fund regulation	−	−	−	689	903	1,073	1,271
Total	407,699	494,875	522,989	564,005	588,680	623,415	659,764

Source: FSB.

1/ The FSB’s financial year runs from the beginning of April to the end of March of the following year.

2/ In addition to securities advisors and intermediaries, financial advisors and intermediaries supervised by the FSB include insurance advisors and intermediaries. It is not possible to break down the budget to these two categories.

Resources

The FSB had 511 full-time staff members at the end of the financial year 2012/2013. The staff turnover at the FSB level was 11.2 percent, significantly higher than the previous financial year’s 6.0 percent. At the end of the financial year 2013/2014, the FSB level staff turnover was 12.0 percent.

The FSB has the authority to pay salaries comparable to private financial services industry pay scales. As a result, its staff is compensated at levels higher than the government norms. This has increased its ability to recruit and retain experienced staff, although the FSB’s senior management expressed some concern about the FSB’s ability to hire staff of sufficient expertise to meet the future challenges. The FSB has been able to use some additional reward structures to enhance its compensation packages; for example, the top 20 percent exceptional performers and the Executive Committee members were awarded performance bonuses during the 2012/2013 financial year. However, the FSB has faced challenges in filling its open positions with staff with sufficient expertise in the FSB’s particular areas of responsibility.

FSB Staff Composition and Turnover*

Department	Total Number of Staff March 31, 2013	Staff Turnover (in percent) March 31, 2013	Total Number of Staff March 31, 2014	Staff Turnover (in percent) March 31, 2014
Capital Markets	10	30	9	0
Market Abuse	9	11	9	0
CRA	0	0	3	0
FAIS Supervision	57	21	64	19
FAIS Enforcement	6	33	9	22
FAIS Registration	30	10	28	21
FAIS Compliance	20	5	17	25
CIS	21	10	22	14

Source: FSB.

*As relevant for the IOSCO assessment.

Some of the FSB’s reporting systems do not support automation of monitoring compliance with the regulatory requirements (such as the quarterly portfolio reporting by CIS managers). Since the JSE has the main responsibility for market surveillance, the FSB does not have its own market surveillance capacity.

Training

During the financial year 2012/2013, the FSB spent ZAR 1.35 million on training and ZAR 520,000 on seminars and conferences. The training program covers a broad range of topics, ranging from specialized professional trading to soft skills training. In support of developing middle management talent, a custom-made program, entitled the FSB High Potential Program, run by the University of Stellenbosch, was developed and implemented for staff members deemed as having potential to operate at a higher level. A total of 28 employees finished the program during the 2012/2013 financial year.

Governance

Board

The FSB has a Board Charter approved by the Board, which sets out the Board’s role and responsibilities as well as requirements for the Board composition and meeting procedures. According to the Charter, all Board members are non-Executive members. The FSB Executive Officer, Chief Operations Officer, Chief Financial Officer, Pension Funds Adjudicator and the FAIS Ombud are standing invitees to all Board meetings. Other members of the Executive Committee of the FSB attend per invitation.

According to the Board Charter, the Board’s role and responsibilities vis-à-vis the FSB include:

Exercising leadership, while acting as the focal point for and custodian of corporate governance;
Facilitating that strategies, risks, performance and sustainability are inseparable and give effect to this by:
- Facilitating and approving the strategies;
- Satisfying itself that the strategies and business plans of the FSB are not encumbered by risks that have not been thoroughly assessed by management;
- Identifying key performance and risk areas;
- Ensuring that the strategies will result in sustainable outcomes; and
- Considering sustainability as a business opportunity that guides strategy formulation.
Providing effective leadership that is based on an ethical foundation;
Ensuring that the FSB is seen to be a responsible corporate citizen by having regard not only to the financial aspects of the business, but also to the impact those business operations have on the environment and the society within which it operates;
Ensuring that the FSB’s ethics are managed effectively;
Ensuring that the FSB has an effective and independent Audit Committee;
Being responsible for the governance of risk through the Risk Management Committee;
Being responsible for information technology governance;
Ensuring that the FSB complies with applicable laws and considers adherence to non-binding rules and standards of governance;
Ensuring that there is an effective risk based internal audit;
Acknowledging that stakeholders’ perceptions affect the FSB’s reputation;
Ensuring the integrity of the FSB’s financial reports;
Reporting on the effectiveness of the FSB’s system of internal controls; and
Acting in the best interests of the FSB.

Section 5 of the Board Charter stipulates the matters that are reserved for decision by the Board and that cannot be delegated. Examples of such matters are:

Approving the FSB’s policies, code of conduct, strategic plan, business plan and any material changes in strategic direction or material deviations in its business plan;
Approving the delegation of authorities;
Appointing Executive Committee members other than the ministerial appointments;
Recommending to the Minister of Finance to take a particular course of action proposed by the FSB;
Exercising oversight powers over the Executive Officer acting as Registrar;
Making recommendations to the Minister of Finance regarding the appointment to and removal from the Board, including the appointment of the Chairperson and Deputy Chairperson; and
Appointing the Chief Operations Officer, the Chief Financial Officer and the Chief Information Officer.

In practice the FSB Board meets quarterly, primarily to oversee the FSB’s internal operations and governance. The Board is also regularly informed of supervisory and enforcement matters, but it does not make decisions on them.

According to Section 9(3) of the FSB Act, the FSB (i.e., the Board) may set aside or vary any decision of the Executive Committee, except a decision in consequence of which a payment has been made or any other right has been granted to any person. Since in practice the Executive Committee does not make any regulatory, supervisory or enforcement decisions, this provision does not appear to undermine the FSB’s or the Registrar’s independence.

Board Committees

According to Section 10(1) of the FSB Act, the FSB may establish committees to assist it in the performance of its functions and at any time dissolve or reconstitute such committees. Any person that complies with the conditions for the membership of the FSB Board may be appointed as a Committee member. The following Committees have been established: Audit Committee, Risk Management Committee, Human Resources Committee, Remuneration Committee, Licensing Committee, Litigation Committee and Legislative Committee. Under Section 10(3) of the FSB Act, the FSB is required to establish an Enforcement Committee to be responsible for enforcing compliance with the laws regulating financial institutions and the provision of financial services.

The first four of the above mentioned Committees are composed only of FSB Board members (2012/2013 Annual Report). The Licensing Committee, Litigation Committee and Legislative Committee also include non-Board members. The function of the Licensing Committee (three Board members, five other members) is to ensure that the Registrar acts according to the legislation administered by the FSB (see Principles 24 and 29 for the role of the Licensing Committee in individual licensing decisions). Three of the Licensing Committee members work for FSB regulated entities. The Litigation Committee (three Board members, four other members) oversees the FSB litigation process for claims against or by the FSB. Finally, the Legislative Committee (four Board members, four other members) considers new legislation (including the various regulatory measures prepared by the FSB) or amendments to existing legislation relating to the FSB’s supervisory functions.

Executive management

As noted above, the Executive Committee performs the functions of the FSB in accordance with the FSB’s policy and instructions between the Board meetings. The Executive Officer, subject to supervision by the Board, performs the functions entrusted to him/her in the FSB Act or any other Act. A Deputy Executive Officer or the Chief Actuary performs the functions delegated to the Deputy Executive Officer or Chief Actuary under the FSB Act and is accountable to the Executive Officer for the performance of those functions. (Section 13(3) FSB Act).

The powers of the FSB or Registrar may be delegated to other persons, including any employee. Sub-delegation is also permitted. The Board, the Executive Officer and the Deputy Executive Officers are required to develop an appropriate system of delegation that maximizes administrative and operational efficiency and provides adequate checks and balances in the performance of their functions. (Section 20 FSB Act).

In practice the Executive Officer/Registrar has delegated many of the duties under the various Acts to the relevant Deputy Registrar/Deputy Executive Officer. Further delegations have been made within the divisions. Supervisory decisions are primarily taken by the relevant Deputy Registrars, while enforcement decisions are taken either by the Deputy Registrar or the Enforcement Committee. Prior to decision-making, licensing decisions are submitted for discussion and recommendation to the Licensing Committee. The FSB Executive Committee meets every two weeks to discuss FSB wide issues, but it does not make supervisory or enforcement decisions as a committee.

Investor education

One of the functions of the FSB under Section 3 of the FSB Act is to provide, promote or otherwise support financial education, awareness and confidence regarding financial products, institutions and services.

The FSB has established a cross-sectoral Consumer Education Unit to promote and implement programs and projects on financial issues, such as budgeting, savings, insurance, investments, retirement funds, dealing with financial services providers, consumer rights and responsibilities and consumer recourse mechanisms. Delivery channels for dissemination of financial information include workshops, radio and television, printed media and exhibitions.

The FSB is a member of the Advisory Board of the International Network on Financial Education (INFE), and co-chairs the INFE Expert Sub-group on National Strategies. The FSB also chairs the Technical Committee on Consumer Financial Education of the Committee of Insurance, Securities and Non-banking Financial Authorities.

The FSB conducted a national survey on financial literacy levels in South Africa in 2011 and used its results to develop a National Strategy for Consumer Financial Education in South Africa in 2013. The strategy development process was guided by the National Treasury.

Market infrastructures are required to report on their consumer education initiatives. Under Section 69 of the FMA, a market infrastructure must within four months after the financial year end submit an annual report containing the details prescribed by the Registrar. The information that must be contained in the annual report includes a status report on the market infrastructure’s consumer education initiatives, if any (Board Notice 101).

Assessment

Broadly Implemented

Comments

The FSB and the Registrar have sufficient policies and governance practices to perform their functions and exercise their powers within the current legislative framework. However, the structures of the legislation and of the FSB have fostered a siloed approach to decision making. The FSB has tried to improve the coordination and cooperation between the various functions by, among other measures, organizing regular Executive Committee meetings. The conversion of the FSB to a conduct authority and the related legislative changes to its governance structure should assist the FSB in undertaking its responsibilities in an increasingly harmonized manner.

Even though the level of the FSB’s resources is generally considered to be sufficient, it has faced challenges in recruiting staff with sufficient expertise in the FSB’s area of responsibilities. Staff turnover in certain departments has also been high. The transformation to the conduct authority and assumption of new tasks will further enhance the need to maintain current and attract new talent.

Principle 4.

The regulator should adopt clear and consistent regulatory processes.

Description

Policy development process

At the moment the various regulation and rulemaking procedures of both the Minister of Finance and the FSB are addressed only at a general level in the different sectoral Acts.

In the General Amendment Act, Section 18(3) was added to the FSB Act. It includes a requirement for the Minister of Finance to prescribe a code of norms and standards for consultation for the FSB Board and Registrars, which must:

Require that appropriate stakeholders to be consulted are identified; the purpose and scope of consultation are clear; the timing, medium and process of consultation are appropriate, proportional and transparent; consultation material is clear; and stakeholder input is considered and feedback provided; and
Stipulate requirements and standards relating to publication.

The commencement date of the above provision has been delayed until the Minister’s code has been prepared.²¹ The intention is to publish the code, once it has been finalized.

Development of Minister of Finance regulations

Each sectoral Act has separate and different provisions on the regulation-making process. The provisions governing making of regulations by the Minister of Finance are as follows:

FAIS Act: Section 35 provides that the Minister of Finance may by notice in the Gazette, after consultation with the Registrar, make regulations on certain matters. There are no other process requirements in the FAIS Act;
CISCA: Section 114 refers to regulations by the Minister of Finance, but does not include any requirements on the process for developing such regulations;
FMA: Section 107(2) includes specific requirements about the process for developing regulations. Before the Minister of Finance makes any regulation, he/she must:
- Ensure consultation with recognized industry bodies;
- Consider any recommendations from the Registrar prior to the publication of draft regulations;
- Publish a notice of the release of draft regulations in the Gazette, indicating that the draft regulations are available on the National Treasury official website, and call for public comment in writing within a period (at least 30 days) stated in the notice;
- In respect of draft regulations to be published under Section 5(1) of the FMA (such as extending regulation to unlisted securities or a new category of unregulated persons), publish on the National Treasury official website, along with the draft regulations, a policy document that informs the draft regulations, and a report on the expediency, effect and implication of the regulations;
- In respect of draft regulations extending regulation to a new category of unregulated persons, publish a notice identifying the persons who may be declared to be regulated persons and inviting comment from those persons in writing within a period (at least 30 days) stated in the notice;
- Submit the draft regulations to the Parliament, while it is in session, for parliamentary scrutiny at least one month before their promulgation;
- Table a copy of the promulgated regulations in the Parliament; and
- Within a reasonable period after prescribing regulations, publish on the National Treasury official website a document summarizing the comments received, and provide a brief response to those comments that were not accommodated.
CRSA: Section 34 requires the Minister of Finance to publish a notice of the publication of the draft regulations in the Gazette, submit the draft regulations to the Parliament for parliamentary scrutiny and submit a copy of the regulations to the Parliament. However, the FMA requirements to consult the industry, consider the recommendations of the Registrar and publish a feedback statement do not apply.

Development of FSB rules and other regulatory measures

According to Section 19 of the FSB Act, the FSB may make rules on any matter which it may deem necessary or expedient to prescribe or to regulate in order to achieve the objectives of the FSB Act. It further states that the FSB may make any such rules known in such manner as it may deem fit. There are no references to the FSB’s power to issue other regulatory measures in the FSB Act. Instead, most of the requirements are included in the sectoral Acts.

The procedural requirements for the development of FSB rules and other regulatory measures are not uniform, given the number of different Acts and the range of measures that the FSB can use. The legislation does not include any formal requirement for the FSB or the Registrar to consult market participants or the public before they take any of their own regulatory measures. The following table highlights the legal requirements that focus on the publication of the final measures through different media²² rather than the consultative process as such:

Procedural Requirements for FSB Regulatory Measures

	FAIS Act	CISCA	FMA	CRSA
Rules	Section 26(2)(b): publication in the Gazette.	Section 52: No procedural requirements.	No reference to FSB rule making power.	Same requirements as for the Minister’s regulations.
Directives of general application	Section 38C(5): publication on the official web site and in any other appropriate media.	Section 15B(5): publication on the official web site and in any other appropriate media.	Section 6(5): publication in the Gazette and on the official website, tabling of a published copy in the Parliament.	Section 26(5): publication in the Gazette and in any other appropriate media, tabling of a published copy in the Parliament.
Various other measures, such as codes of conduct, determinations, declarations, fitness and propriety requirements	Notice on the official web site, unless notice in the Gazette is specifically required.

Source: FAIS Act, CISCA, FMA, and CRSC.

In practice, the various Registrars publish draft regulatory measures for comment accompanied by explanatory memoranda. After the end of the consultation, some Registrars issue explanatory response documents (including comments matrices) and public statements. The Board’s Legislative Committee reviews the measures before their finalization.

In addition to the above binding measures, the Registrar of Securities Services is specifically empowered to issue guidelines on the application and interpretation of the FMA (Section 6(3)(k) FMA. The other sectoral Acts do not include a similar power, but in practice the other Registrars issue circulars and guidance notes on the interpretation of some provisions when needed.

The FSB has included links to or copies of the relevant Acts, Minister’s regulations and FSB regulatory measures on its website. Some (in particular the Acts) are available only through a subscription based service. In addition, in order to locate the relevant documents, it is necessary to know which department is responsible for a particular Act and where, under that part of the website, the materials have been posted. The divisions do not follow a consistent structure in presenting information on the website.

Development of self-regulation

According to Section 11(6) of the FMA, an exchange must have a consultation process for amending its listing requirements and that process must be set out in the Listing Requirements. The process must provide for the persons to be consulted and the manner of consultation, including the time period or periods allowed for consultation. An exchange must submit the proposed amendment, an explanation of the reasons for the amendment, and any concerns or objections raised during the consultation process to the Registrar for approval. The Registrar must as soon as possible publish the amendment on the official website and a notice in the Gazette, calling upon all interested persons to lodge any objections with the Registrar within a period of 14 days. When the Registrar has decided to approve or amend the proposed amendment, it must publish on the official website the amendment and the date on which it comes into operation and in the Gazette a notice that the amended listing requirements are available on the official website and the exchange website.

The above requirements have been implemented through Sections 1.30-1.31 of the JSE Listing Requirements (Equities) and Debt Listing Requirements. Both require a public consultation process to amend the JSE Listing Requirements. The proposed amendments to the Listing Requirements are published through the Stock Exchange News Service (SENS) inviting comments from affected parties for a period of one month. Once the public consultation process has been completed, the JSE submits the proposed amendments, an explanation of the reasons for them and any concerns or objections raised during the public consultation process to the Registrar for approval.

Section 71 of the FMA contains similar provisions relating to the amendment of the rules of a market infrastructure. With regards to the required consultation process, for example the JSE Equities Rules (Section 2.60) provide that any member of the JSE Executive may propose in writing any amendment of the rules or directives. The JSE Executive will consider the proposed amendment and notify members by JSE Gazette of its decision. If, within ten days of the announcement of the JSE Executive’s decision to adopt the proposal, five or more members object in writing the decision, the objection, together with the reasons submitted by the relevant members, will be referred to the JSE Board for determination. If an objection to a proposed rule amendment has not been lodged within the prescribed period, or the JSE Board upholds the JSE Executive’s decision to adopt the proposal, the amendment must be submitted to the Registrar for his/her approval. If an objection to a proposed directive amendment has not been lodged within the prescribed period, or the JSE Board upholds the JSE Executive’s decision to adopt the proposal, the amendment will take effect immediately. Similar process is set out in Sections 2.6-2.19 of Strate Rules.

Procedural fairness

The procedural fairness requirements are described in Principle 3.

Licensing decisions

The criteria for authorizing FSPs and suspending or withdrawing their authorization are in Section 6A (fit and proper requirements) and Chapter II of the FAIS Act (see Principle 29). The criteria for the registration of managers of CIS in securities are set out in Section 42 of CISCA (see Principle 24 for other CIS types). The criteria for the cancellation or suspension of a manager’s registration are in Section 16 of CISCA. The requirements for the authorization of applicants for exchange license are in Section 8 of the FMA (see Principle 33), and those for the applicants for a CSD license, clearing house license and trade repository license are in Sections 28, 48 and 55 of the FMA, respectively. The cancellation or suspension of the license of these market infrastructures is covered in Section 60 of the FMA. Finally, Sections 5 and 6 of the CRSA include the requirements for the registration as a registered CRA and suspension and cancellation of such registration (see Principle 22). These criteria are complemented by requirements that are publicly available in FSB Board Notices, fit and proper requirements, etc. The procedural requirements for the authorization/registration process, including the possibility to appeal a decision, are described in Principle 2.

The authorization requirements for exchange members are required to be included in the exchange rules (Section 17(2)(a) FMA)). The same requirement applies to the rules of a CSD (Section 35(2)(b) FMA) and clearing house (Section 53(2)(b) FMA) in relation to their participants and clearing members. The procedural fairness requirements applicable to these market infrastructures are described in Principle 9.

Confidentiality

Section 22 of the FSB Act includes the requirements on the use and disclosure of information and co-operation. They provide that no information obtained in the performance of any relevant power or function may be used or disclosed to any person except:

In the course of performing functions under, or as enabled by the relevant Acts;
For the purposes of legal proceedings or other proceedings;
When required to do so by a court; or
By the Executive Officer or Deputy Executive Officer, if in their opinion disclosure is appropriate:
- For purposes of warning the public against conducting business with a financial institution or other person conducting activities in contravention of the FSB legislation;
- For purposes of informing the public of actions taken against a financial institution under the FSB legislation;
- For purposes of alerting the public to activities carried out by one or more financial institutions which the Executive Officer or Deputy Executive Officer believes to constitute a potential risk to consumers and in respect of which consumers should take care; or
- In the public interest.

Section 8 of the Inspection Act requires a person carrying out an inspection to preserve and aid in preserving secrecy with regards to all matters that come to his/her knowledge while conducting the inspection. An inspector may not communicate any such matter to any person except the Registrar, unless a court of law orders such communication or insofar as communication is necessary to properly carry out the inspection. The Registrar, however, may disclose any information obtained during an inspection, if he/she has reason to believe that an offence or irregularity has been committed relating to the affairs of the inspected institution or an inspected institution is in an unsound financial condition. The information may be disclosed to the following persons and entities, if they are affected by or have an interest in the information:

A department or organ of State;
A regulatory authority;
A self-regulating association or organization;
A statutory Board charged with supervisory or regulatory duties; and
A shareholder, partner, member, director, auditor, accounting officer, liquidator, curator, executor or trustee of the inspected institution.

Consistency of the application of powers

The FSB and the Registrars aim at ensuring the consistency of the application of their powers through various means. These include the issuance of guidance notes and circulars on the application of powers and authority and by providing all respondents an equal period to respond to a supervisory action. If licenses are suspended, the period of suspension is similar, with similar conditions for the lifting of suspension for similar contraventions.

Assessment

Broadly Implemented

Comments

Even though in practice the Minister of Finance and the FSB follow standard procedures in preparing the various legislative and regulatory measures, these procedures are currently not documented and disclosed to the public. The requirement for the Minister of Finance to prescribe a code of norms and standards for consultation in Section 18(3) of the FSB Act is an important development in this regard. In the upcoming legislative changes, it would be important to harmonize the legal requirements for consultation with the public across the sectors to ensure a uniform process and provide legal backing to the current practices.

The authorities are also encouraged to expressly consider the cost of compliance with regulation in all sectors by preparing an impact assessment, cost-benefit analysis or equivalent when enacting new requirements or making substantive changes to existing ones. They should also ensure that all legislation and regulatory measures are easily available to the public. In this regard, it would be important to improve the public access to all of these measures by posting copies on the FSB website in an easily identifiable location and removing the need to subscribe to a commercial service.

Principle 5.

The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

Description

Code of conduct

Avoidance of conflicts of interest

All FSB staff (including Executive Committee members) are subject to a Code of Conduct (Staff Code of Conduct) as part of their employment conditions. The Code provides that no employee is permitted to have any direct or indirect interest in any entity regulated by the FSB. The standard contract of employment requires an employee to declare any other business interest before commencing work. Employees must take all reasonable steps to ensure that no personal conflict of interest exists or may arise in connection with any agreed service or task that they are performing. Employees must consult their Head of Department for clarity, if there is any uncertainty or doubt whether a particular service or task poses a risk of conflict of interest, before commencing with such performance or task.

Employees are required to disclose, annually and in writing, detailed particulars of their other outside business interests and the business interests or employment of their spouse or life partner in or by any institution regulated by the FSB or providing a service to the FSB. The FSB Executive Committee has reserved the right to instruct an employee to cease any activities, should the activity pose a risk of conflict of interest or impact on their work performance.

Restrictions on holding and trading in securities

The standard contract of employment with the FSB (under the heading investment in shares) prohibits an employee from having any direct interest in any entity regulated by the FSB. This prohibits holding securities of regulated entities. Further, the Staff Code of Conduct provides that an employee may not deal in any security without the prior approval in writing of his/her Head of Department, Deputy Executive Officer or Executive Officer (depending on who the employee reports to). According to the Staff Code of Conduct, such approval must not be granted for any security of an entity regulated by the FSB, if there is a real or perceived possibility of it creating a conflict of interest for the employee in the execution of his/her duties, presently or in the future, and there is a real or perceived possibility of the employee acting in contravention of the market abuse prohibitions in the FMA. Securities encompass shares, options, derivatives, single stock futures, contracts for difference and bonds.

Confidentiality, secrecy and protection of personal data

As noted above, Section 22 of the FSB Act includes requirements on the use and disclosure of information. All of the following persons must not use or disclose information obtained in the course of their duties with the FSB, other than in the situations described in Principle 4:

A member or former member of the FSB Board, a Board Committee, the Appeal Board or the EC (or any alternate member or former alternate member); and
The Executive Officer, the Deputy Executive Officers, the Chief Actuary, persons appointed by the FSB, officers and employees (including any employee, contractor, consultant or person acting on behalf of the FSB), while appointed or after such appointment has terminated.

Section 8 of the Inspection Act includes confidentiality provisions for the persons carrying out the inspections (see Principle 4).

Enforcement of the code of conduct

Disciplinary proceedings may be instituted against any employee who contravenes the FSB Staff Code of Conduct. Possible sanctions are a warning, suspension without pay, final written warning, demotion or dismissal. Contravention of the confidentiality provisions in both the Inspection Act and the FSB Act constitutes a criminal offence. With regard to a contravention of the Inspection Act, the penalty may be a fine or imprisonment for a period not exceeding two years. The penalty for contravening Section 22 of the FSB Act is a fine not exceeding ZAR 1 million or imprisonment for a period not exceeding five years or both such fine and such imprisonment.

The responsibility for enforcing staff discipline lies with the line managers. The FSB has policies in place to deal with staff discipline cases as an when such arise. Depending on the nature of the case, either an internal or external expert is contracted or assigned to work on a particular disciplinary case. Depending on the nature of the case, the staff member is either given a warning letter or, where misconduct is gross, he/she may be dismissed after a hearing has taken place. For example, nine employees have been subject to formal disciplinary action since January 2013, ranging from written warnings to termination of employment. One separation agreement was caused by a conflict of interest.

Assessment

Broadly Implemented

Comments

The standard contract of employment with the FSB prohibits an employee from investing in the shares of a regulated entity. However, the Staff Code of Conduct appears to enable the employee’s manager to grant an approval for dealing in the securities of a regulated entity under certain, not very strict conditions.²³

The FSB should align or merge the requirements in the contract of employment and Staff Code of Conduct and ensure that the holding and trading prohibition applies to all securities, not only shares. At the same time, it is important to ensure that appropriate restrictions apply to all persons that may have access to confidential supervisory information, such as the FSB Board, Board Committee and DMA members. The FSB should also consider introducing an appropriate process to ensure that confidential information relating to entities other than those directly regulated by the FSB cannot be used for trading purposes. Such information can relate to, for example, confidential information received on listed companies in connection with an investigation or enforcement case.

Principle 6.

The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate.

The objectives of the FMA include contributing to the maintenance of a stable financial market environment and reducing systemic risk (Section 2). The FMA also includes a specific obligation for the Registrar to inform the Minister of Finance and the Governor of the SARB of any matter that in his/her opinion may pose systemic risk to the financial markets and to make adequate arrangements for effective cooperation with the Governor in respect of the monitoring and mitigation of systemic risk (Sections 6(3)(n) and (o)). Other Acts do not include specific references to monitoring and mitigating systemic risk. To give effect to the above cooperation requirement, the FSB and SARB have formed a Systemic Risk Committee that is in the process of initiating its activities. These include the compilation of a systemic risk register. Responsibility for this on the FSB side lies in the Capital Markets Department. The staff of this department also attend Strate’s Participant Failure Committee due to the potential systemic implications of a failure of a CSD participant.

The FSB is a member of the FSCF, which is a financial industry wide contingency planning and crisis management forum chaired by a Deputy Governor of the SARB. The primary objectives of the FSCF are to identify potential threats of a systemic nature that may adversely impact the stability of the South African financial sector, to develop and coordinate appropriate plans, mechanisms and structures to mitigate these threats, and to manage systemic crises. The member organizations include the SARB, FSB, National Treasury, Banking Association of South Africa (BASA), South African Insurance Association (SAIA), JSE, Payments Association of South Africa (PASA), South African Bankers Services Co Limited (Bankserv), Strate and ASISA.

There is an MOU and related terms of reference, where the FSCF member organizations commit to share information required to assess systemic risk, report incidents with systemic risk potential, participate in crisis management processes and contribute to the mitigation of systemic risk. The main forum meets twice a year to discuss issues relevant to systemic risk. The FSB’s participation in the FSCF meetings has not been regular in the past, whereas the SARB, the JSE and Strate regularly attend the meetings. Some securities markets related issues have been discussed in the meetings. The responsibility for the FSCF work is allocated to the Capital Markets Department, rather than having established an FSB level function to deal with systemic risks on a broader basis. The FSCF has an Operational Risk Sub-committee, whose objective is to identify and monitor operational risks in the financial sector that could potentially have a systemic impact, and to develop, test and maintain suitable crisis management and contingency plans to mitigate these risks.

Finally, the FSOC has been informally established prior to the enactment of the twin peaks legislation. One of its purposes is to coordinate managing risk to financial stability. The FSOC is jointly chaired by the Governor of the SARB and the Minister of Finance.

Assessment

Partly Implemented

Comments

The first assessments of Principles 6 and 7 conducted by the IMF after the introduction of the new Assessment Methodology focused on three high level issues in assessing the existence of a process to identify systemic risk or to review the perimeter of regulation, which is required pursuant to Key Question 1 of the respective Principles: (i) whether the arrangements in place allow for a holistic (across products, entities, and markets) view of risk; (ii) whether they allow for a periodic reassessment of risk; and (iii) whether they allow for proper follow-up actions). The experience gained since has enabled an enhancement of the assessment criteria, for example, by looking at the type of data and analysis that the authorities use to identify such risks, and the degree to which the processes implemented allow for proper accountability. This is in line with the recommendations included in the recent report of the Assessment Committee of IOSCO.²⁴

The need to monitor and mitigate systemic risk is taken into account in the FMA, whose scope of application is limited to market infrastructures, authorized users, central securities depository participants and clearing members. As result of this, most of the FSB level activities that aim at monitoring systemic risk are undertaken by the Capital Markets Department. There is a need for the FSB to develop organization wide arrangements for monitoring, mitigating and managing systemic risk possibly arising from securities markets in a more holistic manner.

The processes in place through the FSCF, and those expected to be enhanced through the work of the FSOC, to some extent compensate for the lack of FSB level arrangements. However, the current arrangements are very high level, and the FSB does not appear to have been an active contributor to the discussions at the FSCF. As at the FSB, the focus of the FSCF securities markets discussions has been in the trading and post-trading matters. Limited analytical work of relevance to securities markets appears to have been conducted. It will be important to ensure that these cross-sectoral bodies will adopt and maintain a broad approach to analyzing potential sources of systemic risk, ensuring that those possibly arising from securities markets are sufficiently covered. The same applies to any dedicated macroprudential function to be established.

Principle 7.

The Regulator should have or contribute to a process to review the perimeter of regulation regularly.

Description

Approach to reviewing the regulatory perimeter

The FSB has a role in assisting the National Treasury in drafting the sectoral legislation in South Africa. There is also regular interaction between the FSB, SARB and National Treasury to consider legislative amendments. The FSB has a five year review cycle for all legislation falling under its responsibility. According to the FSB, the legislation is assessed against the IOSCO Principles, the FSAP findings and recommendations, the recommendations of the G-20 and the Financial Stability Board, as well as developments in comparable jurisdictions.

The Capital Markets Department informed that it conducts regular reviews and benchmarking exercises based on various IOSCO reports to ensure that the legislative and regulatory framework is aligned with international best practice. The FMA allows the Minister of Finance to prescribe regulations. Further to this, the Registrar can issue additional regulatory measures and the market infrastructures can issue their own rules. Since the FMA is a new Act, the Registrar of Securities Services envisages conducting annual reviews and where necessary proposing legislative amendments.

The FAIS Division has adopted a risk-based approach to the supervision of FSPs (see Principle 31). This approach enables the division to assess the risks posed by the products offered by the FSPs, monitor trends in the FSPs’ activities and deal with the gaps identified. The FAIS Division informed that it also reviews the legislation for gaps and researches the market for risks. When such are identified, it aims at ensuring that the FAIS Act, subordinate legislation and the risk-based framework are updated to ensure consumer protection. Exemptions are granted for a specific period of time to allow for a reassessment of the appropriateness of the exemption after its expiry. In cases where exemptions are granted for an indefinite period, provision is made for their withdrawal at any time. Those exemptions are reviewed from time to time.

The CIS Division informed that it assesses the regulatory framework to identify and assess whether any amendments are required. The annual work plan includes reviews that are the result of the identification of the most pressing needs for review and change. The industry and ASISA play an important role in providing input in this regard. Further, the CIS Division assesses the FSB regulatory framework against the IOSCO benchmarks and makes changes where necessary.

Recent measures to address the regulatory perimeter

The FMA addressed previously identified gaps, for example by requiring the reporting of systemic risks, by addressing the SROs’ conflicts of interest and by introducing codes of conduct for regulated persons. Another example where the authorities have extended the regulatory perimeter is the regulation of credit rating agencies (see Principle 22). Ongoing projects include the planned extension of the hedge fund regulatory framework to hedge funds themselves in addition to the current regulation of hedge fund managers (see Principle 28), the Treating Customers Fairly project, and the assessment of Bitcoin’s risks to investors undertaken jointly by the National Treasury, the SARB and the Registrars of Financial Services Providers, Securities Services and Collective Investment Schemes.

Section 5(1) of the FMA provides a specific power for the Minister of Finance to prescribe requirements for the regulation of unlisted securities. The Minister of Finance may also extend regulation to currently unregulated persons, if it would in his/her opinion further the objects of the FMA. The ministerial regulations may then be complemented by various measures issued by the Registrar under Sections 6(7) and 6(8) of the FMA. The Minister of Finance and the FSB have used these provisions to propose extending the regulatory framework to OTC derivatives.

The Registrar of Securities Services has recently published for comment a draft regulatory framework for the regulation of public unlisted companies making a market in their own shares. These companies were not regulated in the past, but the growth in the activity to trade black economic empowerment shares has made it necessary to regulate this activity.

The Capital Markets Department has also conducted a gap analysis of the exchange’s listing requirements against IOSCO reports on ETFs, ETNs, commodity derivatives, securitization and asset-backed securities. This resulted in a review of the current listing requirements. The Department has also conducted a gap analysis on the Codes of Conduct for Johannesburg Interbank Average Rate (JIBAR) and the South African Benchmark Overnight Rate (SABOR) in relation to the IOSCO Principles for Financial Benchmarks. This resulted in a review of the Codes of Conduct.

The FMA also now makes provision for the authorization of inter-dealer brokers as a category of authorized user. The exchange rules must now provide for the manner in which an authorized user acting as an inter-dealer broker is required to conduct its inter-dealer broking services, including the manner in which it must broadcast bids and offers it receives, as well as for the circumstances in which an authorized user may or may not transact in listed securities using the services of an inter-dealer broker that is not an authorized user.

The FAIS Division has indicated to the industry its intention to include private equity fund managers under the ambit of the FAIS Act in order to align the regulatory framework with international regulatory developments. In this regard, the Registrar has developed a draft Code of Conduct for Private Equity Fund Managers, which is currently under consultation with the industry.

The Registrar of FSPs also recently discovered, as a result of a complaint, that some product issuers have structured the sign-on bonuses to intermediaries in such a way that they avoided the restrictions on incentives under the FAIS Act. The Registrar has therefore decided to amend the FAIS General Code of Conduct to prohibit the payment of such bonuses. Further, as a result of the recent failures of property syndications, the Registrar is also currently investigating the appropriateness of extending the FAIS scope to them.

Assessment

Broadly Implemented

Comments

The comments section of Principle 6 describes the criteria applied also to the assessment of Principle 7, and the recent amendments made to the assessment criteria.

The FSB’s approach to assessing the regulatory perimeter is still largely sectoral, although there is an increasing number of projects undertaken jointly by the various Registrars and/or with the other authorities. Due to the current complex division of responsibilities between the various authorities (and the FSB Registrars), there is a need to further enhance this joint approach to ensure that no products, entities or activities of concern inadvertently fall outside the regulatory perimeter and that the regulatory approach across sectors is sufficiently aligned. This will also assist in ensuring that there is sufficient accountability for this process.

Principle 8.

The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed.

Description

The regulation of conflicts of interest and misalignment of incentives is done at the level of the regulated entity. The various statutes and subsidiary instruments administered by the FSB generally require regulated entities to have policies and procedures in place to identify, eliminate or mitigate, and monitor conflicts of interest. Disclosure to their clients, customers, users or the public is mandated in most situations where there is or might be a conflict of interest.

There is no formal, overall process in place at the FSB that focuses proactively on potential conflicts of interest in the marketplace or where there might be a misalignment of incentives between issuers and regulated entities. New or changing conflicts may be identified as part of the processes described in Principle 7 or during the supervisory process. Regulatory responses to conflicts of interest issues that the FSB deems suitable have been introduced as the issues have been identified.

CISCA

The only conflict of interest provision in CISCA is a high level requirement for the CIS manager to avoid conflicts between the interests of the manager and the interests of an investor. The Registrar of CIS considers conflicts of interest at the time of registration of a manager and requires a manager to have a conflict of interest policy in place. Further, the Registrar is finalizing regulations for publication that would require conflicts of interest to be disclosed in certain marketing material and subscription forms. In addition, the supervisory program for on-site visits at CIS managers may include an evaluation of potential and actual conflicts during the regular supervisory visits to CIS managers. If problems are found, the Registrar communicates with the manager and directs it to take steps to eliminate the conflict.

FAIS Act

Conflicts of interest and misalignment of incentives are addressed by specific requirements and prohibitions in the General Code of Conduct for Authorized FSPs and Representatives, Board Notice 80/2003 (the General Code of Conduct) to which all FSPs must adhere. The provisions cover both prohibitions of certain kinds of incentives (section 3A), the avoidance of conflicts and their general management (sections 3(1)(b) and (c)). Clients are required to be informed of these matters in writing.

The General Code of Conduct was amended in 2010 to add section 3A after an investigation into the conflicts of interest raised by certain types of incentives. The Registrar concluded that the disclosure of such incentives was inadequate and that certain incentives should be prohibited. Section 3A prohibits giving and receiving certain incentives. For example, under section 3A(1)(b), an FSP may not offer incentives to its representatives for giving preference to:

The quantity of business secured to the exclusion of the quality of the service rendered to clients;
A specific product supplier, where a representative may recommend more than one product supplier to a client; or
A specific product of a product supplier, where a representative may recommend more than one product of that product supplier to a client.

In some instances, an FSP may only be paid a fee, if the client specifically agrees in writing to the fee and if the client can stop the payment. Representatives may not receive a financial interest (that includes remuneration), if it is paid for giving preference to the quantity of business to the exclusion of the quality of the financial services or for giving preference to a specific product supplier or its products.

FSPs are required to make full disclosure of any actual or potential conflict of interest before the conclusion of any transaction and on an on-going basis but not less than annually. FSPs are required to have a comprehensive conflict of interest management policy that is approved by their Boards and reviewed on an annual basis. In addition, the FSP’s management of conflict of interest policy must, inter alia, include a list of all associates, the names of any third party in which the provider holds an ownership interest, etc. This policy must be published in an appropriate media and the FSP must ensure that it is easily accessible for public inspection.

In addition, the compliance officer must monitor the FSP’s compliance with the conflict of interest provisions and its conflict of interest management policy and must submit a report to the FSB on an annual basis on the implementation, monitoring and compliance with, and the accessibility of such policy.

Since the introduction of the Code requirements in 2010, the Registrar of FAIS has received several complaints regarding non-compliance with the conflict of interest provisions. These complaints were investigated and some culminated in enforcement action being taken against FSPs. In addition, the FSB established a task team to investigate specific practices in industry that are designed to circumvent the conflict of interest provisions.

JSE Rules

Under the JSE Equities Rules, in its dealings with clients, a member must avoid conflicts of interest and when they cannot be avoided, ensure fair treatment of clients by disclosure, confidentiality or declining to act. A member must not unfairly place its interests above those of its clients (section 8.10.2.5).

FMA

Under, section 62 of the FMA, a market infrastructure must take the necessary steps to avoid, eliminate, disclose and otherwise manage possible conflicts of interest between its regulatory functions and its commercial services. These steps must include:

Implement appropriate arrangements that comply with the requirements prescribed by the Registrar;
Document and make publicly available these arrangements; and
Conduct an annual assessment, in the manner prescribed by the Registrar, of the arrangements and publish the results.

The market infrastructure must report annually on its compliance with this section.

The JSE, as an exchange licensed under the FMA, has certain self-regulatory responsibilities. It is accountable to the Registrar for ensuring that the objectives of the FMA are met in its self-regulatory role. In order to discharge the duty of regulation, the JSE is required to supervise the compliance of both issuers and authorized users (exchange members) as well as enforce the rules governing them.

In 2006, the JSE demutualized and proposed to list its own shares on the exchange. This raised a number of conflict issues. After consideration, it was decided that to prevent any conflicts of interest, the supervision of the JSE in terms of the JSE Listing Requirements would be transferred to the FSB. To address general concerns on the management of conflicts of interest, a new JSE Board Committee, the SRO Oversight Committee was created. It serves as an independent check on the appropriateness of the JSE’s self-regulatory activities and the manner in which conflicts of interest are managed by the JSE. See the discussion in Principle 9. Governance structures and Chinese Walls have also been put in place to mitigate possible conflicts of interest at Strate.

Under section 74(1) of the FMA, the Registrar may prescribe a code of conduct for authorized users, participants and clearing members. Draft Codes of Conduct have been prepared for authorized users and participants, who are required to disclose to the client the existence of any personal interest in the relevant service, or any circumstance which gives rise to an actual or potential conflict of interest in relation to such service as well as to take all reasonable steps to ensure fair treatment of the client.

Further, the firm 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, fee or brokerage as an inducement, if it is likely to conflict with any duty that the authorized 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.

These codes will be published for public comment.

The FSB has no role in issuer disclosure, beyond approving the JSE Listing Requirements.

See also the discussion of the regulation of conflicts of interest set out in Principles 9, 22, 23, 24, 28, 29, and 31.

Assessment

Broadly Implemented

Comments

There is no formal FSB-wide process in place focusing on conflicts of interest and misalignment of incentives. However, when issues of concern are identified, they are addressed by the FSB and there are several examples of these actions being taken in recent years, including with respect to incentives. The sectoral legislation and the JSE Rules all address conflicts of interest and require identification, avoidance, management, mitigation and disclosure, with the exception of CISCA where the provisions are much more high level than in other sectoral legislation. Where disclosure is required, it must be made in documents that are made available to affected clients.

There is a general need for an FSB-wide process that would survey the broad marketplace on a proactive basis to ensure issues of concern, such as emerging conflicts of interest, are identified and addressed early.

Principles for Self-Regulation

Principle 9.

Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

Description

Self-regulation in South Africa

The South African securities regulatory framework requires exchanges, CSDs and independent clearing houses to be licensed under the FMA. To be licensed, they are required to carry out certain self-regulatory tasks, although they are no longer formally referred to as self-regulatory organizations (SROs) in the FMA.²⁵ JSE and Strate are currently the only market infrastructures in South Africa that have self-regulatory responsibilities. SAFCOM is only an associated clearing house and is not required to undertake any such responsibilities. Strate’s self-regulatory functions are also limited to its CSD participants, since it also acts only as an associated clearing house of the JSE for bonds rather than as an independent clearing house.

Exchanges

Section 10 of the FMA includes the self-regulatory tasks that a licensed exchange has to undertake:

Issue exchange rules;
Supervise authorized users’²⁶ compliance with the exchange rules and the exchange directives;
Supervise compliance by issuers of listed securities with the exchange’s listing requirements.
Supervise authorized users’ and issuers’ compliance with the FMA, report any non-compliance to the Registrar and assist the Registrar in enforcing the FMA; and
Enforce the exchange rules, directives and listing requirements.

The exchange rules must provide for:

Equitable criteria for authorization and exclusion of authorized users, including fitness and propriety requirements for authorized users and their managers;
The authorization and criteria for authorization of the securities services that authorized users or different categories of authorized users may provide in different categories of securities;
Prudent capital adequacy, guarantee and risk management requirements for (various categories of) authorized users; and
An efficient, honest, transparent and fair manner in which and terms and conditions subject to which transactions in listed securities must be effected by authorized users, whether for own account or on behalf of other persons.

As required in Section 11 of the FMA, a licensed exchange must also make listing requirements that prescribe, among other issues:

The requirements with which issuers of listed securities and of securities which are intended to be listed, as well as such issuers’ agents, must comply;
The standards of conduct that issuers of listed securities and their directors, officers and agents must meet; and
The standards of disclosure and corporate governance that issuers of listed securities must meet.

Further, Section 17 of the FMA requires that the exchange rules must provide for:

The manner in which the exchange monitors its authorized users’ compliance with the FMA, the exchange rules and the exchange directives;
Surveillance of any matter relevant for the purposes of the FMA, the exchange rules and the exchange directives; and
The steps to be taken by the exchange or its delegate to investigate and discipline an authorized user or officer or employee of an authorized user who contravenes or fails to comply with the exchange rules, the interim exchange rules or the exchange directives and how the exchange is obliged to furnish a report on such disciplinary proceedings to the Registrar within 30 days after the completion of such proceedings.

Similar provisions on investigating and disciplining issuers and their directors, officers and employees have to be included in the listing requirements (Section 11 FMA).

Central securities depositories and clearing houses

Section 30 of the FMA includes the self-regulatory tasks that a licensed CSD has to undertake:

Issue depository rules;
Supervise its participants’ compliance with the FMA, report any non-compliance to the Registrar and assist the Registrar in enforcing the FMA;
Supervise participants’ compliance with the depository rules and the depository directives; and
Enforce the depository rules and the depository directives.

Section 35(2) of the FMA requires the depository rules to provide for equitable criteria for authorization and exclusion of participants, including fitness and propriety requirements for participants and their managers. The rules must also cover the steps to be taken by the CSD or its delegate to investigate and discipline a participant or officer or employee of a participant who contravenes or fails to comply with the depository rules, the interim depository rules or the depository directives and how the CSD is obliged to furnish a report on such disciplinary proceedings to the Registrar within 30 days after the completion of such proceedings.

Similar requirements are included in Sections 50(3) and 53(2) of the FMA for clearing houses. The clearing houses rules must also provide for the authorization and criteria for authorization of the clearing and/or settlement services that clearing members or different categories of clearing members may provide in different categories of securities as well as prudent capital adequacy, guarantee and risk management requirements for (various categories of) clearing members. If there are different categories of clearing members, the rules have to enable the restriction of the activities of such categories subject to different conditions.

Disciplinary measures

For any contravention of or failure to comply with the listing requirements, any one or more of the following penalties may be imposed:

A reprimand;
A fine not exceeding ZAR 7.5 million, to be adjusted by the Registrar annually to reflect the Consumer Price Index, as published by Statistics South Africa;
Disqualification, in the case of a natural person, from holding the office of director or officer of a listed company for any period of time;
Suspension or termination of listing; or
Any other penalty that is appropriate in the circumstances.

According to Section 71(6) of the FMA, the market infrastructure rules may also prescribe that the market infrastructure, or a person to which it has delegated its disciplinary functions, may where appropriate impose any one or more of the following penalties for any contravention of the rules or failure to comply with them:

A reprimand;
A censure;
A fine not exceeding ZAR 7.5 million, to be adjusted by the Registrar annually to reflect the Consumer Price Index, as published by Statistics South Africa;
Suspension or cancellation of the right to be a clearing member, an authorized user or a participant;
Disqualification, in the case of a natural person, from holding the office of a director or officer of a clearing member, an authorized user or a participant for any period of time;
A restriction on the manner in which a clearing member, an authorized user or a participant may conduct business or may utilize an officer, employee or agent;
Suspension or cancellation of the authorization of an officer or employee of a clearing member, an authorized user or a participant to perform a function in terms of the rules; or
Any other penalty that is appropriate in the circumstances.

Licensing requirements for the self-regulatory functions of a market infrastructure

A licensed exchange must conduct its business in a fair and transparent manner with due regard to the rights of authorized users and their clients (Section 10(1) FMA). Section 8 of the FMA sets out the requirements applicable to an applicant for an exchange license and a licensed exchange. With regards to their self-regulatory functions, an applicant for an exchange license and a licensed exchange must:

Have made arrangements for the efficient and effective surveillance of all transactions effected through the exchange and for the supervision of authorized users so as to identify possible market abuse and ensure compliance with the exchange rules, the exchange directives and the FMA;
Have made arrangements for the efficient and effective monitoring of compliance by the issuers of listed securities with the exchange’s listing requirements; and
Have made arrangements for the efficient and effective supervision of authorized users so as to ensure compliance with the Financial Intelligence Centre Act 38 of 2001 (FICA).

Section 28(1)(d) of the FMA provides that an applicant for a CSD license and a licensed central securities depository must have made arrangements for the efficient and effective monitoring of compliance by participants with the depository rules. Similar requirements apply to the applicants for the license of an independent clearing house that are required to have made arrangements for the efficient and effective supervision of clearing members so as to ensure compliance with the clearing house rules, the clearing house directives and the FMA.

Board Notice 104 of 2013 sets out the requirements applicable to the granting of a market infrastructure (i.e., exchange, CSD and independent clearing house) license and requires that the business plan of the applicant, which has been approved by its Board, deals at least with the following matters:

Plans to ensure the integrity of the market and its authorized users, participants, external central securities depositories, other persons or clearing members;
The surveillance procedures established to ensure the compliance by authorized users, participants, external central securities depositories, other persons and clearing members with the FMA and the proposed rules and directives of the market infrastructure and the resources of the applicant available to perform this function; and
Procedures to be followed to effectively discipline the applicant’s authorized users, participants, external central securities depositories and clearing members who fail to comply with the rules of the market infrastructure.

Supervision by the FSB

Rule approval

The rules of a market infrastructure must be approved by the Registrar according to the process described in Principles 4 and 34. The same process applies to an exchange’s listing requirements (Section 11(6) FMA).

Other supervision

The supervision of exchanges has been described in Principles 33 and 34. The reporting requirements applicable under Section 69 of the FMA and the requirement to submit certain documents to the Registrar under Section 70(2) of the FMA apply also to a CSD (Strate) and any future independent clearing houses. Their rules are also subject to the approval of the Registrar. As in the case of the JSE, the FSB representatives attend the Strate Board and Board Committee meetings as well as those of Strate’s Participant Failure Committee. Strate is subject to the requirement to prepare an annual self-assessment. The FSB also conducts on-site visits at Strate; the latest visit focused on Strate’s participant supervision.

Power of the Registrar to assume the responsibility for self-regulatory functions

Section 10(3) of the FMA provides that the Registrar may assume responsibility for one or more of the exchange’s regulatory or supervisory functions, if he/she considers it necessary in order to achieve the objectives of the FMA. Before assuming responsibility for a function, the Registrar must inform the exchange of his/her intention to assume the responsibility, give the exchange the reasons for the intended assumption, and call upon the exchange to show cause within a period specified by the Registrar why responsibility should not be assumed by the Registrar. The same possibility applies to the regulatory and supervisory functions of a CSD and independent clearing house under Sections 30(3) and 50(3), respectively.

Professional standards

Section 73 of the FMA includes the confidentiality provisions applicable to market infrastructures. No market infrastructure or its Chief Executive Officer, other officer, employee, representative or member may disclose to any person any confidential information obtained in the performance of functions under the FMA, unless:

The person to whom the confidential information relates has given consent;
Disclosure is required or permitted under a law or a court order;
Disclosure is necessary to carry out his, her or its functions or in the course of performing duties under any law; or
Disclosure is required for the purposes of legal proceedings.

In addition, a market infrastructure may disclose information relating to or arising from its functions to any market infrastructure or supervisory authority, whether domestic or foreign, if such disclosure will further one or more of the objectives of the FMA.

The market infrastructures also apply procedural rules comparable to those of the FSB. For example, the JSE Equities Rules provide that a Disciplinary Committee may not impose any penalty unless the alleged improper conduct has first been put to the person who is alleged to have committed it and such person has been given an opportunity, orally or in writing, of explaining his/her conduct after being warned that any explanation furnished pursuant to the rules may be used in evidence against him/her. Any person in respect of whom a Disciplinary Committee has imposed a reprimand, censure, or fine (but not a warning) has the right to demand, within a period of three days after the imposition of such reprimand, censure or fine, that the matter be heard by a Tribunal. The Tribunal may, if it finds the person guilty of the conduct that forms the subject of the charge, impose a penalty more severe than that imposed by the Disciplinary Committee. Similarly, Sections 12.2 and 12.3 of the Strate Rules include a requirement to include reasons in the notice on planned enforcement action and provide the participant with an opportunity to make representations.

Conflicts of interest

Section 62 of the FMA includes provisions on conflicts of interest. A market infrastructure must, where applicable, take necessary steps to avoid, eliminate, disclose and otherwise manage possible conflicts of interest between its regulatory functions and its commercial services, which must include the implementation of appropriate documented and publicly available arrangements complying with the requirements prescribed by the Registrar. A market infrastructure must also conduct an annual assessment, in the manner prescribed by the Registrar, of such arrangements and publish the results. FSB Board Notice 101 requires a market infrastructure to report in its annual report on the results of the annual assessment of its conflict of interest arrangements.

In order to give effect to section 62 of the FMA, in July 2013 the Registrar requested both the JSE and Strate to demonstrate that they had mapped their conflicts of interest and had arrangements in place to manage these conflicts. The FSB has prepared a draft Board Notice on conflicts of interest, which is however not yet in force.

In relation to the self-listing of securities issued by the exchange, Board Notice 95 of 2013 requires the controlling body of an exchange to:

Implement appropriate arrangements to ensure that no real or potential conflict of interest arises with respect to such inclusion;
Consider all complaints by affected persons relating to a conflict of interest;
Determine whether a conflict of interest has arisen or may arise; and
Report all complaints received in connection with a conflict of interest to the Registrar as soon as reasonably possible after the receipt of the complaint. The report by the controlling body must include all material facts, together with proposals for the resolution of any conflict of interest.

In practice, the JSE and FSB have minimized the most significant conflicts by having the FSB act as listing authority for the JSE’s shares listed on the exchange. The FSB thereby ensures the Listing Requirements are met by the JSE as an issuer.

The exchange must include in its annual report to the Registrar a section on the regulatory and supervisory structure applicable to and the role of the Registrar in supervising the exchange’s own listing, which section must include a statement to the effect that in the opinion of the controlling body, the exchange has complied with all its rules, listing requirements and procedures in a manner which warrants the continued listing of the exchange’s securities on the exchange and a confirmation that all complaints relating to a conflict of interest were referred to the Registrar during the year under review.

During 2011 a new JSE Board Committee, the SRO Oversight Committee was created. It serves as an independent check on the appropriateness of the JSE’s SRO activities and the manner in which JSE manages its conflicts of interest. It also creates a reporting line between the SRO focused divisions of the JSE, namely the Issuer Regulation and Market Regulation (Surveillance Divisions), and the JSE Board, which is in addition to the direct reporting line between the Chief Executive Officer and the heads of these divisions.

The Committee reports to the JSE Board on a biannual basis and has broad powers to require input from the heads of the two regulatory divisions and any other JSE staff. The Committee’s report is published in the JSE’s Annual Report, submitted to the FSB and published in the FSB’s Annual Report. These documents are available to the public on the respective organization’s website.

Assessment

Fully Implemented

Comments

Principles for the Enforcement of Securities Regulation

Principle 10.

The regulator should have comprehensive inspection, investigation and surveillance powers.

Description

Powers to inspect and obtain information

Under section 4(5)(a) of the FAIS Act the Registrar may:

Conduct an on-site visit under Chapter 1A of the Protection of Funds Act; or
Instruct an inspector to conduct an inspection under the Inspection Act.

The language in section 95 of the FMA gives the Registrar these same powers with respect to entities governed by that Act, as does section 14(1) of CISCA for its regulated entities.

The relevant provisions do not require the Registrar to give prior notice to the entity. The Registrar may use these provisions to conduct on-site visits for general supervisory purposes or in order to investigate suspected non-compliance and contraventions. The Protection of Funds Act powers are used for routine inspection/examination type activities. The Inspection Act authority is aimed more at forensic investigations to be used for enforcement actions. The FSB refers to these as on-site visits and inspections, respectively.

Under section 4A of the Protection of Funds Act, the Registrar may conduct an on-site visit of any regulated entity and has full access to the books and records of regulated entities under all of the FMA, FAIS Act and CISCA, both for routine supervision and for particular matters. The Registrar can also instruct any person that is in possession of any business document relating to the business of the regulated person to produce the document or furnish information about it.

Under the Inspection Act, the inspector may summon any person (regulated or not), whom the inspector thinks may have possession of books and records of a regulated firm and require that person to produce the information (sections 4 and 5). These inspections involve a systematic process of collecting evidence relevant to the areas under review. While performing these inspections, staff may conduct specific actions such as execute search warrants and perform search and seizures.

Under the FAIS Act, the Registrar may direct an FSP, representative or compliance officer to furnish the Registrar, within a specified period, with specified information or documents (section 4(2)). Further, section 6(3)(d) of the FMA stipulates that in performing its functions the Registrar “may require any person, including a regulated person, to furnish the Registrar, within a specified period, with specified information or documents.”

The JSE Equities Rule 12.10 (Surveillance and Investigation by the JSE Surveillance Department) provides for the inspection by the JSE Surveillance Department of the members of the JSE regarding their compliance with the FMA, the JSE Equities Rules, the JSE Equities Directives and the FICA. These rules are stated broadly and there is no requirement for notice prior to an on-site visit.

The JSE’s powers of investigation set out in Equities Rule 12.10.2.1.5 allow for the Director: Surveillance and any other person designated by him to call for any person who is subject to the jurisdiction of the JSE who is believed to be able to furnish any information on the subject of any investigation or to have in his or her possession or under his or her control any book, document, tape or electronic record or other object which has a bearing on the subject of the investigation to produce such book, document, tape or electronic record or object. An investigation is not limited to one in which there is suspected misconduct. It includes any enquiry to assess compliance with a regulatory requirement. The JSE’s powers of investigation also apply to requests for data and information that is required in respect of investigations that are conducted on a scheduled and on-going basis.

Surveillance of trading

While the FSB lacks direct online access to the JSE surveillance system, its Market Abuse Department staff meet with the JSE market surveillance team on a biweekly basis to review information compiled by the JSE and are able to request at any time any needed information from the JSE. The FSB retains exclusive responsibility to monitor trading in the JSE shares that are listed on the JSE. An experienced FSB employee is assigned to monitor this trading.

The DMA has extensive and intrusive investigation powers to investigate market abuse (insider trading, market manipulation and false and misleading statements) under section 84 of the FMA. These investigation powers include:

Summoning any person to provide any information regarding an investigation into market abuse;
Interrogating any person under oath; and
On the authority of a warrant, without prior notice, entering and searching the premises of any person, and seizing relevant documentation.

The JSE and Strate are responsible for the surveillance of their authorized users and participants respectively. Equities Rules 12.10.1.1 and 12.10.1.2 permit the JSE Surveillance Department to set up and maintain systems for market surveillance and compliance monitoring. See the description of these systems in Principles 9, 34, and 36.

Record-keeping requirements

All of the FAIS Act, the FMA and CISCA set high-level record-keeping requirements for entities registered under those statutes (FAIS Act sections 18 and 19, FMA section 90, CISCA sections 4 and 74) and require records to be kept for a minimum of five years.

Section 18 of the FAIS Act requires FSPs to keep and maintain records for a minimum period of five years regarding:

Known premature cancellations of transactions or financial products by clients of the provider;
Complaints received together with an indication whether or not any such complaint has been resolved;
The continued compliance with the fit and proper requirements;
Cases of non-compliance with the FAIS Act, and the reasons for such non compliance; and
The continued compliance by representatives of the authorized FSP with the requirements of the FAIS Act.

Board Notices made under the FMA and FAIS Act set out much more detailed requirements. Board Notice 96 of 2013 (that applies to JSE member firms, the JSE and Strate) requires that the accounting records of a regulated person must show the transactions and financial commitments of a regulated person, and the 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 (section 2(1)).

It further states that a regulated person may keep computerized records provided that such records are subject to acceptable back-up and recovery procedures and can be reproduced in printed form. See also section 3(2) of the General Code of Conduct.

In particular, section 6 of Board Notice 96 of 2013 requires an authorized user, participant and clearing member to maintain, where applicable, extensive accounting records in respect of securities services provided, which, among other things, must contain as a minimum:

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 or contingent liabilities;
A record of all purchases and sales of securities which reflects the:
- Date and time of each transaction;
- Person from whom securities were bought or to whom they were sold unless it is processed through an automated trading system recognized by the relevant exchange;
- Name of the person on whose behalf the securities were bought or sold;
- Quantity and description of the securities which were bought or sold;
- Name of the issuer of the securities;
- Price per security and the total consideration;
- Fees and charges;
- Taxes that are payable in respect of each transaction;
- Terms of the contract;
- Capacity (principal or agent) in which the transaction was entered into;
A record of all securities and documents of title which are in the possession, safe custody or under the control of the authorized user, participant or clearing member in which is reflected the:
- Name of the issuer of the securities;
- Quantity and description of the securities;
- Identification numbers of the securities and documents of title, where applicable;
- Name of the registered holder and, if the registered holder is a nominee controlled by the regulated person, the name of the person on whose behalf the nominee is holding the securities;
- Person from whom the securities were received and to whom they were delivered;
- Date of receipt and delivery;
- Location where the securities or documents of title are kept;
- Details of any pledge to which the securities may be subject;
- Person on whose behalf securities or documents of title have been received or delivered; and
- Purpose for which the securities or documents of title are held.

The JSE Rules also set out very detailed requirements for the records to be kept by member firms. The Equities Rules specify the requirements for the maintenance of client records (Rule 8.10.4) and that members are directed to retain all instructions given by clients to execute transactions for a period of at least six months after the relevant transactions (Rule 8.10.4.5). They also stipulate that all other client records be kept for at least five years after the rendering of the services concerned. Similar requirements are imposed on members under Rule 10.20 of the JSE’s IRC Rules and Rule 16.10.5 of the Derivatives Rules.

Equities Directive DA1 also requires a member to “maintain accounting records on a continual basis so that at all times its records are up-to date” (section 1.1) and sets out additional requirements with respect to the firm’s accounting records. Similar requirements apply under the Derivatives Rules and the IRC Rules.

No detailed record-keeping requirements have been set under CISCA for CIS managers to supplement the very general requirement in section 4 of that Act that a CIS manager keep proper records. However, CIS managers are subject to the record-keeping requirements set out in FICA (see below).

Client identity

The record-keeping provisions mentioned above specifically require entities regulated under the FMA and FAIS Act to keep records of all clients.

JSE members are required by Equities Rule 8.60 to obtain and maintain client information for each account so as to identify their clients. Equities Rule 8.10.4 requires that such client records be appropriately maintained.

Section 56 of the Companies Act deals with beneficial ownership of companies subject to that statute. It allows for shares to be held in the name of one person for the beneficial interest of another. The provision stipulates that the identity of the ultimate owner of the security must be disclosed to the company and provides for the manner of disclosure. A regulated company²⁷ is required to maintain a register of such disclosures and to publish in its annual financial statements a list of the persons who hold beneficial interests of five percent or more of the total number of securities of any class issued by the company, together with the extent of those beneficial interests. These registers are open to access by the public.

Section 22 of FICA places an obligation on accountable institutions (which term includes all securities FSPs, regulated entities under the FMA, and CIS managers other than those that manage participation bond CIS) to keep information and verification documents obtained to establish their clients’ identities. The information must be kept for a period of at least five years from the date on which the business relationship is terminated. Section 45(1) of FICA empowers the FSB to supervise and enforce compliance with FICA on all accountable institutions regulated by it. Further, to ensure on-going compliance with the fit and proper requirements, the Registrar has made it compulsory for FSPs to have policies, procedures and systems in place to comply with FICA and other anti-money laundering legislation (Fit and Proper Notice, Part IV).

Under FICA, accountable institutions are required to have procedures in place to ensure that they regularly monitor transactions and business relationships with clients, having regard to the risk of money laundering and terrorist financing. By establishing and verifying the identity of clients (section 21) and keeping records of verification documents in accordance with section 22 of FICA, accountable institutions are able to identify unusual and suspicious transactions (section 29), cash transactions above ZAR 25,000 (section 28), and property related to terrorist financing activities (section 28A). These suspicious transactions must be reported to the FIC.

Under section 45 of FICA, the FSB has authority to conduct routine inspections on the premises of its accountable institutions to determine their compliance with FICA and the relevant regulations. During the inspections, the FSB may conduct walk-through tests on systems and controls and also scrutinize the verification documents obtained by the accountable institution to establish the identity of clients.

The JSE has the authority to request client particulars under Equities Rule 8.10.4.4, which states that client particulars must be made available for investigation within seven days of a request by the JSE. In practice, the surveillance systems maintained by the JSE contain all the prescribed client particulars.

JSE and Strate supervision

The FMA assigns some supervisory responsibilities to the exchange (JSE) and CSD (Strate). The FSB supervises their compliance with these responsibilities. The FSB has full access to information at the JSE and Strate under section 6(3) of the FMA.

The Registrar has the authority under section 96 of the FMA to order changes to the market infrastructures’ processes. After an on-site visit or inspection, the Registrar may direct the regulated entity to:

Take any steps or cease carrying on any act, in order to terminate or remedy any irregularity or state of affairs disclosed by the on-site visit or inspection; or
Prohibit or restrict specified activities of a director, managing executive, officer or employee, if the Registrar believes that he/she is not fit and proper to perform such activities.

The JSE and other market infrastructures such as Strate are subject to confidentiality requirements under the FMA (see Principle 9).

See also the discussion under Principles 9, 33 and 34 regarding the supervision of the JSE and Strate.

Assessment

Broadly Implemented

Comments

The powers of the Registrar under the FMA and FAIS Act and those of the JSE under its rules to supervise their respective firms are extensive, as are the record-keeping requirements that apply. However, there are some gaps under CISCA that are notable when compared to the requirements and powers available under the FMA and FAIS Act. Each Registrar under the FMA, FAIS Act and CISCA should have equivalent powers. While firms authorized under the FMA, FAIS Act and CISCA are subject to the same record-keeping requirements under FICA, they should also be subject to an equivalent level of detailed record-keeping requirements under their authorizing Acts.

Principle 11.

The regulator should have comprehensive enforcement powers.

Description

As noted above, the FSB has authority under the FSB legislation to conduct on-site visits of regulated entities or conduct investigations of any party (called inspections in South Africa) and to take action where non-compliance with the laws is found.

The Registrar of FAIS has the power to investigate complaints of non-compliance with legislation, and, in complex or serious cases, appoint inspectors under the Inspection Act to conduct inspections into the activities of entities suspected of being in contravention. These powers are not limited to licensed firms. The Registrar may withdraw or suspend licenses or approvals and debar individuals in appropriate circumstances. (See also the discussion under Principle 29.)

Under CISCA, the Registrar of CIS has powers to conduct an investigation, to impose fines, and to request an audit of a CIS manager. The Registrar is also empowered to call for an inspection or investigation into the affairs of a CIS manager (section 14) and may apply to court for an order to wind up the manager or the CIS, to appoint a new trustee or manager, or to appoint a curator in respect of the manager’s business (section 15).

The DMA has the power to investigate any person for the types of market abuse set out in Chapter X of the FMA, which include insider trading (section 78); false, misleading or deceptive statements (section 81) and market manipulation (section 80). Front-running client trading is also prohibited for FSPs under section 3(1)(f) of the General Code of Conduct. The Registrar may give instructions to investigate any misconduct by financial advisers, investment managers, etc.

Section 94(1) of the FMA gives the Registrar authority to investigate a failure to comply with the FMA and sets out the powers of the Registrar, if non-compliance is found. These powers include the right to apply to court to wind up a company under the Companies Act, apply for the appointment of a curator, issue a compliance order, or forward the matter to the criminal enforcement authorities (section 96). The courts have the authority to declare a person disqualified for a definite or indefinite period of time.

Under the Protection of Funds Act, the Registrar may take various actions, including:

Apply to the High Court for the appointment of a curator to take control of and manage the whole or any part of a regulated firm;
Agree with a regulated firm to appoint a statutory manager for that firm;
Institute proceedings in the High Court to compel a regulated firm to comply with the law or any lawful request or instruction issued by the Registrar; and
Seize assets or prevent the dissipation or destruction of assets or evidence (section 6).

Decisions of the Registrar under the FMA, FAIS Act and CISCA are appealable to the Appeal Board. The decisions of the Appeal Board are subject to review by the High Court.

To aid in effective enforcement, the Protection of Funds Act established the EC. The EC is an administrative body charged with adjudicating on all alleged contraventions of and non-compliance with legislation, regulations, codes of conduct, etc. administered by the FSB (section 6D(1) of the Protection of Funds Act). The Board of the FSB appoints the EC. Members are appointed for their knowledge and experience (with reference to the different industries). In addition, the chairperson and deputy chairpersons must either be advocates or attorneys with more than 10 years experience, or judges.

Where there is evidence of breach of or non-compliance with the requirements under the laws, the Registrar has the authority to refer matters to the EC. This evidence may come from routine supervisory activities, such as on-site visits, or an inspection under the Inspection Act.

If the EC determines a respondent has contravened a provision of FSB legislation, it may:

Require the person to pay a sum of money to the FSB; there is no upper limit to the amount of such penalty;
Order the person to pay compensation to make good the loss or damages suffered by the affected parties;
Order a person guilty of insider trading to pay to the FSB a sum of up to ZAR 1 million plus three times the profit made or loss avoided (as set under section 82 of the FMA); and
Make a cost order covering the cost of constituting the EC panel and all expenses reasonably incurred by the Registrar or DMA in investigating the alleged non-compliance and referring the matter to the EC (section 6D).

The EC’s orders are enforceable as if they were judgments of the High Court of South Africa. Section 6D(3) of the Protection of Funds Act sets out some of the factors that the EC may take into account when it decides on a penalty, which include the nature and seriousness of the contravention, the impact, the entity’s previous conduct, the extent of the profits derived, etc.

At any time prior to a referral of a matter to the EC or during or after EC proceedings, the matter may be settled by written agreement (section 6B(7)). This agreement must be filed with the Chairperson and made an order of the EC. Approximately 80 percent of matters are settled in this way.

Decisions of the EC are appealable to the High Court.

Transparency of sanctions imposed

The practice of the FAIS Division is to publish every sanction decision. It also maintains a register of representatives of FSPs on its website that include the names of representatives who have been debarred. The CIS Division does not routinely publish penalties imposed.

All decisions of the EC (including settlements) are published on the FSB’s website once the Chair of the EC issues the decision. A news release is also issued in all cases.

All Appeal Board hearings and those conducted by the EC are open to the public.

The JSE publishes all penalties other than private censures and even these are described on a no-names basis in public documents.

Referral to criminal authorities

The FSB may refer matters to the NPA and SAPS, e.g., under section 11 of CISCA and section 96(e) of the FMA. The FSB provides litigation support in these cases. The FSB does not have authority to institute a criminal prosecution itself.

Each of the statutes contains offenses provisions. The penalties that may be imposed vary from a fine of an unstated amount and a maximum of two years in jail under section 12 of the Inspection Act to a high of up to ZAR 50 million and up to ten years in jail under the market abuse provisions in section 109 of the FMA.

Suspension of license or trading

Section 16 of CISCA empowers the Registrar of CIS to cancel or suspend the registration of a manager. The Registrar of FAIS can suspend any license, if he/she is satisfied that the licensee has committed a material contravention of the FAIS Act.

The licensed exchange has the power to suspend trading of securities under section 12 of the FMA and must make rules regarding when such suspensions will be imposed.

Rule 6.10.6 of the JSE Equities Rules deals with the JSE Equities Trading system and provides that the Market Controller may:

Decide that the market or segments of the market in equity securities be paused, suspended, halted or closed, if he is of the opinion that a fair and realistic market does not exist;
Reduce or extend the hours of operation of the JSE equities trading system for any particular business day;
Without prior notice to any person, pause, suspend, halt or close the JSE equities trading system for trading at any time and for any period; and
Take such other steps as may be necessary to ensure an orderly market.

Section 12 of the Equities Rules contains provisions permitting the JSE to suspend a member for breaches of the Rules or when otherwise in default of its obligations.

Under the JSE Listing Requirements, the exchange has the general power to suspend the listing of any security on the exchange (sections 1.1-1.9), whether for failing to comply with the listing requirements, at the request of the issuer or for other reasons. The detailed listing rules set out when such actions will be taken and the process that will be followed.

Access to information

As noted under Principle 10, the Registrar has full access to information at regulated entities. In addition, the Registrar has the right to require third parties to appear and produce any relevant records under each of the FMA, the Inspection Act and the Protection of Funds Act. For example, section 6(3)(d) of the FMA says that in performing its functions the Registrar “may require any person, including a regulated person, to furnish the Registrar, within a specified period, with specified information or documents.”

Under the Inspection Act, an inspector may:

Summon and interview under oath any person who has information relating to the inspection;
Call for the delivery of any documentary evidence that has a bearing on the inspection; and
Enter and search any premises, and seize any documentation relating to the inspection (in some instances a search warrant is required for this purpose).

Private remedies

Private persons may have rights under common law (such as for negligent misrepresentation) and by contract to take action for misconduct relating to the securities laws. These remedies would be based on the expectations imposed by the general law or the terms of the relevant contract and not on statutory contraventions of the securities legislation as such. Section 87 of the FMA protects the common law rights of persons aggrieved by any market abuse dealing or offence to sue for damages, except to the extent that any such amount has been recovered by the person under section 82 (liability for insider trading). Further, section 6I of the Protection of Funds Act provides that “no provision of the Act, whether it relates to civil or criminal matters, and no act performed under any such provision, may be construed as limiting any right of a person affected by the contravention to seek appropriate legal redress in terms of the common law or any other statutory law.”

Cooperation with other regulators

If action must be taken by a regulator other than the FSB or JSE, both have the ability to share information with that other regulator. For example, under section 9 of the Inspection Act, the Registrar may disclose information to other regulators, organs of state and affected parties, if an offence has been committed or an institution is in an unsound financial condition. Generally, the Registrar may also share information with foreign regulators.

Inspectors under the Inspection Act have wide powers to obtain information directly. However, if for some reason the inspector is unable to obtain the information directly, it may be obtained from any other domestic agency, by notice to such agency. There are MOUs that have been concluded between the FSB and other regulatory authorities for, inter alia, exchange of information. The investigative powers of the Inspectorate extend to information held by other agencies.

See also the discussion under Principles 13-15.

Assessment

Fully Implemented

Comments

The FSB generally publishes all penalties imposed under the FMA and FAIS Act. The JSE publishes all penalties other than private censures and even these are described on a no-names basis in public documents. The exception to the general publication practice is under CISCA.

The publication practices of the FSB should be uniform across the FSB Divisions.

Principle 12.

The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

Description

FSB routine supervisory framework

In 2005, the FSB changed its supervisory approach from compliance-based supervision to risk-based supervision. The FSB put in place an agency-wide Policy Framework for Risk-Based Supervision (RiBS), the latest version of which was approved in 2011. The framework is intended to promote the early identification and on-going management of systemic and organizational risks at the regulated firms, allowing the FSB to focus its attention based on the risk profile of the firms.

The policy document sets out the overall minimum standards that each division within the FSB is to adhere to when designing, implementing and maintaining its respective RiBS framework. It also sets out the basis for sharing of information and co-operation between departments where different licenses are issued to a single financial institution or group of financial institutions.

RiBS is a structured approach designed with two aims:

Identify as early as possible, assess, prioritize and mitigate those important risks relevant to each institution that present the greatest financial risk to its continued viability and that may ultimately impede the ability of the FSB to attain its aims; and
Create incentives for institutions to manage their risks effectively.

The key objectives of RiBS are to:

Assess the safety and soundness of the regulated financial institutions;
Intervene on a timely basis where practices of regulated financial institutions are imprudent or unsafe; and
Ensure that enforcement and regulatory action is taken where institutions continue to be non-compliant despite being afforded the opportunity to correct the area of non-compliance identified.

These are achieved by evaluating an institution’s risk profile, financial condition, risk management processes and compliance with applicable legislation.

RiBS follows a structured approach to consider all of the key aspects of a regulated entity’s business and the risks that might have a material impact within each aspect. These are the risks that merit greater regulatory attention and that may require remediation at the regulated entity and/or intervention by the FSB.

Each Division within the FSB has developed its own approach in implementing RiBS. There are differences in the approaches due to the particular characteristics of each industry and inherent differences between prudential and market conduct regulation. However, the objectives of each of the approaches, the supervisory cycle that is followed and the end result of assigning a risk rating to each regulated entity are similar.

See the description of the individual divisions’ supervisory activities set out below. The supervisory activities for CIS managers appear under Principle 24, that for market intermediaries in Principle 31, and that for the JSE and Strate in Principles 9 and 34.

Unusual transactions at exchanges and trading systems

As noted above, section 8(1) of the FMA requires an applicant for an exchange license and a licensed exchange to have systems in place “for the efficient and effective surveillance of all transactions effected through the exchange and for the supervision of authorized users so as to identify possible market abuse and ensure compliance with the exchange rules and exchange directives and this Act.”

The JSE has a staff complement of experienced market surveillance personnel, with teams assigned to each of its trading markets (Cash Equities, Derivatives and Bonds) that monitor the markets on a continuous basis. The JSE trading systems can identify market participants and provide broad functionality to flag unusual trading patterns and JSE staff has the authority to immediately contact listed companies and authorized users (members) for information or explanations of unusual trading or company activities.

The very detailed information kept on the JSE’s systems allow the exchange to trace the execution of orders on its markets.

Detection and enforcement

The Market Abuse Department is a department within the Investment Institutions Division of the FSB. The department is responsible for investigating market abuse offences as defined in Chapter X of the FMA. Essentially, the Market Abuse Department carries out the mandate of the DMA to enforce the prohibitions against market abuse contained in the FMA.

The Market Abuse Department’s staff is made up of investigators having either legal or accounting experience.

The role of the Market Abuse Department is to protect the integrity of the financial markets, thereby protecting members of the public and investing community who trade in securities listed on a regulated market.

The FMA sets out the market abuse offences. According to the FMA, market abuse offences/contraventions relate to companies whose securities are listed on a regulated market. The FMA sets out three market abuse offences namely insider trading (prohibited in section 78), market manipulation (prohibited in section 80), and false reporting/misrepresentations (prohibited in section 81) with respect to listed companies. (See also Principle 36.)

The Market Abuse Department will investigate a market abuse matter and report such to the DMA for it to make a decision to either close the case or refer it for enforcement action. During the past three years, the DMA finalized the following number of forensic investigations, relating to insider trading, market manipulation and false or misleading reporting.

DMA Investigations

Year	Number
2011	21
2012	15
2013	21

Source: FSB – DMA.

The majority of the DMA’s investigations arise from referrals received from the JSE’s Surveillance Department and Issuer Regulation Department as well as complaints from members of the public. Most of the matters were detected via the JSE surveillance systems. The DMA investigators and the JSE surveillance staff meet bi-weekly to consider surveillance results and the progress of cases under investigation.

After meeting with the JSE departments, cases are logged and allocated to an investigator. The investigator requests all relevant documents and information, subpoenas witnesses and suspects for interrogation and then drafts a forensic report to be presented to the DMA.

The DMA has quarterly meetings and after each meeting it issues a press release updating the public on the status of its current investigations. The determination of the EC in respect of matters referred to it by the DMA for enforcement action is also published once a matter has been finalized.

During the 2012/2013 financial year, the DMA held three meetings. It considered 17 completed investigations. Of the 17 cases, 11 were closed. Investigations are closed once it becomes evident that no, or insufficient evidence, has been obtained to warrant action. The DMA was satisfied that anti-market abuse provisions were not contravened in all these cases.

The DMA referred six cases for enforcement action in the financial year 2012/2013. Four cases related to alleged market manipulation in the Afgri Limited, Metair Investments Limited, Palaborwa Mining Limited and Comair Limited shares. The other two cases related to false and misleading statements by Alliance Mining Corporation Limited and Africa Dawn Limited. The following administrative penalties were imposed:

ZAR 10 million against two individuals for price manipulation in Afgri Limited, Metair Investments Limited, Phalaborwa Mining Limited and Comair Limited shares;
ZAR 71,500 against two individuals for insider trading involving Africa Cellular Towers Limited shares; and
ZAR 68,460 for insider trading involving Dimension Data Limited shares.

See also the discussion in Principle 36.

Investigations and enforcement actions

FSB

In addition to the routine supervisory activities described above, the FSB also conducts inspections at FSPs to investigate allegations of wrongdoing brought to the Registrar’s attention. The inspections may culminate in regulatory and enforcement action taken against the FSP.

The Enforcement Unit conducted the following inspections for this purpose:

Inspections by Enforcement of FSPs

Year	Number of Inspections
2011	14
2012	21
2013	12
2014 to March	9*

Source: FSB.

* of which three have been completed.

The following tables set out the enforcement activities under the FAIS Act from July 1, 2011 to April 1, 2014.

Enforcement Activities Under the FAIS Act

Year	Investigations Received	Cases Closed	Outcome		Total Sanctions Imposed (Thousand ZAR)
Year	Investigations Received	Cases Closed	Finalized Penalties	Lack of Evidence	Total Sanctions Imposed (Thousand ZAR)
2011	98	67	17	50	503
2012	132	97	24	73	5,375
2013	63	42	6	36	1,840
2014	26	20	1	19	50

Source: FSB.

*Numbers from 2012 onward include cases carried over from the previous years.

Many of these matters were concluded by written settlement agreements. Penalties were imposed for breaches of the FAIS Act, Regulations or Codes of Conduct. Many of the offences related to carrying on activities without being licensed or selling/marketing products or services for unlicensed providers. Several other offenses involved failure to maintain liquidity, payment of prohibited incentives, other conflicts of interest and signing blank documents. The individual fines ranged from ZAR 10,000 to ZAR 1.5 million.

The Enforcement cases regarding CIS were fewer in number.

CIS Cases

Year	Number of cases	Breaches
2011	0
2012	0
2013	1	Marketing unauthorised foreign product
2014	1	Unauthorised name change

Source: FSB.

JSE

The responsibility for supervising compliance by authorized users of exchanges has been assigned to the licensed exchanges under the FMA. It is the JSE’s responsibility to monitor, detect and investigate these matters with respect to its members. Applicants for an exchange license and licensed exchanges are required to have adequate mechanisms and procedures to address this.

Section 12 of the JSE Equities Rules deals with the exchange’s supervision and enforcement powers and processes. It contains provisions permitting the exchange to suspend the membership of a member for breaches of the Rules or when otherwise in default of their obligations.

JSE Rule 12.30 sets out what constitutes improper conduct under the Equities Rules when committed by any person who at the time of the alleged act or practice was a member or employee of a member. This conduct includes:

Committing or attempting to commit any act which is dishonest or fraudulent;
Contravening, attempting to contravene, or failing to comply with any one or more provisions of the FMA, a rule or a directive; and
Negligently or recklessly conducting the business or affairs of the member in such a way that actual or potential prejudice is, or may be, caused to the JSE, any other member, a client of a member or the general public. The failure by a member to introduce appropriate and reasonable safeguards or controls to avoid such prejudice may be treated, where appropriate, as constituting either negligence or recklessness.

The Disciplinary Committee of the JSE may take action against anyone who was found committing improper conduct under Rule 12.40.2.2 of the Equities Rules and may impose the penalties deemed to be appropriate. These penalties may include a warning, reprimand, censure or imposition of a fine (with or without ordering that a contribution be made towards the JSE’s costs) on any person who has, in the reasonable opinion of the Disciplinary Committee, been guilty of improper conduct.

The JSE would typically only take enforcement action against members, if the nature of the weaknesses in the member’s arrangements was severe or if the weaknesses had resulted in some form of prejudice to clients.

The JSE enforcement figures for the last three years are as follows:

JSE Enforcement Cases

Nature of Misconduct	Period of Misconduct	Year Closed	Penalty Imposed
Reckless trading by derivatives traders	Pre 2011	2013	Traders prevented from re-entering market
Client losses concealed by derivatives trader	Pre 2011	2013	Traders prevented from re-entering market
Cherry picking by derivatives trader	Pre 2011	2013	Traders prevented from re-entering market
Proprietary losses concealed by senior executive	Pre 2011	2012	No action. No rule breaches. Matter dealt with by member
Cherry picking by derivatives trader	Pre 2011	2014	Trader prevented from re-entering market
Cherry picking by derivatives trader	Pre 2011	2014	Trader prevented from re-entering market
Equities trader booking false transactions to clients	Pre 2011	Ongoing
Senior executive booking trades at	Pre 2012	Ongoing
false prices
Individual trading without registration	2011	2012	Individual to make submission if he attempts to register
Bond firm making profits on agency transactions	Pre 2011	2013	No action. Insufficient evidence of misconduct
Equity member and trader booking trades off market	Pre 2011	Ongoing	Member has withdrawn from market but trader to be charged
Breaches of anti-money laundering requirements	2012	Ongoing	Enforcement action being considered by FSB
Breach of client mandates by portfolio manager	2013	Ongoing

Source: JSE.

System to respond to intelligence received

The FSB receives information that might raise regulatory concerns from many sources including news media reports, complaints and tip-offs. This last could be a direct communication, or through the FSB Tip-Offs Anonymous hotline. The FSB also has a general e-mail address that enables the public to bring information under the attention of the regulator. Once received, these matters are allocated to the relevant FSB division. Outcomes from the Ombuds process are also shared with the relevant FSB division.

Each division has its own complaints register in which the matters are recorded and tracked. The information is allocated to an analyst for evaluation, and if it seems as if it has merit, the Registrar may inter alia instruct an inspection into the matter. In such instance the relevant inspector will have all the Inspectorate powers at his or her disposal (i.e., interviews under oath, calling for documents, and search and seizure powers – with or without a search warrant).

The internal auditors of the FSB do random sampling of complaints to ensure they are dealt with appropriately.

Expected compliance systems

In considering an application for approval, the Registrar must be satisfied that a CIS manager has in place appropriate internal policies and procedures for compliance with relevant legislation. See the discussion under Principle 24.

An FSP under the FAIS Act with more than one key individual or representative must have a fit and proper compliance officer approved by the FSB to monitor the FSP’s compliance with the law. The FSP must also have in place appropriate systems and procedures to be followed by it and any representative to ensure compliance with the FAIS Act (section 17). See also the discussion in Principles 29 and 31.

Rule 4.30 of the JSE Equities Rules makes provision for the appointment of compliance officers who are to assist the board of directors of the member in ensuring compliance by the member with the FMA and the JSE Rules and Directives. The person to be appointed as a compliance officer must be fit and proper. The compliance officer must:

Implement the resources, systems and procedures required to promote and monitor compliance by the member and its employees with the FMA, the rules and the directives;
Report to the Director: Surveillance any breaches by the member of the FMA, the rules and the directives or any other issue considered by the compliance officer to be irregular; and
Ensure that the content of the JSE Gazettes is communicated to and understood by all relevant employees.

Failure to supervise

Sections 8 and 13 of the FAIS Act place an obligation on an FSP to supervise and oversee representatives acting on its behalf and to ensure their ongoing compliance with the fit and proper requirements. The FSP is responsible for the actions and omissions of its representatives.

Under section 14(1) of the FAIS Act, the FSP must withdraw the authority granted to any representative whom it has appointed to act on its behalf, if such representative contravened, failed to comply with or no longer complies with any provision of the FAIS Act, fit and proper requirements, applicable code of conduct, or other applicable laws. The FSP must inform the Registrar after taking such action against the representative and key individual of the representative.

However, section 14A of the FAIS Act empowers the Registrar to take direct action against an FSP’s representative for contravening or failing to comply with the FAIS Act. In addition to that, the Registrar can also suspend or withdraw the license of the FSP under section 9 of the FAIS Act for the offences committed by the representative of such FSP.

Under Rule 3.30.1.2 of the JSE Equities Rules, a member must ensure that its employees are suitable, adequately trained and properly supervised. Failure to supervise an employee would be a breach of the member’s obligations. The JSE may impose penalties on the member, its representatives or its officers and directors.

Criminal enforcement

As in many countries, the criminal enforcement of white collar crime has not been a high priority of the justice system and the number of successful criminal prosecutions is relatively small. This may be ascribed to a combination of factors, such as the complexity of some offences, a lack of training of prosecutors and police, and the difficulty of proving cases beyond a reasonable doubt.

In the period from 2011 to March 2014, the Enforcement Unit of the FSB has referred a total of 14 cases to the SAPS and/or the criminal prosecution authorities. Of these, one has lead to a conviction with a penalty of ZAR 10,000 and 6 months in jail; the other investigations are stated to be ongoing.

In order to reduce these acknowledged impediments to criminal prosecution, the FSB actively engages the police and the NPA on issues relating to the FSB matters. It briefs the NPA, acts as expert witness and assists in training police investigators and prosecutors. The FSB has funded the production of expert witnesses for cases. The Enforcement Unit is building cooperative working relationships with the Special Commercial Crimes Unit (SCCU) of the NPA, the anti-corruption unit of SAPS and the Asset Forfeiture Unit (AFU) of the NPA. In one recent case (Ledimar Financial Services) the powers of the FIC were relied on to freeze assets of a pyramid scheme and then those of the AFU were engaged to get orders to preserve the assets and then seize the bank accounts in order to return the money to the investors who had been defrauded.

Also, the SCCU has recently decided to increase its focus on crimes where the amount of money involved exceeds ZAR 5 million and is looking to the FSB to provide support to the SCCU for these prosecutions. Similarly, the police are increasingly targeting commercial crimes.

Finally, the Ministry of Justice has established special commercial crimes courts with trained magistrates to hear these sorts of cases.

Assessment

Broadly Implemented

Comments

The key to Principle 12 is whether the regulatory system ensures an effective and credible use of all of its supervisory and enforcement powers. The results in South Africa are mixed.

The expectations of the Assessment Methodology regarding supervision and surveillance are met with respect to the FAIS Division, Capital Markets Department, Market Abuse Department and the JSE. The routine supervisory activities of the FAIS Division and the JSE on their regulated entities are extensive and intensive. The JSE conducts detailed surveillance of its markets, under the supervision of the FSB. There are expectations for supervisory and compliance procedures at these regulated firms.

Regulated firms that were interviewed agreed, without exception, that the FSB and JSE inspectors and reviewers were professional, experienced and knew the business of the firms they were examining.

However, there are some concerns about the effectiveness of the supervisory program under CISCA. See the discussion in Principle 24.

Further, in common with many countries, the jurisdiction’s enforcement effectiveness is mixed. There have been some successes at the FSB through the EC process in enforcing breaches of the laws and material penalties have been obtained on some market abuse matters. However, the success of criminal enforcement has been limited. To be viewed as being fully implemented in this Principle, the expectation is that a reasonable number of prosecutions and criminal convictions must have been achieved. A conviction against an individual (even in the absence of a term of imprisonment) is seen as being a powerful deterrent. The challenge here, as in many jurisdictions, is that the regulator has little control over the criminal prosecution process and white-collar crime is often not a priority of either the police or prosecution. The Enforcement Unit is working on building its relationships with other key players in this area and this may well bear fruit in the future. Further, if the JSE enforcement process was swifter and the penalties imposed were more significant, the effectiveness of the program could be improved.

Principles for Cooperation in Regulation

Principle 13.

The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

Description

The FSB has comprehensive authority to obtain and share information with domestic and foreign counterparts. Section 22 of the FSB Act governs the use and sharing of information. Subsection 22(1) imposes a general duty of confidentiality on the Board, its employees, members of committees, the Appeal Board or contractors, and others acting on behalf of the FSB regarding information obtained in the performance of any power or function under the FSB Act, the FSB legislation or sections 45 and 45B of FICA. Section 22(2) permits the use or disclosure of such information only in specified circumstances, which include:

In the course of performing functions under, or as enabled by the FSB legislation;
For the purposes of legal proceedings or other proceedings;
When required to do so by a court; or
By the Executive Officer or Deputy Executive Officer if in their opinion, disclosure is appropriate:
- To a regulatory authority, for the purposes:
  - Of ensuring that financial sector institutions conduct their business in a manner that is consistent with and promotes the objectives of consumer and investor protection, the fair treatment of consumers and investors, efficiency and integrity in financial markets and confidence in the financial system;
  - Of ensuring the safety and soundness of financial institutions, in particular the ability of financial institutions to meet the financial commitments and obligations they incur in the course of carrying out their business;
  - Of ensuring the stability of the financial system;
  - Of coordinating the supervision of financial institutions with other regulatory authorities;
- For the purposes of disclosing to any regulatory authority in accordance with a cooperation agreement or otherwise, information relating to a particular financial or other institution, financial or other service or a particular individual who is or was involved in a particular financial institution or financial service, if that regulatory authority has a material interest in the information.

Regulatory authority is defined very broadly to include both domestic and foreign regulators and domestic market infrastructures and comprises:

Any organ of state responsible for the supervision or enforcement of legislation, or a similar body designated in the laws of a country other than South Africa to supervise or enforce legislation of that country; and
A market infrastructure that is responsible for the supervision of persons authorized by such infrastructure under the FMA (FSB Act, section 22(5)).

The sectoral legislation often contains similar provisions. For example, section 6(3)(e) of the FMA permits the Registrar, despite the provisions of any other law, to furnish information acquired by him/her under the Act to any person charged with the performance of a function under any law, including a supervisory authority.

The FMA also empowers the JSE to share information with other regulators. Further, section 88 of the FMA authorizes the DMA to share information concerning any market abuse matter with any of: the institutions which have nominated persons to the Directorate; the TRP; the SARB; the IRBA; a licensed exchange, CSD or independent clearing house; the FIC; the National Treasury; the Minister of Finance; and the persons, domestic or foreign, responsible for regulating, investigating or prosecuting insider trading, prohibited trading practices and other market abuses.

Under the Inspection Act, the Registrar may disclose information to other regulators, organs of state and affected parties, if an offence has been committed or an institution is in an unsound financial condition. The Registrar may also share information with other regulators, including foreign regulators (section 9). The FSB also has the power under section 3A of that Act to conduct an inspection for the purposes of assisting another regulator under an MOU or other agreement. The FSB has utilized this authority to subpoena witnesses and compel the production of documents at the request of another regulator, even when the inquiry concerns potential violations of foreign law that are not violations of South African law.

Generally, the Registrar may disclose to or share information with foreign financial or investment regulators in the proper performance of his/her functions for the purpose of legal proceedings, in the public interest, and in specific instances.

The FSB has the authority to share information both domestically and cross-border without seeking approval from external authorities. It can share information on request or on an unsolicited basis. There is no need for the conduct alleged by the foreign regulator to be a breach of the law in South Africa; that is, there is no requirement for dual illegality.

The FSB is a signatory to the IOSCO MMOU. Acceptance as a signatory requires a determination by IOSCO that the regulator has all necessary legal authority and complies with all relevant principles regarding cooperation and assistance with other regulatory authorities. The FSB is also a signatory to the South African Development Community (SADC) MMOU and has entered into bilateral MOUs with more than 75 foreign regulatory authorities. These MOUs are not published, although a list of the MOUs is posted on the website.

Intermediaries and market infrastructures operating in the jurisdiction are required to keep extensive records relating to their clients and transactions undertaken. These records include information identifying beneficial owners of accounts related to securities transactions and the information necessary to reconstruct transactions. The FSB has full access to these records. (See the discussion in Principle 10.) The FSB can share this information with other regulators under the authority granted in the legislation.

The IRBA, under section 47(5) of the APA may disclose information obtained during an inspection of a registered auditor to, among others, any appropriate regulator that requires it for the institution or an investigation with a view to the institution of any disciplinary action or criminal prosecution. This can only be done at the written request of that other regulator.

JSE Equities Rule 12.20 deals with the use of information obtained by the JSE Surveillance Department and referral to another authority.

12.20.1 Any information, document, book, tape or electronic record or other object obtained by the JSE Surveillance Department, whether by investigation or otherwise, may be used in evidence in any disciplinary proceedings contemplated in rule 12.40 and may be furnished by the JSE Surveillance Department to any other body which may have jurisdiction over the matter under consideration, whether outside or within the Republic.
12.20.2 If the JSE Surveillance Department become aware of any possible contravention of law by a person over whom the JSE does not have jurisdiction, the JSE Surveillance Department may refer such matter to the appropriate authority or authorities, whether outside or within the Republic.

There are similar provisions under the JSE’s Derivatives Rules and IRC Rules.

As noted above, the information obtained by the FSB is subject to confidentiality requirements. Section 22(4) of the FSB Act provides that information may only be disclosed to another regulatory authority, if it is established that the regulatory authority that will receive the information has appropriate safeguards in place to protect the information, which safeguards must be similar to those required from the FSB. There are also requirements for assurance of confidentiality before such information can be provided to third parties (section 22(4)(b)).

Information requested from or provided to another regulatory authority:

Must only be used for the purpose for which it was requested;
Must not be made available to third parties without the consent of the regulatory authority that provided the information;
If lawfully compelled to make information provided by a regulatory authority available:
- Inform that regulatory authority of the event and the circumstances under which the information will be made available; and
- Where possible, use all reasonable means to oppose the disclosure of or protect the information (section 22(4)(d)).

Assessment

Fully Implemented

Comments

Principle 14.

Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

Description

The FSB has wide authority under the FSB Act to enter into information sharing agreements with other regulators, both domestic and foreign.

Section 22(3)(a)(v)(bb) of the FSB Act provides that the Executive Officer or a Deputy Executive Officer of the FSB may negotiate and enter into bilateral or multilateral cooperation agreements, including MOUs, with regulatory authorities to provide mechanisms for the exchange of information. Regulatory authority is defined to include both domestic and foreign regulators responsible for the supervision or enforcement of legislation and market infrastructures as defined in the FMA.

See also the discussion in Principle 13.

The FSB is a signatory to the IOSCO MMOU. The FSB is also a signatory to the SADC MMOU and has entered into many bilateral MOUs with foreign regulatory authorities.

The International and Local Affairs Unit of the FSB was established in April 2012 and is responsible for dealing with requests for information from other regulators. Since that time there have been 186 requests for information. The processing of a request takes 3-15 working days after receipt.

FSB Information Requests Received April 1, 2012-March 31, 2014

Nature of Request	Number Received
Information only	124
Assistance to be provided by FSB	18
Completion of surveys and questionnaires	44
Total	186

Source: FSB.

The FSB has not refused to provide information in response to a request from another authority that is a party to one of the MMOUs or MOUs signed by the FSB. If the request did not fall into the jurisdiction of the FSB, it was referred to the relevant entity.

Assessment

Fully Implemented

Comments

Principle 15.

The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

Description

Most South African market participants are required to keep extensive records regarding clients and their transactions (see Principle 10). The FSB has full access to all records kept. Further, under the Companies Act, the names of all beneficial owners are required to be disclosed routinely and on demand to the company (section 56). The companies must keep records of these beneficial owners and the registers are public information accessible by all. In addition, the JSE’s surveillance system can provide extensive details on trades.

As a signatory to the IOSCO MMOU, the FSB can provide the assistance contemplated by Key Questions 2, 4, 5 and 6 without there being a need for the FSB to have an independent interest in the matter. If the FSB does not have the information, it may, under section 3A of the Inspection Act and section 95(2) of the FMA, conduct an inspection to obtain the needed information. Requests from foreign regulators are given priority.

See also the discussion under Principles 13 and 14.

Financial conglomerates

The term financial conglomerate is not currently defined in South African financial sector legislation, and no formal group-wide supervisory framework for conglomerate supervision is in place. However, in practice an informal approach to supervision of the major financial conglomerates exists between the FSB and the Bank Supervision Department (BSD) of the SARB. The FSB and BSD determine which groups are major financial conglomerates to which they will apply supervisory focus, and which authority will be the lead supervisor for the group. Group wide supervision of FSB regulated entities is currently undertaken on a moral suasion basis, which relies on the general authority and standing of the regulator rather than specific legislative provisions.

The FSB is able to request information relating to financial conglomerates indirectly through regulated financial institutions under the authority afforded to the FSB in the sectoral legislation that it administers and is able to share such information with other regulators in accordance with section 22 of the FSB Act.

Assessment

Fully Implemented

Comments

Principles for Issuers

Principle 16.

There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions.

Description

There are two regimes in South Africa that govern the disclosure of information by entities that issue securities to the public:

The disclosure obligations set out in the Companies Act and the related Regulations made under that statute that apply to all companies incorporated in South Africa; and
The obligations imposed on listed companies and applicants for listing by the JSE Listing Requirements.

The CIPC (part of the DTI) has legal responsibility for company registration and disclosure under the Companies Act. The JSE Listing Requirements are issued by the JSE and approved by the FSB.

Disclosure requirements

Initial offerings

The Companies Act states that only companies may make offers of securities to the public and contains detailed requirements that would have to be met by a corporate issuer. However, in practice, several other legal entities issue securities to the public, such as trusts issuing exchange-traded funds. If the instruments are listed on the JSE, the exchange’s listing requirements would apply, regardless of the issuer’s legal structure. If the issuer is a CIS, then CISCA would apply. If the issuer is not a company and the securities are not listed, it is not clear what regime would govern the offering.

Under the Companies Act, an offer to the public generally must be accompanied by a prospectus that meets the requirements of section 100 of the Companies Act and the provisions set out in Part 4 of the Regulations. Under section 99, the prospectus, along with any material contracts, must have been filed with and registered by the CIPC, the responsible authority created under the Companies Act. Offerings, other than initial public offerings, by JSE listed companies are exempt from the Companies Act provisions, provided they meet the requirements set in the JSE Listing Requirements (section 99(3)(a)(i)).

Section 96 of the Companies Act lists certain transactions that are not public offerings under the statute and so exempt from the prospectus requirements. These include:

Offers made only to sophisticated investors, such as financial institutions, exchange members, FSPs or entities registered with the SARB;
Where the minimum block purchased as principal is at least ZAR 100,000;
Rights offerings that meet prescribed terms and where the securities issued are to be listed;
Sales to directors and prescribed officers;²⁸ and
Transactions relating to employee share schemes.

Under section 100, every prospectus must contain all the information that an investor may reasonably require to assess the assets and liabilities, profit and losses, current financial position and prospects of the company as well as the securities being offered and the rights attached to them. It must also adhere to the more detailed requirements set out in the Regulations.

Section 56 of the Regulations provides that a prospectus must include all the material information concerning the offer, set out in separate sections. The order that information is presented is prescribed and each topic set out in the Regulations must be covered in a separate paragraph using the regulation heading as the paragraph title. The mandated information and format is:

Section 1—Information about the company whose securities are being offered:
- Name, address etc. of the issuing company;
- Details about the directors, company secretary, auditors, bankers and underwriters/stock brokers involved in the offering;
- History, state of affairs and prospects of the company;
- Share capital of the company;
- Options or preferential rights in respect of shares;
- Commissions paid or payable in respect of underwriting;
- Material contracts;
- Interest of directors and promoters;
- Loans;
- Shares issued or to be issued otherwise than for cash;
- Property acquired or to be acquired;
- Amounts paid or payable to promoters;
- Preliminary expenses and issue expenses (Regulations 57-69);
Section 2—Information about the offered securities
- Purpose of the offer;
- Time and date of the opening and of the closing of the offer;
- Particulars of the offer;
- Minimum subscription (Regulations 70-73)
Section 3—Statements and reports relating to the offer
- Statement as to adequacy of capital;
- Report by directors as to material changes;
- Statement as to listing on stock exchange;
- Report by the auditor where business undertaking will be acquired;
- Report by the auditor where the company will acquire a subsidiary;
- Report by the auditor of the company;
- Requirements for the prospectus of a mining company (Regulations 74-80);
Section 4—Additional material information
- Separate enumerated paragraphs as required to address any material information relating to the offer, not contemplated in sections 1, 2 or 3 above.
Section 5—Inapplicable or immaterial matters
- A list setting out those regulation numbers and headings contemplated in the outline for Sections 1, 2 or 3 above that are not applicable in the circumstances of the offer.

Each of the individual provisions in the Regulations goes into some detail on what information must be included.

In practice, a prospectus is expected to contain audited financial results for the past three years. However, there is no explicit requirement in this regard.

The disclosure regime is a general one; there are no special rules for other types of issuers or issues such as asset-backed securities or exchange traded funds, other than a few additional requirements in Regulation 80 that apply to mining companies. These relate chiefly to disclosure of experts’ opinions on a mining company’s properties.

There are no express requirements under the Companies Act mandating specific disclosure of the risks of the issuer’s business in a prospectus. As part of its prospectus review process (discussed below) the CIPC has a practice of requiring the prospectus to be accompanied by a table reflecting all risks relating to the offer as well as mitigation actions. This requirement is set out in an unpublished prospectus vetting checklist. The CIPC indicated that it expects prospective investors be given this table of risks.

Subscriptions must not be accepted from any investor unless the investor is in possession of a copy of the prospectus or is aware of its contents (section 108).

JSE requirements

The JSE Listing Requirements contain extensive provisions setting out the information that must be included in pre-listing statements/prospectuses (Section 6), listing particulars (Section 7), financial information (Section 8), and the circulars required for transactions such as takeover bids and those with related parties (Sections 9 and 10). Property, mineral and investment companies also have additional disclosure requirements, such as experts’ reports on mineral resources or valuers’ reports. There are also special disclosure elements that must be met for asset-backed securities, options, structured products, exchange-traded funds and other particular types of securities (Section 19).

The information required to be disclosed includes information on the issuer and its capital; directors, management and advisors; securities for which application is made for listing; group activities; three years’ audited financial information; material contracts; and information on the issuer’s compliance with the King Report on Governance for South Africa 2009 (King III Code).²⁹ Extensive information is required. No particular format or presentation order for the information is specified.

General requirements applicable to circulars, pre-listing statements/prospectuses and announcements are set out in Section 11 of the Listing Requirements. These include general content standards, describe the approvals required, set out what must be delivered to shareholders and define the applicable publication requirements. There is no specific requirement referring to business risk disclosure in a prospectus or listing document, however, these matters would be captured under several of the mandated heads of information.

Continuous disclosure requirements.

The requirements that apply to the preparation and publication of annual and interim financial statements are discussed in Principle 18. Under the Companies Act and JSE Listing Requirements, audited annual financial statements only have to be provided to shareholders by the end of six months after the end of the relevant financial year. There are no general requirements for interim financial statements or any other routine periodic reports under the Companies Act. In practice, JSE companies are expected to produce provisional annual financial statements within three months of the year-end. These statements must be reviewed by the issuer’s auditor prior to issue. In practice, most listed companies apparently issue their audited annual financial statements within the three month period.

For a discussion of the information to be provided regarding matters that require shareholder approval, see Principle 17.

Timeliness of information in disclosure documents

The Companies Act permits the distribution under the prospectus to continue during a four month period after the date of registration of the prospectus. Thereafter, no sales may take place unless a new prospectus is registered (section 107). Unlike for takeover bid circulars, there is no express requirement with respect to the timeliness of the information contained in the prospectus.

The JSE Listing Requirements mandate that unless otherwise provided, all information contained in a disclosure document is to be as at the issue date of the document or as near to that date as practicable (see for example, paragraph 6.9(c)).

Advertising public offerings

Section 98 of the Companies Act contains specific guidelines for advertising a public offering outside of a prospectus. An offer of securities may be advertised to the public, but the advertisement must contain a statement that it is not a prospectus and include information on how a copy of the prospectus may be obtained. It also must not contain any untrue statement or anything that would mislead the reader regarding any material aspect of the offering.

There are no specific provisions in the JSE Listing Requirements with respect to advertising, beyond the general principle that there should be full, equal and timely public disclosure of all material information. For listings on the JSE, the issuer’s management may make presentations to market participants and/or prospective investors, or conduct meetings with prospective investors only after the listing is granted. Advisors to an offering are free to use any offering materials during the pre-listing process, such as circulars, pre-listing statements, prospectuses and announcements. Road shows are commonly relied upon to solicit investors. There is no specific oversight of these aspects of the initial offering process at the JSE.

Material change disclosure

Under Regulation 75, the directors must include in the prospectus any material changes that have occurred between the end of the financial year for which there are audited financial statements to the date of the prospectus.

A company must lodge a supplementary prospectus, if there is any material change that is related to the public offer during the distribution period. No specific time is stated for lodging the supplementary prospectus. The amendment must be published to persons known to have received the original prospectus. Should the investor not be happy about the change, the subscription may be withdrawn within 20 days after the publication (Companies Act, section 100(1) and (12)).

There is no general requirement in the Companies Act that public companies make prompt public disclosure of material changes other than during the period of an offering under a prospectus.

The JSE Listing Requirements mandate that full, equal and timely public disclosure be made to all holders of securities and the general public at large regarding the activities of an issuer that are price sensitive. Issuers are bound by this general obligation of disclosure under paragraph 3.4 throughout the period that the securities are listed.

There are extensive provisions in the Listing Requirements governing material price sensitive information that generally require issuers, without delay, to release an announcement providing details of any developments in the issuer’s sphere of activity that are not public knowledge and that may, by virtue of their effects, lead to material movements of the reference price of such issuer’s listed securities. The JSE also requires companies to issue, without delay, a cautionary notice if there are any developments in the issuer’s sphere of activity, which may lead to material movements in the price of the issuer’s securities. These are short notices flagging that there are significant matters pending, but do not contain extensive disclosure. For example, if there are merger discussions underway, but they are not yet definitive, and there is a risk that the information may have leaked, a cautionary announcement would be issued indicating that discussions are ongoing. When a binding agreement is concluded an announcement containing full details would be required to be made.

In addition, the JSE requires a company to issue a Trading Statement when there is a reasonable certainty that its financial results for the period to be reported on will differ by more than 20 percent from those of the preceding period. Transactions in company assets that are equal to 5 – 25 percent of company market capitalization must also be disclosed, including share offerings or buybacks for more than 3 percent of the market capitalization (paragraph 3.4).

These types of information must be announced in summary form over the Stock Exchange Notification System (SENS), an electronic information system operated by the JSE. Companies must also post required information on the company’s website, and in some cases must publish it in the news media.

There are also continuing obligations on listed companies to update their information that are set out in other sections of the Listing Requirements, including those with respect to financial information (Section 8), transactions (Section 9), transactions with related parties (Section 10), and circulars (Section 11).

General standards and responsibility

Section 29 of the Companies Act provides that financial statements must present fairly the state of affairs and business of the company and explain the transactions and financial position of the business of the company. They must not be misleading or incomplete in any material respect.

Under section 214(1)(d) a person is guilty of an offence, if the person is a party to the preparation or dissemination of a prospectus that contains an untrue statement. An untrue statement is a statement that is misleading in the form and context in which it is made and includes omission from a prospectus or written statement of any matter that, in the context, is calculated to mislead by omission (section 95). This provision catches statements made in the prospectus or that are incorporated by reference or contained in other documents that accompany the prospectus.

The Regulations require prospectuses to be signed by each director (Regulation 52). The Companies Act in sections 104-106 imposes liability on directors, promoters, experts and anyone who authorized the issue of the prospectus for any loss or damage caused to any purchaser under the prospectus as a result of any untrue material statement.

Under the Listing Requirements, sponsors and Alt^X Designated Advisors (DAs) are responsible for ensuring that their issuers’ announcements and documents, both in principle and content, comply with the Listing Requirements. A directors’ responsibility statement must be included in all prospectuses, prelisting statements and transaction circulars in which the directors collectively and individually accept full responsibility for the accuracy of the information given and certify that to the best of their knowledge and belief there are no facts that have been omitted which would make any statement false or misleading, and that all reasonable enquiries to ascertain such facts have been made and that the document contains all information required by law and the JSE Listing Requirements (paragraph 7.B.22).

Every director of the applicant must sign the company’s prospectus, pre-listing statement, or circular, and, where responsibility has been extended to or accepted by any other person (such as an auditor or expert), that other person must also sign the document (paragraph 7.B.23).

Review

The Companies Act established the CIPC. The CIPC has a mandate that includes:

Registering and maintaining information concerning companies in South Africa;
Monitoring and promoting compliance;
Promoting the reliability of financial statements; and
Effective enforcement of the Act (sections 186 and 187).

The CIPC is mandated to vet the prospectuses filed under the Companies Act and ensure that their content adheres to the Companies Act and other relevant legislation, such as that required for property syndication schemes under the Consumer Protection Act.

A new division within the CIPC called Corporate Disclosure Regulation and Compliance has been established to monitor compliance with disclosure requirements. A disclosure framework, disclosure process and guidelines are being established to ensure that standards and norms are adhered to. The division was set up in September 2013.

All prospectuses are vetted following an electronic checklist that includes both the disclosure requirements and a narrative explanation. A vetting committee conducts a substantive review of the prospectuses. Further, a process for periodic reporting after registration has been adopted. The company must report on the offer when it closes and again six months later. This later report confirms that the terms and conditions of the offering continue to be complied with, such as the funds have been used for the purposes stated in the prospectus.

From January 1, 2011 to December 31, 2013, 46 prospectuses were filed with the CIPC. All of these were for domestic companies. No sanctions have been imposed in connection with the prospectus process.

The CIPC is planning to issue a guidance note on the expected content of the prospectus and the prospectus process in the near future.

Information filed with the JSE with respect to applications for listing, transaction circulars etc. is subject to a detailed review process involving several analysts with relevant expertise. The documents are also subject to a final senior manager review and approval step prior to the exchange granting approval for the issue, listing or other matter.

Approved circulars and other documents are uploaded onto the JSE system and available to the public on the exchange’s website. Listed firms are required to have websites and the information must also be posted on the issuer’s website. Hardcopies of the documents must be available to investors at the issuer’s registered office.

Omitted information

Under section 6(2) of the Companies Act, a person may apply for an administrative order exempting an agreement, transaction, arrangement, resolution or provision of the company’s memorandum of incorporation (MOI) or rules from any requirement set out in the statute. For prospectuses, section 100(9) allows for the exclusion of otherwise required information, if its publication would be unnecessarily burdensome to the applicant, seriously detrimental to the company or against public interest, so long as users would not be unduly prejudiced by that omission. The applicant must apply to the exchange (if listed) or the CIPC (if unlisted) for this permission.

The JSE Listing Requirements provide for exceptions to the usual full, prompt disclosure obligations set out in paragraph 3.4. Under paragraph 3.10, if the directors of an issuer consider that disclosure to the public of information will or probably will prejudice the issuer’s legitimate interests, the JSE may grant a dispensation from the requirement to make such information public. Further, paragraph 6.16 permits the JSE to authorize the omission of information from pre-listing statements when the JSE has received a detailed application and is satisfied that:

The information is of minor importance and will not influence any assessment of the financial position, changes in equity, results of operations or cash flows;
Disclosure would be contrary to the public interest and its omission is not likely to mislead investors with regard to any important/material facts and/or circumstances; or
Disclosure would be seriously detrimental to the applicant or would constitute an invasion of the applicant’s rights to privacy and its omission is not likely to mislead investors with regard to any important/material facts and/or circumstances.

Material change reports are not to be released during trading hours unless first published in accordance with the rules on SENS (paragraph 3.5). The JSE has the authority to suspend trading on the request of an issuer (paragraph 1.9) or when the trading activity in that security appears unusual (Equity Rule 6.80, Interest Rate and Currency Rule 7.40, Derivatives Rule 7.190).

Trading with knowledge of undisclosed material information is a market abuse offence under Chapter X of the FMA and subject to substantial penalties (see Principles 12 and 36). Disclosing and/or trading on confidential information and failing to disclose information required to be published are breaches of the general principles that apply under the Listing Requirements. The JSE can censure the issuer, its directors in their personal capacities, its sponsor or its Alt^x DA, and executives of the sponsor or DA for any breach of the requirements (Listing Requirements, Sections 1 and 3). In addition, the JSE can also refer matters to the FSB where there may have been insider trading, market abuse, etc.

Cross-border offerings

Cross-border offerings are not common in the jurisdiction.

There have been no prospectuses filed with the CIPC by foreign companies in the past three years. Only 45 of the listings on the JSE are secondary listings (slightly over 10 percent). Many of these companies have their primary listing on major international exchanges such as NASDAQ, Euronext, or the exchanges in London, Toronto or Australia.

Under the Companies Act, foreign issuers would have to comply with all the usual prospectus requirements and file their MOI and details of their directors at least 90 days before the offering (section 99).

An issuer seeking a primary listing on the JSE must comply with all the initial and ongoing requirements set out in the JSE Listing Requirements, regardless of where it is located. Issuers seeking a secondary listing on the JSE must comply with the entry criteria that apply to all applicants for listing. However, provided that its primary listing is on an exchange that is a member of the World Federation of Exchanges, the JSE usually relies on the disclosure etc. required by the exchange on which the issuer has its primary listing. In addition, the issuer must comply with the JSE’s rules on immediate public disclosure of material changes.

There have been circumstances where the JSE has required that both its initial and continuing requirements be complied with by a company with a secondary listing. These conditions would be imposed when the JSE is of the view that its requirements are much more onerous than those of the primary exchange.

Assessment

Partly Implemented

Comments

The initial disclosure requirements for an offer of securities to the public to be listed on the JSE are satisfactory, as are most of the continuous disclosure requirements thereafter. There are significant gaps in both the initial and continuous disclosure requirements applicable to public companies that are not listed on the exchange. Unlisted entities (other than companies and CIS) offering their securities to the public do not appear to be required to make any disclosure, either initially or thereafter. This gap is compounded by the fact that an issuer can sell its securities directly to a member of the public without going through a licensed market intermediary or being licensed itself for such activity.

Under the Companies Act, the initial prospectus disclosure requirements do not:

Contain specific information on the financial information that must be provided and there is no requirement that the information contained in the prospectus be timely; and
Require the prospectus to contain detailed information on the risks of the issuer and the securities.

The relevant regulations should be supplemented to include these provisions. In the meantime, the CIPC should issue guidance on these topics.

There are very few continuous disclosure requirements in the Companies Act, beyond an obligation to prepare annual financial statements within six months of the company’s year-end. This is very slow. There is no requirement for interim statements and there is no requirement for prompt public disclosure of material changes after the prospectus distribution period is over. There is a requirement for a company to file a notice of change of auditor to the CIPC, but only within 10 days after the change. This notice does not need to be communicated to the shareholders.

All entities, regardless of their legal form of organization, that have issued securities to the public should be subject to both initial and continuous disclosure requirements, regardless of whether they are listed on an exchange. This should include annual audited and interim financial statements. All public companies should publish and file their annual audited financial statements promptly after the year end. In most major jurisdictions, the deadline for such statements is a maximum of 120 days, with many moving to shorter periods. Consideration should be given to amending the Companies Act provisions to shorten the deadline accordingly. The Companies Act should also be amended to require publication of interim financial statements at least semi-annually, within a reasonable period after the period end.

All public companies should make prompt public disclosure of material changes. A change in auditor should always be considered to be a material change, giving rise to an immediate obligation for all public companies to inform the relevant authorities and make prompt public disclosure. The Companies Act should be amended to include both of these requirements.

Under the JSE Rules, the stated reporting deadline for annual audited financial statements is six months, which is very slow by international standards. However, the listed issuer is expected to produce attested financial statements within three months and the practice is to issue the audited statements within that period. It would be better if this requirement were made mandatory. The 90-day deadline for semi-annual statements is also long by international standards.

The JSE is encouraged to make the de facto 90-day deadline for audited financial statements a firm requirement. Consideration should be given to whether the Alt^x issuers should adhere to the same time frame or be given somewhat longer. Consideration should also be given to shortening the reporting period for interim statements of JSE companies; 60 days or less is a more common period for main listing on major exchanges.

Principle 17.

Holders of securities in a company should be treated in a fair and equitable manner.

Description

Equality of Treatment and Disclosure

Companies Act

Under section 37 of the Companies Act, all the shares of any particular class of a company must have preferences, rights, limitations and other terms that are identical to those of other shares of the same class. Each share has a voting right attached to it unless specifically limited by the Companies Act or the company’s MOI. There must be at least one class of shares designated as voting shares. In all cases, the shareholder has a right to vote on any proposal to amend the rights attached to the shares held.

Section 66(4) permits the direct appointment of directors by particular persons, if this is set out in the company’s MOI; however, for-profit companies other than state-owned ones must provide for the election by shareholders of at least 50 percent of the directors and 50 percent of any alternate directors. The election of directors takes place at the annual meeting of shareholders.

Under the Companies Act, transactions such as a sale of the business or a substantial part of the business or assets of the company or an amalgamation with another company are subject to a disclosure process (sections 112 and 113) and require the approval by special resolution of shareholders (i.e., 75 percent approval) (section 115).

Under section 62 of the Companies Act, shareholders of public companies must be given at least 15 days notice of a meeting of shareholders and provided with:

The date, time and place for the meeting, and the record date for the meeting;
The general purpose of the meeting, and any specific purpose that might apply;
A copy of any proposed resolution of which the company has received notice, and which is to be considered at the meeting, and a notice of the percentage of voting rights that will be required for that resolution to be adopted;
Information on the financial statements of the company (if an annual meeting); and
A statement on the shareholder’s rights to attend the meeting or appoint a proxy.

This information must be sent to shareholders by mail and be posted on the company’s website. The Regulations do not impose more detailed information requirements on ordinary shareholder meetings.

Under section 58 of the Companies Act, a shareholder has the right to appoint someone as proxy to attend shareholder meetings and vote on behalf of the shareholder. The company is not obliged to provide a form of proxy with the shareholder meeting materials, but if it does so, that proxy form must be sent to all shareholders entitled to vote and must contain a summary of the statutory provisions governing proxies.

Under section 51, if the share has been transferred and the company receives satisfactory evidence of the transfer, the company must enter the transfer of any certificated securities in its register.

Dividends must be declared by the board of directors of a company and the record date for payment published to shareholders (Companies Act, section 46).

There are rules set out in Chapter 5 of the Companies Act and the Regulations that govern fundamental transactions, takeovers and offers. These provisions contain detailed information and timing requirements and specify when shareholder approvals are required. The relevant rules of the JSE relate to JSE prior approvals of announcements, notice provisions and requirements that information must be filed with the JSE and the TRP. All holders of the same class of securities must be treated equally. See the discussion below.

Directors are subject to extensive legal duties and liabilities under the Companies Act (section 77). They are subject to statutory fiduciary duties and must act in the best interests of the company.

There are provisions in Chapter 6 of the Companies Act governing business rescue arrangements and compromises with creditors. Under section 137, during business rescue proceedings, an alteration in the classification or status of any issued securities of a company, other than by way of a transfer of securities in the ordinary course of business, is invalid unless directed by the court or as contemplated in an approved business rescue plan. Shareholders of the same class are treated alike on a business rescue, liquidation or insolvency of a company under the Companies Act.

JSE requirements

Under paragraphs 3.27 to 3.33 of the JSE Listing Requirements, an issuer must ensure that all holders of any class of its securities that are in the same position receive fair and equal treatment. An issuer may not issue any securities with voting rights differing from other securities of the same class. Paragraph 3.29 requires securities in each class to rank equally in respect of all rights; they must be identical and have the same nominal value, paid up amount per share, right to unrestricted transfer of the shares, right to attend and vote at general/annual general meetings and right to dividends.

See also the JSE Listing Requirements in paragraphs 1.14 to 1.16 and Schedule 10.15 to 10.17, that set out specific requirements for voting in related party transactions, repurchase of securities and the issue of shares for cash. Amendments to share capital and the rights attached to any class of listed shares are subject to the JSE and shareholder approval. Public companies that issue new stock must provide existing shareholders with a pre-emptive rights offering, unless 75 percent of voting shareholders approve the issue.

Section 9 of the Listing Requirements governs significant transactions proposed by the JSE listed companies. The applicable public notice/circular requirements vary based on the nature and size of the transaction. Larger transactions require shareholder approval. Fundamental changes to the company generally require extensive information to be provided to shareholders via a circular containing the information required by the JSE. As noted under Principle 16 all of these documents require the approval of the JSE prior to issue.

A proxy form together with the notice convening a meeting of holders of JSE listed voting securities must be sent to each person entitled to vote at such meeting (paragraph 3.52). Under paragraph 3.49, circulars and pre-listing statements (including proxies) must be sent to all beneficial shareholders, including specific instructions for both dematerialized and certificated shareholders as to submission of their voting instructions. Paragraph 11.1 sets out detailed requirements for the contents of all circulars and pre-listing statements, including the general requirement that if voting or other action is required the document must:

Contain all information necessary to allow the holders of the securities to make a properly informed decision; and
Contain a heading drawing attention to the importance of the document and advising holders of securities that are in any doubt as to what action to take, to consult appropriate independent advisers.

Under the JSE requirements, all certifications of paper share transfers must be completed within 24 hours of lodgment and, in the dematerialized environment, be approved as Strate eligible in terms of the Central Securities Depository Rules (paragraph 3.51).

Takeover transactions and other changes in control

Takeovers and mergers are regulated by the TRP under Chapter 5 of the Companies Act and Chapter 5 of the Regulations made under the Companies Act (Takeover Regulations).

The takeover regime applies to all “affected transactions” regarding a “regulated company”, which is a public or state-owned company or a private company where 10 percent or more of its issued securities have been transferred other than among related persons within 24 months prior to the date of the transaction (Companies Act, sections 117 and 118(1))

“Affected transactions” are defined in section 117 of the Companies Act and include:

A transaction or series of transactions disposing of all or the greater part of the assets of a regulated company, under section 112;
An amalgamation or merger, as contemplated in section 113, if it involves at least one regulated company;
A scheme of arrangement between a regulated company and its shareholders, as contemplated in section 114;
The acquisition of, or announced intention to acquire, a beneficial interest in any voting securities of a regulated company under section 122(1);
The announced intention to acquire a beneficial interest in the remaining voting securities of a regulated company not already held by a person or persons acting in concert;
A mandatory offer under section 123; and
A compulsory acquisition under section 124.

Under section 119 of the Companies Act, the TRP must regulate any affected transaction or offer in accordance with the law and the regulations in order to:

Ensure the integrity of the marketplace and fairness to the holders of the securities of regulated companies;
Ensure the provision of:
- Necessary information to holders of securities of regulated companies, to the extent required to facilitate the making of fair and informed decisions; and
- Adequate time for regulated companies and holders of their securities to obtain and provide advice with respect to offers; and
Prevent actions by a regulated company designed to impede, frustrate, or defeat an offer, or the making of fair and informed decisions by the holders of that company’s securities.

The TRP’s tasks are to be carried out in a manner that ensures:

That no person may enter into an affected transaction unless that person is ready, able and willing to implement that transaction;
That all holders of:
- Any particular class of voting securities of a target regulated company are afforded equivalent treatment;
- Voting securities of a target regulated company are afforded equitable treatment, having regard to the circumstances;
That no relevant information is withheld from the holders of relevant securities;
That all holders of relevant securities:
- Receive the same information from a bidder, potential bidder, or target regulated company during the course of an affected transaction, or when an affected transaction is contemplated; and
- Are provided sufficient information, and permitted sufficient time, to enable them to reach a properly informed decision.

Information

The bid must be notified in writing to the target’s board or its advisers (Takeover Regulation 99). There is no requirement for prior notification to the TRP. The TRP must be notified when a cautionary announcement or a firm intention announcement is made regarding an affected transaction (Regulation 99), although it encourages the parties to consult with it before then.

All documents relating to an affected transaction must be approved by the TRP before they are posted or published (Regulation 117).

The target’s board is entitled to be reasonably satisfied that the bidder is, or will be, in a position to implement the offer in full. The TRP must also be satisfied that the bidder has sufficient resources before approving the offer document (Regulation 99).

A cautionary announcement is a brief statement published in the press and on SENS. Its aim is to preserve the integrity of trading in a company’s shares on the JSE, both before and during negotiations concerning an offer. It usually only states that either:

Talks are taking place and that a potential bidder is considering making an offer; or
An announcement is pending which could have a material effect on the price of the bidder’s or the target’s shares (Regulation 100).

A company must make a cautionary announcement, if it acquires knowledge of any material price sensitive information and the necessary degree of confidentiality of the information cannot be maintained or the company suspects that confidentiality has been breached.

An announcement of a firm intention to make an offer must be made when the target’s board has been notified, in writing, of a firm intention to make an offer from a serious source or where a mandatory offer must be made. The target company is responsible for making the announcement. It is published in the press and on SENS and must contain:

The terms of the offer;
The identity of the bidder;
The details of any existing holders of shares in the target;
All material conditions to which the offer is subject; and.
The details of any arrangements that exist between the bidder and the target or any concert party of the bidder or the target (Regulation 101).

Following the announcement, the bidder must proceed with the offer in 20 business days, unless the posting of the offer is subject to a condition that has not been fulfilled (for example, approval of the bid by the bidder’s shareholders or the competition authorities).

The bidder must send the offer document to the target’s shareholders. This document must include:

The reasons for the offer, and the intentions of the bidder in relation to the continuation of the business and the continuation in office of the target’s directors;
Financial and other information on the target and the bidder;
The bidder’s holdings in the target;
Whether directors’ remuneration will be affected by the acquisition of the target or by any other associated transaction;
The terms and mechanics of the takeover offer;
Arrangements, undertakings or agreements between the bidder and the target in relation to the takeover offer; and.
A fair and reasonable opinion from an independent expert (Regulation 106(4)).

In the 20 business days following the posting of the offer document, the target’s board must circulate its views on the takeover offer (and make any alternative offers known) to the target’s shareholders. The target’s response circular must set out:

The board’s comments on the statements in the offer document in relation to the bidder’s intentions for the target and its directors;
The holding of any shares in the bidder by the target;
Whether the target’s directors intend to accept or reject the offer in respect of their own holdings;
Material particulars of the service contracts of the directors; and.
Disclosures of any arrangements, undertakings or agreements between the bidder and the target (Regulation 106(7).

The offer document and the target’s board document must satisfy the highest standards of accuracy and the information given must be adequately and fairly presented.

If the offer is revised, an updated offer document must be sent to the target’s shareholders. This document must contain details of any material changes in information previously published by, or on behalf of, the parties during the offer period and the information required by the Companies Act (Regulation 104).

Timetable

The timetable for takeover offers is set out in Regulation 102:

The timetable begins when the firm intention announcement is published.
After publication of the firm intention announcement, the bidder has 20 business days to post the offer document to the target’s shareholders.
The offer must initially be open for acceptance for at least 30 business days after the offer document is posted.
The target’s independent board must advise its shareholders of its views of the offer within 20 business days of the posting of the offer document by way of a response circular.
The offer must be declared unconditional (that is, that all the necessary acceptances have been received) within 45 days from the posting of the offer document, or the offer will lapse.

Once the offer has been declared unconditional, the bidder must announce that fact within one business day and the offer must remain open for a further ten business days after that announcement.

Consideration for the offer must be settled within six business days of the offer becoming or being declared unconditional, or the offer being accepted, whichever is the later.

An offer may be extended by an announcement made prior to the initial closing date provided that the right to do so has been specifically reserved in the offer document.

If the consideration for an offer is revised (by increasing the original announced consideration or providing an alternate consideration), it must remain open for 15 business days following the date on which the revised consideration is announced. Shareholders who have accepted the original consideration are entitled to revise their initial acceptance and elect to receive the revised offer.

Mandatory offers

A mandatory offer must be made for the rest of the target’s shares, if a bidder’s holding (or its combined holding with any concert party) increases to 35 percent or more of the voting rights of the target (Companies Act, section 123).

Mandatory offers must be made at the highest price paid for the relevant shares in the six months preceding the offer (Regulation 111(2)).

A transaction is exempt from the requirement to make a mandatory offer, if the holders of a majority of the independent shares of the target (in other words, excluding shares held by the bidder and its concert parties) have agreed to waive the mandatory offer (Regulation 86(4)).

Consideration

A bidder may offer cash, shares or other securities, or a mixture of any of these, as consideration for a bid. However, where the bidder, or its concert parties, acquired shares in the target carrying 5 percent or more of the voting rights during the six month period before the offer is made and paid cash for those securities, the offer must be in cash (or accompanied by a cash alternative) at not less than the highest price paid by the bidder in that six-month period (Regulation 111(2)).

If any bidder or person acting in concert with a bidder acquires any shares subject of the bid after the firm announcement at a price higher than the bid price, the offer must be amended to reflect this higher price (Regulation 111(6)).

No person may be given more favorable terms than those offered to all affected shareholders.

Comparable offers are required to be made to all classes of issued securities that have voting rights or may have voting rights in the future, such as options (Regulation 87(2)).

Squeeze-out transactions

Where a takeover offer is made and 90 percent of a class of the target’s shareholders accept the offer, the bidder can compulsorily purchase the shares of the non-accepting shareholders in that class (Companies Act, section 124). A court may in certain circumstances authorize such a squeeze-out despite the fact that less than 90 percent of shareholders of a class has accepted the offer.

A non-accepting shareholder can apply to court within 30 business days of the posting of the compulsory acquisition notice for an order to prohibit it or make it subject to conditions.

Disclosure of significant shareholdings

A person who acquires a beneficial interest in shares of five percent, or any multiple of five percent (i.e., five, 10, 15), of a particular class of shares issued by a regulated company must notify the company within three business days of such acquisition. Similarly, a person must notify the company within three business days, if a disposal of securities results in that person dropping below a threshold that is a multiple of five percent. A regulated company must then notify the TRP and shareholders of such disclosures unless the transaction was a disposition of less than 1 percent of the class (Companies Act, section 122).

Under the Listing Requirements, an issuer must publish the information provided in a disclosure notice within 48 hours on SENS. The disclosure requirements apply irrespective of whether the acquisition or disposal was made directly, indirectly, individually or in concert with any other person. Options and other interests in securities must be taken into account in calculating whether an ownership or reporting threshold has been reached.

A regulated company must disclose shareholdings of more than five percent in its annual financial statements and its shareholders’ circulars (Companies Act, section 56(7) and Listing Requirements, paragraph 8.63). Under the Listing Requirements it must also include the names and securities positions of any person holding more than five percent of any class of securities of a listed issuer in its listing particulars.

In addition, a nominee shareholder (a registered holder of shares who holds on behalf of the beneficial holder) of a regulated company must disclose to the company the identity of the beneficial holder within five business days after the end of every month during which a change has occurred (Companies Act, section 56(4)). The company can also compel a nominee shareholder to disclose the identity of the beneficial holder at any time (section 56(5)).

Disclosure of shareholdings of directors and senior management

A company that is required to have its financial statements audited (all public companies) must include disclosure in those financial statements of the number and class of any securities of the company issued to any director or person holding a prescribed office or any related person (Companies Act, section 30(4)). In the context of a bid, Regulation 106 requires the bid circulars to disclose the shareholdings of directors:

Of the target company in both the target and bidder companies; and
Of the bidder company in both the bidder and target companies.

Under paragraphs 3.63 – 3.74 of the Listing Requirements, all transactions in securities by directors of listed companies must be disclosed to the issuer. Details of all transactions (including off-market transactions) in securities relating to the issuer by or on behalf of: a director and company secretary (held beneficially, whether directly or indirectly) of the issuer; a director and company secretary (held beneficially, whether directly or indirectly) of a major subsidiary company of the issuer; or any associate of them must be reported. Directors are required to disclose transactions without delay and, in any event, by no later than 24 hours after dealing. The issuer must in turn publically announce such information on SENS without delay and, in any event, by no later than 24 hours after receipt of such information from the director concerned (paragraph 3.63). The provisions contain a very wide list of transactions and securities that must be reported.

Application to parties acting in concert

If one or more persons are acting in concert, as that term is defined in section 117(b) of the Companies Act and Regulation 84, with the bidder, their holdings are aggregated for the purposes of any calculation or reporting required by the regime governing fundamental transactions and takeovers in Chapter 5.

The Listing Requirements in paragraph 3.63 also require information on the securities positions of directors and their associates to be included in listing particulars, annual financial statements and circulars. Associate is a defined term and includes the person’s immediate family, any trustee of a trust of which the person or his/her immediate family is a beneficiary and a company in which the person and/or his associates have at least a 35 percent direct or indirect ownership interest.

Enforcement

The Companies Act contains enforcement provisions in Chapter 7. Investigations may be performed by the CIPC or TRP under section 168. They may issue compliance orders under section 171 unless the alleged contravention could otherwise be addressed under the Companies Act by an application to a court or to the Companies Tribunal. The CIPC has issued approximately 160 compliance notices, often in response to irregularity notices filed by accountants or auditors as required by the law. Market participants indicated there is a substantial backlog of matters waiting for court action.

The DTI, that was directly responsible for enforcement of companies legislation before the establishment of the CIPC, previously submitted some matters to the criminal authorities. Due to the complexity of enforcing the Companies Act by the police and the NPA, the matters submitted either did not lead to charges or the charges were withdrawn before trial. The CIPC has referred three cases for criminal enforcement under the new Companies Act. These matters are ongoing.

The JSE has the power to ensure that issuers comply with its Listing Requirements. As noted above, circulars and other information provided by issuers must be approved by the exchange prior to distribution to shareholders. Compliance with the Listing Requirements is also enforced on an on-going basis and the JSE Issuer Regulation Department devotes significant resources to this activity. Five of thirty-five employees in the department are investigators.

Under paragraphs 1.20 to 1.22 of the Listing Requirements, failure to comply with the JSE requirements may result in sanctions such as a public censure or fine. Using the disciplinary processes set out in the Listing Requirements, the JSE has imposed sanctions that range from private censures to suspension of listing and permanent removal from listing. Private censures are often imposed for minor technical breaches of the rules, such as filing documents a day late. To provide guidance to the market, the exchange publishes periodically no-name summaries of these actions.

The JSE has also established the Financial Reporting Investigation Panel (FRIP) to monitor compliance by the companies listed on its exchange with the IFRS. (See the discussion in Principle 18.) Where breaches of the accounting rules are suspected or there may have been a problem with the audit, the FRIP refers the matters to the relevant body, such as IRBA.

There is evidence that these powers have been exercised in practice. The JSE reports annually to the FSB with information on actions taken, including public censures and withdrawals of listing. These matters are also published on the JSE website. For example, in the 2013 report, two issuers were subject to public sanctions for failure to meet disclosure obligations and three companies were removed from listing for failure to meet the requirements for continued listing. Several other issuers were censured for late filing of financial statements.

Cross-border issuers

Cross-border offerings are not significant in the jurisdiction. See the discussion under Principle 16 on the requirements that would apply to these transactions.

Assessment

Fully Implemented

Comments

The 15-day notice period for shareholder meetings may pose some practical challenges for foreign shareholders, unless the issuer has implemented electronic voting facilities. Otherwise, it may be difficult to receive the materials, make an informed decision, execute the proxy and get that back to the issuer in advance of the meeting date.

Principle 18.

Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.

Description

All public companies in South Africa, whether listed or unlisted, are required to prepare their financial statements in accordance with the IFRS as issued by the IASB (Companies Act, sections 27-30, and Regulations 26-30; JSE Listing Requirements, paragraph 8.62). Some small, unlisted public companies may use IFRS for Small and Medium-Sized Entities (SMEs) under Regulation 27. All issuers with securities listed on the JSE, regardless of the legal form of the issuer, must prepare their financial statements in accordance with the IFRS. South Africa was one of the first countries to permit the use of IFRS (in 1999) and in 2004 adopted the IFRS. The FSB is a member of the Monitoring Board of the IFRS Foundation.

Audited financial statements are required to be included in prospectuses under the Companies Act (section 100 and Chapter 4 of the Regulations). There are no specific references to inclusion of financial statement information in the detailed provisions that apply to prospectuses. Paragraph 8.4 of the Listing Requirements mandates that prospectuses, pre-listing statements and transaction circulars contain three years of audited financial information.

Audited financial statements or annual reports that contain/are accompanied by audited annual financial statements must be prepared by all public companies, listed or unlisted (Companies Act, section 30, JSE Listing Requirements, paragraph 3.19). Under paragraph 3.19 of the Listing Requirements, every issuer must, within six months after the end of each financial year and at least 15 business days before the date of the annual general meeting, distribute these audited statements to all holders of securities and submit them to the JSE. Section 30 of the Companies Act imposes similar requirements on unlisted public companies. The financial statements normally are distributed to shareholders with the annual meeting notice and other materials. As noted above, JSE firms are expected to issue provisional annual financial statements within three months of the year-end and these statements must be reviewed by the issuer’s auditor prior to issue. The practice is to issue audited financial statements within the three month period.

Under the IFRS, both audited and interim statements are required to contain a balance sheet, statement of results of operations, statement of cash flow, and a discussion of changes in ownership equity, along with notes to these statements. Accounting statements prepared using the IFRS are required to be comprehensive, designed to meet the needs of investors, reflect consistent application of accounting standards and be comparable across accounting periods.

Unaudited interim financial statements for listed companies are required to be prepared in accordance with the IFRS requirements on interim reporting - IAS 34, the financial reporting guides issued by the Accounting Practices Committee of the South African Institute of Chartered Accountants (SAICA) and financial reporting pronouncements (FRP) issued by the Financial Reporting Standards Council (FRSC) established under the Companies Act. They must also comply with the requirements of the Companies Act that apply to financial statements generally. A statement confirming that the interim statements have been so prepared must be included in the report (JSE Listing Requirements, paragraph 8.57). Interim reports must be published and distributed to shareholders after the end of the first six-month period of a financial year, by no later than three months after that date. For issuers that prepare quarterly reports, these must be published as soon as possible after the end of each quarter (paragraph 3.15).

There are some references to interim financial information in the Companies legislation under the secondary offering prospectus requirements in section 101(6)(c) of the Act and the bid circular requirements under Regulation 106(7)(c). There is no general obligation for public companies to issue interim statements under the Companies Act.

Oversight

The Companies Act established the FRSC to advise the Minister of Trade and Industry (MTI) on matters relating to financial reporting standards. The FRSC’s responsibilities include:

Receiving and considering any relevant information from the CIPC and other sources relating to the reliability of, and compliance with, financial reporting standards;
Advising the MTI on matters relating to financial reporting standards, including the making of regulations that establish financial reporting standards and requirements for the form and content of the summaries of financial statements; and
Adapting international reporting standards for local circumstances, including development of authoritative interpretations for specific issues that only occur in South Africa (section 204).

The regulations prescribe the use of either the IFRS or the IFRS for SMEs with respect to all public companies. Therefore, the FRSC has no role in setting applicable accounting standards for these entities. The FRSC does, however, have the power to issue FRPs, which take into account South African circumstances and issues not specifically addressed by the IFRS, such as accounting for Black Economic Empowerment transactions and the interaction of IAS 19: Employee Benefits, and the South African pension fund environment. The FRSC may also issue FRPs where divergent practices have arisen. These FRPs may not contradict or weaken the IFRS or the IFRS for SMEs. The FRSC reviews any newly issued IAS or interpretations and assesses their local impact with a view to determining whether local interpretations in the form of FRPs are required. Also, the FRSC may consider issuing interpretations where there appears to be a need for additional clarity.

The FRSC has a role in participating and influencing the IASB in its accounting standard setting process and participating in standard-setting initiatives. In fulfilling these roles, the FRSC draws on the expertise and technical resources of South African accountancy bodies, regulators, and business and investment professionals.

The FRSC was formed in October 2011 and its members were appointed by the MTI to serve three year terms; they may be reappointed. The appointed members of the FRSC include auditors; preparers of financial statements for both public and private companies; security holders or creditors who rely on financial statements; company law experts; and representatives from the FSB, SARB, and JSE. There is also a small professional secretariat charged with supporting the functions of the FRSC.

The rules of procedure of the FRSC are published on the DTI website. These rules set out information about the establishment of the FRSC, its due process policy, and its administrative policies and procedures. Information on the activities of the FRSC is also available online, including its annual activity plans, minutes, agenda and other reports.

FRPs and other publications must be developed following an open process that involves publication for comment and input from accountants, auditors, preparers, regulators, academics, legal authorities and users of financial statements. Due process is viewed as necessary to ensure the quality and independence of the FRSC’s recommendations and its continued relevance.

Compliance reviews

The Companies Act requires that any financial statements prepared by a company should not be false, misleading or incomplete in any material respect (section 29(2)). The statute also criminalizes the intentional preparation, approval, dissemination, or publication of materially false or misleading statements (section 214) and requires the CIPC to enforce and report on compliance with financial reporting requirements. The Regulations impose an obligation on auditors and other independent reviewers to submit notices of reportable irregularities to the CIPC (section 29). If the irregularity falls within its scope of authority, the CIPC may choose to conduct an investigation; otherwise it is statutorily obliged to refer the report to the appropriate regulator.

However, the statute does not provide a safe harbor for any auditor filing these reports; they may still be subject to law suits from clients for the breach of their duties of confidentiality.

The CIPC is required to promote the reliability of financial statements by monitoring patterns of compliance with, and contraventions of, financial reporting standards and making recommendations to the FRSC for amendments to the financial reporting standards.

To fulfill its mandate to monitor compliance with the IFRS, in April 2014 the CIPC established a system to select and review a sample of financial accountability supplements, audited annual financial statements, and independently reviewed annual financial statements that have been filed under the Companies Act. The program reviews five financial statements every month from high risk public and private companies that have a public interest score above 350. This forms part of the CIPC’s operational plan for 2013/14 and 2014/15. There are over 3000 public companies in South Africa, not including those listed on the JSE.

The reviews of financial statements address both general compliance with the Companies Act, the IFRS and the King III Code and an evaluation of the solvency and liquidity of the companies. The latter evaluation uses simple balance sheet formulae such as the ratio of current assets to current liabilities and the ratio of total assets to total liabilities.

The CIPC’s longer term intention is to adopt a process analogous to that used by the JSE FRIP (see below) and engage with one or more universities to make use of their expertise to expand the review process.

The JSE and SAICA in 2002 formed the GAAP Monitoring Panel (now called FRIP) to review financial statements of listed companies. The joint initiative was established to fill the gap in the previous Companies Act where there was no requirement to review financial statements for compliance with stipulated accounting standards.

In April 2011, the JSE commenced a process of proactively reviewing annual financial statements (AFS) for compliance with the IFRS. The objective of the JSE’s review process is to contribute to the production of quality financial reporting of entities listed on its market.

In any year approximately 80 companies are reviewed. Selections are made using both a random selection process and one where certain AFS are targeted based on predetermined risk areas that change from year to year. The selection process aims to review AFS across all sectors and markets and to cover issuers of all sizes. The focus is on aspects of financial reporting that are potentially price sensitive or could affect investors’ understanding of the issuer’s business.

Every listed company’s annual report and annual financial statements is subject to an intensive accounting review by the University of Johannesburg at least once every five years. The partnership with the university gives the JSE effective access to 21 additional expert reviewers.

The feedback is then researched and considered by the JSE Listing Division. Issuers are then contacted in writing, and where necessary, are required to respond to areas of concern.

Under this review process, only certain cases where the JSE requires detailed technical advice are referred to the FRIP, following a process set out in the FRIP Charter (available on the SAICA website). A review panel of five members selected from the 16 FRIP members reviews each case referred. The results of the review are then reported to the JSE.

The JSE is able, in its sole discretion, to instruct the management of a non-compliant company to publish or reissue any information it deems appropriate or to censure the issuer (paragraph 8.65). Where errors and omissions are identified, the matter may be referred to IRBA and/or SAICA to take the necessary disciplinary action against the auditor or accountant involved (paragraph 8.66). In addition, the FSB can take separate action against the issuer under the FMA for the publication of false or misleading information.

The JSE publishes an annual report regarding its monitoring program, which includes a description of the process and its outcomes. The statistics from its first three years of activity are set out below. As of the end of 2013, the JSE had reviewed the AFS of 216 issuers, with 10 repeat reviews.

JSE Annual Financial Statements Reviews

	2011	2012	2013
Total AFS reviewed	56	82	78
Cases closed immediately (no issues)	16	14	19
Letters of inquiry sent	40	68	59
Cases brought forward from previous year		11	15
Cases pending	(11)	(15)	(9)
Cases completed during period	45	78	84

Source: JSE, Report Back on Pro-Active Monitoring of Financial Statements in 2013.

Outcomes of JSE AFS Reviews

	2011	2012	2013
Material misstatements – immediate restatement and public announcement made	2	7	3
Misstatements – must be corrected with next published results	2	2	8
Non-material compliance issues – must be corrected in next published results	10	10	7
Total of AFS with required corrections	14	19	18
Smaller disclosure issues that will be corrected in future	15	28	33
Total cases with corrections	29	47	51
Other AFS without issues or only potential areas of improvement identified*	16	31	33
Total cases closed	45	78	84

Source: JSE, Report Back on Pro-Active Monitoring of Financial Statements in 2013.

* includes files closed immediately.

The IRBA Inspections Department also performs financial statements reviews as part of the inspection process. Although financial statement reviews are performed on all inspections, the IFRS specific reviews are also performed on a sample basis, depending on the available capacity of the inspectors. The criteria used for selecting IFRS reviews are based on the risk factors identified (as discussed in Principle 19) regarding the firms, partners, industry, previous results, ratios, market capital, public interest score, etc.

Cross-border

For entities with a secondary listing on the JSE, South Africa recognizes IFRS, U.S. GAAP, IFRS as adopted by the European Union, UK GAAP, Australian GAAP and Canadian GAAP (Paragraph 8.13 of the JSE Listing Requirements). Of the 386 entities listed on the JSE, about 45 entities have a secondary listing.

Issuers with secondary listings usually are required to comply only with the listing requirements of the exchange where they have their primary listing, except if otherwise specifically stated in the Listing Requirements.

Assessment

Fully Implemented

Comments

As noted under Principle 16, there are gaps in the requirements for interim financial statements and the deadlines for releasing financial statements are slow. The downgrade for these gaps is reflected in the rating for Principle 16 and not here.

Principles for Auditors, Credit Ratings Agencies, and Other Information Service Providers

Principle 19.

Auditors should be subject to adequate levels of oversight.

Description

The Auditing Profession Act, 2005 (APA) established IRBA to regulate the auditing profession. The APA provides that IRBA’s responsibilities include registration, inspection, and discipline of auditors, as well as the accreditation of professional bodies. IRBA replaced the Public Accountants and Auditors Board (PAAB), which was a self-regulatory body for the profession. IRBA also has responsibility for setting auditing standards and standards of professional competence, ethics, and conduct for registered auditors (RAs).

IRBA is a member of the International Forum of Independent Audit Regulators (IFIAR).

The ISA issued in 2009 by the IAASB, which is the independent standard-setting body of the International Federation of Accountants (IFAC), have been officially adopted for use in South Africa. Upon its establishment, IRBA confirmed the adoption of the ISA and other pronouncements as issued by the IAASB to be applied by RAs in South Africa. The continuing adoption and prescription of the IAASB standards is made legally effective by IRBA publishing notices in the government Gazette.

IRBA also has the mandate to develop and issue its own authoritative and non-authoritative pronouncements with regard to auditing and other professional standards. The authoritative pronouncements issued by IRBA are to be consistent with the principles of the international standards, but may provide implementation requirements or application material on a particular subject.

IRBA’s Competency Framework and Training Model sets out minimum academic credentials, professional training and other competencies that must be met for individuals to qualify for registration as an RA. An applicant must be a professional accountant, qualified through a professional body recognized by IRBA, and, starting this year, complete an audit development program that entails at least two years of specialized work experience. The Competency Framework also imposes minimum continuing professional education requirements.

There are approximately 4,300 auditors and 1,900 audit firms registered with IRBA.

Under the APA, a part-time board governs IRBA. The Minister of Finance appoints the IRBA Board, which is made up of a minimum of six and maximum of ten members. According to the Act, the IRBA Board may not include more than 40 percent practicing auditors. IRBA is le

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About

Resources

Abstract

Introduction

Information and Methodology Used for Assessment

Institutional and Market Structure—Overview

A. Regulatory Structure

New legislation

B. Market Structure

Market infrastructures

JSE members

Other intermediaries

CIS

Preconditions for Effective Securities Regulation

Main Findings

Summary Implementation of the IOSCO Principles

Recommended Action Plan and Authorities’ Response

A. Authorities’ Response to the Assessment

Detailed Assessment