The FSCA has published the final version of a notice setting out the conditions under which collective investment scheme (CIS) managers are exempt from some of the requirements of the Collective Investment Schemes Control Act (Cisca) when amalgamating two or more schemes or portfolios.
CIS Notice 1 took effect on 8 February.
Section 99 of Cisca provides that a CIS of two or more portfolios may not be amalgamated without the prior consent of investors. Also, the rights of the investors in a portfolio may not be ceded or transferred without the investors’ prior consent.
In July 2022, when the draft version of the exemption notice was published for comment, the FSCA outlined the challenges the CIS industry was experiencing with the requirement.
Read: FSCA proposes to ease requirements for CIS portfolio amalgamations
In terms of the exemption, investors in what the notice calls the targeted portfolio (“portfolio” replacing “fund” in the final version) will not have to be balloted, but they must be given prior warning of the proposed amalgamation, so they have an opportunity to object.
The targeted portfolio is the CIS or portfolio that will receive the transferred CIS or portfolio.
The FSCA has amended the draft notice as a result of comments from industry stakeholders.
In its comments to the Authority, the Association for Savings and Investment South Africa (Asisa) said its members welcomed the proposed exemption.
“More often than not, targeted portfolio investors are not impacted at all or, in fact, [are] impacted positively due to the subsequent larger fund size and further economies of scale in cost achieved, as well as through increased liquidity.”
However, Asisa objected to a proposed condition for the exemption: that investors in a targeted portfolio must be provided with an opportunity to raise objections. It said this was tantamount to a vote and would effectively nullify the effect of the proposed exemption.
The FSCA disagreed, saying that, from an administrative and cost perspective, the process of allowing for objections is not similar to a ballot process. (See below for more detail on Asisa’s objection and the FSCA’s response.)
Boutique Collective Investments (BCI) was opposed to the exemption.
It said investors in the targeted portfolio should be informed of a proposed amalgamation when they are sent a ballot letter. Most letters are emailed, so it is not as expensive as it used to be, and it will cost nothing extra if investors decide to vote for or against the amalgamation.
BCI said it has conducted more than 100 amalgamation ballots over the past 10 years – more than any other CIS manager in the country. “We are of the opinion that the status quo should be retained, as it is in line with TCF [Treating Customers Fairly] principles: one investor participatory interest, one vote.”
In response, the FSCA said a CIS manager does not have to make use of the exemption and can continue with the full balloting process if it so wishes.
Amendment to the exemption
Paragraph 2(1) has been reworded to clarify that the exemption applies only to investors in the targeted scheme/portfolio. It now reads:
A manager is exempted from having to obtain the prior consent of investors in a targeted portfolio, as required in terms of section 99(1)(a) of the Act [Cisca] when amalgamating two or more collective investment schemes or two or more portfolios of a collective investment scheme.
Changes to the conditions in paragraph (2)(2)
The exemption in paragraph 2(1) is subject to certain conditions, which are set out in paragraph (2)(2).
Item (a)
The wording has been changed. It now reads:
A manager must at the same time at which investors in a transferring portfolio are informed of a ballot for an amalgamation referred to in subparagraph (1) [instead of “at least 30 working days before an amalgamation referred to in subparagraph (1) takes place”] provide the targeted portfolio [“fund”] investors with a warning of the proposed amalgamation so that they may consider their options and have an opportunity to exercise their rights before the transfer is concluded [“and afford such investors an opportunity to object to the amalgamation in writing”].
Asisa objected to the use of the word “warning”, saying it has a negative connotation and “may unnecessarily create a negative investor perception”.
The FSCA disagreed. It said the “warning” is similar to cautionary announcements on the JSE. The purpose is alert investors of the possible impact the proposed merger or amalgamation may have on their investments.
Item (b)
The wording of the second condition is largely the same:
The warning referred to in item (a) must be transparent, in writing and provide appropriate and accurate information to the targeted portfolio’s investors concerning the expected impact of the amalgamation, to enable the investors to make an informed decision pertaining to the exercise of their rights.
Item (c)
This condition has been completely reworded as follows:
Should investors holding a majority in value of participatory interests in the targeted portfolio object to the proposed amalgamation following the warning referred to in item (a), the manager –
(i) may not proceed with the amalgamation; and
(ii) must inform the Authority of the objection;
In the draft version, item (c) read:
The investors in the targeted fund must be informed that any written objection to the proposed transaction, must be sent to the auditors of the targeted fund tasked with the audit of the amalgamation.
Item (d)
In the draft version, this item read: The manager of the targeted fund must, upon completion of the amalgamation, verify through an audit report the value of the participatory interests of those investors in the targeted fund that objected to the amalgamation, and a copy of the auditors’ report must be submitted to the Authority.
This condition has been removed from the final version. Item (e) in the draft version has become item (d) in the final version, and the wording has been retained:
The assets that are transferred as part of the amalgamation must be of similar type, quality and liquidity as the assets in the collective investment scheme or portfolio receiving the transferred assets. Alternatively, assets in liquid form must be transferred and re-invested within one month after the amalgamation, into the targeted fund.
Item (e)
This was item (f) in the draft version. The wording has been retained, except for substituting “portfolio” for “fund”:
A manager of the targeted portfolio must develop a plan as to how any illiquid assets will be dealt with, including any necessary disclosures related thereto, and must ensure that in implementing the plan the fair treatment of investors is prioritised and not compromised.
Item (f)
This was item (g) in the draft version. The wording has largely been retained, except for the clarification highlighted in bold:
Trustees of the targeted portfolio [“fund”] must agree that the receipt of the assets held in the targeted portfolio [“fund”] as a result of the amalgamation is not likely to result in any material prejudice to the interest of investors in the targeted portfolio [“fund”], and that such receipt is consistent with the objective of the targeted portfolio [“fund”] and can be effected without any breach of investment limits or the investment policy, subject to sub-paragraph 3(1)(b)(ii) of Board Notice 90 of 2014 in Government Gazette No. 37895 on 8 August 2014, including the limit on borrowing powers.
Objection is tantamount to a vote, says Asisa
Asisa said it understood the FSCA’s rationale for providing investors in a targeted portfolio with an opportunity to object to an amalgamation was to assist the Authority in exercising its discretion as to whether to grant consent for the intended amalgamation.
“However, an objection is tantamount to a vote and is likely to confuse investors in a targeted portfolio if they receive a notice that an amalgamation process under way and they do not have to vote, but they can object.
“If the FSCA intends an objection to assist in exercising [its] discretion, when will objections be material enough to cause the FSCA not to approve the amalgamation? This could lead to inconsistency in decision-making.”
Asisa said this does not align with paragraph 2(2)(d) of the draft exemption, which requires an audit report upon the completion of the amalgamation. “How will a report provided when an amalgamation has been completed assist the FSCA with exercising its discretion?
Furthermore, it said, there was a problem with the proposed timing of informing targeted portfolio investors of an amalgamation and affording them an opportunity to object before an amalgamation takes place.
“The timeline will not align with the ballot process in the transferring portfolio. Auditors of a transferring portfolio usually conclude the audit three to five weeks before the effective date of the amalgamation. Misaligned timelines complicate the administration of the ballot process.”
Asisa said paragraph 2(2)(b) of the draft exemption adequately provides that investors in a targeted portfolio must receive a notice so that they can make an informed decision and exercise their rights. This aligns with international practice.
“In addition, paragraph 2(2)(g) of the draft exemption requires that the trustees of the targeted portfolio must agree that the receipt of the assets in the targeted portfolio as a result of the amalgamation is not likely to result in any material prejudice to the interest of investors in the targeted portfolio.
“Furthermore, if a transferring portfolio pro-actively aligns its assets before the amalgamation, there will be no impact on the targeted portfolio investors. These measures are believed to be adequate to protect investors in a targeted portfolio.”
Investors have a right to be heard, says FSCA
The FSCA said the purpose of providing investors in a targeted portfolio with an opportunity to object to an amalgamation is not only to assist the Authority in exercising its discretion as to whether to grant consent for the intended amalgamation. It is also to ensure that investors are not deprived of the right to be heard, per the intention of section 99(1).
It said that depriving these investors of the right to be heard would be contrary the objectives of Cisca and/or the Financial Sector Regulation Act.
The FSCA said its Communication 21 of 2022 stated that one of the main objectives of the exemption is to alleviate some of the costs associated with conducting a ballot in respect of the targeted fund.
Therefore, the proposed exemption strikes a balance between alleviating some of the costs while still preserving investor rights. The intention is that active balloting does not have to occur (thereby reducing costs), but if there are investors who wish to object, they should be able to do so, the Authority said.
Further, if the investors who hold a majority of the value of participatory interests in the targeted portfolio object, the amalgamation should not proceed. The latter is in line with the objectives of section 99, and the exemption has been revised to clarify this.
“Objections would be akin to a vote only if objections are made, and it should be so as explained above. But it cannot be said that the process of allowing for objections is, from an administrative and cost perspective, similar to a ballot process. We therefore disagree that this will nullify the exemption, especially considering that the objective of the exemption is to reduce the administrative burden and costs insofar as it relates to the targeted portfolio (while still preserving investor protection), and not to deprive investors from the right to be heard,” the FSCA said.
It said the possible confusion that could be caused by the investor notice “can easily be dealt with”. For example, the investor communication should be clear and unambiguous and in plain language state the implications of the amalgamation and what is expected of investors.
