2016 Regulatory Briefing FAIS LICENSING...–In the case of juristic entities, an AI must further...

2016 Regulatory Briefing

FAIS LICENSING

Richard Flett

October 2016

Existing FAIS Exemptions

Cat Exemption New Expiration Date

FSB Notice Regist-ration Required

I & II Level 1 regulatory exams No expiry (tbd by Registrar)

BN102 of 2012 Yes

II S5(1)(c) – Existing fund “mandate” must contain a statement on risk

No expiry BN208 of 2012

Yes

II S5(1)(j) - 60 day notice for “mandate” cancellation *

No expiry Idem Yes

II S9(4)(c) - FSP’s liquid assets > 8/52 annual opex

30 June 2017 FN76 of 2016 Yes

I & II S13(1)(c) - Juristic Rep cannot contract or render financial services in its own name

30 June 2017 FN77 of 2016 Yes

All existing time limited exemptions have been extended by a further year

* Exemption subject to condition that fund investors representing at least 75% of the fund’s committed capital can terminate the FSP’s mandate on 180 days notice

New Lobbying/Exemption Applications

Category

Regulation FSB Notice Date Submitted Current Status

I & II Lighter licensing regime for VCCs Response to workshop held 27 Mar 2015

09 Jun 2015 (forwarded to Financial Sector Policy unit at NT)

Pending

I & II Proposed amendments to Fit & Proper requirements for FSPs, KIs and Reps

Invitation to comment 17 Dec 2015

09 Mar 2016 Pending

I & II Level 1 regulatory exams for Compliance Officers

Invitation to comment 14 Apr 2016

15 May 2016 Pending

New License Category for PE

Recap

o Dec 2011: SAVCA drafted and submitted a specific Code of Conduct (CoC) to the FSB for consideration

o Mar 2014: FSB proposed a completely redrafted CoC for SAVCA’s consideration

o Jun 2014: SAVCA submitted an extensive mark-up

o Mar 2015: New draft finally received from FSB

o May 2015: SAVCA submitted an extensive mark-up

Latest Developments

o Feb 2016: FSB committed to holding a workshop to discuss the new category

o Aug 2016: Different direction taken at FSB workshop to discuss PE fund structures. Further work on new code of conduct under existing FAIS framework now looks unlikely. Regulator prefers to consider possible new category within the FSR bill - once they have figured out how to treat private equity funds within Twin Peaks.

Twin Peaks

Recap

o Establishes two regulators to oversee banking, insurance, financial services:

• Prudential regulation: SARB

• Market conduct regulation: FSCA (Financial Sector Conduct Authority)

o SAVCA provided comments to NT on draft of Financial Sector Regulation (FSR) bill in Feb 2015 proposing:

• A distinction be drawn between retail and institutional/sophisticated investors

• A lighter touch regime for PE fund managers servicing institutional investors

Latest Developments

o Aug 2016: SAVCA presented PE fund structures to large working group from FSB, NT and SARB tasked with aligning existing legislation with Twin Peaks

• Private equity will be a “product” under Twin Peaks

• Fund regulation versus manager regulation

• Government appears open to the idea of legislating a dedicated vehicle for PE funds offering tax transparency, limited liability and industry specific licensing requirements and will evaluate structures used overseas

Regulatory Update:

FICA

Craig Dreyer

October 2016

Acknowledgement to Lerato Lamola, Webber Wentzel

FINANCIAL INTELLIGENCE

CENTRE AMENDMENT BILL,

2015

This presentation does not constitute advice, but is intended to create awareness. Please consult your appropriate professional advisor.

FICA Bill

• FICA Bill does not amend who is deemed an

accountable institution

• Enhances South Africa's anti-Money Laundering

("AML") and Combating of Terrorist Financing

("CFT") regulatory regime.

• Introduction of a risk based approach to customer

due diligence measures.


3

FICA Bill – Risk based approach

• Moving away from a rules-based approach

• accountable institutions ("AI") will have greater

discretion to determine the appropriate compliance

steps to be taken in accordance with their AML and

CFT compliance and risk management

programmes.

• Introduction of the concept of a risk management

and compliance management programme


4


• Risk Management and Compliance Programme

– AI must develop an AML and CFT risk management

and compliance programme

– risk management and compliance programme must:

• identify

• assess

• monitor

• mitigate

• manage

• the risk that the provision by the AI of products or

services may involve or facilitate money laundering

or the financing of terrorist activities.

This presentation does not constitute advice, but is intended to create awareness.

Please consult your appropriate professional advisor. 5


• Risk Management and Compliance Programme ("Programme")

– Should provide for the AI's processes and procedures for:

• the establishment and verification of clients

• the due diligence processes

• how the AI deals with foreign prominent public officials & domestic

prominent influential persons

• the keeping of records

• identifying when a transaction is reportable and how such reports

are made

• how the Programme is implemented in branches, subsidiaries or

other operations of the AI in foreign countries

• any other matters that may be prescribed

• AI must make a copy of the Programme available to the FIC on

request

• Programme must be approved by the AI's board

• AI must make Programme available to all employees involved in

transactions to which FICA applies.



Section 21 – Identification of

clients and other persons

• Customer due diligence plan

– knowledge an AI has about its customer and an AI's

understanding of the business a customer is

conducting

– section 21 amended extensively – AI cannot enter

into a business relationship or conclude a single

transaction with an anonymous client.

– Insert section 21A & 21 B – understanding and

obtaining information on business relationship

– In the case of juristic entities, an AI must further

establish the ownership and control structure of the

client (includes verifying the identity of individuals who

exercise control over the client)



FICA Bill

• Status of Bill: – Parliamentary process completed on 25 May 2016

– The Bill has been sent to the President for his assent

– Commencement of the Bill will be a date determined by the Minister of Finance published in the Government Gazette

• Draft Regulations have not been tabled to date.


8

Protection of Personal Information Act

(“POPI” or “the Act”)

no.4 of 2013

Craig Beney

4 October 2016

Current Status

• The act was signed into law by the President on 19 October 2013 and government gazetted 26 October 2013 however an effective date was not gazetted

• The President then proclaimed certain sections of the Act effective 11 April 2014 relating to the appointment of the Information Regulator

• The anticipation is that the President will proclaim the balance of the sections effective during the first quarter of next calendar year

• Once the Act is made fully effective companies will receive a year’s grace period to comply with the Act

• The grace period could be extended as this is allowed for under the Act

Intentions of the Act

• Promote the protection of personal information processed by

public and private bodies

• Establish minimum requirements for the processing of

personal information

• Establish the Information Regulator to exercise certain powers

and to perform certain duties in terms of this Act and the

Promotion of Access to Information Act

• Establish codes of conduct and regulate personal information

flow across the borders of South Africa

Practical implementations

• Non-compliance could result in a R10m fine and/or 10 years jail sentence having serious implications for directors and compliance officers

• POPI therefore needs to form part of your RiskFramework but we believe it will have limited impact on the private equity industry although it be a strong focus in your approach to internet security

• Your obligations are to the following individuals and certain juristic persons (e.g. partnerships) • Staff information

• KYC done on directors of portfolio/investee companies

• Other

• The type of personal information includes: • Age, gender, race, culture, language marital status, identity number, email

address, physical address

• Education, financial, employment and medical records

• Biometric information, personal opinions/views, private and confidential correspondence

• Obligation extends to recording, communication, storage and destroying the personal information • Email

• Fax

• Telephonic calls

8 conditions for the lawful processing of Personal Information

• Accountability • A responsible party (determines purpose and means of processing) must ensure that the other 7

conditions are complied with

• Processing Limitation • May only process information with consent of the data subject (person to whom the personal information

relates) Data subject to consent obtaining of information from another source

• Purpose Specification • Must be collected for specific lawful purpose and only for the purpose disclosed

• Personal information not be retained any longer necessary to achieve the purpose

• Must delete information when it no longer has consent

• Further Processing Limitation • Must be compatible to the purpose for which it was originally collected

• Data subject must consent to the further processing and information has to be in the public domain

• Can only be used for statistical purposes and not published in an identifiable form

• Information Quality • Ensure personal information is complete, accurate, not misleading and updated where necessary

• Openness • Responsible party to be transparent in processing operations and maintain full records how information

was collected, why collected, supplying information is voluntary or mandatory, the recipient of the information

• Security Safeguards • Prevent loss, unauthorised loss and/or destruction of personal information

• Data Subject Participation • Data subject has right to confirm whether responsible party holds personal information and a description

of it

• Data subject may request responsible party to correct or delete personal information


Automatic Exchange of Information

(AEOI)

Richard Flett

October 2016

FATCA (Foreign Account Tax Compliance Act)

o US tax avoidance legislation

• Adopted by SA through IGA, effective 28 Oct 2014

o Requires identification and reporting of all accounts held or controlled by US

residents or citizens

• specific client due diligence rules to identify reportable accounts

• FIs must report account income and balances of US clients to SARS annually

o All SA resident PE/VC funds are considered reporting FIs and should by

now have:

• registered on IRS portal and received a GIIN number

• filed reports with SARS for 8 months to 28 Feb 15 and 12 months to 29 Feb 16

o Local funds without US investors must still file nil returns

o Filing is a challenge

• Full returns - only via SARS 3rd party data submission channels

• Nil returns - possible via eFiling – clunky

• One or two service providers offer solutions – for a fee

CRS (Common Reporting Standard)

o OECD tax avoidance legislation

• Over 100 countries signed up – but not US

o Effective in SA as of 1st Mar 2016. First reports required by:

• 31 May 2017 for 12 months to 28 Feb 2017 in respect of all new clients (post-28

Feb 2016) and/or pre-existing individual clients as at 28 Feb 2016

• 31 May 2018 for 12 months to 28 Feb 2018 in respect of pre-existing entity

clients as at 28 Feb 2016

o “ Wider approach” adopted by SARS

• Requires identification and reporting in respect of all accounts held by foreign

residents (except US residents), including those from non-signatory countries

o Reportable data similar to FATCA

• Demographic data of foreign account holders

• Account balances, interest, dividends, gross proceeds from sale of assets

• But also TIN number from account holder’s country of residence

• As with FATCA, SARS wants nil reports

o SARS developing a common reporting platform for FATCA and CRS

CRS Implementation Challenges

o Enhanced client due diligence procedures require identification of

controlling persons (“warm bodies”) - no matter how many levels of

ownership are involved.

• Conflicts with current FICA requirements (although consistent with pending amendments) which only require identification one level up

• Also some conflict with FATCA

o No “sponsor” regime as per FATCA

• Fund vehicle itself must register rather than GP/Trustee

• Registration currently requires an SA tax number which a partnership won’t have

• Will lead to different entities reporting for CRS and FATCA

o Data submission challenges same as for FATCA

• Solutions becoming available from the same service providers as for FATCA

• SAVCA intends to lobby for a simplified reporting mechanism

o SAVCA website resources

• KPMG guidance note for members published Feb 2016

• SARS FAQ guide published Aug 2016

Regulatory Update:

Taxation – Section 8c

Craig Dreyer

October 2016

What is a Section 8c Instrument &

what are the consequences of

holding one?

• Section 8c triggered by vesting of an equity instrument

• Section 8c taxes gains and allows losses (on a revenue basis, ie

gains not taxed at CGT rates)

• Section 8c applies in respect of gains/losses in respect of:

– The vesting

– An equity instrument

– Which was acquired by virtue of employment

• An equity instrument is:

– A share in a company

– Members interest in closed corporations

– An option to acquire a share….

– Financial instrument convertible into a share

– Contractual right or obligation, the value is determined directly or

indirectly with reference to a Share (this captures trusts) 2 This presentation does not constitute advice, but is intended to create awareness. Please consult your appropriate professional advisor.

• An equity instrument vests when:

– All restrictions cease

– Before the tax payer disposes of instrument

– After option terminates

– On death

– If instrument is disposed of

– The time option converts into equity instrument, is released, lapses

• A restricted instrument is:

– Any condition preventing tax payer from disposing of instrument

– Subject to restrictions, to acquire at value other than market value

– Subject to employee being penalized financially

– Plus several other conditions

3

What is a Section 8c Instrument &

what are the consequences of

holding one?


Calculation of Gain/Loss

• Amount of which market value exceeds consideration paid, when

vesting occurs.

• Example:

– Employee acquired share in ABC (Pty) Ltd, cost R1,000 (100

shares).

– In terms of employment agreement not allowed to sell shares for

one year. After one year he/she could sell 50% of shares, and after

2 years the balance.

– At the end of year 1, market value was R1,500, gain was R500 for

100% of shares, 50% become unrestricted, therefore 50% of R500 is

subject to tax. This is regardless of cash flow.

4 This presentation does not constitute advice, but is intended to create awareness.

Please consult your appropriate professional advisor.

So what does this mean for the

Private Equity Industry?

• Don’t think trusts or partnerships resolve or shield you from 8c

• Consider construction of incentive schemes for management of

portfolio companies, where there are underlying equity instruments.

– Often PE manager wants to tie teams in, i.e. cant vest immediately,

resign and hold onto shares

• Consider construction of how carry participants in PE obtain gains

from a fund.

– Can these be captured under 8c

– Consider restrictions

• TLAB – expected November 2016

– Watch out, some horrible consequences for 8c instruments in draft

5


A word on Trusts • Types:

– Vesting

– Discretionary

• Bewind Trusts:

– Instrument vests in beneficiaries

• FSB – requires if trusts used and PE Manager manages pension

fund money, trust to be Bewind Trust

• SARS/NT – are weary of trusts, think abuse happens in these

vehicles (some of their concerns historically have been grounded)

• Seek tax advice on which is the correct vehicle to use

• Tax law around trusts and particular future amendments are

uncertain

• TLAB – now charging interest on loans by individuals to trusts

5

Instruments / Share vesting Trustees


SECTION 12J: Venture Capital

Company regime

Samantha Pokroy

October 2016

Background

SiMODiSA Impact Trust Submission

• Policy recommendation made in January 2014

National Budget Review – Venture Capital Company

Regime

– Making deductions permanent if investments are held for a

certain period of time.

– Allowing transferability of tax benefits when investors dispose of

their holdings.

– Increasing the total asset limit for qualifying investee companies

from R20 million to R50 million, and from R300 million to R500

million in the case of junior mining companies.

– Waiving capital gains tax on the disposal of assets, and

expanding the permitted business forms.

Approved effective January 1st 2015

Clarification Matters

• Mainly in SA

• s12J(1)(vii) “impermissible trade’ means”… “any trade carried on

mainly outside the Republic”

• What constitutes a South African based venture? What metric should

be measured at time of investment?

• Applies only at the time of investment and not on an ongoing / annual

basis?

• Impermissible trades

• Grey areas in description of company’s trade, e.g. services, property,

fintech

• Book value of assets

• Differing views on what is and is not included in the definition of book

value of assets.

Priority Matters

• Reduce multiple layers of taxation which dilutes the incentive

• Company structure, not tax transparent forms

• Incremental taxes are as follows:

CGT incurred in the VCC on sale of shares in the investee companies

CGT in the VCC has a higher effective rate than that paid by individuals

Dividend withholding tax is then levied on the net proceeds

Prevailing CTC rules result in the shares having base cost of zero

• Proposal #1: No capital gains tax in the VCC on disposal of shares in

qualifying company

• Proposal #2: do not reduce base cost to zero as a result of the section

12J(2) deduction

• Revise “connected person” test

• 20% shareholding or more, no deduction

• Proposal #3: Apply “connected person” test at the end of the first year

of assessment following the 36 month period (with recoupments

where the test is failed)

Other

• Apportioned transfer of tax deduction on transfer of shares

• Tax benefits for salaried employees

• Allowing employees to reduce their employees’ tax by submitting their VCC

certificates to their employers

• Consider allowing FSP license at the fund manager level (as

required by the FSP)

• Qualifying Company is disqualified by virtue of interest income and

is holding company for operating company

National Budget & TLAB 2016

• Connected person test

• At the end of any year of assessment, after

the expiry of a period of 36 months

commencing on the first date of the issue

of venture capital shares

• Mainly in SA

• Double tax / vehicle form

?

?

National Budget Review – Venture Capital Company Regime “Address unintended consequences”

Expected approval effective January 1st 2017


B-BBEE (FSC) Update

Daniel Hatfield

October 2016

What is SAVCA’s role in the FSC Council?

• SAVCA is an Associate member to the FSC Council

– No seat on the FSC Council

– Representation on any FSC Reporting Working Committees (“RWC”) e.g.

Charter

• RWC participation enables us to:

– Table proposals for change in the Charter alignment process

– Debate / discuss any other constituency proposals

– Put forward a draft FSC for approval by council for submission to the

Minister of Finance

Although only an Associate member, SAVCA has been able to have

significant influence on the FSC Charter alignment process

What were our ‘wins’ in the 9(5)?

• General (All):

– Inclusion of SAVCA members within the ambit of the FSC

– Alignment of the Qualifying Small Financial Institution definition with the QSE (R50m turnover)

• Private Equity structures (PE Investors):

– 25% ownership threshold measured post investment (not pre)

– Aligning the use the Modified Flow Through principle to the Generic Codes

– Time to ramp up the portfolio to 50% > 25% black owned

– Differentiating how BO is rated based on it being done through a PE vs. holding company structure

• Enterprise & Supplier Development (Impact Investors):

– Only divide grant based programmes (not funding) by the number of years that the programme runs

– Clarify that an Supplier Development beneficiary is a sub set of Enterprise Development beneficiaries

– Cap the amount of bad debt write-offs that can be used for ED grant portion

– Standard interest rate lending should not qualify as Supplier Development funding

– Increasing turnover thresholds for SMEs being grown through ESD

We have achieved a number of good outcomes for the SAVCA members

(both PE Funds & Impact investors) and for transformation in general

What additional wins since the 9(5)?

• Private Equity

– In definition of BO Fund Manager, excludes capital invested outside of

SA

• ESD

– Get credit for procuring from key Private Equity specific BO

intermediaries/service providers

– Guidance notes for Empowerment Financing & Ownership pillar which

encourage PE & SME investment

• SED

– Allow members to have their own SED programmes (i.e. Fundisa &

consumer financial literacy not compulsory)

All SAVCA’s suggestions to 9(5) were accepted by the RWC & drafted

into the FSC approved by the Minister of Finance

What are the time-frames?

• Approval by council and submission to minister (mid-Aug)

• Approval by minister and submission to DTi (end Sep)

• DTi review & publishing 9(1) gazette (mid-Nov)

The final FSC is likely to be gazetted by December 2016, with the

measurement thereof to kick-off immediately thereafter

What does this mean for SAVCA members?

• Prepare yourself to get rated on the new FSC if your financial year

ends in December this year

• If transformation is important to your business start working on the

priority pillars (using the generic Codes as a guideline)

– Ownership,

– Skills development,

– Enterprise & Supplier Development,

– Procurement

Start working on the priority pillars anticipating that from end 2016 your

business will be governed by the revised FSC


Exchange Control

Richard Flett

October 2016

Exchange Control

o SAVCA is participating in a lobbying initiative led by Webber Wentzel

regarding exchange control restrictions on intellectual property (IP), with the

objective of finding a more workable framework.

o Fruitful discussions took place at a roundtable discussion on18 August 2016

involving the South African Reserve Bank, National Treasury and industry

participants (including SAVCA and several PE & VC firms).

o SARB appears open to the idea of assisting technology ventures through

relaxation of excon restrictions on inter alia

o assigning or licensing IP to foreign residents

o paying royalties to foreign residents,

o 'loop structures‘ in the context of overseas funding rounds

o SARB has also asked SAVCA to identify any other excon issues within the

wider PE industry

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