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Johannesburg - The Financial Services Board (FSB) will be changing regulations for certain unit trust categories, to ensure that they remain a trustworthy investor instrument.
The fact that some unit trusts have devolved into wolves in sheep's clothing has become evident from the debacle around Corporate Money Managers (CMM), which offered a risky investment in the guise of a money-market trust.
Earlier this year CMM was placed into curatorship by the FSB and some of the changes now receiving attention arise from lessons learnt from CMM.
Pat Ward, the head of collective investments at the FSB, says the new regulations are intended to plug the loopholes exploited by CMM to offer a risky investment.
"What happened in the case of CMM is regrettable and we will prevent it occurring again," he said.
The National Treasury, the South African Revenue Service (Sars) and the Association for Savings & Investment SA (Asisa) are also involved in reviewing the regulations.
In the first line of sight are the rating agencies that acted irresponsibly in awarding grades to instruments in which CMM invested.
Some "money-market instruments" into which CMM investors' money was deposited certainly did not comply with the requirements for money-market instruments. If the ratings had been correct, investment in these vehicles would have been impossible.
The big concern is that all sorts of other inappropriate investments find their way into unit trust portfolios on the strength of ratings.
For instance, there are asset funders' securitised debt instruments that are listed on the stock exchange on the basis of their ratings and in which income, money market, and diversified specialist funds can then invest. "We want to prevent unit trusts from investing in such instruments," says Ward.
Experience with CMM has also highlighted deficiencies in the operations of so-called third-party trusts, where a licensed portfolio manager manages a unit trust on behalf of a third party.
Ward reckons there's a place for third-party trusts, but this leaves the door open to abuse if the financial intermediary recommends investment in only his or her own unit trust. This occurred at CMM, where investors were advised to invest in the trust managed by a licensed portfolio manager.
"There is a definite risk of competing interests if a financial intermediary is directly involved in his own unit trust," Ward explains.
A further two categories of unit trust for which stricter regulations are proposed are funds of funds (FoFs) and dividend-income trusts.
With regard to dividend-income trusts, questions again arise as to the rating of the available investment instruments, and Sars has for some time suspected that these trusts are being misused to avoid tax.
Dividend-income trusts were created to lighten the tax burden of the wealthy. By making an investment in these trusts a tax-bearing interest income is converted into a dividend income, which is tax-exempt. Currently there are only four such trusts, but they manage R46bn in assets. This gives rise to the supposition that they are being used by individuals other than the wealthy.
Ward points out that within the structures of dividend-income trusts there are all sorts of shady investment instruments, which are also subjected to rating.
"These investment instruments cannot be prohibited, but rating agencies must disclose their ratings."
Applications have been submitted to have additional dividend-income trusts licensed, but not all will necessarily be granted licences.
In the sphere of investments there is also room for FoFs, but these vehicles are misused to charge, in effect, double management fees.
FoFs are intended to be investment vehicles in different unit trusts which are presumed to be the best in particular categories.
But what is happening in practice is that portfolio management companies put together FoFs from unit trusts in their own stables. In that way management fees are twice levied - once on the FoF and once on the underlying unit trust.
Ward points out that the total cost of such investments is high and the fees associated with the underlying investments should be disclosed - not merely those relating to the FoFs.
- Sake24.com
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