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Co-branding likely for white-label funds
2011-07-25 08:52:44 Source:

Unit trust companies that allow other parties to use their collective investment scheme licences may soon have put their names to these funds if the party that manages the funds has no intention of obtaining its own licence, a draft notice published by the Financial Services Board (FSB) indicates.

The notice has been published for comment, and if it is published finally as proposed, unit trust companies will have to put their names to funds run by brokers.

The notice says its provisions are aimed at protecting you, the investor, by ensuring transparency about the management company that is responsible for the portfolio, as well as ensuring that white-label, or third-party, branded funds have sufficient assets to be viable.

The practice of white-labelling funds arose in order to allow new asset managers to launch funds using the licence and services of a larger, established fund manager until they have enough assets under management to stand alone. It also enables larger independent financial advisers to run their own funds, known as broker funds.

Typically, broker funds are funds of funds in which the broker makes the asset allocation calls and chooses the underlying funds in each asset class.

But the FSB has been unhappy with the activities of some financial services providers (FSPs) that run white-label funds. For example, earlier this year the FSB finally succeeded in having the FSP licence of Dynamic Wealth Management and that of the group¡¯s stockbroking company withdrawn.

Dynamic Wealth ran a number of unit trusts on the licence of Metropolitan Collective Investments.

The FSB, which wanted to close Dynamic Wealth last year but faced an appeal against its decision to withdraw Dynamic¡¯s licences, said in the appeal that it had lost faith in Dynamic¡¯s management, because the company had contravened the law by running an illegal collective investment scheme, had treated its clients unfairly and caused them to lose money in the unregistered funds, and had failed to return investors¡¯ money.

The appeal, which upheld the FSB¡¯s decision to withdraw the licences, was finalised late last month and Metropolitan was then expected to take over the investment management of the funds.

The notice published this week proposes that two categories of white-label funds be allowed.

One of the categories will cater for managers that are starting up and need to use the collective investment scheme licence of an existing manager before registering a scheme of their own.

The other category will be for FSPs that have no intention of becoming registered managers in their own right, such as brokers who run their own funds.

If an FSP has no intention of becoming a manager in its own right, its funds will be known as co-branded funds and will have to be ¡°branded in the name¡± of the FSP and the unit trust company.

The FSP and the unit trust company will be expected to enter into an agreement that stipulates that the unit trust company commits to running the portfolio as if it were its own, even though the FSP will be responsible for the investment management of the portfolio.

The FSP will be prevented from entering into a similar agreement with another unit trust company.

The agreement must make the unit trust company responsible for the portfolio if the agreement is terminated, stipulate that the unit trust company must identify itself and its role in the portfolio to you, the investor, and stipulate that the portfolio must be marketed under the company¡¯s registered name.

In the agreement, the parties will be expected to address all potential conflicts of interest.

The second category of white-label funds, for FSPs who intend to become managers in their own right, will be called incubator portfolios, the draft notice proposes.

Incubator funds will be branded in the name of the FSP, but the FSP will have to apply for registration as a unit trust company within three years of launching the fund. An extension may be granted if good cause for granting one can be shown, the draft notice proposes.

FSPs that want to establish an incubator fund will have to submit to the FSB a business plan and also enter into an agreement with the host unit trust company in accordance with the notice, and this must be submitted to the registrar of collective investments at the FSB.

The unit trust company that hosts the incubator fund will have to disclose to you in all communications its identity, contact information, and its role and responsibility as the manager of the portfolio.

No more than 30 percent of a host unit trust company¡¯s portfolios may comprise of incubator port-folios or no more than 30 percent of its assets under management may be in incubator portfolios.

Both co-branded and incubator white-label funds will have to obtain at least R50 million in assets within three years of being launched. If a fund does not meet the minimum, it must be wound up or amalgamated with one of the unit trust company¡¯s portfolios.

Robert Walton, the managing director of Metropolitan Collective Investments, the company with the most white-label funds, says while Metropolitan would prefer the status quo to remain, it is not surprised by the draft notice and supports the FSB¡¯s regulation of the sector.

Metropolitan does not have a problem with putting its name to the white-label funds it hosts and is already closing some smaller portfolios as part of a rationalisation exercise due to its merging with Momentum, Walton says.

He expects between eight and 10 portfolios to be closed, including five broker portfolios.

Last year, the FSB unsuccessfully attempted to stop Metropolitan Collective Investments from registering more white-label portfolios.

Its attempts were thwarted when Metropolitan successfully appealed to the FSB¡¯s Appeal Board.

Sanlam Collective Investments also hosts a number of white-label funds, including those managed by Citadel, First Global Asset Management, Associated Portfolio Solutions, Barnard Jacobs Mellet, National Finance Brokers and Lynx Fund Managers.

Sanlam will hold discussions with its white-label partners about the changes that will be required as a result of the notice and will also seek clarity from the FSB on some of its provisions, San-Marie Greeff, the chief executive of Sanlam Collective Investments, says

Sanlam already has a rigorous process to approve new third-party portfolios, and the notice formalises some of these, Greeff says.

She says Sanlam and its white-label partners already have a level of co-branding in that fund fact sheets bear Sanlam¡¯s branding, and letters are sent to investors informing them of Sanlam¡¯s responsibility for the fund, as is required in terms of an Association for Savings & Investment SA (Asisa) standard on third- party funds and co-branding.

A directive published many years ago set the level of assets under management that unit trust companies could hold in white-label funds as 50 percent, Greeff says. The notice proposes lowering this to 30 percent and also introducing a limit on the number of portfolios. Sanlam¡¯s white-label portfolios are within with both proposed levels.

Peter Blohm, the senior policy adviser at Asisa, says Asisa will respond to the FSB¡¯s draft notice once it has canvassed its members.

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