Dear reader

Regulation 28 (and 15 of the Long-term Insurance Act) Revised Once Again

The latest version of Regulation 28 (Regulation 15 of the Long-term Insurance Act) and a few other Regulations were circulated by Namfisa in early February this year.

Trustees need to take cognisance of the following new obligations and requirements, should this Regulation be approved by the Minister and proclaimed in the Gazette:

• Late submission of financial statements, documents and information attracts a penalty of N$ 500 per day;
• Contravention of Regulation 28 is subject to a fine of not more than N$ 1,000 per day in default, upon conviction;
• Housing loan interest rate will be variable at BON repo rate plus 4%;
• Funds are required to invest a minimum of 1.75% in unlisted investments by end 2011, unless prior written application has bee made for exemption, and has been granted;
• Funds must report biannually on placement of investments in unlisted investments and provide any other information required by Registrar;
• Funds must report within 30 days of the effective date of down scaling of dual listed company investment limit on compliance therewith, i.e. by 31 January 2012, 31 January 2013, 31 January 2014, 31 January 2015, 31 January 2016;
• Funds offering members a choice to invest in cash or similar low risk portfolios must still comply with the overall requirements of Regulation 28.

We provide an overview of this regulation below. Changes from the previous draft are reflected in bold text.

1. Regulation 8 – Registration Fees

The registration fees of N$ 20 for the registration of a privately administered fund and other prescribed fees are replaced by new fees as set out in a new Schedule E:

• Registration of fund – N$ 1,000, plus N$ 1/N$ 2 per A4 page for authentication by registrar/search fee if required;
• Section 14 – N$ 50 per member transferred, maximum of N$ 1,000, plus N$ 1/ N$ 2 per A4 page for authentication by registrar/ search fee if required;
• Rule amendment – N$ 200 per amendment, plus N$ 4 per A4 page for perusal, maximum of N$ 1,000 per amendment, plus N$ 5 per resolution, plus N$ 2 per A4 page for search fee;
• Rule amendment or conversion of fund – N$ 900;
• Consolidation of rules – N$ 200;
• Inspection of any public document or making of copies – N$ 2 plus N$ 0.50 per A4 copy;
• Authentication of documents by registrar – N$ 1.00;

2. Regulation 26 - Penalties

• Penalties for late submission of any report etc. have been raised from N$ 10 per day to N$ 500 per day.
• Contravention of provisions of Regulation 28, upon conviction a fine not exceeding N$ 1,000 for every day in default.

Comment:

Namfisa has recently advised all funds that no late submission of annual financial statements will be accepted in future. Has its position changed as the revised regulation refers to late submission?

For complex and large funds, submitting annual financial statements within 6 months could be quite a challenge. One month late submission could thus imply a penalty of N$ 15,000, to be borne by the fund and its members in the first instance. In most cases the finalisation of annual financial statements involves a number of different parties and to try and pinpoint responsibility for recovery of a penalty imposed on a fund could be very difficult.

3. Regulation 27 - Prescribed Interest Rate

Interest on housing loans granted by a fund to be set at BON repo rate plus 4% (currently this would produce a rate of 11%).

4. Regulation 28 – Limits Relating To Asset In Which a Fund May Invest

The Annexure to Regulation 28 is now established as Schedule G.

Assets Excluded:

It is to be noted that the aggregate value of housing loans, money in hand, approved investment in participating employer and asset designated by the Minister in the Gazette, are to be excluded from the analysis of assets in Schedule G to the regulation;

Investment Limits:

• The limit of an investment in Government bills, bonds or securities or loans to or guaranteed by Government is 95% (was 50%);
• The limit of an investment in a single property is 20% (was 5%);
• The limit of an investment of shares or debentures that are unlisted/listed in the capital development sector of any stock exchange in the CMA is 10% (was 5%);
• The maximum equity exposure is 75% (was 65%);
• Schedule G to reg 28 now makes provision for investment in foreign governments’ and foreign local authorities’ bills, bonds and securities of up to 50%, subject to a maximum of 30% per government and 10% per local authority and subject to Registrar approval of these governments (this sounds quite amusing) and entities;
• The maximum investment in any other asset not listed in Schedule G, and not excluded per above, is 2.5% (was 5%);

5. Regulation 28 - Definition of Unlisted Investment

This definition has been rephrased. It now refers to 5 types of asset:

• Unlisted share/share listed on alternative exchange, in company incorporated in Namibia and specified by the Registrar by notice in Gazette.
• Ordinary or preference shares/debentures in private equity or venture capital fund.
• Equity investment in state owned enterprise.
• Investment in equity and debt capital in company incorporated in Namibia and consortium, including a privatisation opportunity

Comment:

The meaning of the last bullet is not clear to us.

6. Reg 28 (5) to (13) – Conditions for Unlisted Investment and Other Conditions

Any unlisted investment is to adhere to the requirements of sub regulations (5) to (13) :

• the minimum investment in ‘unlisted investments’ by end 2011 (was in stages to 2014) will be 5% of market value of investments in total domestic assets;
• The limit to an investment in dual listeds is postponed by 1 year, from 35% to 30% by Dec 2011 (was 2010), to 25% by Dec 2012 (was 2011), to 20% by Dec 2013 (was 2012), to 15% by Dec 2014 (was 2013) and to 10% by Dec 2015 (was 2014) is still maintained.
• unqualified auditors’ IFRS certification not older than 18 months and which has been approved by the Registrar;
• adherence to good corporate governance;
• minimum 25% Namibian ownership prior to fund investment;
  other Registrar requirements;
• official of investment object, investment adviser/manager who has a conflict of interest with regard to this investment must disclose this to Registrar.;
• Registrar may conduct an investigation into the affairs of any of the parties to such investment;
• Registrar needs to give prior written approval for an investment manager or adviser to invest in any entity that is not listed on an alternative stock exchange;
• Fund must report biannually on placement of investments in unlisted investments and provide any other information required by Registrar;
• Investment in an insurance policy shall be deemed not to be an asset of the fund as its requirements are encompassed in Regulation 15 of the Long-term Insurance Act. Unit trusts no longer feature in the asset analysis of schedule 7 to reg 28, and the ‘see through principle’ is adopted;
• Fund must report on compliance with Regulation 28 annually within 6 months after the end of the financial year;
• Fund must report within 30 days of the effective date of down scaling of dual listed company investment limit on compliance therewith;
• Investment outside the CMA is to comply with the Currency and Exchanges Act (Act 9 of 1933);
• The Registrar may grant exemption from any provision of Regulation 28 upon prior written application.

Comment:

• The requirement to invest in unlisted investments read together with sub regulation (5) and (6) appears to be self defeating. Consider a fund intending to make an unlisted investment which does not pass the Registrar’s requirements. It also occurs to us that the investment targets envisaged by the new unlisted investment requirement are unlikely to comply with IFRS and internationally accepted norms on good corporate governance, the domain of companies listed on conventional stock exchanges.
• We foresee a problem with funds offering prudential managed portfolios, that cater for the typical money market, high income and other low risk prudential managed portfolios based on individual member choice. They will be faced with the question how to deal with the ‘unlisted investment’ requirement in such portfolios. It could mean that even in low risk cash or bond portfolios, asset managers will be required to introduce ‘unlisted investments’. This would be in conflict with the principle of low risk investing.

7. What is the Purpose of Prudential Investment Guidelines?

In our view the purpose is to prevent funds from taking too high risks to the detriment of its members. This purpose is congruent with one of Namfisa’s mission statements.

Does it make sense with such intentions to set a minimum for investment in a risky asset rather than a maximum?

We trust you find this interesting and relevant reading. Feel free to contact us for further information or assistance.

Regards

Tilman Friedrich