LEGAL NOTE | January 2024 Composition of the Board - Number of Trustees on the Board – Rules – FSCA Approval – Textile open provident fund

Summary: 

Financial Services Tribunal (FST) application for reconsideration of a decision of the FSCA where the FSCA declined to register the rules of the Fund; rules of the Fund must provide for the number of trustees on the Board.

This is an application for reconsideration of the decision taken by the Financial Sector Conduct Authority ("the FSCA") on 16 November 2022 where it decided not to approve and register a proposed rule amendment of the applicant's Fund Rules. The applicant is an umbrella fund with different employees and employers contributing in the textile industry. The Fund seeks an order that the initial decision of the FSCA be overturned, and that an order is granted for the FSCA to register the Rules of the Fund.

Facts:

The decision which the Fund seeks to overturn is set out in its reconsideration application and refers to the FSCA's letter where it declined to register the rule amendment of the Fund. The letter records that FSCA required the exact number of trustees to reflect in the rules of the fund, and that this requirement is implied in Section 7A(1A) of the PFA. The FSCA informed the Fund that if the actual composition of the Board is not stipulated, it will never be possible to determine whether the Board is properly constituted at any given time and there can be no vacant seat on the Board where the actual number of seats is not known.

The FSCA did not approve the proposed Rule amendment on the basis that it required the Board of the Fund to always be properly constituted and that all vacancies must be filled within the specified period which implied that an actual number of Board members (trustees) must be provided for in the Rules.

The FSCA was of the view that the proposed rule amendment was inconsistent with Section 7A of the Pension Funds Act, 1956 (‘the PFA’).

In terms of this section, every fund is required to have a board of trustees with a minimum of four members, and the members of the fund have the right to appoint at least 50% of the members of the board. The purpose of Section 7A is to give members of the fund an equal say in the affairs of a fund, and it gives them the right to elect their number of trustees. The principle underlying section 7 A was confirmed by the then Appeal Board of the Financial Services Board in Gumede & Another v PEP Limited Provident Fund & Others (case number: A7/2016).

The Fund contends that the Fund rule is not inconsistent with the PFA. Ms. Badsha (on behalf of the Fund) contended that since the Rules provide for a minimum of four trustees, the proposed amendment complied with Section 7 A(1) and (2). Accordingly, so she argued, the FSCA must register the Fund Rules, and it has no discretion to refuse.

She contended that the Act stipulates that the     Registrar shall register the alteration.

Ms. Badsha however conceded that there was no maximum number of trustees provided for in the Rules and argued rather that this was not a requirement and that the Act only stipulates that there should be a minimum of four trustees. Accordingly, there could be any number of trustees, but the minimum must always be four.

The FST found that firstly, the Fund’s argument is not supported by the construction and interpretation of Section 7A(2) which requires that the rules of the fund make provision for the constitution of the board. Thus, the specific number of board members must be provided for in the rules as the number of board members plainly constitute the board. The rationale which underpins this provision also serves to support the FSCA's oversight duties over a fund. This is illustrated by Section 26(2) of the PFA which permits the Registrar to appoint so many persons as may be appropriate to the Board of the fund as may be necessary to make up the full complement or quorum of the board. This reasoning is supported by the approach to statutory interpretation where inter alia, the statutory provisions should always be interpreted purposefully and the provision must be properly contextualised to give it its true and proper meaning (see Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) and Cool Ideas 1186 CC v Hubbard 2014 (4) SA 474 (CC).

Secondly, is that the number and/or formula of additional trustees for appointment to the Board is decided outside of the Fund Rules, is determined by extrinsic factors and an external decision-making process which, in our view, violates the Section 7A(2), in particular, the requirement that the fund make provision for the constitution of the Board. Put differently, the fund rules must make provision for the full composition of the Board.

This must mean on proper construction of the provision that a determined number of trustees must be provided for.

Thirdly, this is a consequence of the second point above, is that absent the total number of trustees, it will be difficult to determine the vacancies on the Board which will then, in turn, impact the quorum requirement. Overall, this will also result in a lack of certainty and transparency in the Rules of the Fund. Is ultimately subject to and constrained by the provisions of the PFA.

Whilst the FST did not take issue with the Fund’s discretion to determine the number of trustees on its Board, the Board’s discretion is ultimately subject to and constrained by the provisions of the PFA. The FST added further, that on proper construction of Section 7A, it is implicit that a fund must stipulate the number of trustees on the board. Absent this, there can be no proper determination of the vacancies on the Board, full complement of the Board, as well as the quorum of the Board. It will be difficult to determine as to the voting rights of members and the breaking of deadlocks, as provided in Rule 7A(2).

The FAS was therefore unable to uphold the application for reconsideration, and dismissed the Fund’s application, on the basis that the FSCA’s decision not to approve the Rule amendment was sound, and there is no basis to interfere with this decision.

Content from the Financial Services Tribunal Judgement made on the Textile Open Provident Fund v the Financial Services Conduct Authority, heard on the 9th November 2023.