On October 8, 2018, the Securities and Futures (Amendment) Act 2017 and a series of related regulations came into effect, introducing and operationalizing wide-ranging amendments to the Securities and Futures Act, Chapter 289 of Singapore (SFA) and the securities regime in Singapore in general. This briefing focuses only on the key amendments that may affect (1) fund management companies (FMCs) that either hold a capital markets services license (CMSL) for fund management (LFMC) or that are registered fund management companies1 (RFMCs) and (2) offerors of collective investment schemes2 (CIS).
A) Enhanced Protection for Accredited Investor Class
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Feature |
Summary |
1. |
Amendment to the definition of “accredited investor” (AI) |
Individuals (effective October 8, 2018)
- New net financial assets test: An individual with net financial assets (generally, bank deposits and capital markets products) exceeding S$1 million will be an AI.
- The existing tests have largely been preserved; i.e., an individual with net personal assets exceeding S$2 million or annual income of S$300,000 (or its equivalent in a foreign currency) or more will be an AI. However, there is a new limitation that the net equity of an individual’s primary residence may be used to contribute only up to S$1 million of the S$2 million threshold in net personal assets.
Joint Account Holders (coming into effect on January 8, 2019)
- New provision where any individual who holds a joint account with another individual who is an AI will also be an AI but only in respect of dealings through that joint account.
Corporations (coming into effect on January 8, 2019)
- New provision where any corporation wholly owned by AIs will be eligible to be treated as an AI even if the business of the corporation is not solely to hold investments (as was previously the requirement).
Trustees (coming into effect on January 8, 2019)
- New provision where the trustee of any trust in which all beneficiaries are AIs will be eligible to be treated as an AI.
- New provision where the trustee of any trust in which all settlors (i) are AIs, (ii) have reserved to themselves all powers of investment and asset management functions under the trust and (iii) have reserved to themselves the power to revoke the trust will be AIs.
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2. |
New opt-in / opt-out regime for AIs |
- New opt-in regime under which, in certain circumstances3, an AI-eligible prospective client4 (i.e., a prospective client that meets the AI criteria) will have the choice of opting in for AI status (and in the absence of opting in, its default status would be retail). The client has the right to withdraw at any time its previous consent to opt in.
- New opt-out regime under which, in certain circumstances, an AI-eligible existing client5 will have the choice of opting out of its AI status (and in the absence of opting out, its default status would remain AI).
- This opt-in / opt-out regime will come into effect on January 8, 2019.
Consequences
- Where a prospective client does not opt in for AI status, an existing client opts out of its AI status or a client withdraws its previous consent to opt in, the counterparty dealing with such a client would be subject to a suite of relevant regulatory obligations that apply when dealing with a retail client (Retail Obligations). The counterparties that may be affected by this change in status include a CMSL holder, a RFMC or a person who intends to make an offer (Offeror) resulting in a first sale of units in a CIS.
- As a first step, it is advisable for a counterparty to carry out an analysis of whether the circumstances that would trigger the AI opt-in / opt-out regime will apply to its business model and activities. If so, the next step would be for the affected counterparty to determine the number and nature of the Retail Obligations that will apply to the affected counterparty should a client’s status change from AI to retail and also to consider whether it is feasible, in light of its specific business model, activities and regulatory status, to continue its relationship with such clients.
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Proposal |
Summary |
1. |
Scope of application |
- The Proposed Guidelines will be applicable across the financial sector to a number of FIs, including CMS Licensees.
- It will therefore apply to Singapore FMCs that are CMS Licensees but will not apply to registered FMCs.
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2. |
Outcome 1: Senior managers1 who have responsibility for the management and conduct of functions that are core to the FI’s operations are clearly identified |
- FIs should clearly identify senior managers who have responsibility for functions that are core to the management of the FI’s affairs, including to the core management functions (CMFs) set out in Annex A.
- FIs should review how each CMF applies in the context of their operations in Singapore and identify the senior managers who have actual decision-making authority and oversight of each function.
- The identification of senior managers should take into account seniority within the organization.
- Apart from the CEO who is directly accountable to the board of directors (Board) or head office, senior managers should generally have direct reporting lines to the CEO and, where relevant to the performance of that function, to the Board or head office as applicable2.
- FIs may, in certain circumstances, determine that more than one senior manager have responsibility for a certain function3. In such cases, FIs should ensure that there is clarity in each senior manager’s scope of authority and reporting lines so that the underlying principle of proper accountability is met.
- Where the activities of a function have been outsourced, FIs should identify the senior manager who has responsibility for making decisions on and overseeing the outsourced function and who has responsibility for reporting on the activities of that function directly to the CEO and Board or head office, as applicable.
- FIs may designate senior managers who are b
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B) Amended Definition of “Institutional Investor” (II)
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Feature |
Summary |
1. |
Amendment to the definition of IIs |
- The definition of II will be widened to include investors such as
- entities organized in foreign jurisdictions that are regulated for carrying on financial activity by a public authority in that jurisdiction, where that public authority exercises a function that corresponds to a regulatory function of the Monetary Authority of Singapore (MAS)6
- central banks, central governments and central government agencies of foreign states
- sovereign wealth funds7
- multilateral agencies, international organizations or supranational agencies as prescribed in the Third Schedule of the Classes of Investors Regulations (which currently includes the Asian Infrastructure Investment Bank, the International Monetary Fund, etc.)
- corporations wholly owned by one or more IIs
- partnerships (other than a limited liability partnership under the Limited Liability Partnerships Act, Chapter 163A of Singapore) in which each partner is an II.
- On the other hand, the definition of II will be restricted to the extent that only Singapore statutory boards as prescribed in the Second Schedule of the Classes of Investors Regulations (and not all statutory boards, as was previously the case) will be IIs.
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C) Migration of the Regulated Activity of “Marketing of CIS”
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Feature |
Summary |
1. |
Regulated activity of “marketing of CIS” moved from Financial Advisers Act, Chapter 110 of Singapore (FAA), to SFA |
- “Marketing of CIS,” a regulated activity previously regulated under the FAA, will now be regulated under the SFA under the regulated activity of “dealing in capital markets products that are CIS.”
- For LFMCs, this means that they will no longer be required to rely on a licensing exemption under the FAA to conduct its CIS marketing activities. Instead, the LFMCs’ CIS marketing activities will be regulated under “dealing in capital markets products that are CIS” under the SFA.
- Some licensing exemptions for “dealing in capital markets products that are CIS” that may be relevant to FMCs include the following:
- a corporation that carries on fund management when dealing in capital markets products that are units of a CIS that is managed by the corporation or any of its related corporations8
- a person whose dealing in capital markets products that are units in a CIS is solely incidental to his carrying on business in fund management
- a person carrying on business in dealing in capital markets products that are units in a CIS for a customer who is (i) an II, (ii) a related corporation10 of the person or (iii) a connected person11 of the person12
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D) New Regulation of Over-the-Counter (OTC) Derivatives Contracts
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Feature |
Summary |
1. |
New regulated activity of dealing in OTC derivatives contracts |
- Previously, dealing in OTC derivatives contracts that are not securities or leveraged foreign exchange (FX) contracts (e.g., interest rate swaps, non-leveraged FX forwards, etc.) was not regulated. Now there is a new regulated activity of “dealing in capital markets products,” which includes dealing in OTC derivatives contracts13.
- Accordingly, an entity that carries out the regulated activity of dealing in capital markets products that are OTC derivatives contracts will be required to hold a CMSL.
- Some licensing exemptions for “dealing in capital markets products that are OTC derivatives contracts” that may be relevant to FMCs include the following:
- an entity that deals in OTC derivatives contracts of which the underlying thing is a commodity, with AIs, IIs or expert investors14only15
- an entity that deals in OTC derivatives contracts where such dealing is solely incidental to its carrying on business in fund management16
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2. |
Transition arrangements |
- If an FMC was dealing in OTC derivatives contracts prior to October 8, 2018, and there is no licensing exemption applicable to such dealing, then it will be given a two-year transitional period (until October 8, 2020) to apply for a CMSL (in the case of an RFMC) or apply to vary its CMSL (in the case of an LFMC) in respect of the new regulated activity. In the meantime, the FMC may continue dealing in OTC derivatives contracts until its application is rejected or withdrawn17.
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E) Regulating Nonconventional Investment Schemes
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Feature |
Summary |
1. |
Regulation of FMCs of physical assets |
- As a result of the amendments to the definitions of “fund management” and “derivative contract,” an FMC managing a CIS that invests solely in physical assets18 (Physical Asset Funds) will now be considered to be carrying on the regulated activity of fund management.
- The manager of a Physical Asset Fund will be exempted19 from holding a CMSL for fund management provided that
- all the participants of the CIS are qualified investors20, or
- the units of the CIS are not the subject of any offer or invitation for subscription or purchase on or after October 8, 2018
- The existing CIS offering exemptions under the SFA would extend to an offer of a Physical Asset Fund, save for some slight differences for the AI exemption under Section 305 of the SFA.
- With respect to using the exemption under Section 305 of the SFA to offer a Physical Asset Fund to AIs, while it is still required to submit a CISNet notification for the Physical Asset Fund, a Physical Asset Fund that is not managed by a licensed or regulated fund manager (whether in Singapore or elsewhere) will not be entered into the publicly available list of Restricted Schemes on the CISNet website.
- Conversely, a Physical Asset Fund that is managed by a licensed or regulated fund manager (whether in Singapore or elsewhere) may or may not choose to enter the Physical Asset Fund into the publicly available list of Restricted Schemes on the CISNet website.
- However, whether the Physical Asset Fund is entered into this list will not in itself affect its ability to be offered to AIs under Section 305 of the SFA.
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2. |
Regulating collectively managed investment schemes as CIS |
- Previously, a CIS was defined as an arrangement in respect of any property with all of the following characteristics:
- Investors have no day-to-day control over management of the property.
- Property is managed as a whole by or on behalf of the scheme operator (Management Limb)
- Investors’ contributions and profits of the scheme from which payments are to be made to investors are pooled (Pooling Limb)
- The purpose or effect of the arrangement is to enable investors to participate in profits arising from the scheme property
- The definition of CIS is amended such that the Management Limb is an alternative to the Pooling Limb, thereby having the effect that a collectively managed investment scheme that meets all the above characteristics other than the Pooling Limb may still be a CIS under the SFA.
- The motivation to remove the Pooling Limb as a mandatory limb is to close a regulatory loophole where certain investment schemes in undeveloped land, plantation plots and apartment blocks (run as a hotel) will avoid regulation as individual participants were allocated specific land or property plots or units (i.e., there is no pooling of contributions).
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F) Others
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Feature |
Summary |
1. |
Additional factors that MAS may take into account when recognizing a foreign fund offered to retail investors |
- Previously, a foreign CIS may be recognized for offer to retail investors if the laws and practices of that jurisdiction that the CIS is constituted and regulated under provide retail investors with a level of protection equivalent to a locally constituted CIS.
- Now, MAS may consider the following additional factors when considering whether to recognize a foreign CIS:
- the investment policy of the fund
- the fund’s trust deed or constituent documents
- the roles, responsibilities and powers of the trustee or a person in an equivalent capacity
- MAS may consider these factors individually or collectively to determine whether the foreign CIS will accord to investors in Singapore protection at least equivalent to that provided to them under a comparable authorized CIS that is locally constituted.
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2. |
Enhanced requirements under the Licensing and Conduct of Business Regulations |
- The requirements pertaining to due diligence, recordkeeping and disclosure have been enhanced in relation to customer monies and assets received from or on account of retail customers.
- There are transition periods (of up to two years) for some of the new requirements under the Licensing and Conduct of Business Regulations.
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1 A corporation that is exempted from holding a capital markets services license for fund management under paragraph 5(1)(i) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations (Licensing and Conduct of Business Regulations).
2 As defined in Section 2 of the SFA.
3 These circumstances relate to the provisions listed in Regulation 3(1) of the Securities and Futures (Classes of Investors) Regulations 2018 (Classes of Investors Regulations).
4 A prospective client could include a prospective investor in a fund or a prospective counterparty to a transaction, depending on the circumstances.
5 “Existing client,” in relation to any counter party, means any other person (a) with whom the counter party entered into transactions immediately before January 8, 2019, and (b) whom the counterparty treated as an AI in those transactions.
6 In relation to the MAS’ regulatory function under the SFA, the Banking Act, Chapter 19 of Singapore, the Finance Companies Act, Chapter 108 of Singapore, the Monetary Authority of Singapore Act, Chapter 186 of Singapore, the Insurance Act, Chapter 142 of Singapore, the Trust Companies Act, Chapter 336 of Singapore, or such other act as may be prescribed by regulations.
7 Specifically, as defined in Section 4A(1)(c) of the SFA, “an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is: (a) to manage its own funds; (b) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (c) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country.”
8 See Paragraph 2(1)(m) of the Second Schedule of the Licensing and Conduct of Business Regulations.
9 See Paragraph 2(1)(b) of the Second Schedule of the Licensing and Conduct of Business Regulations.
10 As defined in Section 4 of the Companies Act (Chapter 50 of Singapore).
11 As defined in Paragraph 1 of the Second Schedule of the Licensing and Conduct of Business Regulations.
12 See Paragraph 2(1)(l) of the Second Schedule of the Licensing and Conduct of Business Regulations.
13 As defined in Section 2 of the SFA.
14 As defined in Section 2 of the SFA.
15 See Paragraph 3A(1)(b) of the Second Schedule of the Licensing and Conduct of Business Regulations.
16 See Paragraph 3A(1)(c) of the Second Schedule of the Licensing and Conduct of Business Regulations.
17 See Paragraph 3A(1)(c) of the Second Schedule of the Licensing and Conduct of Business Regulations.
18 This means the assets of CIS does not include any capital markets products, including any shares of special purpose vehicles.
19 Exempted under Paragraph 5(1)(j) and (k) of the Second Schedule of the LCB Regulations.
20 As defined in paragraph 5(3) of the Second Schedule to the Licensing and Conduct of Business Regulations.