Client Information: Licensing Regime for FMCs in Singapore

Transcription

1 November 2013 Client Information: Licensing Regime for FMCs in Singapore On 6th August 2012 the MAS released enabling legislation and underlying regulations to implement changes to the licensing regime for fund management companies proposed initially in April Relevant Rules Amendments have been made to the Securities and Futures (Licensing and Conduct of Business) Regulations, the Securities and Futures (Financial and Margin Requirements) Regulations and the Financial Advisers Regulations. Amendments have also been made to the Guidelines on Fit and Proper Criteria, Guidelines on Licence Applications, Representative Notification and Payment of Fees and Guidelines to MAS Notice SFA04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism. The following new regulations have been issued:- FAQ on the Licensing and Registration of Fund Management Companies Guidelines on Licensing, Registration and Conduct of Business for Fund Management Companies Guidelines on Criteria for the Grant of a Capital Markets Services Licence Other Than for Fund Management Updates to various other FAQs to remove information on fund management; New Forms 1, 3A, 11 for licensed fund management companies; New Forms 22A, 23A and 24A for registered fund management companies. Categories of FMC Licence Directors and CEOs are to have managerial or supervisory experience in addition to their portfolio management or other relevant experience.

2 Overall experience will be assessed in the context of the role to be performed in the FMC. Experience in proprietary trading could be counted towards meeting the relevant experience requirement for portfolio managers. Relevant experience may also include sector experience (e.g. corporate strategy and management of businesses), particularly for private equity and venture capital FMCs. 1. CMS Licence Holders There are 2 categories of CMS Licence holders for fund management (known as LFMCs):- Retail LFMC which are permitted to carry on business in fund management with all types of investors; and A/I LFMC which are permitted to carry on business in fund management only with qualified investors. An A/I LFMC is subject to all the requirements of the SFA except those applicable only to dealing with non accredited investors. 2. Registered Fund Management Company Registered Fund Management Companies (known as RFMCs) can carry on business in fund management with no more than 30 qualified investors (of which no more than 15 may be funds or limited partnership fund structures) and only where the total value of the assets managed does not exceed S$250 million. MAS will maintain an online directory of RFMCs on the MAS website. Prior to be being listed in the directory a FMC will not be allowed to enter into any investment management agreement, nor accept client monies. MAS differentiates between an exempt person (which is only required to comply with requirements relating to Prevention of Money Laundering and Countering the Financing of Terrorism and Fit and Proper requirements) and RFCMs which in addition are subject to business conduct regulations and fall within the regulatory purview and supervisory oversight of MAS. Managed assets are calculated as net assets being managed by an FMC excluding:-

3 Money committed by investors but not drawn down Leverage to which managed assets exposed but including:- Assets contracted to affiliate or other manager to which FMC provides services Only include portion attributable to FMC (sector / geography) An RFMC must monitor S$250 million limit and factor in potentially crossing the limit because of by new investors / mandates. If this occurs the RFMC should apply to become a RFMC. Other factors The MAS will consider the following additional factors:- The track record of the LFMC or its holding company or related corporation; whether the FMC, its holding company or related corporations are subject to proper regulation; commitment of the FMC s holding company to the FMC s operations in Singapore; and commitment from the FMC s shareholders, as demonstrated through seed investments in funds managed by the FMC. Retail LFMCs must also show that it or it related corporations have at least a 5 year track record of managing funds for retail investors in a jurisdiction comparable to Singapore; manage total assets of at least S$1 billion; and sufficient PII insurance. Activities Carrying on business in fund management means that the FMC s business involves making investment decisions regarding a pool of moneys or assets, on behalf of customers. This is in contrast to a company whose primary business involves the day-to-day operation and

4 management of property or infrastructural assets and who do not require licensing. It should be noted that this definition is broader than the definition in the SFA and is likely to capture a larger number of fund managers (including private equity and venture capital funds). A person that acts as investment advisor, sub-advisor or provides research to other investment managers (either in Singapore or overseas) is considered to be conducting fund management if the person is able to exercise direct or indirect control over the management of the investment portfolio. To determine whether a person can exercise control over the investment portfolio, MAS looks at whether the person is involved in the construction of the portfolio; has knowledge of the holdings of the portfolio beyond what is publicly available; or is named to in fund s prospectus, offering documents or marketing materials An FMC that engages in marketing funds to end investors or intermediaries is dealing in securities under the SFA. If the funds are collective investment schemes (CIS) they may also be marketing CIS under the FAA. An FMC may be exempt from holding a dealing in securities licence where its fund-marketing activities are solely incidental to its fund management business. An FMC that markets funds for which it is the investment manager or investment subadviser is exempt. An LFMC that conducts central dealing activity for funds managed by its related entities needs a licence for dealing in securities trading futures contracts or leveraged foreign exchange trading as appropriate. Securities borrowing and lending is dealing in securities. An RFMC is not permitted to offer central dealing for funds managed by other persons, including its related entities. Investors A qualified investor is defined as: An accredited investor; A CIS or close ended fund only offered to accredited investors. An accredited investor means:-

5 an individual whose net personal assets exceed S$2 million or whose income in the last 12 months is not less than $300,000; a corporation with net assets exceeding S$10 million as shown in the audited accounts or certified balance sheet; the trustee of a trust where the property held in trust for the beneficiaries of exceed S$10 million; a partnership (other than an LLP ) where each partner is an accredited investor; a corporation whose sole business is to hold investments and entire share capital is owned by accredited investors. Some key restrictions on dealings with certain investors must be noted:- A/I LFMCs and RFMCs cannot target retail investors through investment structures that circumvent clientele class restrictions. Where the GP of a LP structure the FMC can manage the fund even if the GP is not an accredited or institutional investor but only if GP is ultimately owned by the key officers and/or shareholders of the FMC. Employees of A/I LFMCs and RFMCs must meet the definition of an accredited investor or cannot otherwise participate in the fund. Financial Requirements Base Capital FMCs must maintain a base capital of S$250,000. Base capital is defined as paid-up ordinary share capital; plus irredeemable and non-cumulative preference share capital; and any unappropriated profit or loss less any interim loss in the latest accounts of the FMC and any dividend that has been declared since the date of the latest audited accounts of the FMC.

6 There are 3 base capital levels:- For a LFMC managing retail CIS S$1,000,000 For a Retail LFMC (non CIS) S$500,000 For A / I FMC and RFMC S$250,000 MAS recommends a buffer is held but has given no guidance on the amount. Risk Capital LFMCs are required to maintain financial resources of at least 120% of their risk based capital requirements at all times. The operational risk requirement is calculated as the highest of:- 10% of the average annual adjusted gross income of the FMC for the last 3 preceding financial years; 5% of the average annual gross income of the FMC for the last 3 preceding financial years of the holder; and $100,000. Annual adjusted gross income is defined as or a financial year means the annual gross income for the financial year less the sum of non-guaranteed staff bonuses, commission and interest expenses reported as expenses in the annual statements in Form 6 for the same financial year, and is deemed to be zero if it is a negative amount. Gross income for a financial year is the total revenue of the FMC as stated in the latest statement Form 6 for the financial year, adjusted by deducting the following: any realised or unrealised profits or losses arising from the sale or revaluation of financial assets in that financial year that are classified as held to maturity or available for sale ; any income or expense item not derived from the ordinary activities of the holder in that financial year and not expected to recur frequently or regularly; and any income derived from any insurance recoveries in that financial year.

7 The FMC shall calculate the operational risk requirement as 10% of the total revenue as stated in the latest Form 6, adjusted by deducting the following: profit on the sale or termination of a business operation; profit on disposal of a fixed asset; and such other item as MAS may specify in a guideline. Breaches and Reporting In the case of a breach by the FMC, the MAS may require the FMC to stop increasing positions, securities financing, funds accepted for management or accepted for custody or operate its business with any conditions imposed by the MAS. LFCMs are required to comply with the financial resources reporting requirements under the Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services Licences) Regulations. Audit All LFMCs and RFMCs must have annual audits and the audited P&L and auditors report must be filed with the annual declaration within 5 months of the calendar year end. The auditor will be required to report on the FMC s compliance with the following: Restrictions in clientele and assets under management ( AUM ); Minimum base capital requirement; Key business conduct rules such as independent custody, valuation of clients assets and client reporting; and Implementation of a risk management framework Regulatory Reporting LFMCs are required to report on matters including:- Quarterly reports on financial resources. Notice of changes in particulars within 14 days of the change

8 Reports on misconduct of their representatives In addition certain changes (eg appointment of new CEOs or directors, appointment of representatives, changes in structure or shareholdings) will require pre-approval from MAS. RFMCs will be subject to the same reporting requirements that exist for EFMs continue to apply i.e. filing a notice of change in any particulars not later than 14 days after the change and filing a notice of cessation of business prior to business cessation. Staffing Directors All FMCs must have 2 directors with 5 years experience. At least 1 executive director must be resident in Singapore. Nominee directors are not sufficient to satisfy this criteria. One director must be appointed as the CEO. The CEO of a RFMC or an A/ I LFMC must declare 5 years fund management experience and in the case of a retail LFMC 10 years experience. Directors and CEOs are to have managerial or supervisory experience in addition to their portfolio management or other relevant experience. Relevant Professionals Residing in Singapore An RFMC or A / I LFMC must have at least 2 relevant professional with 5 years experience and in the case of a retail LFMC at least 3. Representatives Residing in Singapore Representatives are the persons who conduct the regulated activity of fund management.

9 An RFMC or A / I LFMC must have at least 2 relevant professional with 5 years experience and in the case of a retail LFMC at least 3. In the case of LFMCs they must be Appointed Representatives under the Representative Notification Framework. In the case of a retail LFMC the representatives must sit relevant MAS examinations. The above roles are not cumulative and the same 2 persons can perform all the roles if competent. Business Conduct Rules Now Applicable to RFMC A number of business conduct sections of the SFA will apply to RFMCs. These cover:- Keeping books and records) and preventing their falsification; Handling client assets and keeping separate book entries for each customer; Reporting to clients; No client money to be used for the debts of the firm; Appointment of auditor; Advertising New Requirements for All FMCs in Singapore MAS has taken the opportunity to impose new obligations for all CMS licence holders for fund management. 1. A FMC must when managing client assets ensure that it implements a risk management framework that identifies, addresses and monitors the risks associated with the customer s assets which is appropriate to the nature, scale and complexity of the assets; 2. Customer s assets must be subject to independent valuation for the purpose of determining their net asset value and the NAV must be reported to the customer; 3. Priority must be given to transactions for the purchase or sale of securities or futures

10 contracts, or to investments made, on behalf of the customer, over those made for the FMC, its affiliates, staff or their families. 4. The FMC must ensure effective controls and segregation of duties to mitigate potential conflicts of interest that may arise from its operations. 5. Conflicts of interest arising from the management of the customer s assets must be mitigated and where appropriate, disclosure of such conflicts of interest must be made to the customer. In particular MAS has focused on situations where:- The FMC uses related corporations or other entities in which the staff of the FMC have controlling interests or substantial shareholdings; The FMC invests into the fund using its proprietary moneys or moneys belonging to its related entities or employees; The FMC invests customer moneys into the securities of the FMC s related entity; and The staff of the FMC have outside business interests which may be in conflict with the interests of the customers of the FMC. Risk Management Each FMC must have a written risk management framework based on the MAS Guidelines on Risk Management Practices and covering as a minimum:- Governance, independence and competency of the risk management function which should be segregated from and independent of the portfolio management function; Identification and measurement of risks associated with customer assets so that risks associated with customer assets are identified and measured (including credit, market, counterparty and liquidity risks); Timely monitoring and reporting of risks to management; and Documentation of risk management policies, procedures and reports.

11 Internal Audit MAS expects the business activities of an FMC to be subject to adequate internal audit which can be conducted by the internal audit function within the FMC, an internal audit team from the head office of the FMC, or outsourced to a third party service provider. Compliance Retail LFMC A retail LFMC must put in place an independent and dedicated compliance function in Singapore with staff who are suitably qualified and independent from the front office. Form 1A asks for the employment history of compliance officer for the last 10 years. Compliance staff may perform other non-conflicting and complementary roles such as that of an in-house legal counsel. A / I LFMC with over S$1 billion in AUM An A/I LFMC with AUM exceeding S$1b but carrying out only research and advisory activities may obtain compliance support from an independent and dedicated compliance team at its holding company, or at an overseas related entity. If the A / I LFMC is carrying out other activities it requires a compliance officer in Singapore. A / I LFMC and RFMC These FMCs should have an independent compliance function with staff who are suitably qualified and independent from the front office. This can include a senior back office person (e.g. COO or CFO) or the provision of compliance oversight and support from an independent and dedicated compliance team at its holding company, or an overseas related entity. If the firm does not have a head office n compliance function it may engage an external service provider to support its compliance arrangements.

12 The external compliance provider must be competent and familiar with the requirements for FMCs under the SFA and other regulations in Singapore and able to provide meaningful onsite presence at the LFMC. About ComplianceAsia We specialize in the provision of regulatory and compliance consulting services to financial institutions in the Asia-Pacific region. Our client base consists of international investment banks, independent research providers, trust banks, private banks and representative offices, asset management companies, hedge funds, start-ups and industry organisations. In the last financial year, we have provided services to over clients in the Asia-Pacific region. Founded in 2003 by Philippa Allen, our principals have over thirty years of legal and compliance experience in the financial industry in the Asia-Pacific region, with in-house experience in each major Asian jurisdiction. Why ComplianceAsia? ComplianceAsia: is on the ground in Asia with offices in Hong Kong and Singapore understands our existing clients, their businesses and Asian regulatory regimes quickly learns about its new clients, their business and its needs understands the Act and the registration requirements under the Act is headed by compliance experts with experience spanning 40 years in Asia is concerned about your business and it meeting its regulatory obligations Contact our people Feel free to contact us to discuss how we can assist your business in meeting the relevant admission criteria. Philippa Allen Nithi Genesan CEO Head of Singapore t: Hong Kong t: Hong Kong t: Singapore t: Singapore

13 Disclaimer This document provides a practical summary of the rules and procedures set out by financial regulatory authorities in various jurisdictions. It does not constitute legal advice. In providing this document ComplianceAsia Consulting Ltd and its directors and employees ("ComplianceAsia") are not providing nor purporting to provide legal advice. If you require legal advice you must consult legal counsel in the jurisdiction, which is relevant to you. ComplianceAsia believes this information is reliable and in good faith, but makes no representation as to the accuracy, completeness or correctness of the information. ComplianceAsia accepts no liability whatsoever for any direct or consequential loss or damage arising from any use of this report or its contents. This report may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose, without the prior, written consent of ComplianceAsia.