Jurisdiction - Singapore
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Asia Pacific – Consultation Paper On Arrangements For An Asia Region Funds Passport.

28 May, 2014

 

 

Singapore, Australia, Korea, New Zealand, Philippines, and Thailand have released a joint consultation paper on the proposed rules and arrangements that will govern the operation of the Asia Region Funds Passport (“ARFP”). The ARFP is an APEC initiative for the creation of a regulatory arrangement for the cross-border offer of collective investment schemes (“CIS”) in participating economies. When implemented, it will allow fund managers operating in a passport member economy to offer their funds in other passport member economies under a streamlined authorisation process.


The consultation paper sets out the substantive rules that will apply to participating fund managers and passport funds. It also sets out common standards and expectations amongst regulators from passport member economies on the supervision of passport funds, including the protection of investor interests. The last day for comments is 11 July 2014.


Following the consultation, the jurisdictions that decide to participate in the passport will together work towards the launch of the ARFP in 2016. This Update takes a look at the Consultation Paper.


Applicable Rules


A fund manager that intends to obtain a passport to operate outside its home jurisdiction will need to comply with the laws and regulations of its home jurisdiction, the foreign jurisdiction it intends to enter (the “host jurisdiction”), and the applicable rules under the ARFP regime. The applicable laws and regulations will apply in the following ways:

 

  • The basic eligibility criteria outlining which CIS can access the passport will be set out in passport rules.
  • The laws and regulations of the host jurisdiction will apply to the offer of CIS to investors in the host jurisdiction.
  • In the remaining areas of regulation, the laws and regulations of the home jurisdiction will apply but in a number of areas, these will be supplemented with passport rules. If the requirements of the home jurisdiction exceed those of the passport rules, compliance with the home jurisdiction requirements will suffice. If the converse is the case, the CIS will need to meet the higher standard of the passport rules.


Accordingly, the proposed application process is briefly as follows:

 

  • The home regulator will assess whether a prospective passport fund meets the eligibility and registration requirements of the home jurisdiction as well as the passport funds regime.
  • Once a passport fund has been authorised by its home regulator, it may apply for entry into each host jurisdiction in which it wishes to make offers.
  • In assessing an application, the host regulator will not generally reassess the passport fund’s compliance with th home jurisdiction laws and regulations or the passport rules. Instead, it will focus on assessing the documents required to be lodged with the application by the host jurisdiction laws and regulations (for example, disclosure documents).


Basic Eligibility Criteria: Passport Rules To Apply


There are three types of basic eligibility criteria. These relate to:

 

  • the types of CIS that are eligible;
  • where they are located; and
  • the CIS having made an offer in the home jurisdiction.


Types Of CIS


Each jurisdiction will nominate types of CIS that are authorised for offer to the public in its economy and could be offered under the passport. Only eligible CIS which invest predominantly in transferable securities and certain other liquid assets will fall within the scope of the passport arrangements.


Location Of CIS


A CIS can only be offered as a passport fund if:

 

  • the CIS is constituted or established, and authorised in a passport member jurisdiction; and
  • the operator is authorised and has a principal place of business in that same jurisdiction.


Home Jurisdiction Public Offer


Interests in a passport fund may be offered in a host jurisdiction if the following conditions are met:

 

  • There is an ongoing offer of the interests in the home jurisdiction;
  • The offer attracts the offering and disclosure requirements of the home jurisdiction that would apply to an offer to the public at large;
  • The interests may be acquired by any member of the public in the home jurisdiction on an application under the offer, subject to applicable laws;
  • Information about the offer is made available to persons who customarily arrange for investments in regulated CIS operated by the passport fund operator in an equivalent way to the way in which information about some or all other regulated CIS of the operator is made available;
  • If commissions are paid by the passport fund operator on most of its other regulated CIS to persons who arrange for investments in the regulated CIS, equivalent commissions to that payable in relation to another regulated CIS are payable in the same circumstances in relation to the passport fund which is the subject of the offer; and
  • If the passport fund operator enters contracts under which persons arrange for investments to be made for most of its other regulated CIS, those contracts or substantially equivalent contracts are entered in relation to the passport fund which is the subject of the offer.


Dealing With Investors: Host Jurisdiction Rules To Apply


In general, the laws and regulations of the host jurisdiction will apply in relation to the offers of interests to investors in its jurisdiction. This will involves in particular the following matters:

 

  • Marketing;
  • Distribution and licensing of distributors;
  • Listing and quotation of interests;
  • Disclosure of information about the CIS; and
  • Complaints handling, including both internal dispute resolution and external dispute resolution.


Areas Where Home Jurisdiction and Passport Rules Apply


As noted above, there are various areas where home jurisdiction and passport rules will apply. We set out below a table of the applicable proposed passport rules that will apply.

 

Licensing Of The Passport Fund Operator
Applicable laws and regulations: 

  • Home jurisdiction
  • Some additional passport fund requirements as set out below
Experience
  • At least five years’ experience as the operator of CIS or other investment schemes that:
    • predominantly invest in transferable securities or money market instruments; and
    • are offered to retail investors in a jurisdiction which has a CIS regulatory framework that is comparable to that of the home jurisdiction.
Qualifications of officers of the operator
  • The chief executive officer, or equivalent, must have a minimum of 10 years’ experience as an officer or employee of an entity that carries on a business in financial or capital markets.

 

  • At least two executive directors, or equivalent, must have a minimum of five years’ experience as an officer or employee of an entity that carries on a business in financial or capital markets.

 

  • Persons responsible for making discretionary investment decisions for the passport fund must have:

 

  • at least a bachelor’s degree or equivalent in a relevant discipline that the home regulator considers demonstrates relevant knowledge to a sufficient degree, and a minimum of three years’ (in the past five years) experience in financial or capital markets that the home regulator considers demonstrates relevant knowledge to a sufficient degree; or
 
  • a minimum of five years’ (in the past seven years) experience in financial or capital markets that the home regulator considers demonstrates relevant knowledge to a sufficient degree.

 

  • There must be at least one person responsible for making discretionary investment decisions for the passport fund who is an officer or employee of the operator of the passport fund.
Good standing The operator, and its directors and senior managers and persons having control or significant influence over the operator, must not have been the subject of a judgement or finding by a court or regulator that, in the opinion of the home regulator, indicates they are less than competent or are not of sufficient good standing to be permitted to operate a passport fund.
Funds undermanagement The operator and its related parties must have AUM in investment schemes of at least USD 500m. Only assets in investment schemes that invest at least 50% of their assets in permissible investments may be counted toward the USD 500m requirement.
Capitaladequacy
  • The operator must maintain equity of at least USD 1m.
  • Where the operator has assets under management exceeding USD 500m, it must maintain additional capital equivalent to 0.1 % of the AUM in excess of USD 500m, up to a maximum of USD 20m of additional capital.

 

Operation Of The Passport Fund
Applicable laws and regulations: 

  • Home jurisdiction
  • Some additional passport fund requirements as set out below
Requirement for Custody Arrangements
  • Use of a custodian: There must be a custodian for the fund’s assets of the passport fund. The custodian must be licensed as such and not be the relevant operator.

 

  • Independence of custodian: The activities that relate to the asset holding must be performed by officers who are separate from, and able to act independently from, people involved in investment or trading decisions whether in relation to the passport fund or otherwise (except for deposit accounts and currency investments or trading).

 

  • Separation of assets: In general, the assets of the passport fund must be held separately from assets that are not assets of the passport fund. Passport fund assets are allowed to be held in an omnibus account as long as the account:
    • is managed in accordance with good custodial practice;
    • is reconciled on each business day in the jurisdiction of the custodian; and
    • does not also hold the assets of the holder of the omnibus account.

 

  • Identification of assets: A passport fund must ensure that assets of the passport fund are identified in the records of the custodian as assets of the passport fund.

 

  • Independent oversight: The operator must be subject to oversight. This may be by:
    • a separate and independent entity (for example, a trustee if applicable);
    • a board of directors of which at least half of the members are independent; or
    • a compliance committee of which more than half of the members are independent.
Compliance Audit
  • Auditor appointment: There must be, at all times, an auditor engaged to audit the fund’s compliance with the passport rules.

 

  • Audit requirement: For each period of 12 months (or lesser period to which the audit relates), an appointed compliance auditor must carry out an audit of the passport fund’s compliance with:

 

  • the passport rules; and

 

  • a defined set of obligations under home jurisdiction laws and regulations that help ensure the passport fund operational requirements are in place.
Delegation
  • An operator may delegate any function, as allowed under its home jurisdiction laws and regulations, subject to ensuring proper oversight of the delegate as specified in the passport rules.

 

  • The operator remains responsible to members for any delegated functions.

 

  • Where the portfolio management function is to be delegated, the passport fund must ensure that the delegate meets certain requirements as to regulation and eligibility as set out in the passport rules.
Valuation For Pricing
  • A passport fund must properly value all assets in its portfolio.

 

  • Funds may rely on the specific valuation requirements in their home jurisdiction.

 

Publication And Distribution Of Audited Accounts
Applicable laws and regulations: 

  • Home jurisdiction
  • Some additional passport fund requirements as set out below
  • If annual reports are required in the host jurisdiction, these will be subject to host rules.
Frequency of publication For each period of 12 months, a passport fund must publish its financial statements and an audit report.
Deadline for publication The audit report must be published within three months of the end of the period to which it relates.
Provision of audit report It must also be provided to the home regulator and any host regulators.
Auditor The auditor must a person duly allowed to audit financial statements of regulated CIS under the home jurisdiction laws and regulations.
Content of financial statements and audit report
  • If the home jurisdiction’s standards are converged or substantially converged with the International Financial Reporting Standards and International Standards on Auditing:

 

  • The financial statements and audit report should be prepared in accordance with the home jurisdiction laws and regulations.

 

  • The report should also include any information required to be published in or with the financial statements by the home regulator in the home jurisdiction.

 

  • If the home jurisdiction’s standards are not converged or substantially converged with the International Financial Reporting Standards and International Standards on Auditing:

 

  • The financial statements and audit report must be prepared in accordance with the International Financial Reporting Standards and the International Standards on Auditing, rather than the home jurisdiction’s national standards.

 

  • The home jurisdiction can elect to require the passport fund to prepare two financial statements and two audit reports (that is, one set prepared in accordance with national standards, and one prepared in accordance with international standards) or may elect to allow passport funds to use international standards only.

 

  • The report must also include (as a wrapper or otherwise) any other information that would not form part of the financial statements but is required in the host jurisdiction to be published or provided to members with the financial statements.
Language of financial statements and audit report
  • The passport fund must have all reports translated into one or more of the official languages of the host jurisdiction if required by the host regulator.

 

  • Such translations must be certified as a correct translation in accordance with any requirements for certified translations as determined by the host regulator.

 

Redemption
Applicable laws and regulations: 

  • Home jurisdiction
  • Some additional passport fund requirements
Right to redemption
  • Unless there is a suspension permitted by the passport rules, a passport fund must offer a reasonable opportunity to members to redeem their interests, other than interests in an exchange traded passport fund class, at the usual redemption price.

 

  • The passport fund must pay the redemption price in no more than:

 

  • 15 days from the time the request for redemption is received by the passport fund; or

 

  • any lesser period of notice that has been disclosed to members or persons considering applying for interests as the redemption period.

 

  • The passport fund must redeem interests in the passport fund based on a price calculated after the time the redemption request is made.
Currency conversion Interests may be redeemed in the currency of the passport economy in which the member’s registered address is located or, if that address is not in a passport economy, the currency of any economy.
Exchange traded passport fund classes If a passport fund is an exchange traded fund, it must take all reasonable and lawful steps to ensure that interests in the fund are able to be sold on the financial market at a price that is not materially different from the NAV per interest of the passport fund.
Suspension of redemptions A passport fund must suspend or restrict redemptions if, and only if: 

  • It is directed to do so by the home regulator (the home regulator would be given the power to give such direction if it does not have it for its own regulated CIS); or

 

  • It considers that a suspension is in the best interests of members and fair as between members, and:

 

  • such a proportion of the passport fund’s assets are not able to be valued sufficiently reliably that there is an unreasonable risk that the redemption price will be incorrect (except where the scope for error is unlikely to affect the decision of members about whether to redeem); or

 

  • based on the information available to the passport fund, the passport fund reasonably expects that more than 20% of the passport fund’s assets could not be realised, at the market value of the assets or more, within the period for satisfying redemption requests; or

 

  • the fund is closed to members and is being wound up.

 

 

Investment Restrictions
Applicable laws and regulations: 

  • Home jurisdiction
  • Some additional passport fund requirements as set out below. Exceptions to these limits are available as set out in the passport fund rules.
Asset classes Passport funds will only be allowed to hold the following assets: 

  • investments in regulated CIS;
  • deposits;
  • currency;
  • derivatives;
  • transferable securities;
  • money market instruments; and
  • depository receipts over gold.
Single entity limit Subject to the exemptions outlined in the consultation, a passport fund must not acquire an asset or enter a derivative or securities lending transaction if it results in the passport fund holding or holding to an increased extent: 

  • More than 5% of the value of its assets in transferable securities and money market instruments issued by the same entity together with any derivatives that have securities of that entity as the underlying reference asset;

 

  • Derivatives or securities lending transactions with a single counterparty that could expose the fund to a maximum potential loss of more than 5% of the value of its assets should the counterparty default; or

 

  • More than 20% of the value of its assets in deposits with, or depository receipts issued by, the same entity.
Group limit A passport fund must not acquire an asset if it results in it holding more than 20% of the value of its assets in: 

  • Deposits, transferable securities, or money market instruments issued by entities controlled by the same entity; and

 

  • Any derivatives with counterparties controlled by that entity.
Single CIS limit
  • A passport fund must not acquire an interest in a regulated CIS if it results in the passport fund holding or holding to a greater extent more than 10% of the value of its assets in that regulated CIS, or 25% for an index fund or a benchmark fund meeting the requirements in the exception to the single entity limit.

 

  • To accommodate feeder funds, the single CIS limit will not apply where:

 

  • the passport fund has disclosed an investment strategy of investing at least 85% of the value of its assets in another passport fund (that is, it is a feeder fund); and

 

  • the passport fund in which it holds at least 85% of the value of its assets is itself not a feeder fund.
Total CIS limit A passport fund must not acquire an interest in a regulated CIS if it results in more than 30% of the value of its assets being in interests in regulated CIS that predominately invest in transferable securities and money market instruments but are not passport funds.
Limit on unquoted shares, stocks, and interests in investment schemes A passport fund must not acquire a share, stock, or interests in investment schemes, other than regulated CIS, if it results in the passport fund holding, or holding to a greater extent, more than 10% of the value of its assets in shares, stock, or interests that are not: 

  • quoted on a financial market regulated by an ordinary or associate member of IOSCO; or

 

  • approved for quotation on such a regulated financial market.
Limit on investments conferring significant management influence
  • A passport fund other than a feeder fund must not acquire any securities carrying voting rights that would enable it to exercise significant influence over the management of an entity (including a regulated CIS).

 

  • Voting rights exceeding 25% of the votes that may be cast would generally be significant.
Limits on share of securities or money market interests on issue A passport fund must not acquire more than: 

  • 10% of the non-voting securities of an entity other than a regulated CIS;
  • 10% of the debt securities of an entity; or
  • 10% of the money market instruments for which an entity is or may be liable.
Depository receipts over gold A passport fund must not acquire depository receipts over gold if it would result in the passport fund holding or holding to an increased extent over 25% of the value of the assets of the passport fund in depository receipts over gold.
Derivatives
  • Passport funds must limit their exposure to derivatives.

 

  • For this purpose, the passport rules will include four key requirements:

 

  • Rules to ensure the requirements relating to portfolio allocation are not avoided by use of derivatives;

 

  • A limit on passport funds’ global exposure to derivatives;

 

  • A requirement that exposures are covered by assets available to perform obligations; and

 

  • Requirements to manage counterparty risk.

 

Restricted Transactions
Applicable laws and regulations: 

  • Home jurisdiction
  • Some additional passport fund requirements as set out below
Securities lending
  • A passport fund must not engage in securities lending to generate leverage.
  • The fund also must not reinvest any collateral it obtains or any income earned on that collateral except in case of counterparty default.
  • It must not at any time have transferred more than 50% of the value of its assets in securities lending transactions excluding assets transferred where the obligations of the transferee have been terminated including by performance.
  • The passport rules in relation to limits on global exposures for derivatives apply to securities lending transactions as set out above.
Lending, guarantees, and underwriting A fund must not engage in money lending, or the provision of guarantees and underwriting.
Borrowing In general, a passport fund must not borrow money or other assets or obtain finance.
Partly paid securities A fund must not hold securities which are partly paid.
Short selling A fund must not engage in short selling.

 

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For further information, please contact:

 

Kah Keong Low, Partner, WongPartnership

kahkeong.low@wongpartnership.com

 

Elaine Chan, Partner, WongPartnership

elaine.chan@wongpartnership.com

 

Joy Tan, Partner, WongPartnership

joy.tan@wongpartnership.com

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