Jurisdiction - Singapore
Reports and Analysis
Asia Pacific – Launch Of The ASEAN CIS Framework For Cross-Border CIS Offers.

11 September, 2014

 

Legal News & Analysis – Asia Pacific

 

On 25 August 2014, Singapore, Malaysia, and Thailand launched the ASEAN Collective Investment Schemes Framework (“Framework”). The Framework will facilitate cross-border offers of collective investment schemes (“CIS”) to retail investors in these three countries. Fund managers based in Singapore, Malaysia, and Thailand can now offer CIS constituted and authorised in their home jurisdiction directly to retail investors in the other two ASEAN countries under a streamlined authorisation process.

 

A set of common ASEAN standards has been established and set out in “Standards of Qualifying CIS”. These are to ensure that participating fund managers have the necessary experience and track record in managing retail funds offered under the framework. The three countries have also jointly published a handbook, “Handbook for CIS managers of ASEAN CISs”, to provide guidance to fund managers on the operational aspects of the Framework. The Monetary Authority of Singapore (“MAS”) has also introduced new provisions in a new Chapter 10 of the Code on Collective Investment Schemes (“Code”) to implement the Framework in Singapore.

 

This article takes a look at the Framework.

 

Approval For Offers Under The Framework

 

A manager of a Singapore-constituted CIS that wishes to make an offer of units in Singapore and Malaysia and/or Thailand under the Framework must first apply to the MAS. The CIS must meet the following requirements:

 

  • It must be an authorised scheme under section 286 of the Securities and Futures Act (“SFA”);
  • The CIS, its manager, and the trustee must satisfy the requirements in the SFA and the Code that are applicable to an authorised scheme;
  • It must be assessed as suitable to be an ASEAN CIS (“Qualifying CIS”) by the MAS;
  • The CIS, its manager, and the trustee satisfy the Standards of Qualifying CIS; and
  • The offer must be or has been approved for offer to the public in Singapore and the units must have been offered, or will be concurrently offered, to the public in Singapore.
 

Once MAS approval is obtained, the manager of the CIS must then apply to the relevant regulator of the jurisdiction(s) where he wishes to offer the units. For Thailand, this will be the Securities and Exchange Commission of Thailand (“SEC, Thailand”); for Malaysia, this will be the Securities Commission of Malaysia (“SC, Malaysia”). The regulator will review the application under a streamlined authorisation process.

 

The offer of the units in the host jurisdiction must be accompanied by an offering document or prospectus that complies with the laws and regulations in the host jurisdiction. In addition, the offer must be done through locally licensed or regulated intermediaries in the host jurisdiction.

 

Where the CIS concerned is constituted in Thailand or Malaysia and is intended to be offered in Singapore, similar requirements will apply with respect to the approvals to be obtained from the SEC, Thailand and/or SC, Malaysia (as the case may be). For approval of offer from the MAS, the CIS must also be approved as a recognised scheme under section 287 of the SFA.

 

Reviewing Suitability To Be A Qualifying CIS

 

In reviewing an application from a CIS to be a Qualifying CIS, the regulator will take into consideration, among other things, the qualifications of the manager or operator of the CIS and the trustee/fund supervisor, the custody arrangements for the assets of the CIS, and compliance with the product restrictions specified in the Standards of Qualifying CIS. In addition, the regulator will also consider whether the CIS satisfies the following criteria:

 

  • It does not name or describe itself as “capital guaranteed”, “capital protected”, “principal protected”, “real estate investment trust”, or “REIT”;
  • It should not charge performance fees; and
  • The following matters meet the applicable requirements of its home jurisdiction:
    • disclosure of risk factors;
    • payoff structure and distribution policy;
    • fees;
    • pricing method/methodology of asset valuation;
    • delegation of fund management or custody of assets (if any);
    • redemption policy; and o conflicts of interest.
 

Standards Of Qualifying CIS

 

The table below summarises the requirements set out in the Standards of Qualifying CIS:


Qualifications of the CIS Manager
Licensing / Registration The CIS manager must be licensed or registered by its home regulator
Experience of CIS manager The CIS manager must have a track record in managing CIS of at least five years
Assets under Management The CIS manager, together with its related companies, must have assets under management (“AUM”) of at least USD 500m globally. AUM would include discretionary funds but exclude property funds or REITs.

 

Capital adequacy
  • The CIS manager must maintain shareholders’ equity of at least USD 1m.
  • Where the CIS manager has AUM of more than USD 500m, it must maintain additional capital equivalent to 0.1% of the AUM in excess of USD 500m. Alternatively, subject to conditions, it may procure an equivalent amount of coverage in professional indemnity insurance.
  • The home regulator may impose a condition requiring the CIS manager to procure a Letter of Responsibility and/or Letter of Undertaking from its parent company if the parent company is of satisfactory financial standing.

 

Roles and responsibilities/legal liabilities The CIS manager must carry out the following:

 

  • manage the Qualifying CIS strictly in accordance with its constitutive documents, Standards of Qualifying CIS, as well as all laws and requirements of the home jurisdiction;
  • exercise care and diligence, and act in the best interest of unitholders;
  • ensure that all assets of the Qualifying CIS are deposited with an independent custodian;
  • maintain a register of unitholders (if applicable);
  • keep or cause to be kept such books and records as will sufficiently explain the transactions of the Qualifying CIS and all transactions in the Qualifying CIS units;
  • prepare all accounts and reports; and arrange for unitholders to receive accounts/reports (if applicable);
  • ensure that the units of the Qualifying CIS are correctly valued and priced;
  • pay out redemption proceeds within the specified timeframe;
  • conduct all transactions with or for the Qualifying CIS at arm’s length;
  • inform existing unitholders of any significant changes to be made to the Framework no later than one month before the change is to take effect, and where the change cannot be determined in advance, unitholders must be informed as soon as practicable;
  • inform the host regulator at the point of application for the offer and on an on-going basis of any:in addition to the above requirements, the CIS manager must be subject to the requirements in its home jurisdiction.in addition to the above requirements, the CIS manager must be subject to the requirements in its home jurisdiction
    • disciplinary or enforcement actions against the CIS manager in any jurisdiction;
    • conditions imposed by the home regulator on the Qualifying CIS or CIS manager;
    • suspension, withdrawal, or revocation of approval of the CIS in the home jurisdiction as a Qualifying CIS by the home regulator;
    • circumstances which would affect the home regulator’s assessment of the CIS’s suitability to be a Qualifying CIS; or
    • winding up of an Qualifying CIS; and
  • in addition to the above requirements, the CIS manager must be subject to the requirements in its home jurisdiction.
Qualifications equivalent of personnel of the CIS manager
  • The Chief Executive Officer or must have a minimum of ten years experience in financial or capital markets.
  • All members of the Board of Directors must have a minimum of five years experience, as follows:
    • For Executive Directors or equivalent, the five years’ experience must be in financial or capital markets; and
    • For Non-executive Directors or equivalent, the five years’ experience may be in any other field.
    • Key executive officers must have either:
      • At least a Bachelor’s degree or equivalent, and a minimum of three years (in the past five years) experience in financial/capital markets; or
      • A minimum of five years (in the past seven years) experience in financial/capital markets.
      • Fund managers, who are responsible for making investment decisions, must have either:
        • At least a Bachelor’s degree or equivalent, professional qualifications, or passed applicable exams, and at least three years (in the past five years) experience in fund management; or
        • Professional qualifications or passed applicable exams, and at least five years (in the past seven years) experience in fund management.

 

Delegation A CIS manager may delegate any function, subject to the conditions set out in the Standards of Qualifying CIS.
Audit The CIS manager must:

 

  • appoint an independent auditor to conduct an annual audit of the CIS manager covering, at the minimum, the compliance with the Standards of Qualifying CIS; and
  • provide the independent auditor’s report to the trustee/fund supervisor of the relevant Qualifying CIS, the home regulator, and the host regulator.

 

Qualifications of Trustee/Fund supervisor
Requirements on trustee/fund supervisor
  • The trustee/fund supervisor must be domiciled and regulated in the same jurisdiction as that of the Qualifying CIS it oversees.
  • The trustee/fund supervisor must be an institution that is subject to prudential regulation and on-going supervision.
  • The trustee/fund supervisor must satisfy the following minimum criteria:
    • be in sound financial position;
    • the trustee/fund supervisor as well as its directors and key executive officers must be fit and proper;
    • have a sufficient number of qualified personnel;
    • have an appropriate operational system and procedures to carry out all of its required functions, which include:
      • safekeeping of the assets of the Qualifying CIS;
      • where the trustee/fund supervisor is the custodian, segregation of the assets of the Qualifying CIS such that there is adequate protection from losses by or insolvency of the trustee/fund supervisor;
      • an internal control system to prevent unauthorised use of the assets of the Qualifying CIS;
      •  adequate monitoring of all deposits and withdrawal of the assets of the Qualifying CIS;
      •  preparation of the books on fund assets (where applicable);
      • avoidance of conflicts of interest;
      • protection of confidentiality of fund information;
      • oversight of the subscription and redemption of units in the Qualifying CIS; and
      • oversight of the CIS manager to ensure that the CIS manager complies with the constitutive documents of the Qualifying CIS, Standards of Qualifying CIS, as well as rules and requirements of the home jurisdiction.

 

Capital Adequacy The trustee/fund supervisor must comply with the base capital requirement as stipulated by its home regulator’s licensing requirement
Roles and Responsibilities/Legal liabilities The trustee/fund supervisor must carry out the following:

 

  • act in the best interests of the unitholders;
  • take into custody or control all the assets of the Qualifying CIS;
  • prepare deposit and payment accounts of the fund assets (where applicable);
  • exercise care and diligence when monitoring the functions of the CIS manager;
  • notify the home regulator of any breach by the CIS manager as soon as practicable, in any case no later than five business days from the day the trustee/fund supervisor becomes aware of the breach;
  • maintain a register of unitholders (if applicable); and
  • prepare all accounts and reports and arrange for unitholders to receive accounts/report (if applicable).

 

Independence  The trustee/fund supervisor must be independent from the CIS manager.
Custody of Fund Assets
Segregation of Fund Assets The assets of a Qualifying CIS must be segregated from the custodian’s assets and other clients’ assets such that there is adequate protection from losses by or insolvency of the custodian.
Delegation/ Outsourcing Where the custodian of Qualifying CIS delegates its custody function to a sub- custodian:

  • the sub-custodian must be licensed/approved/regulated by a competent regulatory authority in its home jurisdiction;
  • the delegating custodian remains responsible for the actions or omissions of any party the function is delegated to; and
  • the delegating custodian must have adequate procedures to monitor its delegate.

 

Valuation Requirement
Calculation and Disclosure of Net Asset Value (NAV The CIS manager or trustee/fund supervisor must ensure that:

 

  • the NAV of the Qualifying CIS is calculated on a consistent basis; and
  • the NAV is calculated and published at least every dealing day and that the published NAV is readily accessible by investors in the host jurisdiction.

 

Pricing of units
  • The units in a Qualifying CIS should be issued, redeemed, or repurchased at a price arrived at by dividing the fund’s NAV by the number of units outstanding.
  • The price of units may be adjusted by adding or subtracting, as the case may be, fees and charges, in compliance with the relevant provisions in the Qualifying CIS’s prospectus or trust deed.

 

Valuation of the fund asset The CIS manager must ensure that the valuation of assets of a Qualifying CIS is consistently applied and leads to objective and independently verifiable valuations
Requirement for an independent party An independent party should:

  • determine the valuations of investments of the Qualifying CIS; and
  • calculate or cross-check NAV every dealing day.

 

Valuation errors/incorrect pricing Where a valuation error/incorrect pricing occurs , the CIS manager must:

  • notify both the home regulator and the trustee/fund supervisor;
  • perform a revised valuation to correct the valuation error; and
  • compensate affected participants and the scheme for any losses incurred as a result of the valuation error.

 

Redemption of Unit
Frequency The CIS manager must deal in units of a Qualifying CIS at least once a month.
Timing Investors in the host jurisdiction must receive their redemption payment within seven business days.
Suspension of redemption The CIS manager may suspend dealings inunits of a Qualifying CIS when:

 

  • dealings in a material portion of the assets of the Qualifying CIS are restricted or suspended, provided that the trustee/fund supervisor is consulted;
  • it is not in the best interests of the unitholders to liquidate a material portion of the assets of the Qualifying CIS, provided that the trustee/fund supervisor’s approval is obtained;
  • the market value or fair value of a material portion of the assets of the Qualifying CIS cannot be determined, provided that the trustee/fund supervisor’s approval is obtained; or
  • instructed by the home regulator in the interest of protecting the rights of unitholders.

 

Product Restrictions of Qualifying CIS
Permissible investments Subject to the requirements set out in the Standards of Qualifying CIS, the Qualifying CIS’s underlying investments may only consist of the following assets: 

  • transferable securities;
  • money market instruments;
  • deposits;
  • units in other CIS; and
  • financial derivatives.

 

Non-permissible activities A Qualifying CIS must not engage in non- permissible activities such as securities lending, repurchase transactions, and direct lending of monies.
Investment Limits of Qualifying CIS
Single body limit
  • A Qualifying CIS must invest no more than 10% of its net assets in aggregate in transferable securities or money market instruments issued by a single body.
  • A Qualifying CIS must invest no more than 20% of its net assets in deposits placed with a single body
Single group limit A Qualifying CIS must not invest, in aggregate, more than 20% of its net assets in any of the following issued by any single business group: 

  • in transferable securities;
  • in money market instruments;
  • in deposits; and
  • in OTC financial derivatives.

 

Aggregate limit  Investments in the following must not, in aggregate, exceed 15% of the net assets of the Qualifying CIS:
 

  • deposits placed with unrated or non- investment grade deposit-taking institution;
  • debt securities or money market instruments not dealt in on organized market or issued by an unrated or non- investment grade issuing body;
  • unlisted shares; and
  • OTC financial derivatives with non- investment grade or unrated counterparty.

 

Borrowing limit  Subject to the following requirements, a Qualifying CIS may borrow, on a temporary basis, for the purpose of meeting redemptions and bridging requirements: 

  • The borrowing period should not exceed one month; and
  • Aggregate borrowings should not exceed 10% of net assets of the Qualifying CIS.

 

Concentration limit A Qualifying CIS may acquire no more than: 

  • 10% of the shares or securities equivalent to shares of any single issuing body;
  • 10% of the debt securities of any single issuing body; and
  • 10% of the money market instrument of a single issuing body.

 

Use of financial derivatives 

 

A Qualifying CIS may invest in financial derivative instruments provided that CIS manager employs a risk-management process which captures the risks associated with the use of financial derivatives and satisfies the requirements set out in the Standards on Qualifying CIS on an ongoing basis.
Counterparty of financial derivatives The maximum exposure of a Qualifying CIS to the counterparty of an OTC financial dervative must not exceed: 

  • in the case of a countery party with a minimum long-term rating of investment grade, 10% of the net assets of the CIS; or
  • in any other case, 5% of its net assets.

 

 

The standards of Qualifying CIS also sets out additional rules applicable to Money Market Funds, Fund-of-Funds, and Exchange-Traded Funds.

 

wongpartnershiplogo

 

For further information, please contact:

 

Kah Keong Low, Partner, WongPartnership
kahkeong.low@wongpartnership.com

 

Elaine Chan, Partner, WongPartnership
elaine.chan@wongpartnership.com

 

Comments are closed.