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Singapore – Consultation On Securities And Futures Act And Financial Advisers Act Regulations.

23 December, 2012

 

Legal News & Analysis – Asia Pacific – Singapore – Regulatory & Compliance 

 

 

INTRODUCTION


The Monetary Authority of Singapore (“MAS”) has recently published a consultation paper (“Consultation Paper”) on proposed amendments to regulations pursuant to the Securities and Futures Act (“SFA”) and the Financial Advisers Act (“FAA”). 

For the SFA, the proposed amendments are to the following sets of regulations:

 

  • (a) the Securities and Futures (Licensing andConduct of Business) Regulations (“LCB Regulations”);
  • (b) the Securities and Futures (Offers of Investments)(Shares and Debentures) Regulations (“OI regulations”); and
  • (c) the Securities and Futures (Composition of Offences) Regulations (“CO Regulations”).


For the FAA, the proposed amendments are to the Financial Advisers Regulations (“FA Regulations”).

 

The closing date for the Consultation Paper is 4 January 2013.


LCB REGULATIONS


The proposed amendments to the LCB Regulations relate to the following areas:

 

  • (a) expanding the application of market conduct provisions; 
  • (b) strengthening record keeping for internetbased transactions; and
  • (c) tightening the exemption from the requirement to hold a Capital Markets Services (“CMS”) licence for providing fund management services to a “connected person”.


Expanding the application of market conduct provisions

 

Currently, under Regulation 13 of the LCB Regulations, risk management and compliance functions such as implementing and ensuring compliance with written operational policies, and identifying, addressing and monitoring the risks associated with trading activities are prescribed as duties of the Chief Executive Officer (“CEO”) and Directors of the corporate CMS licence holder (“Corporate Licensee”).

The proposed amendment will impose such duties pertaining to risk management and compliance on the Corporate Licensee as opposed to such duties being confined to the CEO and Directors. The CEO and Directors will still have the duty of ensuring compliance by the Corporate Licensee with each of these risk management and compliance duties.

MAS has indicated that the rationale for this proposed amendment is that control failures within the Corporate Licensee may not always be fully attributable to the CEO and the Directors. Accordingly, the Corporate Licensee should take collective responsibility (together with its Directors, CEO and senior management) to ensure the proper institution and implementation of risk management and compliance systems.

 

Strengthening record keeping for internet-based transactions


Under the current LCB Regulations, CMS licence holders licensed to deal in securities, trade in futures contracts or carry out leveraged foreign exchange are to keep various particulars of their customer instructions such as the date and time of the receipt of the customer order.

For instances where customer orders are placed via internet-based trading platforms, the proposed amendment to Regulation 39(3) of the LCB Regulations will impose an additional requirement of requiring that the CMS licence holder maintain a record of the Internet Protocol addresses from which such customer orders are received.

MAS has indicated that the recording of such details will help in maintaining in a proper audit trail and may be useful in resolving issues or disputes concerning orders placed in customer accounts.


Connected person exemption


Under Paragraph 5(1)(c) of the Second Schedule of the current LCB Regulations, an individual who provides fund management services to a 
“connected person” may be exempt from the requirement of holding a CMS licence. The SFA defines a “connected person” as:

 

  • (a) the individual’s spouse, son, adopted son, step-son, daughter, adopted daughter,step-daughter, father, step-father, mother, step-mother, brother, step-brother, sister or step-sister; or
  • (b) a firm, a limited liability partnership or a corporation in which the individual or any of the persons mentioned in paragraph (a) above has control of not less than 20% of the voting power in the firm, limited liability partnership or corporation, whether such control is exercised individually or jointly.


MAS has indicated that they have noticed instances where this exemption is used for the management of funds on behalf of non-family members. This is contrary to the intention of this exemption, which is for the management of funds on behalf of immediate family members. As such, it is proposed that definition of a “connected person” will be tightened such that it will only cover immediate family members, and firms or corporations which the individual and his immediate family members, whether individually or jointly, have sole control of.


OI REGULATIONS


The Eighth Schedule to the OI Regulations prescribes the information that needs to be set out in a prospectus for an offer of asset-backed securities. The proposed amendments to the Eighth Schedule will require the following additional disclosures to be made in such prospectuses:

 

 

  • (a) any form of due diligence, including any review, verification or assessment in respect of underlying assets undertaken by the issuer, sponsor, originator, underwriter or any third party; and
  • (b) the use of derivatives contracts, including the name of the counterparty to such contract, the nature of the operational and principal activities of the counterparty and the material terms and conditions of the derivatives contract.


Due diligence disclosure


MAS has indicated that this requirement to disclose due diligence performed on the underlying assets may encourage parties involved in the offer of asset-backed securities to conduct more careful due diligence and risk assessment as investors may be less likely to purchase asset-backed securities where such disclosure may indicate that the due diligence performed was inadequate.


Derivatives contracts disclosure


For derivatives contracts, MAS has indicated that such disclosure would be beneficial to investors given the impact that derivatives may have on the amount and timing of cash flow payments for asset-backed securities. For example, certain derivatives instruments such as interest rate and currency swap agreements may be used to alter the payment characteristics of cash flows from the underlying assets.


CO REGULATIONS


The CO Regulations empower MAS to offer compositions for offences that are punishable by a fine only, as well as selected offences that may be punishable by imprisonment under the SFA. The composition of an offence gives the offender theoption to pay a fine in lieu of prosecution and conviction.

The proposed amendments are to allow compositions to be offered for breaches of the following provisions:

 

  • (a) Regulation 47B of the LCB Regulations where a CMS licence holder is to inform its customer that it is acting as a principal in the transaction of sale or purchase of securities;
  • (b) Regulation 47E of the LCB Regulations where a CMS licence holder that trades in futures contract, carries out leveraged foreign exchange trading or fund management shall furnish the customer with risk disclosure documents and receive acknowledged signed copies of the same documents; and
  • (c) Section 99J of the SFA where a representative shall act for only one principal company, unless the principal companies are related corporations.MAS has indicated that these proposed amendments are to give it greater flexibility in pursuing the appropriate regulatory actions.


FA REGULATIONS


The proposed amendments to the FA Regulations are analogous to those proposed to be made to the Securities and Futures Regulations. The proposed amendments are in relation to:

 

  • (a) expanding the application of the prescribed duties of CEOs and Directorsof Financial Advisers’ (“FA”) licence holders, currently set out in Regulation 14 of the FA Regulations, to the FA licence holders themselves (analogous to the proposed amendment to be made to Regulation 13 of the LCB Regulations); and
  • (b) empowering MAS to offer composition for the following offences that are punishable by a fine only and/or imprisonment under the FAA. These are Section 23G of the FAA where a representative is to act for one principal company only and Section 36 of the FAA where a financial adviser who makes a recommendation for any security is to disclose his interest in such security.


REFERENCES


Please click here to refer to the Consultation Paper

 

 

 

For further information, please contact:


Eric Chan, Director, Drew & Napier 

eric.chan@drewnapier.com

 


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