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Singapore – Consultation Paper On Draft Regulations Relating To The Sale And Marketing Of Investment Products.

3 October, 2013

 

Legal News & Analysis – Asia Pacific – Singapore  Investment Funds

 

BACKGROUND

 

The Monetary Authority of Singapore (“MAS”) has recently embarked on a new consultation for proposed amendments to regulations relating to the sale and marketing of investment products.


The global financial crisis of 2007 and 2008, together with the corresponding failure of several structured investment products prompted the MAS to conduct a review of the regulatory regime governing the sale of marketing of investment products. MAS’ policy proposals with regard to the changes to be made to such regulatory regime were then set out in two consultation papers dated 12 March 2009 and 28 January 2010 together with their associated responses.


Subsequently, the Securities and Futures (Amendment) Act 2012 was passed by parliament in November 2012, which amongst other amendments, provided MAS with legislative powers to give effect to the above mentioned policy proposals.


The current consultation paper publishes and seeks feedback on proposed amendments to regulations made under the Securities and Futures Act (“SFA”) and also the Financial Advisers Act (“FAA”). These amendments are aimed at further enhancing and refining the regulatory regime governing the sale and marketing of investment products.The closing date for this consultation is 17 October 2013.

 

THE PROPOSED AMENDMENTS

 

In exercise of its powers under the SFA as amended, MAS intends to make provision in regulations under the SFA and FAA for:


(a) requiring a Product Highlights Sheet (as defined in the SFA) to be issued in a prescribed format for certain offers of securities under Part XIII of the SFA;


(b) requiring issuers of unlisted debentures to provide timely and ongoing disclosures to investors;


(c) requiring advertisements of certain offers of securities to give a fair and balanced view of the product and to comply with other restrictions; and


(d) removing exemptions available to Financial Advisers (as defined in the FAA) from complying with certain business conduct requirements under the FAA when providing financial advisory services to overseas investors.

 

PRODUCT HIGHLIGHTS SHEET (“PHS”)

 

Pursuant to the amended SFA, the requirement for a PHS is now a statutory one. Currently, the requirements relating to the form and content of the PHS are set out in the “Guidelines on the Product Highlights Sheet (SFA 13-G10)” (“PHS Guidelines”). MAS now proposes to extract these requirements in the PHS Guidelines and incorporate them into the following regulations:


(a) the Securities and Futures (Offers of Investments) (Shares and Debentures)Regulations (“SD Regs”); and


(b) the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations (“CIS Regs”).

 

The prescribed requirements for a PHS are set out in draft regulation 17B of the SD Regs and draft regulation 19Aof the CIS Regs and stipulate what a PHS should and should not contain. A template of the form of the PHS will be set out in the amended regulations.
In brief, a PHS should contain:


(a) a description of the key features and risks of the product;


(b) where appropriate, diagrams and illustrations of the features and structure of the product; and


(c) where technical terms are used in the PHS, a glossary explaining such technical terms.


A PHS should not:


(a) contain any statement or matter that is false or misleading in the form and context in which it is included;


(b) contain any material information that is not contained in the prospectus;


(c) contain any material information that differs in any material particular from that set out in the prospectus; or


(d) omit any information from any part of the PHS which would result in that part of the PHS being false or misleading.


Besides the above requirements, the proposed amended regulations will also stipulate that the PHS should give a “fair and balanced” view of the nature, material benefits and material risks of the product and elaborate on what would constitute a “fair and balanced” view.
“Fair and balanced” as proposed in the draft regulations requires the PHS to give a balanced description of the risks and potential returns of the product, and a proportionate level of prominence to the warnings, disclaimers and qualifications in relation to the claims on potential returns.


“Fair and balanced” also requires that the PHS does not given the impression of profit without risk, contain words or graphics that convey an impression that is inconsistent with the nature or risks of the product or present footnote information that would alter the meaning of the main text of the PHS or cause an investor difficulty in understanding the product.


The draft regulations also contain specific prohibitions that the PHS should not indicate that the product is comparable to a deposit or that there is little risk of loss to the principal or of the investment not achieving the target rate of return.


Additionally, the draft regulations also requires the PHS to satisfy a minimum legibility criteria and a page limit.

 

TIMELY AND ONGOING DISCLOSURES TO INVESTORS IN RELATION TO UNLISTED DEBENTURES

 

Pursuant to the amended SFA, the requirement to provide timely and meaningful ongoing disclosures to holders of unlisted debentures is now a statutory one. Currently, these requirements are set out in the “Guidelines on Ongoing Disclosure Requirements for Unlisted Debentures (SFA 13-G11)”. MAS now proposes to prescribe the form and content of ongoing disclosures in relation to unlisted debentures by including a new Division 2 of Part III for the SD Regs. The SFA 13-G11 Guidelines will be cancelled when the amendments to the SD Regs are effected.


Draft regulation 23B will prescribe the frequency and form of semi-annual reports to be made available to holders of unlisted debentures and draft regulation 23C will prescribe the content of such reports.


Under draft regulation 23B, it is proposed that semi-annual reports are to be made available to holders of unlisted debentures within two months of the period covered by such semi-annual report via a designated website or in printed form. The borrowing entity is also to promptly notify investors via electronic means or in print of the release of such reports, stating how and where the reports can be accessed. Additionally, the borrowing entity is to provide investors with printed copies of such reports upon request.

 
Under draft regulation 23C, the content of semiannual reports is prescribed in some detail in the draft regulations and include but are not limited to the following:


(a) whether or not the limitations on the amount that the borrowing entity may borrow have been exceeded;


(b) whether or not the borrowing entity and the guarantor entity have observed and performed all of the covenants and provisions binding upon them pursuant to the unlisted debentures or any trust deed;

 

(c) the occurrence of any event which has or  could cause the unlisted debentures or  any provision of the relevant trust deed to become enforceable and the particulars of such event;


(d) changes in the prices of the unlisted debenture during the report period and since issuance, in graph chart format;


(e) the factors contributing to the changes in the prices of the unlisted debenture during the report period;


(f) the amount and date of coupon payments during the report period, an explanation of the calculation of the coupon payments and any significant deviation from the maximum coupon payments set out in the marketing and advertising material or disclosure documents;


(g) in relation to the borrowing entity, its subsidiaries or its guarantor, the particulars of circumstances which may materially affect any security or charge included in or created by the unlisted debentures or any trust deed and/or materially affect the ability to fulfil their respective obligations under the unlisted debenture;


(h) in relation to the borrowing entity, its subsidiaries or its guarantor, particulars of any substantial change in the nature of their respective business since issuance;


(i) the particulars of instances where the borrowing entity has deposited money with or lent money to or assumed any liability of a corporation which is related to the borrowing entity;


(j) where the unlisted debenture has exposure to reference assets or are secured on an underlying collateral, information relating to such that may have a material adverse effect on the unlisted debenture;


(k) the particulars of any change in the credit rating of the unlisted debenture, the borrowing entity or the guarantor entity, the reference assets, or the underlying collateral during the report period;


(l) any other risk exposure, or information, that has had, has or will have an adverse impact on the unlisted debenture that the borrowing entity is aware of; and


(m) fees and charges borne by holders of the unlisted debentures during the period covered by the report.


This new division also stipulates requirements relating to the disclosure of material changes, bid and redemption prices and financial statements. Material changes are to be disclosed via the designated website or via electronic or print means. Bid and redemption prices to be disclosed via the designated website and financial statements are to be released via the designated website or in print form. The borrowing entity is also required to promptly notify investors of the release of such financial statements via print or electronic means.

 

FAIR AND BALANCED ADVERTISING AND OTHER ADVERTISING RESTRICTIONS

 

In its response to the 12 March 2009 consultation paper, MAS articulated its intention to require advertisements for unlisted investment products to give a fair and balanced view of a product and comply with other advertising restrictions. The scope of MAS’ proposals was subsequently extended to include listed investment products in the January 2010 consultation paper.

 

Advertisements For Shares, Debentures, Business Trusts And Collective Investment Schemes

 

To prescribe restrictions on advertisements in relation to shares, debentures, business trusts and collective investment schemes, MAS is proposing amendments to the SD Regs, CIS Regs andSecurities and Futures (Offers of Investments (Business Trusts) Regulations (“BT Regs”). These restrictions will apply to all persons preparing or issuing advertisements in relation to shares, debentures, business trusts and collective investment schemes which are subject to prospectus requirements under Part XIII of the SFA. 

 

Draft regulation 16A of the SD Regs, draft regulation 21A of the CIS Regs and draft regulation 14A of the BT Regs stipulate that advertisements are to give a “fair and balanced”view of the nature, material benefits and risks of the product. Advertisements are also to present information in a clear manner in that the information is in plain language and is easily understood by investors and that the use of jargon or technical terms is limited or where used, explained in such a way that is easily understood.


“Fair and balanced” as proposed in the draft regulations requires the advertisement to give a balanced description of the risks and potential returns of the product, and a proportionate level of prominence to the warnings, disclaimers and qualifications in relation to the claims on potential returns.


“Fair and balanced” also requires that the advertisement does not given the impression of profit without risk, contain words or graphics that convey an impression that is inconsistent with the nature or risks of the product, omit any material information if the omission would cause the advertisement to be misleading or present footnote information that would alter the meaning of the main text of the advertisement or cause an investor difficulty in understanding the product.


Advertisements should also not suggest that the product is, or comparable to, a deposit and that there is little or no risk of the investor losing the principal amount or not achieving the stated or targeted rate of returns. Even for products structured with the objective of returning the full principal amount at maturity, the advertisement needs to state that whilst the objective is to return the full principal at maturity, such return of principal is not unconditionally guaranteed.


Other restrictions include a prohibition on the inclusion of outdated information in an advertisement unless it is specified that such information is historical information and the inclusion of a statement in the advertisement that such advertisement has not been reviewed or endorsed by MAS.


To promote accountability, any person who issues an advertisement or publication is also to ensure that such advertisement or publication is approved by “senior management” prior to publication or dissemination. The draft regulations go on to define “senior management” as referring to the chief executive officer or executive director.

 

Advertisements By Capital Markets Services Licence Holders And Exempt Financial Institutions

 

MAS is proposing that advertisements in respect of capital markets products prepared, published, circulated or distributed by holders of a capital markets services licence (“CMSLs”), exempt financial institutions, and their representatives will be subject to similar requirements as those applicable to shares, debentures, business trusts and collective investment schemes (as discussed above).


Such requirements are prescribed under the draft regulation 46AA of the Securities and Futures (Licensing and Conduct of Business) Regulations(“LCB Regs”). Besides requirements which are largely similar to those applicable to shares, debentures, business trusts and collective investment schemes, draft regulation 46AA also contains the following additional restrictions with regard to advertisements for capital markets products.
Advertisements are not to represent that any graph, chart, formula or other device can, in and of itself, be used to determine or assist a person in determining which capital markets product to buy or sell, or when to buy or sell such product, without prominently disclosing the limitations and difficulties with respect to the use of such graph, chart, formula or other device.


Advertisements are also not to contain any statement to the effect that any report, analysis or service will be furnished free or without charge, unless such report, analysis or service is in fact or will in fact be furnished in its entirety without any condition or obligation.


It is also proposed that existing advertising regulations contained in regulation 46 will be rationalised with the new regulation 46AA, where appropriate, but will otherwise continue to apply in respect of all other advertisements made by CMSLs, exempt financial institutions and their representatives.

 

Advertisements By Financial Advisers

 

For financial advisers and their representatives, the scope of advertisements covered by theproposed regulation 22A of the Financial Advisers Regulations (“FAR”) (which mirrors the proposed regulation 46AA of the LCB Regs) will be wider, including advertisements in respect of life policies and structured deposits. MAS is further proposing to introduce an equivalent of regulation 46 of the LCB Regs, as amended, to the FAR. This would provide specific prohibitions on inaccurate or misleading statements in financial advisers advertisements, In addition, the proposed restrictions on advertisements would be extended to all direct life insurers via a Notice issued underthe Insurance Act.

 

EXEMPTION WHEN PROVIDING FINANCIAL ADVISORY SERVICES TO OVERSEAS INVESTORS

 

Regulation 36 of the FAR exempts financial advisers from having to comply with certain conduct of business requirements under the FAA when providing financial advisory services to “overseas investors”. MAS is proposing to remove this exemption by deleting regulation 36.


MAS has indicated that this will provide certainty to overseas investors on the safeguards that apply when receiving financial advisory services from financial advisers in Singapore, in turn bolstering such investors’ confidence in Singapore’s financial advisory industry. MAS has also indicated that removing the exemption would also be in line with
the International Organisation of Securities Commissions’ core objectives of securities regulation, which provides that investors should be treated in a just and equitable manner.

 

REFERENCES

 

Please click on the links below to refer to the relevant documents. 


1. Current MAS consult
2. MAS consult dated 28 January 2010 on “Regulatory Regime for Listed and Unlisted Investment Products”
3. MAS consult dated 12 March 2009 on “Review of the Regulatory Regime Governing the Sale and Marketing of  Unlisted Investment Products”

 

Drew & Napier

 

For further information, please contact:

 

Eric Chan, Director, Drew & Napier
eric.chan@drewnapier.com

 

Justin Chan, Drew & Napier
justin.chan@drewnapier.com

 

Drew & Napier Investment Funds Practice Profile in Singapore

   

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