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Singapore – MAS Issues Proposed Amendments To The Securities And Futures Act And Financial Advisers Act.

7 June, 2012

 

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

 

SUMMARY

 

On 12 March 2009, the Monetary Authority of Singapore (“MAS”) issued a consultation paper (“March 2009 Consultation Paper”) proposing enhancements to the regulatory framework for unlisted investment products. On 28 January 2010, a further consultation paper (“January 2010 Consultation Paper”) was published to extend the scope of review to both listed and unlisted investment products sold to retail investors. Our firm’s update on the March 2009 Consultation Paper and the January 2010 Consultation Paper can be accessed by clicking on the respective links.

 

MAS has now issued a new consultation paper with regards to amending the Securities and Futures Act (“SFA”) and the Financial Advisers Act (“FAA”) to effect the policy positions set out in the March 2009 Consultation Paper and the January 2010 Consultation Paper and MAS’s response to feedback from the industry. The relevant legislative drafts are the Draft Securities and Futures (Amendment) Bill 2012 (“SFA Amendment Bill”) and Draft Financial Advisers (Amendment) Bill 2012 (“FAA Amendment Bill”).

 

BACKGROUND

 

The key amendments proposed to the SFA to give effect to policy proposals contained in the March 2009 Consultation Paper and January 2010 Consultation Paper are as follows:

 

(a) requirement for issuers to classify products as MAS may prescribe, and disclose such classification to relevant persons;

(b) control over the use of the terms “capital protected” or “principal protected”;

(c) enhancement of MAS’s investigatory and regulatory powers;

(d) enhancement of civil remedies available to investors in cases of market misconduct;

(e) requirement for marketing and advertising materials to give a fair and balanced view of the products;

(f) requirement for Product Highlights Sheet to follow a prescribed format;

(g) requirement for the appointment of approved trustees for unlisted debentures;

(h) requirement for timely and meaningful on-going disclosure by issuers of unlisted debentures;

(i) requirement for bid/redemption prices for unlisted debentures to be made publicly and regularly available; and

(j) provision of a cooling-off period for investors in unlisted debentures.

 

In addition, amendments to the SFA are also being proposed to clarify the MAS supervisory framework in relation to false trading and market rigging, as well as to better safeguard retail investors’ interests and moneys.

 

The key amendments proposed to the FAA to give effect to policy proposals contained in the March 2009 Consultation Paper and January 2010 Consultation Paper are as follows:

 

(a) widening of grounds on which licenses may be revoked or prohibition orders may be imposed;

(b) provision for civil liability to apply when financial advisers fail to furnish product information to investors or when they make false or misleading statements; and

(c) enhancement of MAS’s investigatory and regulatory powers.

 

PROPOSED AMENDMENTS TO THE SFA

 

Classification of products and disclosure of classification

 

MAS proposes introducing a new section 309B to the SFA. The amended section stipulates that no issuer shall make an offer of a capital markets product unless he has:

 

(a) determined whether the product belongs to such class of specified products as MAS may prescribe; and

(b) notified the holder of a capital markets services licence or financial adviser in writing as to whether the product belongs to such class of specified products as MAS may prescribe.

 

Use of term “capital protected” or “principal protected”

 

Under the proposed new section 309C, no person shall use the terms “capital protected” or “principal protected” or any of their derivatives, in any language in the name or within the prospectus related to the capital markets product when referring to any capital markets product which is, will be or has been the subject of an offer or intended offer.

 

Civil remedies in cases of market misconduct

 

Amendments are proposed to be made to section 234 of the SFA on civil liability that will result in the enhancement of civil remedies where a person has acted in contravention of the SFA, and has as a result gained a profit or avoided a loss. Under the proposed amendments, there will be liability to pay compensation to the aggrieved claimant.

 

Product Highlights Sheet

 

The requirements for a Product Highlights Sheet is currently set out in MAS Guideline SFA 13-G10 (Guidelines on the Product Highlights Sheet). This is now proposed to be set out in the SFA namely under section 240AA (offer of debentures) and section 296A (offer of collective investment schemes). The Product Highlights Sheet will have to comply with MAS’s prescribed requirements. Essentially, the Product Highlights Sheet will be a brief document, separate from the prospectus which highlights the key features and risks of the investment product.

 

Appointment of approved trustees for unlisted debentures

 

MAS has proposed introducing a new section 265A to the SFA which concerns the appointment of trustees when debentures are offered. The proposed section states that where an offer of debentures is made in or accompanied by a prospectus, the borrowing entity shall appoint a trustee for the holders of debentures and ensure that a trustee is appointed for the entire tenure of the debentures.

 

Section 266(1) of the SFA will be amended to require that the trustee for the debenture holders must:

 

(a) be independent of the borrowing entity, guarantor entity, arranger and counterparty of the debentures;

(b) at all times exercise due diligence and vigilance in carrying out its functions and duties, and in safeguarding the rights and interests of the holders of debentures;

(c) ensure that it has the ability and powers to perform all its duties, as set out in the trust deed;

(d) ensure that where there is a collateral trustee appointed, the collateral trustee must be subject to duties that are equivalent to, or higher than those imposed on the trustee for the debenture holders; and

(e) comply with such other requirements as may be prescribed or imposed by MAS in respect of a particular offer or transaction.

 

Ongoing disclosure requirements in respect of unlisted debentures

 

Under a new section 268A in the SFA, where the debentures are not listed on a securities exchange and have a tenure of 12 months or more, the borrowing entity must prepare and make available to debenture holders, semi-annual reports covering every six month period commencing from the date of issuance of the debentures. These reports must cover the topics prescribed by MAS.

 

A borrowing entity will be required to immediately disclose to holders of unlisted debentures any information which may materially affect:

 

(a) the risks and returns; or

(b) the price or value of the unlisted debentures.

 

Bid/redemption prices in respect of unlisted debentures to be made publicly and regularly available

 

Where the unlisted debentures allow the holder a right of redemption, the new section 268A(7) of the SFA will require the borrowing entity to make bid or redemption prices for the debentures available at the frequency at which the borrowing entity has committed to buying back the unlisted debentures or once every fortnight (whichever is more frequent). The prices should be available on the borrowing entities’ own websites or where redemption is available through distributors, on the distributors’ websites.

 

If the published bid prices are only indicative and may not be the actual bid price, this fact has to be stated clearly on the borrowing entity’s website or the distributors’ website.

 

Mens rea in false trading and market rigging

 

Prompted by the Court of Appeal decision in Tan Chong Koay & anor v Monetary Authority of Singapore [2011] SGCA 36, on what is the required state of mind or mens rea for establishing liability in respect of false trading and market rigging, MAS is proposing to amend sections 197 and 206 of the SFA to provide clarity and to distinguish between the mens rea requirements of the various limbs of sections 197 and 206 of the SFA, according to whether the acts are prosecuted as criminal offences or pursued as civil penalty claims.

 

Three levels of mental culpability are provided – actual knowledge (ie knowing that a false or misleading appearance will or will likely be the result), reckless indifference (ie not caring whether or not a false or misleading appearance will or will likely be the result) and negligence (ie ought reasonably to know that a false or misleading appearance will or will likely be the result). Of these three levels, only the first two will render the person liable to criminal prosecution.

 

Safeguarding retail investors’ interests and moneys

 

At present, capital markets services licensees are permitted to withdraw customer monies maintained in segregated trust accounts, provided this is agreed to by the customer. Such arrangements, however, are not necessarily in the best interest of retail investors, as they will lose the trust protection accorded under the SFA should the licensee default. Retail investors may also potentially be unable to fully appreciate the implications and risks involved when consenting to such arrangements.

 

Therefore, MAS has stated in this new consultation paper that it is proposing to amend section 104 of the SFA to state that customers may agree to alternative arrangements in relation to the use of their money or assets received by capital markets services licensees, except in certain circumstances prescribed by MAS.

 

PROPOSED AMENDMENTS TO THE FAA

 

Widening of grounds on which licenses may be revoked and prohibition orders imposed

 

Amendments are proposed to be made to section 59 of the FAA to widen the powers of MAS to make prohibition orders. It is proposed that MAS should be able to make a prohibition order by notice in writing against an individual, if MAS has reasons to believe that circumstances exist under which, if that individual had been on the Register of Representatives, MAS would have grounds to revoke his status as an appointed representative or as a provisional representative.

 

Extension of civil liability for contravention of sections 25 and 26 of the FAA

 

Amendments to sections 25 and 26 of the FAA have also been proposed. Section 25 imposes an obligation on a financial adviser to give all material information concerning a designated investment product recommended to the client, while section 26 makes it an offence if the financial adviser, with intent to deceive, makes false or misleading statements as to the amounts payable in respect of an investment product or the effect of the terms of any investment product. Under the proposed amendments, a breach of these provisions will be actionable by the client who suffers loss or damage as a result.

 

This would be similar to the position under the existing section 27 of the FAA, where a right of civil action is given to a client who suffers loss or damage as a result of relying on recommendations made by a financial adviser who does not have a reasonable basis for making the recommendations.

 

PROPOSED COMMON AMENDMENTS TO BOTH THE SFA AND FAA

 

Enhancing MAS’s investigatory and regulatory powers The proposed amendments to the SFA will also see the widening of investigatory and regulatory powers of MAS. A new section 163A is proposed, giving an officer authorised by MAS (upon the satisfaction of certain requirements, including the giving of notice) the power to enter premises without a warrant if there are reasonable grounds for suspecting that the premises is occupied by persons who have acted in contravention of the SFA. Amendments are also proposed to section 164 with regards to an application for a warrant to seize books that are required to be, but have not been produced to MAS. Enhancements are also being proposed in the FAA Amendment Bill with regards to MAS’s investigatory and regulatory powers under the FAA. These include:

 

(a) requiring a person under investigation to appear before an MAS officer for an examination on oath and to answer questions;

(b) improving the process under which examination of persons under investigation is to be conducted;

(c) empowering an MAS officer to enter premises without a warrant, where he has reasonable grounds to suspect that the premises are or have been occupied by a person whom is being investigated;

(d) enabling MAS to apply for a warrant to seize books not produced where there are reasonable grounds to suspect that there is, on any particular premises, any book which has been required to be produced but has not been produced;

(e) enabling MAS to furnish any book, document, written record of any examination or other information obtained by it to a police officer, commercial affairs officer, or the public prosecutor, for the purpose of any investigation into or criminal proceedings against a person for an alleged contravention of any provision under the FAA;

(f) empowering the court to prohibit payment or transfer of moneys, investment products, etc in certain circumstances; and

(g) empowering the court to grant an injunction restraining a person from engaging in the conduct or requiring that person to do an act or thing.

 

REFERENCES

 

1. Consultation Paper on Proposed Amendments to the Securities and Futures Act and the Financial Advisers Act

2. Draft Securities and Futures (Amendment) Bill 2012 3. Draft Financial Advisers (Amendment) Bill 2012

3. Draft Financial Advisers (Amendment) Bill 2012

 

 

For further information, please contact:

 

Eric Chan, Director, Drew & Napier 

eric.chan@drewnapier.com

 

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