The Monetary Authority of Singapore (“MAS”) has announced key regulatory enhancements to safeguard investors' interests in the capital markets, following a public consultation in July 2014.
The key enhancements are:
- Stronger safeguards for investors in non-conventional investment products: MAS will extend its capital markets regulatory framework to non-conventional investment products that share features similar to capital markets products. These non-conventional investment products refer to precious metals buy-back arrangements and collectively-managed investment schemes.
- Accredited investors (“AIs”) will now have the option to benefit from the full range of regulatory safeguards that are applicable to retail investors: Financial institutions (“FIs”) will have to treat new customers who are AI-eligible as retail investors by default, unless they choose to opt-in to AI status.
Legislative amendments to the Securities and Futures Act (“SFA”) to effect these changes will be tabled in Parliament in 2016. MAS is still reviewing feedback on the remaining proposal to introduce a complexity- risk ratings framework for investment products and will issue a separate response later.
This update takes a look at the new proposed enhanced safeguards.
Stronger Safeguards for Investors in Non-Conventional Investment Products
MAS will extend regulatory safeguards to investors in non-conventional products that are in substance, capital markets products. For now, the scope of regulation is limited to precious metals buy-back arrangements and collectively-managed investment schemes.
Precious metals buy-back arrangements
Arrangements involving sale of precious metals with a guaranteed buy-back at an agreed price will now be characterized as debentures and therefore, subject to the debenture regulatory regime. The scope of regulation will be limited for now to arrangements involving gold, silver and platinum as these are widely regarded as financial assets and commonly used as collateral for such arrangements.
Commercial financing arrangements involving precious metals, where funding is provided by the lender in its ordinary course of business or incidental to its ordinary course of business, will be excluded from the scope of regulation, regardless of whether the lender is a corporation or natural person.
Collectively-managed investment schemes
Collectively-managed schemes that meet all the elements of a collective investment scheme (“CIS”) as defined in section 21(4) of the SFA, except for the pooling of investors’ contributions and profits, will be subject to the CIS regulatory regime under the SFA.
In the past few years, several schemes have avoided regulation as a CIS by offering investors direct legal title to the underlying assets (i.e. no pooling of investors’ contributions) or by allocating profits to investors based on their individual legal title to assets (i.e. no pooling of profits). However, in all other aspects, such schemes are effectively managed as a whole for the collective benefit.
As such, MAS has decided that no pooling of investors’ contributions or profits will be necessary for a scheme to be caught as a CIS. The definition of a “CIS” will be amended such that the “management” limb will be an alternative to the “pooling” limb. Both limbs are to be assessed independently from each other, and the absence of either the pooling of contributions or profits will not preclude the finding that there is management as a whole.
MAS has said that it will adopt a “substance over form” approach in assessing whether an arrangement is a CIS. It has also said that the respective limbs of the CIS definition should be “interpreted in a way that promotes their purpose”, i.e. to safeguard the interest of investors who have contributed money or assets to an investment scheme under circumstances where they have no day-to-day control of their investments.
Guidance on MAS’ intent in applying the respective limbs of the CIS definition can be found in its response to the July 2014 consultation (see section on “Resources” below). MAS is also considering issuing additional guidance when the revised CIS definition comes into effect.
MAS has clarified that the new regulations will not apply to transactions entered into before the regulations come into effect. However, scheme operators who intend to raise fresh funds for existing or new schemes will have to ensure that such schemes comply with the new regulations.
Examples of schemes that may be affected include land investment schemes (where investors are offered fractional interests in undeveloped land), investments in land for forestry or harvesting purposes (where again, investors acquire fractional interests) and arrangements in which investors are offered units in real estate with entitlement to participate in rental income, where such scheme operators manage these arrangements as a whole and investors do not have day-to-day control over their interests and will have rights to participate in profits generated.
Refinement of Investor Classes
Opt-in regime for AI investors
Currently, a person who meets the requirements to be an AI is automatically classified as such and issuers and intermediaries dealing with him are exempted from various regulatory requirements.
The opt-in regime will be introduced to empower AI-eligible investors to choose their investor classification and associated level of regulatory protection that suits their individual circumstances, risk profile and investment needs. It will also avoid situations where an AI-eligible investor may be classified as an AI without his awareness or consent. The opt-in regime will apply to all AI-eligible investors, including corporations.
Such opt-in regime for AI-eligible investors is more in line with the current regulatory position in other countries such as Hong Kong and Europe which have given a similar choice to AI-equivalent investors.
Parties involved in opt-in process
The onus is on FIs who wish to rely on AI exemptions when dealing with an investor, directly or through a third party intermediary, to obtain the investors' opt-in (i.e. consent) to be treated as an AI. FIs should obtain the opt-in confirmation from the party authorized to execute transactions on behalf of the investor. In ascertaining AI-eligibility, FIs should look at the AI-eligibility of the investor himself, and not the holder of the power of attorney or authorized signatory. For corporations that are AI-eligible, FIs are only required to obtain opt-in confirmation at the corporation level, and not the shareholder level.
AI status on per FI basis and change in investor classification
MAS will proceed with the proposal for AI status to be held on a per FI basis, so that investors will have the flexibility to choose their AI status with each FI. An investor will be able to change his investor classification at any time by making a written request to the relevant FI.
Under the opt-in regime, FIs must provide clients who are assessed as being AI-eligible with a written notification setting out their request for AI status and a clear description and warning of the regulatory safeguards that will be dis-applied if they opt-in (“opt-in notification”). In addition, clients must confirm in writing to the FI that he wishes to opt-in as an AI and acknowledge that he accepts and understands the consequent reduction in regulatory safeguards (“opt-in confirmation”).
MAS will not be prescribing any specific opt-in documentation, as the implications for an AI-eligible investor who opts in will differ between FIs. MAS has stated that the opt-in notification and the opt-in confirmation can be combined into a single document provided a copy of the opt-in notification is otherwise made available to the investor. Verbal and email confirmations are also acceptable provided they are properly recorded and documented.
However, to ensure that any opt-in by an AI is accorded sufficient consideration, the opt-in documentation should be separate from account opening documentation.
Opt-out approach for existing AI clients
For an FI’s existing AI clients, MAS will adopt an opt-out approach. However, FIs must notify their existing FI clients that they have been assessed to be AIs and that they have a right to opt-out under MAS’ new regulations. Such AI clients should also be notified that if he does not opt-out of AI status, the FI will be exempt from complying with certain regulatory requirements when dealing with him, and that if he opts out of AI status, the FI may not be able to continue dealing with him but his existing investments will not be affected.
MAS will also require FIs to obtain the AI client’s acknowledgement and confirmation of their AI status and the implications of such status at the next account review.
The definition of AI will be modified to include the following categories:
Individuals: Currently, the definition of an AI includes an individual whose net personal assets exceed $2 million (“net personal assets test”). MAS will modify this criterion so that the net equity of an individual’s primary residence can only contribute up to $1 million of the minimum net assets threshold of $2 million.
In addition, MAS will introduce a “financial assets test” (based on an individual’s financial assets) as an alternative to the net personal assets test, to give FIs flexibility in determining an investors’ AI-eligibility. This test will be introduced on a “net” basis, i.e. $1 million financial assets excluding related liabilities (such as margin account and credit lines taken to finance an investor’s portfolio).
FIs should obtain independent documentary proof to ascertain an individual’s AI-eligibility, including net equity in an individual’s primary residence or value of overseas properties. A self-declaration by the investor will not suffice.
Joint account holders: FIs will be able to market AI products to an individual who opts in as an AI by virtue of holding a joint account with an AI, but only as a holder of and for transactions made out of that joint account.
Corporations: Where a corporation is relying on its shareholders’ AI status for AI-eligibility, all its shareholders must be AIs. Where shares are held by nominee shareholders, the nominee shareholder (as trustee of a trust where all beneficiaries are AIs) would be regarded as an AI for the purposes of determining whether the corporation is AI-eligible under the “look-through” approach.
Trustees of a trust: Trustees of a trust where the property held on trust for beneficiaries of the trust exceed $10 million are AIs. AI-eligibility will now be extended to trustees of a trust where all trust beneficiaries are AIs. Further, where a settlor of a trust continues to have interest over the management of the trust assets such as where he has reserved investment powers and revocation powers, the trustee of such a trust will also be accorded AI-eligibility.
As MAS is adopting an opt-out approach for existing AI clients, there will not be a transitional period for this group of clients. As such, organisations should ensure that they have complied with MAS' requirements with respect to existing AI clients (please see above) and are operationally ready once the legislative changes take effect. What is clear is that there will be quite a lot of work to do with respect to both existing and future clients including repapering such clients and even terminating relationships as may be deemed necessary.
For existing AI clients who will no longer be AI-eligible due to the introduction of the $1 million cap to the net personal assets test, FIs can continue to treat them as AIs only in respect of existing investments made on the basis of their AI status.
As finalisation of the legislative changes to implement the opt-in regime is expected to be in 2016, FIs should have adequate time to prepare the necessary documentation and upgrade their systems to track changes in clients' AI status ahead of the opt-in regime taking effect.
In addition to the current types of financial services firms in the definition of institutional investors (“IIs”), the following types of entities will also now also be considered IIs:
- financial market infrastructure regulated by the MAS or in a foreign jurisdiction;
- entities wholly-owned by one or more IIs;
- certain specified statutory boards;
- foreign central government and central governmental agencies; and
- supranational governmental organizations.
This is a sensible and welcomed extension to the current list of IIs.
The changes made to the AI and II definitions will be reflected in amendments to the SFA and supporting subsidiary legislation.