Presently, an investor who meets one of the following criteria is automatically classified as an “accredited investor” (AI):
- an individual whose net personal assets exceeds S$2 million or whose income in the preceding 12 months is not less than S$300,000;
- a corporation with net assets exceeding S$10 million or whose sole business is to hold investments and the entire share capital of which is owned by one or more persons each of whom is an AI;
- the trustee of a trust of which all property and rights held on trust for the beneficiaries exceeds S$10 million;
- an entity (other than a corporation) with net assets exceeding S$10 million; or
- a partnership (other than a limited liability partnership) in which each partner is an AI.
As AIs, offerors of investments and financial institutions (FIs) who deal with them are able to rely on various exemptions under the Securities and Futures Act (SFA) and the Financial Advisors Act (FAA).
Proposed Opt-in Regime
In July 2014, the Monetary Authority of Singapore (MAS) issued a consultation paper setting out a slew of proposals to enhance regulatory safeguards for investors in the capital markets. These measures include a proposal that all investors (other than Institutional Investors) should, as a starting point, be treated as retail investors, thereby according them with greater regulatory protection. 1 If an investor qualifies as an AI, he would be required to “opt-in” to such classification, giving such investors the ability to choose the investor classification and associated level of regulatory protection that best accords with their individual circumstances, risk profile, and investment needs.2
The “opt-in” regime will apply to all new AI-eligible investors following the implementation date of the “opt-in” regime and may be worked into offering and accounting opening processes. Either the FI or the client can initiate the “opt-in” process, which is envisaged to be as follows:
- FIs provide clients assessed as AI-eligible with a written notification setting out their right to “opt-in” to AI status, with a clear description and warning of the regulatory safeguards that will henceforth dis-apply to them; and
- the client must confirm in writing to the FI (in a separate document) a decision to “opt-in”, acknowledging that he understands and accepts the consequent reduction in the regulatory safeguards that he is entitled to.
Industry feedback has largely been positive although respondents did raise various policy and operational concerns. In MAS's Response to Feedback Received released in September 2015 (the Response), the regulator clarified and refined the proposed “opt-in” regime.
Status of Existing AI Clients
Recognizing the operational difficulties in applying the “opt-in” regime to existing AI clients, MAS will permit an “opt-out” approach whereby FIs need to notify their existing AI clients that:
- the client has been assessed to meet prescribed wealth thresholds and is hence considered an AI;
- the client has a right to “opt-out” of AI status;
- if the client decides not to “opt-out,” the FI is exempt from complying with certain regulatory requirements when dealing with him; and
- if the client “opts-out” thereby preventing the FI from retaining him as a client, the client’s existing investments will not be affected.
Loss of Business for FIs Who Are Only Permitted to Service AI Clients
Some FIs are prohibited by the regulatory approvals they hold to service only AIs; Registered Fund Management Companies (RFMC) and Licensed Accredited/Institutional Fund Management Companies (Licensed A/I FMC) fall in this group (together Restricted FMs). The “opt-in” regime represents a potential loss of business for these managers if the investors in funds managed by them choose not to “opt-in.” MAS's view is that empirical evidence3 does not support any potentially impactful loss of business an,d in any case, it remains for these FIs to convince their clients of their value proposition.
An FI’s “opt-in” notification and the investors “opt-in” confirmation can be combined into a single document to reduce paperwork provided a copy of the notification is otherwise made available to the investor. In addition, MAS will allow for verbal and email confirmations provided these are appropriately recorded and documented. The “opt-in” documentation must, however, be kept separate from accounting opening paperwork although both may be presented to the client at the same time during the account opening process.
MAS has also declined to prescribe standard-form “opt-in” documentation. FIs will have to develop their own forms, taking into account their dealing with AI clients, the consequences of “opting-in” with that FI, and the FI’s procedures for processing a change in investor classification.
In particular, MAS will require that descriptions of the regulatory safeguards that an investor is giving up by “opting-in” be made in plain, practical language. Clients need to know that once they “opt-in” to AI status with a particular FI, these regulatory safeguards will cease to apply in respect of all accounts with that FI or, in the case of Restricted FMs, that they can no longer be serviced by these Restricted FMs.
AI Status on a Per-FI basis
MAS envisions that investors will be able to “opt-in” to AI status on a per-FI basis. In other words, an AI-eligible investor may elect to obtain AI status with one FI but remain a retail investor with another FI. 4 This will allow AIeligible investors to consider their comfort level with each FI as well as their intended investment with that FI. For instance, an investor could elect AIstatus with a FI for ordinary securities trading yet elect non-AI status with another FI for riskier derivative products. That said, investors will not be able to exercise their AI election in respect of different product and markets within an FI.
Change in Investor Classification
An investor determines his classification at the point he enters into an investment transaction with an FI but will be able to move between AI and non-AI classification at any time and without limit, in accordance with the relevant FI’s internal procedures. Any move from AI to non-AI status will not, however, require the FI to accord the investor with retrospective non-AI benefits in respect of past transactions conducted while the investor was an AI.
FIs will have to ensure that their systems and infrastructure are capable of monitoring and recording each investor’s status when transactions are effected, to process any investor request for change in classification and, in respect of Restricted FMs, termination of the FI’s business dealing with an investor who has elected non-AI status. FIs will have the flexibility to draw up their internal processes in dealing with an investor’s change in classification but must do so within a reasonable time and communicate these internal procedures clearly to their clients.
When Are Dealings Considered Part of One Transaction?
For fund investors who make their commitments at the point of subscribing into a fund, subsequent drawdowns of capital will be treated as part of the same transaction. If, however, an investor receives dividends on an existing investment and subsequently decides to re-invest the same (for example, by purchasing additional securities), the re-investment will be treated as a separate transaction and the applicable investor classification determined at the point of re-investment.
Legislative changes to implement the “opt-in” regime are expected to be finalized in 2016. The previously proposed two-year transition period to allow existing AI investors to “opt-in” will no longer be necessary considering the proposal to allow for their “opt-out” (as described above). Further, Restricted FMs will be permitted to continue providing service to existing AI clients who no longer qualify as such but only in respect of existing funds managed by these Restricted FMs.
Do note that the July 2014 consultation paper also proposed refining the AIeligibility criteria. For individuals, the most significant change will be that the net equity of an individual’s primary residence will only be permitted to contribute up to S$1 million as part of the S$2 million required in the net personal assets test. In addition, a “net financial asset test”5 will be introduced as an alternative to the net personal assets test.
One can choose to view an investor’s ability to “opt-in” and “opt-out” as an operational hassle. In reality, while the proposal will certainly increase the compliance and monitoring workload of affected FIs in the near future, its operational impact will, over time, diminish as the measures put in place to implement the regime become par for the course. From the FIs’ perspective, presumably an investor’s proactive election to “opt-in” will strengthen the assertion that the FI is dealing with a sophisticated investor who understands and can bear the investment risks associated with products marketed to this class of investors.