In our February 2013 edition of the Chronicle, we summarised the key changes set out in the consultation paper (the Consultation Paper) released by the Monetary Authority of Singapore (MAS) in relation to: (i) the proposed changes to the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 (CIS Regulations); and (ii) the proposed regulatory treatment of closed-end funds.
Most of the proposed changes have been passed by way of the following subsidiary legislation under the Securities and Futures Act (Cap. 289) (SFA):
- the Securities and Futures (Offers of Investments) (Collective Investment Schemes) (Amendment Regulations 2013, which amended the CIS Regulations to provide for enhanced disclosure requirements; and
- the Securities and Futures (Closed-End Fund) (Excluded Arrangements) Notification 2013, which broadened the category of schemes regulated under the SFA as collective investment schemes, to include certain closed-end funds.
MAS has also provided additional details on the changes in its response (the MAS Response) issued on 1 April 2013 to the feedback received on the Consultation Paper.
We set out below a summary of the main points of the legislative amendments and the MAS Response.
AMENDMENTS TO THE CIS REGULATIONS
(a) Enhanced Disclosure Requirements for Offers of Units in CIS
In its Consultation Paper, MAS proposed imposing additional disclosure requirements in relation to the information that must be set out in a prospectus for an offer of units in a collective investment scheme (CIS or scheme). MAS clarified the application of these additional disclosure requirements in the MAS Response.
Information on scheme manager and its principals:
- Information on the manager’s directors and key executives: MAS had proposed that the prospectus for a CIS include disclosure of certain information of a manager’s directors and key executives (such as working experience, educational and professional qualifications and areas of expertise). MAS has clarified that a “key executive” here refers to a person who makes, has the capacity to make, or participates in making decisions that affect the whole or a substantial part of the management of the CIS. Additionally, such disclosure is only required of the relevant working experience of the directors and key executives, not their entire working experience.
- Information on any functions that the manager has delegated to a third party: MAS explained that this proposed requirement applies where the manager delegates investment management, administration and valuation functions to a separate legal entity, regardless of whether that entity is within or outside the manager’s group. This is because investors would expect the manager to seek recourse against the delegate in the event of non-performance by a delegate of its obligations under the service agreement governing the relationship between the two parties.
- Name of the financial supervisory authority which licenses or regulates the manager (as well as its underlying funds and sub-managers, where applicable): MAS amended the scope of this requirement such that it applies only to (i) the manager of the CIS, (ii) the manager of the underlying fund which constitutes 30% or more of the asset value of the scheme, and (iii) a sub-manager that manages 30% or more of the asset value of the scheme. If the manager is licensed or regulated by more than one financial supervisory authority, only the name of the financial supervisory authority which licenses or regulates the relevant entity in its principal place of business needs to be disclosed.
- Information on custodial arrangements:
In relation to the proposed requirement of disclosing the identity of the entity responsible for safekeeping the scheme’s assets as well as the custodial arrangements in place, MAS clarified the level of details required to be disclosed. In essence, there should be adequate disclosure on the custodial arrangements to enable investors to obtain a general understanding of how the assets of the scheme are being held.
- Valuation method for a scheme’s assets
With the amendments to the CIS Regulations, it is currently a legislative requirement to disclose the valuation method adopted for the scheme in the prospectus. Key elements of the valuation method (for instance, the methods that will be used for valuing quoted and unquoted investments) should be described.
(b) Information memorandum to be furnished to investors in respect of an offer of units in a restricted scheme
The amended CIS Regulations re-introduced the requirement for an offer of units in a restricted scheme, being schemes offered to accredited investors and other relevant persons only, to be made in or accompanied by an information memorandum. A copy of the information memorandum must be submitted to MAS for record purposes. The information memorandum must set out certain information prescribed in the CIS Regulations such as the restricted scheme’s policy regarding side letters (if the scheme has such a policy) as well as the nature and scope of the side letters that may be issued under this policy.
All offers and annual declarations of restricted schemes that are submitted on or after 1 July 2013 must comply with this new information memorandum requirement.
REGULATORY TREATMENT OF CLOSED-END FUNDS
(a) Regulating closed-end funds as CIS
Previously, closed-end funds were expressly excluded from the definition of a CIS and hence, did not fall within the regulatory regime governing a CIS under the SFA. MAS noted in the Consultation Paper that aside from the characteristic of its units being exclusively or primarily non-redeemable at the election of the holders of the units, a closed-end fund does not differ from an open-end fund. To accord investors in closed-end funds the same level of protection as that accorded to investors in a CIS, MAS has prescribed the following criteria to determine whether a closed-end fund is deemed to be a CIS:
- all or most of the units issued under the arrangement cannot be redeemed at the election of the holders of the units;
- the entity operates in accordance with an investment policy under which investments are made for the purpose of giving participants in the arrangement the benefit of the results of the investments, and not for the purpose of operating a business; and
the arrangement has one or more of the following characteristics:
- the final form of the investment policy is fixed by the time investors’ commitments to the entity become binding on them;
- a contractual relationship between the entity and the investors binds the entity to follow the investment policy; or
- the investment contains a series of investment guidelines.
The offer of units in a closed-end fund to accredited investors and other investors under section 305 of the SFA must now comply with the requirement to submit notification and annual declarations, as well as the requirement to furnish an information memorandum (when this requirement comes into operation). MAS will not require a closed-end fund that is already closed for subscription to submit an annual declaration or an updated information memorandum.
Similarly, retail closed-end funds that now fall within the definition of a CIS are expected to observe the Code on Collective Investment Schemes. Additionally, offer of units in a retail closed-end fund will be subject to authorisation or recognition requirements under the SFA and must be accompanied by a prospectus that is registered with MAS.
To minimise the impact on existing closed-end funds, MAS has decided to grandfather all closed-end funds that are constituted before 1 July 2013. Such funds will have to make clear disclosures in their annual reports and offer documents that they are grandfathered and not subject to the regulatory regime applicable to CIS.
(b) Requirement for retail closed-end funds to be listed on an approved securities exchange
MAS will require, as a condition to authorisation or recognition, a retail closed-end fund to be listed on an approved securities exchange. Although MAS recognised that this requirement will entail additional costs, it remained of the view that it is important for closed-end funds offered to retail investors to be listed to provide an avenue for retail investors to exit their investments in closed-end funds.