Introduction
The Monetary Authority of Singapore (MAS) has recently set up a department to supervise and drive regulatory policies on fund management activities, a move prompted in no small measure by the increasing call for greater regulatory oversight in the financial industry. Recently, MAS issued a consultation paper (the Paper) setting out proposals aimed at enhancing supervisory oversight of exempt fund managers (EFMs) in Singapore. Currently, fund managers who serve not more than 30 ‘qualified’ investors are exempted from having to apply for a capital markets services licence (CMSL) under the Securities and Futures Act, Cap 289.
In line with the increasing scrutiny over hedge funds and private equity firms globally, there was wide-spread speculation as to how far the MAS would propose to go in tightening up a relatively light regulatory framework which, coupled with the ease and cost-efficiency of doing business in Singapore, had proved highly successful in drawing fund managers to Singapore. In 2006, there were estimated to be about 190 hedge fund managers in Singapore with assets under management (AUM) of about S$40 billion. Those figures saw an increase to 300 managers in 2007 and 350 in 2008 although AUM has retreated from S$80 billion in 2007 to approximately S$61 billion in 2008 as a result of the global financial crisis.
The fund management companies under the Paper
The Paper creates three categories of fund management companies. FMCs whose AUM do not exceed S$250 million and who serve not more than 30 qualified investors (of which no more than 15 are funds with accredited investors only) will receive the lightest treatment as Notified FMCs. They will be permitted to commence fund management activities once they file the necessary notifications with MAS. Licensed FMCs, as the nomenclature suggests, will require a CMSL to conduct fund management activities. Of this category, Licensed A/I FMCs will be licensed to serve only accredited and institutional investors whilst Licensed Retail FMCs will be licensed to manage retail unit trusts and collective investment schemes. Once a Notified FMC approaches AUM in excess of S$250 million, it will need to ‘convert’ itself into a Licensed A/I FMC and obtain a CMSL. In cases where the AUM is only expected to breach the threshold temporarily due to market movements or other transient reasons, the Paper recognises that MAS will adopt a practical approach in assessing the need for the Notified FMC to apply for a CMSL.
Competency requirements
To ensure management by individuals with the requisite level of expertise, all FMCs will be required to meet certain competency and staffing requirements. FMCs will need to have at least 2 directors with experience in the financial services industry (including managerial experience or experience in a supervisory capacity) and a minimum of 2 resident representatives. In addition, all FMCs must employ 2 resident full-time individuals who each have at least 5 years’ relevant experience; these individuals may concurrently be appointed representatives but one of them must be the CEO and executive director of the FMC. Licensed Retail FMCs have a higher burden - they will be required to employ at least 3 representatives and a CEO with at least 10 years experience in the financial services industry. In addition, the CEO, directors and representatives of all FMCs must satisfy MAS’ ‘fit and proper’ guidelines.
Compliance
Compliance procedures are strongly recommended and in some cases, required - a practical approach is adopted in aligning the required compliance arrangements with the scale and size of a FMC’s business. Recognising the smaller scale of operations that Notified FMCs will have, MAS will not require that their compliance function be independent or dedicated. In practice, it is likely that the CEO or a designated senior member of the Notified FMC will be responsible for compliance matters although support from third party compliance service providers or the FMC’s head office is recommended. In the case of Licensed FMCs, however, compliance functions must be independent of any front, middle or back office functions and, in the case of Licensed Retail FMCs or Licensed A/I FMCs with AUM exceeding S$1 billion, must also be performed by qualified full-time employees.
To address concerns of ‘flight risk’, CMSL holders are currently required to maintain professional indemnity insurance (PII) with coverage ranging from S$2 million up to S$25 million, depending on AUM. The need for PII protection will continue for Licensed Retail FMCs but will not be mandatory for Notified FMCs and Licensed A/I FMCs, although the Paper strongly encourages that they too take up PII.
EFMs are currently not required to comply with ongoing business conduct requirements as set out in subsidiary legislation. The Paper proposes to remove this exemption and further recommends that certain industry best practices in custody and fund administration be formalised and applied to all FMCs moving forward. Essentially, all FMCs will now be required to place customer monies and assets with custodians which are licensed, registered or authorised in the jurisdiction where these monies or assets are being held and must now outsource fund administration duties to an independent service provider or, if fund administration is conducted internally by the FMC or its affiliates, implement measures to ensure that conflicts of interests are adequately dealt with, for example, through the segregation of valuation and fund accounting functions.
Base capital requirements
To ensure FMCs have sufficient capital for operations, holders of a CMSL are currently subject to base capital requirements (BCR) ranging from S$250,000 to S$1 million, depending on the nature of their clientele. Notified FMCs will now also be required to maintain BCR of at least S$250,000 but this may be used for investments in assets, which could be cash, investments (including investments in its own funds) or fixed assets such as hardware and office infrastructure. The Paper does not, however, go so far as to impose the risk-based capital requirements currently imposed on holders of CMSL on Notified FMCs. These will continue to apply only to Licensed FMCs.
Where do we go from here?
Existing EFMs with AUM exceeding S$250 million or who manage more than 15 funds will need to apply to be a Licensed A/I FMC. EFMs with AUM below S$250 million and who manage not more than 15 funds may elect to submit a notification as a Notified FMC or an application to be approved as a Licensed A/I FMC. Existing EFMs will have 6 months after the legislative amendments are effected to meet the revised admission criteria and to submit their notifications or licence applications, as the case may be. The current time-lines anticipated that fund managers will have up to 18 months (November 2011) to re-align themselves to the new regime. Those who fail to comply will be required to cease their fund management activities before the expiry of the 6-month transitional period.
EFMs have greeted the Paper with a collective sigh of relief. Prior speculation that key features of the existing framework, such as an exemption from making quarterly reports to the regulator, do not feature in the reform proposals. The spirit of the Paper is to maintain Singapore’s push to establish itself as a funds ‘hub’ in the Asia-Pacific region by maintaining a regulatory environment that is attractive and conducive to fund managers whilst at the same time, imposing fairly light measures to enhance the quality of players in the industry.