The Variable Capital Companies Act 2018 (VCC Act), which is the governing legislation for the new Variable Capital Company (VCC) fund structure in Singapore, and the related subsidiary legislation have come into operation as of 15 January 2020, officially launching the VCC framework. The launch has been highly anticipated by the investment funds management industry in Singapore and comes after the Monetary Authority of Singapore (MAS) most recently sought public feedback in the second quarter of 2019 on the subsidiary legislation pertaining to a VCC’s operational aspects, its anti-money laundering and countering the financing of terrorism obligations, and its insolvency and winding-up regime.
Brief Background of the VCC
The VCC is a new corporate fund structure tailored for collective investment schemes. It can take the form of an umbrella structure, consisting of multiple sub-funds with different investment strategies and objectives, assets and liabilities, and investors. Introduced to encourage investment funds to be incorporated and operated in Singapore, the VCC structure aims to enhance Singapore’s position as a fund domicile alongside global fund domiciles such as the Cayman Islands and Luxembourg. Given that Singapore is an established fund manager domicile, the VCC would bolster its reputation and position as a full-service international fund management center.
Timeline of Events in the Development of the VCC structure
The VCC Act, which is the governing legislation for the VCC structure, was passed by the Singapore Parliament in October 2018 following an extensive consultation with the asset management industry in Singapore.
In the second quarter of 2019, MAS issued two consultation papers on the subsidiary legislation for the VCC structure, focusing on the operational, anti-money laundering, and insolvency and winding-up regime of the VCC.
Subsequently, in September 2019, the Singapore Parliament passed the Variable Capital Companies (Amendments) Bill to put in place the tax treatment for VCCs, and to amend the VCC Act to incorporate relevant insolvency provisions under the Insolvency, Restructuring and Dissolution Act.
In the run-up to the launch of the VCC framework, MAS has been administering a pilot program for the initial wave of fund managers seeking to launch their investment funds as VCCs. It is expected that such fund managers will be able to establish and incorporate their VCCs on or about 15 January 2020.
Also noteworthy is an effort by a working group formed under the Singapore Academy of Law (SAL)—a promotion and development agency for the Singapore legal industry—to prepare two model VCC constitutions for use for private funds. The initiative is intended to encourage adoption of the VCC by overcoming initial investor unfamiliarity with the VCC structure. The model constitutions were officially released in December 2019, and are publicly available for download on SAL’s Singapore Law Watch website.
The VCC Launch
Finally, in a move eagerly anticipated by the investment funds management industry in Singapore, the VCC Act and the related subsidiary legislation have come into operation as of 15 January 2020, officially launching the VCC framework. MAS has also launched a Variable Capital Companies Grant Scheme for a period of up to three years, to help defray the costs involved in incorporating or registering a VCC by co-funding up to 70% of eligible expenses paid to Singapore-based service providers.
The Path Ahead
The VCC has generated significant interest amongst fund managers and substantial enthusiasm among service providers in the fund management ecosystem. We are optimistic that the VCC regime will be successful to elevate Singapore’s position as a fund domicile center, in light of the multiple rounds of public consultations conducted (not only on the VCC Act, but also the subsidiary legislation) and the administration of the pilot program. Industry-led efforts such as the preparation of the model constitutions are certainly helpful to achieve the same end.
To encourage further adoption of the VCC structure in the future, we hope that the scope of the VCC legislation will be further expanded such that the VCC can be managed by the full range of exempt managers. Currently, the VCC framework can only be adopted by funds managed by a licensed or registered fund manager or one who is otherwise regulated as a financial institution (e.g., licensed bank, merchant bank, finance company, or insurance company).
For now, we foresee that the main uptake of the VCC structure will be driven by private fund managers. It may take several months before retail fund managers jump on the bandwagon, after use of the VCC structure becomes more widespread and established among fund sponsors and investors, having regard also to the additional regulatory considerations governing retail funds. Another important driver for the adoption of the VCC structure is the inward re-domiciliation of foreign-domiciled funds into Singapore, which we are expecting to be a popular option in the months ahead.
Ultimately, education of fund sponsors and investors is key to ensure the long-term sustainability in the use of the VCC structure. While investor unfamiliarity is difficult to overcome, it is hoped that this can be reduced with the passage of time and increasing awareness. Singapore has much to offer as a fund domicile center, arising from its pro-business environment, stable political conditions, competitive tax rates, and robust legal system.