Current Regulatory Regime for FMCs
FMCs are currently divided into two categories: licensed FMCs and exempt FMCs. All FMCs must apply to the MAS for a capital market services (CMS) licence, unless they fall under an exemption in the regulations under the Securities and Futures Act (SFA), which is the principal legislation governing FMCs and other financial institutions in Singapore. A key exemption that is frequently used caters to FMCs with no more than 30 qualified investors. If an FMC is unable to qualify under an exemption, it will have to obtain a full CMS licence; a boutique CMS licence or a start-up boutique CMS licence. The licensing required depends on the category of investors it serves and its track record. For example, if the FMC is targeting retail investors, a full CMS licence is required. If the FMC only intends to serve accredited investors, it can apply for a boutique CMS licence, provided it also has a track record of at least three years. If the FMC intends to serve accredited investors but does not possess the requisite track record, it should apply for a start-up boutique CMS licence, under which the FMC will initially be limited to serving 100 qualified investors.
Proposed Changes to the Licensing Regime
The consultation paper proposes to reclassify FMCs into three categories:
(1) Notified FMCs;
(2) Licensed accredited/institutional (A/I) FMCs; and
(3) Licensed retail FMCs.
The notified FMC classification is the most basic category, allowing the FMC to have up to 30 qualified investors, no more than 15 of which can be funds, but limits its assets under management (AuM) to S$250 million, with a minimum paid-up capital of S$250,000. Furthermore, they must fulfil certain personnel requirements and provide a demonstration of commitment to the MAS. It is unclear when would be the relevant time for assessment of AuM and whether the amount is computed at inception, annually or throughout the lifetime of the fund. The MAS has stated that FMCs should initiate discussions with them if there is a reasonable expectation that the AuM will exceed S$250 million on a permanent basis. It is hoped that more clarity on the above issues will be issued by the MAS in due course, particularly regarding the point at which notified FMCs should start upgrading their licences to the next category.
The new requirement for FMCs to provide a demonstration of commitment to the MAS has also been of some concern. Specific guidelines on the criteria for such demonstration of commitment are not included in the consultation paper, but the MAS has suggested that the CEO and executive directors being the majority shareholders of the FMC, or the fund manager providing start-up money for the fund, should suffice.
The consultation paper requires FMCs to have at least two directors (one of whom must be the CEO) living in Singapore, each with a minimum of five years relevant experience. Currently, an exempt FMC only needs to have one resident CEO or executive director. Notified FMCs also need to have two full-time resident representatives, each of whom has a minimum of five years relevant experience. These same two full-time resident individuals can be counted towards meeting the minimum requirement of having two representatives, if they are conducting fund management activities.
In the consultation paper, the MAS appears to be merging the boutique CMS licence and the start-up boutique CMS licence into the licensed A/I FMC categorisation. Like the notified FMCs, the underlying investors of the funds will have to be accredited and/or institutional. Under the current regime, a boutique CMS licence is required to have global funds of at least S$100 million. However, the MAS appears to be relaxing its stance on this as the proposed changes no longer mandate a minimum AuM requirement.
Another key change will be the elimination of the three-year corporate track record for boutique CMS licences, although the MAS has added other competency requirements. While the number of directors
and representatives will remain the same, the CEO and executive director of the licensed A/I FMC must be resident in Singapore and have a minimum of five years relevant experience, while both executive directors must have experience in the financial services industry. However, the representatives of the licensed A/I FMCs will no longer need to pass the Capital Markets and Financial Advisory Services Examinations which tests the candidate's knowledge of the regulatory framework and the tools needed to analyse products.
Licensed A/I FMCs will have to abide by the business conduct standards presently found in the SFA as well as the additional requirements set forth in the consultation paper. Like notified FMCs, licensed A/I FMCs will need to place customers' monies and assets with a custodian. However, unlike notified FMCs, additional safeguards will be required for licensed A/I FMCs which include a compliance function that is independent from the front office, and managers of larger funds with AuM close to or above S$1 billion will be required to have both independent and dedicated compliance.
The licensed retail scheme applies to FMCs which serve retail investors. As there is no restriction on the type of clientele, most of the more stringent requirements have already been established under the current regime or have already been adopted by FMCs as best practices. A licensed retail FMC will therefore find there will be no change to the minimum base capital requirement of S$1 million if they manage any collective investment scheme.
The MAS is proposing an increase in the minimum number of representatives from two to three full-time resident representatives for licensed retail FMCs. However, this is more of a codification of current best practices given that most retail licensees would already have substantial operations in Singapore before being granted a retail licence. Like the other categories, licensed retail FMCs must also provide a demonstration of commitment, which the MAS has requested in the form of a letter of responsibility from the parent company at the minimum.
Licensed retail FMCs will need to abide by the business conduct requirements pursuant to the SFA as well as new requirements stated in the consultation paper. Like the licensed A/I FMCs, licensed retail FMCs will need to place its customers' monies and assets with a custodian to ensure proper segregation of duties. There also needs to be an independent and dedicated compliance function.
The MAS proposes to maintain the requirement that all licensed retail FMCs obtain professional indemnity insurance (PII), in accordance with the size of their AuM. Although the MAS does not require notified FMCs and licensed A/I FMCs to also obtain PII, it strongly encourages such FMCs to obtain PII as well.
Leading Fund Jurisdiction
The MAS has taken into account the interests of the various stakeholders in the fund management industry when formulating the proposals in the consultation paper, striking a balance between protecting investors' interests without detracting from Singapore's strong reputation as a competitive and attractive market for fund managers to base their operations. Singapore has been growing strongly as a leading fund management hub, not just for Asia but globally, and the latest changes are expected to enhance and strengthen its position in the future.
Yang Eu Jin is a partner with the corporate and securities laws department at KhattarWong. He specialises in corporate finance and capital markets work, as well as mergers and acquisitions, fund management and private equity. His clients include listed companies, financial institutions and multinational corporations.
Tan Choon Leng is a partner with the corporate and securities laws department at KhattarWong. He has a strong track record of advising MNCs, private equities and hedge funds in their South-East Asian transactions, with an emphasis on restructurings, mergers and acquisitions.
This article first appeared in HFMWeek (Singapore 2010, Pages 18-19). For more information, please visit www.hfmweek.com