Monetary Authority of Singapore Responds: Consultation on Proposals to Enhance Regulatory Safeguards for Investors

Investment Funds Update

On September 22, the Monetary Authority of Singapore (MAS) issued its response to feedback received (MAS Response) on its “Consultation Paper on Proposals to Enhance Regulatory Safeguards for Investors in the Capital Markets” issued on July 21, 2014 (Consultation)1. The MAS Response can be found here.

The MAS Response sets out comments from the MAS on policy proposals in Parts I and III of the Consultation (Proposals). The MAS is still studying the feedback on proposals in Part II of the Consultation. The MAS will issue a separate response on the necessary legislative amendments to implement the Proposals and these will be tabled for Parliament in 2016.

This briefing provides a summary of the MAS Response. The key Proposals that will be implemented are:

  • Investors in nonconventional investment products that are in substance capital markets products will be accorded the same regulatory safeguards as investors in capital markets products.
  • Investors who meet prescribed wealth or income thresholds to qualify as accredited investors (AIs)2 may choose whether to be treated as an AI or as a retail investor.

Summary of the MAS Response

Regulating nonconventional investment productsProposal SummaryRegulating buy-back arrangements involving Precious Metals as debenturesWhere a buy-back arrangement involving gold, silver or platinum (Precious Metals) is in effect a debt financing arrangement (i.e., where the purpose of the arrangement is to enable the initial buyer to receive a financial benefit from the initial seller, and where the main risk involved is the credit risk of the initial seller rather than fluctuations in the asset's market value), such arrangement will be regulated as a “debenture” under the Securities and Futures Act, Chapter 289 of Singapore (SFA) and the Financial Advisers Act, Chapter 110 of Singapore (FAA). Ordinary commercial financing activities involving Precious Metals (where the initial buyer is in essence providing funds to the initial seller in its ordinary course of business or incidental to its ordinary course of business) would be excluded from such regulation. Regulating collectively managed investment schemes as collective investment schemes (CISs)CISs are regulated investment products and are currently defined in the SFA as arrangements in respect of any property that exhibit all the following characteristics:investors have no day-to-day control over management of the property; property is managed as a whole by or on behalf of the scheme operator (Management Limb); investors’ contributions and profits of the scheme from which payments are to be made to investors are pooled (Pooling Limb); and the purpose or effect of the arrangement is to enable investors to participate in profits arising from the scheme property. Collectively managed investment schemes (Managed Schemes) that meet all elements of the CIS definition, apart from the Pooling Limb, will be regulated as CISs. The definition of “CIS” under the SFA will be extended to include such Managed Schemes by making the Management Limb an alternative to the Pooling Limb. However, the legislation effecting such change will not have retrospective effect. Operators of Managed Schemes offered to retail investors will need to be licensed as fund managers, whereas operators of Managed Schemes investing in physical assets offered solely to institutional and accredited investors will be exempted from licensing. The MAS will also develop specific rules in the MAS Code on CISs for Managed Schemes that invest solely in Precious Metals to be authorized for general retail offer. A separate consultation will be issued in this regard.

Refinements to nonretail investor classes, new opt-in/opt-out regime for AIs Proposal MAS ResponseNew opt-in regime for AIsOpt-in regime for new investors The MAS will introduce an opt-in regime under which any “AI-eligible investor” (i.e., an investor, whether an individual or an entity, that meets the AI criteria) will have the choice of electing retail or AI status. This regime will apply only to AI-eligible investors with whom a financial institution (FI) does not have an existing relationship before introduction of the opt-in regime (i.e., new investors/clients). A FI will need to provide AI-eligible investors with: an opt-in notification setting out their right to request AI status and a description and warning of the regulatory safeguards that will be disapplied if they opt in to AI status (in plain language) an opt-in confirmation that they wish to be treated as AIs and acknowledging that they understand the consequent reduction in regulatory safeguards Opt-out regime for existing investors An opt-out approach will be introduced for a FI’s existing AI investors. FIs will nonetheless have to notify their existing AI investors that: they have been assessed to meet prescribed wealth thresholds and are hence considered an AI they have a right to opt out of AI status under the new rules if they do not opt out of AI status, the FI is exempt from complying with certain regulatory requirements when dealing with them (such exemptions to be explained in plain language) if they opt out of AI status, the FI may not be able to continue dealing with them, but their existing investments with the FI will not be affected (where applicable) The opt-out notification should include a form for the AI investor to opt out. FIs will also need to obtain individual AI investors’ acknowledgement of their AI status and acceptance of the implications of such status at the next account review. Given the introduction of the opt-out regime for existing AI investors, the MAS will not provide the two-year transitional period for FIs to migrate existing AI clients (as initially proposed in the Consultation). AI status will be held on a per-FI basis. Investors will have the flexibility to choose their AI statuses with each FI. Investors may also change their classifications at any given time. The relevant investor classification would be at the point an investor entered into an investment transaction with the FI. For existing AI investors who would no longer be AI-eligible (e.g., due to changes in the AI definition), a FI can treat them as AIs only with respect to existing investments. Refinement of the eligibility criteria for AIsIndividuals The minimum monetary threshold criteria of S$2 million net personal assets or S$300,000 annual income for an individual will remain the same; however, the MAS will introduce a S$1 million cap when the primary residence is used for the net personal assets test (i.e., the net equity of an individual’s primary residence may be used to contribute only up to S$1 million of the minimum threshold of S$2 million). The MAS will also introduce a new net financial assets test (i.e., minimum S$1 million in financial assets excluding related liabilities). Joint Account HoldersAny individual who holds a joint account at a FI with an individual who is an AI will be eligible to opt in as an AI (however, only in respect of transactions entered into with or through the FI, using the joint account). If the AI joint account holder ceases to opt in to be treated as an AI, the non-AI account holder will also cease to be eligible to opt in for AI status in respect of the joint account. Corporations Any corporation wholly owned by AIs will be eligible to be treated as an AI (even if the business of the corporation is not solely to hold investments). Trustees A trustee of any trust in which all beneficiaries are AIs will be eligible to be treated as AI. Amending definition of institutional investor3 classThe definition of “institutional investor” will be widened to include additional types of investors such as: entities organized in foreign jurisdictions carrying out financial services activities similar to those for which the MAS licenses are granted (excluding financial advisers, remittance agents and moneylenders) and that are licensed, authorized and/or regulated in one or more foreign jurisdictions central governments and central government agencies of foreign states supranational governmental organizations sovereign wealth funds entities wholly owned by one or more institutional investors The Singapore “statutory bodies” limb of the institutional investor definition will be amended to include only specified Singapore statutory boards (and not all statutory bodies). Expert investor4 classThe MAS has decided to retain the expert investor class for now.

1Our earlier briefing on the consultation paper can be found here.

2An “accredited investor” is currently defined under the Securities and Futures Act as:

i. an individual —

a. whose net personal assets exceed in value S$2 million (or its equivalent in a foreign currency); or

b. whose income in the preceding 12 months is not less than S$300,000 (or its equivalent in a foreign currency);

ii. a corporation with net assets exceeding S$10 million in value (or its equivalent in a foreign currency), as determined by —

a. the most recent audited balance-sheet of the corporation; or

b. where the corporation is not required to prepare audited accounts regularly, a balance-sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance-sheet, which date shall be within the preceding 12 months;

iii. the trustee of such trust as the MAS may prescribe, when acting in that capacity; or such other person as the MAS may prescribe.

3An “institutional investor” is currently defined under the SFA as:

i. a bank that is licensed under the Banking Act, Chapter 19 of Singapore;

ii. a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act, Chapter 186 of Singapore;

iii. a finance company that is licensed under the Finance Companies Act, Chapter 108 of Singapore;

iv. a company or co-operative society that is licensed under the Insurance Act, Chapter 142 of Singapore, to carry on insurance business in Singapore;

v. a company licensed under the Trust Companies Act, Chapter 336 of Singapore;

vi. the Singapore government;

vii. a statutory body established under any Singapore act;

viii. a pension fund or CIS;

ix. the holder of a capital markets services license for:

a. dealing in securities;

b. fund management;

c. providing custodial services for securities;

d. real estate investment trust management;

e. securities financing; or

f. trading in futures contracts;

x. a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors;

xi. the trustee of such trust as the MAS may prescribe, when acting in that capacity; or

xii. such other person as the MAS may prescribe.

4An “expert investor” is defined under the SFA as:

i. a person whose business involves the acquisition and disposal, or the holding, of capital markets products, whether as principal or agent;

ii. the trustee of such trust as the MAS may prescribe, when acting in that capacity; or

iii. such other person as the MAS may prescribe.

If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or

Han Ming Ho Partner

hanming.ho@sidley.com

+65 6230 3966 Josephine Law

Counsel

jlaw@sidley.com

+65 6230 3916

Investment Funds, Advisers and Derivatives

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