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Reports and Analysis Singapore: New Regime For Exempt Fund Managers: 10 Things To Know.
29 September, 2012 Legal News & Analysis Asia Pacific - Singapore - Investment Funds Introduction Following the issue by the Monetary Authority of Singapore (MAS) of two consultation papers on the review of the fund management regulatory framework in Singapore in April 2010 and September 2011 respectively, the new rules proposed in these consultation papers were finally implemented on 7 August 2012. 1. What are existing exempt fund managers (EFMs) required to do? EFMs have a 6 month grace period until 6 February 2013 to either lodge an application to transition to become a Registered Fund Management Company (RFMC) or if they do not meet the new criteria for RFMCs, apply for a capital markets services licence in fund management to become an Accredited / Institutional Licensed Fund Management Company (Licensed A/I FMC) or a Licensed Retail Fund Management Company (Licensed Retail FMC). The obligation is to submit the appropriate forms to the MAS by 6 February 2013 the transitional rules provide that so long as you do so, your exempt status continues until you are granted Licensed A/I FMC or Licensed Retail FMC status, are published on the MAS website as a RFMC, have been notified that your submission has been rejected or if you
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have withdrawn your submission 2. What new criteria has been introduced before you can apply to be a RFMC? While RFMCs continue to be able to serve up to 30 qualified investors, not more than 15 of these investors may be collective investment schemes, closed-end funds or limited partnership structures. In addition, a RFMC must ensure that its assets under management (AUM) do not at any time exceed S$250 million. If you are unable to satisfy either of these requirements, you should consider applying to be a Licensed A/I FMC instead as this would allow you to serve an unrestricted number of qualified investors without a cap on AUM size. From a continuing business perspective, various additional requirements have been introduced for RFMCs in the areas of compliance, risk management, auditing, custody, valuation and valuation reporting and disclosures. 3. Are research and investment advisors fund managers? The new guidelines on Licensing, Registration and Conduct of Business for Fund Management Companies (the Guidelines) clarify that investment advisors, subadvisors or person providing research to other investment managers (whether based in Singapore or overseas) would potentially be deemed to be conducting fund management business in Singapore if such advisor is able to exercise direct or indirect control over management of the investment portfolio. Factors such as whether such person is involved in investment portfolio construction, has knowledge of or access to non-publicly available information of the holdings of the portfolio or is named in or referred to in the funds prospectus, offering or marketing documents, will be relevant in determining if such person is engaged in fund management. 4. Measures to protect client assets Assets under management (excluding unlisted securities and interests in closed-end private equity funds) must be independently held by professional custodians such as prime brokers, depositories and banks. These assets are also subject to independent valuation, whether by external service providers like fund administrators, trustees or custodians or internally (provided the valuation function is segregated from the investment management function), with reporting to clients performed by an independent entity. MAS has explicitly stated that the annual audit will not fulfill the requirement for independent valuation. Various disclosure obligations are also in place to ensure adequate disclosures are made to fund clients in respect of each fund or account managed by the fund management company (FMC). At a minimum, disclosures are required in the areas

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of: investment policy, strategy and risks; fees, termination or exit rights; valuation policy and performance measurement standards; the definition, measurement and extent of use of leverage under the investment mandate; and the funds counterparties and brokers, prime brokers, custodians, trustee, administrators and auditors engaged by the fund. 5. Ensuring appropriate compliance and risk management frameworks All FMCs are required to implement independent and dedicated compliance functions commensurate with the scale, nature and complexity of its operations. The CEO and directors of a FMC are the persons ultimately held responsible for all compliance and regulatory matters. Licensed Retail FMCs and Licensed A/I FMCs managing an AUM in excess of S$1 billion must maintain their compliance functions in Singapore while Licensed A/I FMCs managing less than S$1 billion may have such function performed at group level or engage qualified external service providers to perform such function. Compliance functions for a RFMC may be performed by an independent internal function, compliance support from overseas affiliates and/or qualified external service providers. Where external service providers are engaged, they should preferably belong to relevant professional bodies in Singapore and perform their services onsite at the FMC. All FMCs, whether RFMCs, Licensed A/I FMCs or Licensed Retail FMCs are now required to implement a risk management framework to identify, address and monitor the risks associated with customer assets that it manages. The sophistication of the framework will depend on the nature, scale and complexity of the assets being managed and should also take into account the MAS Guidelines on Risk Management Practices as well as industry best practices. MAS expects that the framework will at the minimum: be segregated from, and independent of, the portfolio management function; ensure that all pertinent risks associated with customer assets are identified and measured; require timely monitoring and reporting of risks; and provide for proper documentation and maintaining of policies, procedures and reports. FMCs should bear in mind that additional obligations are contained in the MAS Guidelines on Outsourcing and MAS Notice on the Prevention of Money Laundering and Countering the Financing of Terrorism. open in browser PRO version Are you a developer? Try out the HTML to PDF API

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FMCs without access to sophisticated backroom staff, whether locally or at a centralized risk management function at head or regional office level, should consider working with leading independent risk and internal audit consultants like Protiviti who can assist in the initial development of your risk management framework and ongoing assessments of the continued effectiveness of these frameworks as your business develops.

6. Call for independent monitoring FMCs will be required to conduct internal audits commensurate with the scale, nature and complexity of their operations. Internal audits may be conducted by an internal function within the FMC, an internal team at group level or outsourced to external service providers. In addition to internal audits, all FMCs must also procure independent audits of their financial statements annually and, in the case of a Licensed A/I FMC, provide MAS with the auditors report on its compliance with key licensing and business conduct rules. 7. Maintaining an appropriate capital buffer RFMCs and Licensed A/I FMCs are required to maintain a minimum capital of S$250,000 (including paid up share capital and retained earnings). The Guidelines further stipulate that it would be prudent for an additional capital buffer, in addition to the requisite base amount, to be maintained, bearing in mind the scale and scope of the FMCs operations. Licensed A/I FMCs are also required to comply with operational risk requirements which are based on its average annual income or S$100,000 (whichever is lower). 8. Do all fund managers have to maintain professional indemnity insurance? The MAS has stated that it may require Licensed Retail FMCs to obtain professional indemnity insurance (PII) with the required cover ranging from S$2 million (where AUM is less than S$100 million) to S$25 million (where AUM exceeds S$10 billion). As for Licensed A/I FMCs and RFMCs, adequate PII coverage is strongly recommended and clients (existing and future) should be informed of the FMCs PII arrangements (or absence thereof). 9. Now that the RFMC scheme is in place, are there any other available exemptions? Responding to earlier feedback received as part of the consultation process, MAS has introduced a new exemption in respect of fund managers who only serve

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qualified investors and manage securities in entities whose sole purpose is to hold immovable assets. Further guidance is expected from MAS on the operation of and application process for this new exemption. 10. What if I am interested in registering a RFMC? You will need to submit your registration in Form 22A with accompanying supporting documentation including your Singapore-incorporated entitys business profile obtained from the Accounting and Corporate Regulatory Authority of Singapore, a group shareholding chart and organizational chart with reporting lines. To facilitate submission, a new online system Corporate e-Lodgement (CeL) system has been implemented for submission of RFMC registrations and Licensed A/I FMC applications. You should note that under the new regime, a RFMC will not be permitted to commence operations until its registration lodgment has been approved and it is listed on the MAS website as a RFMC. Until this happens, you must not commence business including entering into any investment management agreement or receiving or investing any customer moneys. Under the previous regime, an EFM notification could be lodged up to 14 days following the commencement of business.

For further information, please contact: Daniel Yong, Partner, Norton Rose daniel.yong@nortonrose.com Zi Yang Lim, Norton Rose ziyang.lim@nortonrose.com Si Xuan Cai, Norton Rose sixuan.cai@nortonrose.com Homegrown Investment Funds Law Firms in Singapore International Investment Funds Law Firms (International with Local Law Capabilities) in Singapore International Investment Funds Law Firms in Singapore

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