The Monetary Authority of Singapore (the “MAS”) is seeking to enhance the regulatory framework of the entities currently operating under its fund management regime. This will mean strengthening the supervision of the fund management industry in Singapore, raising the internal controls of the current and future players. Laven Partners met with the MAS in early April to gain a better understanding of the key differences between the old and new regime, which will be implemented in mid-2012.
Under the existing regime, companies conducting fund management activities in Singapore must either hold a Capital Market Services (“CMS”) license, or be exempted from the same. Fund management companies (“FMCs”) who notify the MAS that they are not servicing more than 30 qualified investors may be exempted from licensing if they meet the exemption criteria. FMCs dealing with more than 30 qualified investors are however currently required to hold a CMS license.
Under the proposed regulatory regime for fund managers, there will be three categories of FMCs:
Registered Fund Management Companies: FMCs whose assets under management (“AUM”) do not exceed S$250 million and who serve no more than 30 qualified investors, of which no more than 15 are funds, will be categorised as Registered Fund Management Companies. The underlying investors of such funds will nevertheless have to be accredited investors. The Registered FMCs will be permitted to commence business after submitting the necessary notifications to the MAS.
Licensed Accredited/ Institutional Investors (“AI”) Fund Management Companies: Licensed AI FMCs have no restrictions in AUM (although managers with less than S$250 million in AUM can also apply), however they can only service accredited and/or institutional investors. To the extent that the Licensed AI FMCs manage a fund, the underlying investors will equally have to be accredited investors and/or institutional investors. The firm may commence business only after the grant of the license by the MAS.
Licensed Retail Fund Management Companies: Licensed Retail FMCs have no restrictions in AUM or type of clientele. Such companies may commence business only after the grant of the license by the MAS.
Conduct of Business
Until now, only holders of a CMS license have been required to abide by the business conduct requirements relating to recordkeeping rules, providing of statements to clients, disclosure agreements and restrictions on financial promotions.
Going forward, all FMCs will be required to meet the conduct of business requirements as set out in the Securities and Futures Act. In addition, the MAS proposes to impose additional business conduct requirements relating to custody, fund administration and compliance.
With regards to custodial arrangements, customers’ monies and assets should be placed with a licensed custodian, registered or authorised, to perform the custodial function in the jurisdiction where the monies or assets are being held. The fund administration function should be kept separate and independent, by outsourcing to an independent service provider or, if performed in-house, ensuring there is independence and segregation of front office functions from fund administration functions.
With regards to compliance arrangements, there are currently no specific requirements for exempt fund managers. In the new regime, all FMCs must have at least one officer responsible for compliance functions: For Registered FMCs, a compliance person is required but they do not have to be dedicated or independent; the CEO or senior staff is able to carry out these duties For Licensed AI FMCs, the compliance function is required to be kept independent from portfolio management. Only when the AUM grows close to or above S$1billion, will an independent and dedicated full time compliance officer be needed. Licensed Retail FMCs will need an independent and dedicated compliance function based in Singapore.
Finally, the implementation of a formalised risk management framework for all FMCs’ fund management operations is required. The risk management framework should be suited to the size and scale of the FMCs operations and be able to effectively identify, manage and monitor risks.
Capital Adequacy
Under the existing regime, exempt managers are not subject to any minimum base capital requirements, while CMS license holders acting for accredited investors must maintain a base capital of S$250,000. Under the new regime, both Registered FMCs and Licensed AI FMCs will have to maintain a base capital of S$250,000 at all times. Licensed Retail FMCs will continue to maintain a base capital requirement of S$500,000 to S$1 million, depending on their activities.
With regards to risk-based capital, there are no proposed requirements for Registered FMCs. Licensed AI FMCs and Licensed Retail FMCs will be subject to a renewed risk-based capital requirement framework which is designed to harmonise the risk based capital requirements across all FMCs. At the end of each quarter, FMCs will be required to calculate whether their average adjusted assets exceed the lower of either (a) 10 x base capital or (b) 5 x financial resources. If so, the FMCs will be subject to counterparty, position, operational, large exposure risk requirement, among others. This means that FCMs may become subject to higher financial resources requirements than before.
Staff and Competency
Currently, all CMS license holders are required to appoint at least two directors with experience in the financial services industry, including experience in management. The firms are also required to employ a minimum of two full-time investment professionals carrying out fund management activities, i.e. front office personnel who are conducting portfolio management, trading, research and business development.
Under the new regime, the MAS has further specified the requirements for competency. It has proposed that all FMCs will be required to employ at least two full-time individuals who both have at least five years of relevant experience and who reside in Singapore. One of these individuals must be appointed as the CEO and executive director of the FMC. The same two full-time resident individuals can be representatives of the FMCs if they conduct the regulated activity of fund management, and can be counted towards meeting the minimum requirement of having two representatives.
In addition to the above, Licensed Retail FMCs will be required to hire a minimum of three full-time representatives who are resident in Singapore, and appoint a CEO with at least ten years of experience in the financial services industry.
Conclusion
The implementation of the new regime will allow Singaporean fund managers to align their processes with international practices standards, and raise the quality of new entrants. At Laven Partners, we believe that regulatory compliance can be approached as a positive component of business. The new regulatory framework in Singapore will give managers the opportunity to improve operational processes and governance and, as a consequence, their marketability.
Laven Partners is committed to providing its global expertise in structuring and regulatory compliance to managers in Singapore. Should you wish to discuss any of the above, please do not hesitate to contact us.
Sophie Benalioua (Senior Associate): [email protected] / +65 6412 0110
