The Singapore Variable Capital Companies (“VCC”) Regulations.

The road thus far for the VCC (or “Vic” as we affectionately term it)

 

First announced in 2016, the VCC Act was passed on 1 October 2018. The Monetary Authority of Singapore (“MAS”) issued two consultation papers on 30 April 2019 to seek public feedback on the proposed VCC Regulation and proposed Notice on Anti-Money Laundering/Countering the Financing of Terrorism (“AML/CFT”) for VCCs. These Consultations close on 30 May 2019 and barring unforeseen circumstances we expect the VCC to go live in Q4 2019. In addition, tax incentives applicable to funds under Sections 13R and 13X of the Income Tax Act will be extended to VCCs. The Financial Sector Incentive for fund management and GST remission for funds will also be applicable to VCCs, provided that all applicable incentive conditions are met.

 

Key features and benefits of the VCC

 

The VCC is an entirely new legal structure that provides an attractive alternative to existing fund or collective investment scheme (“CIS”) structures, which are currently the corporate, limited partnership and unit trust structures. Please refer to our October 2018 article “Vic is coming to town” for the key features of VCC.

Key features

 

The draft VCC Regulations and other related amendments now proposed by MAS will establish the framework to operationalize the VCC regime. In essence, they are administrative in nature and not overbearing, nor do they require much more than what a normal fund managed by a regulated fund management company in a reputable international financial centre need to deal with.

 

These are the key elements proposed by MAS:

 

1. Filings: The VCC Regulations 2019 set out the miscellaneous regulations that are applicable to VCCs like the registration forms and statements required from the officers. The VCC filing procedures substantially mirror those which apply to companies under the Companies Act with modifications to cater to the unique features of VCCs, especially the sub-funds structure. When a VCC is incorporated, a notice of incorporation will be issued and given a unique entity number (“UEN”). When each sub-fund is registered, an email will be issued and each sub-fund will be given a separate UEN.

2. Accounting: VCCs consisting of one or more Authorised Schemes will be required to prepare their financial statements using RAP 7. VCCs which do not consist of any Authorised Schemes can choose to prepare their financial statements in US GAAP, in addition to an ASC Standard or the IFRS. VCCs can revise financial statements pursuant to Section 100 of the VCC Act.

3. Fit & Proper Directors: Directors of VCCs must be fit and proper based on the guidelines provided in the regulations. Relevant factors to consider include the applicant’s past conduct and application history as a director of a VCC or financial institution, any credible adverse information from an AML/CFT perspective, and any serious professional lapses (including issues that may impinge on his integrity), or any compelling public-interest reasons. A point to note is that the checklist is different from the fit and proper criteria checklist applicable to shareholders, directors and representatives of Singapore regulated financial institutions, where the latter is more prescriptive and has a 10 year look-back period.

4. Re-domiciliation of Foreign Funds: The VCC (Transfer of Registration) Regulations 2019 applies with modifications, the existing regulatory regime for the transfer of registration of foreign corporate entities under the Companies Act, to foreign corporate entities that intend to be registered as VCCs. MAS proposes that only foreign corporate entities with positive net assets and which will remain solvent within 12 months from the date of application can re-domicile to Singapore. The applicant must provide the documents set out in the regulations to the Registrar at the time of registration for the inward re- domiciliation. The proposed minimum requirements are also set out in the regulations. 

5. Striking Off: The VCC (Striking Off) Regulations 2019 set out the procedure for the striking off and restoration of VCCs and their sub-funds with references made to Sections 344A – 344D of the Companies Act.

6. Court Winding Up: The VCC Regulations 2019 provide that the Court may order the winding up of a VCC under Section 130(8)(n) of the VCC Act if a VCC contravenes Section 46 of the VCC Act for a period of three months or more.

7. Insolvency: Insolvency regulations relating to the VCC and sub-funds will only be rolled out at a later time. It seeks to align the VCC insolvency regime with that of other corporate structures in Singapore.

8. Prescribed Matters and Information for Retail VCCs: MAS also proposes to make amendments to the Securities and Futures (Offers of Investments) Regulations (“SFR(CIS)”) to implement the VCC framework. The amendments, which are to be read with the consequential amendments to the Securities and Futures Act as set out in Section 167(5) of the VCC Act, pertain to:

   •   operational requirements for custodians of VCCs;

   •   provisions to be included in a VCC constitution (see Regulation 10AA and 10AB);

   •   provisions to be included in contractual agreements between a VCC and its directors, manager

     and custodian;

   •   provisions to be included in VCC legal contracts for authorized funds (see Regulation 10AC)

   •   prospectus disclosure requirements; and

   •   other consequential amendments.

9. Custodian Requirements for Retail VCCs: The proposed amendments to the SFR(CIS) shed light on role and duties of the custodian. They align the duties of the custodian with that of an approved trustee, other than the obligation to safeguard the rights and interests of the VCC’s shareholder requires the disclosure of the risk of cross-cell contagion to shareholders of VCCs. Regulation 7A requires a custodian of VCC to:

   •   notify MAS within 3 business days upon knowing of the breach of the VCC or the fund manager in relation to laws or regulations relating to the VCC or the fund manager;

   •   take custody and control of all VCC assets;

   •   ensure all VCC assets are accounted for; and

   •   ensure all VCC assets are distinct from its own and those of its clients.

     The other proposed requirements to the VCC constitution and contractual agreements are intended to mirror the current requirements which MAS imposes for trust deeds of unit trusts.

10. Code on CIS – Amendments for Retail VCCs: MAS is also proposing amendments to the Code on CIS (which apply only to authorised funds or recognised funds, offered to retail investor) to extend certain existing responsibilities and independence requirements relating to approved trustees and managers of authorised funds, to the VCC, its directors (including independent directors) and custodians (where applicable). The amendments provide guidance on what constitutes an independent custodian. The amendments also require authorised VCCs to prepare their financial standards using RAP 7, as currently required for authorised unit trusts under the CIS Code, and to implement MAS’ policy to allow authorised VCCs and authorised sub-funds of a VCC to invest in assets located in a jurisdiction that does not have a cellular structure after reasonably mitigating cross-cell contagion risk, provided this is done after taking reasonable measures to mitigate cross-cell contagion risk.

11. AML/CFT Requirements: AML/CFT requirements are imposed on the VCC but it can be outsourced to the fund manager of the VCC or a regulated financial institution in Singapore, although the VCC and its directors remain primarily responsible. There are some proposed substantive requirements but would not be entirely applicable or are less of a real concern if the VCC remains an investment fund since typically the fund managers, the custodian banks and prime brokers would be subject to similarly, if not more, stringent AML/CFT requirements when dealing with the fund and the fund investors.

 

VCC vs funds domiciled in tax havens

 

One common question we get is how the Singapore VCC compares to the Cayman Segregated Portfolio Company (“SPC”). We have observed a growing trend of clients making the obvious choice of Singapore as a structuring venue, investment fund and asset/wealth management jurisdiction. In recent times, banks and investors have a strong say in whether the funds should be domiciled in a reputable international financial centre.

 

All things being equal, we anticipate the VCC to be comparable to the Cayman SPC with a strong likelihood that it will be easier, faster, more convenient, and less expensive to operate and maintain the VCC. In addition, much of the regulatory (including AML/CFT and Common Reporting Standards) and substance requirements are already fulfilled by the Singapore regulated fund management company and the relevant financial institutions servicing the funds. The additional benefits are:

 

• everything (including the process, documentation and professionals) will now be located in one central business district in Singapore, a safe and reputable international financial centre and asset and wealth management hub

• availability of a tax neutral fund structure pursuant to tax incentives approved in writing by the local regulators

• availability of the benefits of more than 80 double tax agreements

• no more need for offshore directors, offshore agents, offshore registered office, offshore shell fund

  manager

• no more hefty CIMA registration fees and annual fees

 

The next steps

 

A VCC can be used by fund/asset managers, wealth managers, PE/RE/VC managers and multi-family offices. It can be used for traditional, alternative, PE/RE/VC funds. It can also be used as an alternative to retail unit trust funds. Practically, we anticipate a significant take up rate for the private VCC, both for traditional and alternative fund strategies. We also anticipate a significant shift from conventional tax haven segregated portfolio company fund and protected cell company fund structures to private VCC funds in Singapore.

 

Vic is almost in town and it will be shaking things up. 

 

Tan Woon Hum, Partner, Shook Lin & Bok

woonhum.tan@shooklin.com