1. Market Overview
1.1 State of the Market
Regulations and the Regulator
In Singapore, the management, offering and distribution of funds and related issues are regulated and primarily governed by the Securities and Futures Act 2001 (SFA) and its subsidiary regulations. The regulatory authority in Singapore that has supervisory responsibility for administering the SFA and its subsidiary regulations is the Monetary Authority of Singapore (MAS).
The funds market can be broadly divided into retail and non-retail. Any investor which does not qualify as an accredited investor (AI) or institutional investor (II) as defined in the SFA will be considered a retail investor. Any funds that are not offered exclusively to AIs and/or IIs are considered retail funds.
Retail Funds
Retail funds are generally called collective investment schemes (CIS) and comprise:
- listed real estate investment trusts (REITs);
- listed exchange-traded funds (ETFs);
- listed business trusts (BTs); and
- non-listed retail unit trust funds.
The management, offering and distribution of retail funds entails stricter licensing requirements, regulatory compliance, disclosures, regulatory approvals and filings. Any fund manager that manages retail funds and any entity that offers and distributes retail funds requires a capital markets services (CMS) licence for retail products, unless otherwise statutorily exempted.
Any offering of retail funds in Singapore must be accompanied by a registered prospectus which must first be submitted to the MAS for review and approval. The prospectus must comply with the disclosure standards set out in:
- the SFA
- the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 (SFR); and
- the Code on Collective Investment Schemes (the “Code on CIS”).
The retail fund must also be authorised (for Singapore funds) and recognised (for non-Singapore funds) by the MAS. In addition, the prospectus must be accompanied by a product highlights sheet in respect of the offer.
Alternative Funds
Non-retail funds are commonly known as private funds or alternative funds.
Alternative funds were active throughout the past year (2022), especially due to the increasing acceptance and popularity of variable capital company (VCC) funds, an influx of family offices setting up alternative funds, and the preference to use fund managers and funds in an international financial centre instead of using offshore centres.
Listing of REITs and ETFs became more challenging during 2022 due to poor capital market conditions, geo-political risks and uncertainties, and post-pandemic overhang.
2. Alternative Investment Funds
2.1 Fund Formation
2.1.1 Fund Structures
Alternative funds may take any of four legal structures, namely:
- unit trust;
- limited partnership (LP);
- company; and
- VCC.
The most common structure was the LP prior to the launch of the VCC framework on 15 Jan 2020. Since then, a significant shift towards VCCs has been seen.
Unit Trust Fund
The unit trust fund is not a separate legal entity. The unit trust fund is organised as a trust pursuant to a trust deed where the legal ownership of the unit trust fund’s assets is vested in a trustee that holds such assets on trust for the benefit of the investors. The trust does not need to be registered with the Accounting and Corporate Regulatory Authority (ACRA) and there is no public register for private trusts. The trustee must hold a trust business licence pursuant to the Trust Companies Act 2005 (TCA).
Investors are known as unitholders and own units. There are no management units or general partnership units. There is no board of directors as in a normal company. As such, the day-to-day control, management and decision-making powers of the unit trust fund vest with the trustee but are delegated to the fund manager. The investment mandate and terms of such delegation are normally found in the trust deed.
Unit trust funds are more commonly used for open-end funds, hedge funds and private property income funds.
A unit trust fund can be organised as an umbrella fund with sub-funds created under the umbrella structure. The umbrella structure itself is not a fund that investors may invest into, but is merely an overarching structure to house the sub-funds. Investors select and invest into the sub-funds and the investment assets are held by the sub-funds. The sub-funds are not separate legal entities. Although the performances, assets and liabilities of each sub-fund may be contractually segregated from those of other sub-funds, there is no statutory or legal segregation.
LP Fund
The LP fund is not a separate legal entity. The LP fund is organised as a limited partnership pursuant to the Limited Partnerships Act 2008 and pursuant to an LP agreement where the legal ownership of the LP fund’s assets is vested in the general partner (GP), who holds such assets on behalf of the LP fund. The LP fund must be registered with the ACRA.
Investors are known as LPs and own LP units. GP units are usually owned by the fund manager or a GP entity. There is no board of directors as in a normal company. As such, the day-to-day control, management and decision-making powers of the LP fund vest with the GP but are often delegated to the fund manager. The investment mandate and terms of such delegation are normally found in the investment management agreement.
LP funds are more commonly used for closed-end private equity, real estate, venture capital and other exotic assets funds.
Company Fund
The company fund is a separate legal entity. The company fund is organised as a private limited company pursuant to the Companies Act 1967 and pursuant to the constitution, where the legal ownership of the company fund’s assets is vested in the company. The company fund must be registered with the ACRA.
Investors are known as shareholders who typically own preference shares or redeemable preference shares. The ordinary shares are usually owned by the fund manager or a GP entity. There is a board of directors. As such, the day-to-day control, management and decision-making powers of the company fund vest with the board of directors but are often delegated to the fund manager. The investment mandate and terms of such delegation are normally found in the investment management agreement.
Company funds are seldom used and have certain disclosure and reporting requirements under the Companies Act 1967. Company funds are also subject to capital maintenance requirements.
VCC Fund
The VCC framework was introduced in Singapore on 15 Jan 2020 pursuant to the Variable Capital Companies Act 2018 (the “VCC Act”). The VCC Act stipulates that the VCC can only be used as a fund and must appoint a Regulated FMC (as defined in 2.3.1 Regulatory Regime) or certain types of financial institutions licensed in Singapore to manage the VCC.
There is ongoing discussion with the MAS to amend the VCC Act and its regulations to allow a single-family office to manage the VCC under certain conditions.
The VCC fund is a separate legal entity, and is organised as a VCC pursuant to the VCC Act and pursuant to the constitution where the legal ownership of the company fund’s assets is vested in the VCC. The VCC fund must be registered with the ACRA.
Investors are known as shareholders who own participating shares. The management shares are usually owned by the fund manager or a GP entity. There is a board of directors. As such, the day-to-day control, management and decision-making powers of the VCC fund vest with the board of directors but are often delegated to the fund manager. The investment mandate and terms of such delegation are normally found in the investment management agreement.
VCC funds have certain disclosure and reporting requirements under the VCC Act, but capital maintenance requirements are not applicable and the register of shareholders is not available to the public. The VCC must also comply with the requirements for prevention of money laundering and terrorism financing prescribed by the VCC Act.
VCC funds can be used for open-end and closed-end funds. VCC funds can be used for hedge, private equity, real estate, venture capital and exotic assets funds. It is the most flexible of all the Singapore funds structures.
A VCC fund can be organised as an umbrella VCC fund with sub-funds created under the umbrella VCC. The umbrella structure itself is not a fund that investors can invest into, but is merely an overarching structure to house the sub-funds. Investors select and invest into the sub-funds and the investment assets are held by the sub-funds. The sub-funds are not separate legal entities but have their own unique sub-fund registration number issued by the ACRA.
The performances, assets and liabilities of each sub-fund must be segregated from those of other sub-funds as required by the VCC Act. Hence, there is statutory and legal segregation, unlike in the case of sub-funds of an umbrella unit trust. In fact, the VCC Act stipulates that the sub-funds must be segregated from each other and that the directors of the VCC must ensure that sub-funds are segregated from each other.
2.1.2 Common Process for Setting Up Investment Funds
Unit Trust Fund
The unit trust fund is constituted when the trust deed is executed by the trustee and the fund manager, and no registration is required.
The constitutive document for a unit trust fund is the trust deed, and the main contracts are the trust deed and subscription agreement.
There is usually an offering memorandum called the private placement memorandum (PPM).
The time taken to set up a unit trust fund can range from a few days to a few weeks, and this is largely dependent on the negotiation of the terms of the trust deed between the parties. There is no registration fee and the professional fees for setting up are considered reasonable.
LP Fund, Company Fund and VCC Fund
The LP fund, company fund and VCC fund are constituted when they are registered or incorporated by the ACRA. Prior to establishment or incorporation, reservation of names is required, and the registration or incorporation forms must be lodged with the ACRA, together with relevant supporting documents.
The constitutive document for the LP fund is the LP agreement, and the main contracts are the LP agreement, investment management agreement and subscription agreement.
The constitutive document for the company fund and VCC fund is the constitution, and the main contracts are the constitution, investment management agreement and subscription agreement.
There is a PPM for LP funds, company funds and VCC funds.
The time taken to set up an LP fund, company fund or VCC fund can range from a few days to a few weeks, and this is largely dependent on the negotiation of the terms of the LP agreement, investment agreement and subscription agreement (as may be applicable) between the parties. The incorporation/registration fee for a VCC is SGD8,000. The professional fees for setting up LP funds, company funds and VCC funds are considered reasonable.
2.1.3 Limited Liability
Generally, investors of funds have limited liability and are only liable for their respective capital contributions or capital commitments based on the subscription agreement.
Where the fund is constituted as a private limited company or a VCC under Singapore law, the fund is a separate legal entity. The investors which are its shareholders are not liable for the obligations of the fund. The corporate veil of the company or the VCC can be lifted if there are abuses of the limited liability status of the company or the VCC.
Where the fund is constituted as a unit trust or a limited partnership under Singapore law, the fund is not a separate legal entity. The investors which are its unitholders or limited partners are usually not liable for the obligations of the fund, which are usually expressly stated in the trust deed and limited partnership agreement, respectively, as well as in the PPM.
If there are specific atypical terms and conditions set out in the constitution (or trust deed in the case of a unit trust fund), subscription agreement and/or PPM, the investors may be liable. If the investors participate in the management of the funds in any manner, they may be liable. For example, an investor may be liable as a director of the fund established as a company or VCC, or an investment committee member of the fund (regardless of the structure).
2.1.4 Disclosure Requirements
Fund managers are required to provide adequate disclosures to the investors and prospective investors of the funds.
Disclosures are usually made in the PPM, and should cover all material and up-to-date information that will assist the investors and prospective investors to make informed decisions about investing in the funds. The information should include:
- names of the funds and sub-funds;
- a description of the funds and sub-funds;
- names of the fund managers, and other professionals and main service providers;
- legal structures of the funds;
- investment strategies, theses, approaches, restrictions and limitations of the funds;
- risks associated with the funds;
- fees and charges applicable to the funds;
- conflicts of interests;
- how the funds are offered in Singapore and which statutory exemptions are invoked for the offers;
- subscriptions, redemptions, exits, suspensions, valuations terms and conditions;
- gatings and lockups;
- restrictions on transfers and redemptions;
- distributions, if any;
- leverage, if any;
- the charter life of the funds; and
- termination.
If there are material changes to the terms and conditions of the funds, or to any sections of the PPM, it is likely that an amendment or supplement to the PPM must be issued with a notice to the investors who have invested with the funds.
2.2 Fund Investment
2.2.1 Types of Investors in Alternative Funds
Singapore alternative funds have been popular and widely accepted by investors, both from Singapore and from outside Singapore (especially Asian investors and European investors).
Investors include high net worth individuals, large corporations, institutional investors, family offices, sovereign wealth funds and foreign funds of funds.
2.2.2 Legal Structures Used by Fund Managers
All four Singapore fund structures have been used, although the most common structures are the LP fund and (in the last two to three years) the VCC fund.
2.2.3 Restrictions on Investors
Non-retail funds can only be offered to AIs and IIs as defined in the SFA.
There are no restrictions on nationality or domicile of investors for non-retail funds.
2.3 Regulatory Environment
2.3.1 Regulatory Regime
See 1.1 State of the Market.
Any entity that manages alternative funds in Singapore must hold one of the three licences or be registered as set out here, unless otherwise statutorily exempted:
- CMS licence for fund management for retail investors (Retail LFMC);
- CMS licence for fund management for AIs and IIs only (AIFMC);
- CMS licence for venture capital fund management for AIs and IIs only (VCFMC); or
- registered fund management company for AIs and IIs only (RFMC – collectively “Regulated FMCs“).
Any entity that distributes or markets any alternative funds requires a CMS licence for dealing in capital markets products (CMS-DCMP), unless otherwise statutorily exempted. Applications for the CMS licence and registrations of RFMCs must be submitted to the MAS. The MAS will only grant its approval if the application terms and conditions are met and after substantial due diligence on the applicants, its shareholders, directors and key employees.
Statutory Exemptions
Where the alternative funds are offered to non-retail investors, there are statutory exemptions from the requirements of authorisation for the alternative funds and registering a compliant prospectus, provided certain conditions are met. These statutory exemptions are discussed as follows.
Small offers
This exemption applies to personal offers of units in the fund where the total amount raised from such offers within any period of 12 months does not exceed SGD5 million.
Private placements
This exemption applies to offers of units in the fund where the offers are made to no more than 50 persons within any period of 12 months.
Offers to institutional investors
This exemption applies to offers of units in the fund where the offers are made solely to IIs.
Offers to accredited investors and certain other persons
This exemption applies to offers of units in the fund where the offers are made solely to:
- AIs or certain relevant persons who are related to the offeror; or
- a person who acquires the units as principal if the offer is on terms that the units may only be acquired at a consideration of not less than SGD200,000 for each transaction.
To invoke this exemption, a notification must be lodged with the MAS before the fund can be offered pursuant to Section 305 of the SFA.
For exempt offering of alternative funds to non-retail investors, the following applies:
- the offer must be accompanied by the PPM;
- the PPM must state the statutory exemption that is invoked for the exempt offer;
- there must be no advertising or promotion of the funds; and
- there must not be a prospectus registered with the MAS.
For non-retail funds, there are no investment restrictions or limitations. Non-retails funds can adopt any investment strategy, apply any investment thesis or approach, invest in any asset class or jurisdiction, raise any amount of capital and invest any amount of committed capital for any length of investment period, subject to legal limitations, sanctions and any other specific legal regulatory restrictions.
Non-retail funds can invest directly or indirectly through special purpose vehicles.
The critical requirement is that the investment terms and conditions, and risks, are adequately disclosed in the PPM.
2.3.2 Requirements for Non-local Service Providers
Generally, non-local service providers that do not conduct any regulated activities in Singapore are not subject to Singapore licensing regulations or registration requirements.
For non-local service providers that carry out business activities in Singapore which are regulated under the SFA (eg, sub-management, sub-advisory, securities custody), requirements would depend on whether the relevant activities are deemed to be conducted in Singapore pursuant to the SFA, which has certain extraterritorial provisions (namely Section 339). Where such relevant activities are deemed to be conducted in Singapore, the parties must apply to the MAS for the requisite CMS licence, unless statutorily exempted.
2.3.3 Local Regulatory Requirements for Non-local Managers
See 2.3.2 Requirements for Non-local Service Providers.
Non-local managers may launch and manage alternative Singapore funds, except VCCs. Alternative Singapore funds that are managed by non-local managers will not enjoy the tax incentives available to alternative funds (eg, under Sections 13O and 13U of the Income Tax Act 1947 (ITA)).
For non-local managers that manage alternative Singapore funds but do not otherwise carry out business activities or have a physical presence in Singapore, requirements would depend on whether the relevant activities are deemed to be conducted in Singapore pursuant to the SFA , which has certain extraterritorial provisions (namely Section 339). Where such relevant activities are deemed to be conducted in Singapore, the non-local managers must apply to the MAS to be a Regulated FMC, unless other statutory exemptions are available.
2.3.4 Regulatory Approval Process
Alternatives funds are not regulated in Singapore. There is no regulatory approval or registration required, except for the notification that must be lodged with the MAS before the fund can be offered to AIs and certain other persons pursuant to Section 305 of the SFA.
See 2.3.1 Regulatory Regime.
2.3.5 Rules Concerning Pre-marketing of Alternative Funds
For the statutory exemptions of small offers, private placements and offers to accredited investors and certain other persons (see 2.3.1 Regulatory Regime), none of the offers must be accompanied by an advertisement making an offer or calling attention to the offer or intended offer, and there must be no selling or promotional expenses paid or incurred in connection with each offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by certain prescribed persons.
Apart from this, there are no express legal requirements or prohibitions against pre-marketing of alternative funds in Singapore. However, any regulated activities in Singapore may require the requisite CMS licence or statutory exemptions, and any offer of units in alternative funds must be made pursuant to the statutory exemptions of the SFA and comply with the conditions applicable to the exempt offering.
In the absence of any other formal offering documents, a presentation, flipbook or teaser document (in print or other form) containing the key terms of the investment in the alternative fund such that it practically forms the basis of the offer might result in them being considered a form of offering document. Much depends on the actual facts, and the details and substance found in such documents.
2.3.6 Rules Concerning Marketing of Alternative Funds
Any entity that distributes or markets any alternative funds in Singapore would likely be seen as conducting the regulated activity of dealing in capital markets products as defined in the SFA, and would be required to hold a CMS-DCMP, unless otherwise statutorily exempted.
The entity that distributes or markets any alternative funds in Singapore is also likely to be seen as conducting the regulated activity of advising others, either directly or through publications or writings, whether in electronic, print or other form, concerning any investment product. This is a regulated activity that requires a financial adviser’s licence pursuant to the Financial Advisers Act 2001, unless otherwise statutorily exempted.
A Regulated FMC can market in Singapore the alternative funds that it manages or sub-manages, as well as the funds that such manager’s related corporations (as defined in the SFA) manage without a CMS-DCMP.
2.3.7 Marketing of Alternative Funds
See 2.2.3 Restrictions on Investors.
2.3.8 Marketing Authorisation/Notification Process
See 2.3.1 Regulatory Regime and 2.3.4 Regulatory Approval Process.
2.3.9 Post-marketing Ongoing Requirements
There are no specific ongoing legal requirements applicable to firms which have marketed alternative funds in Singapore, except for ongoing anti-money laundering, countering of financing of terrorism and suspicious transactions monitoring requirements that are generally applicable to Regulated FMCs.
2.3.10 Investor Protection Rules
Aside from what has been discussed in 2. Alternative Investment Funds and elsewhere, there are no specific investor-protection regulations in relation to investing in alternative funds.
2.3.11 Approach of the Regulator
The MAS is generally considered to be proactive, forward-looking, approachable and business-friendly. The regulatory teams in the MAS are known to be willing to engage with the industry to understand the market, trends, challenges and needs. They are also willing to meet face-to-face or attend audio or virtual calls, where appropriate.
The development team which promotes Singapore as an international financial centre and asset and wealth management hub is also willing to engage with the industry and prospective licence applicants, and is willing to support credible applicants by providing useful connections, information and guidance.
The MAS also engages with groups of fund managers, professionals, service providers and associations in the funds space to seek feedback, provide high-level guidance and directions, or conduct pre-consultations before implementing or amending relevant laws and regulations that will have a substantial impact on funds or fund managers.
The MAS takes a strong view on legal and regulatory compliance, especially for professional breaches, professional misconduct, fraud, know-your-customer checks, money laundering and financing of terrorism. On its website the MAS publishes formal regulatory and enforcement actions taken by it against any entities for breaches of laws and regulations under its jurisdiction, including breaches by fund managers and their personnel.
2.4 Operational Requirements
See 2.1.1 Fund Structures.
Where funds invest in securities (as defined in the SFA), a securities‑based derivatives contract that is not a futures contract, or units in a CIS, the funds must appoint a custodian. The custodian must have a CMS licence for providing custodial services pursuant to the SFA.
The PPM must disclose information that is true, accurate and not misleading to enable the reasonable investors or prospective investors to make an informed decision on whether to invest in the fund. The PPM should include sufficient disclosure of the risks of the investment in the fund.
Alternative funds have no borrowing restrictions. If the intention is for the funds to borrow, this must be disclosed in the PPM.
Private equity, real estate, venture capital and exotic funds are typically audited and valued annually.
Insider trading and market manipulation rules pursuant to the SFA are applicable to funds.
Ongoing anti-money laundering, countering of financing of terrorism and suspicious transactions monitoring requirements are applicable to Regulated FMCs. Regulated FMCs and the entities that provide services to the funds, such as the custodians, banks and brokers, must comply with these ongoing obligations. VCC funds and their directors must also comply with these ongoing obligations.
2.5 Fund Finance
Alternative funds may avail themselves of financing from the banks in Singapore. There are no restrictions on fund financing.
It is common for banks in Singapore to obtain sufficient security as collateral for fund financing. This could take the form of charges or pledges of the securities owned by the fund, mortgages over real estate owned by the fund, assignments of income or receivables, assignments of insurances, and debentures, including corporate guarantees and personal guarantees. Banks may also secure financing against the uncalled capital of the investors of the funds.
Where banks finance the funds, the banks would typically conduct due diligence and know-your-customer checks on the funds, the fund managers and even the investors of the funds, especially if the funds are not considered to be widely held. The due diligence and know-your-customer checks could be extensive, requiring considerable time and a fair amount of information and supporting documents.
2.6 Tax Regime
Taxes in General
In Singapore, income tax is imposed on any income that is accrued in or derived from Singapore and on any foreign-sourced income received in Singapore, unless otherwise statutorily exempted. Currently, the corporate income tax rate in Singapore is 17%.
The Singapore government does not impose tax on capital gains unless the investment gains of any entity are considered to be income in nature, which will depend on a number of factors. This is subject to scrutiny by the Inland Revenue Authority of Singapore (IRAS). For the purposes of funds, the investment decisions and control and management are typically delegated to the fund manager. If the fund manager is incorporated in Singapore, or has its control and management in Singapore, it is highly likely that the fund will be considered to have tax residence in Singapore, and would be subject to Singapore income tax.
Specific Taxes
Unit trust
The unit trust fund is not a separate legal entity. However, the unit trust fund requires a trustee which must hold a licence pursuant to the TCA. Such trustee must be a company incorporated under Singapore law. Thus, the unit trust fund is subject to 17% corporate income tax by virtue of the trustee being a Singapore tax resident.
LP fund
The LP fund is not a separate legal entity and will not be subject to corporate income tax. Instead, the limited partners will be subject to tax on the income derived from the LP fund in accordance with their own tax incidence and liability.
Company fund
The company fund is a separate legal entity, and is subject to 17% corporate income tax.
VCC fund
The VCC is a separate legal entity, and is subject to 17% corporate income tax.
Fund managers
Regulated FMCs are subject to 17% corporate income tax. The income of the Regulated FMC typically includes management or base fees, performance fees and carried interest, including any other income derived from the fund.
Tax Incentives
There are certain tax incentives available to funds and fund managers, provided certain conditions are fulfilled.
Sections 13O and 13U tax incentives
A fund managed by a Regulated FMC can apply to the MAS for tax incentives pursuant to Section 13O or Section 13U of the ITA, allowing the fund to be taxed at a lower rate. If the incentives’ conditions are met, the MAS will grant the incentives in writing to the fund. The key conditions for the incentives are as follows:
- the fund must be managed by a Regulated FMC;
- for Section 13O, the fund must be a Singapore company or VCC;
- for Section 13U, the fund must have minimum assets under management of SGD50 million at the time of the application;
- the Regulated FMC must have at least two (for Section 13O) or three (for Section 13U) full-time investment professionals with minimum salary qualifications;
- the fund must be administered in Singapore;
- the fund must have a minimum annual local expenditure of SGD200,000;
- the fund must not alter its investment strategy or objective after the tax incentives are approved unless it obtains the prior approval of the MAS; and
- there are other specific requirements and restrictions for Section 13O.
There are also specific requirements and restrictions regarding the investment assets and investment income of the fund.
Where the fund is managed by a single-family office that is exempt from needing a CMS licence for fund management under the SFA, additional requirements are applicable for the purposes of Section 13O and Section 13U tax incentives with effect from 18 April 2022.
Financial Sector Incentive – Fund Management Award
A Regulated FMC can apply to the MAS for incentives under the Financial Sector Incentive – Fund Management Award. This incentive allows the Regulated FMC to be taxed at a lower rate of 10%. The key conditions are:
- the fund manager must be a Regulated FMC;
- the Regulated FMC must have at least three full-time investment professionals with minimum salary qualifications; and
- the Regulated FMC must have minimum assets under management of SGD250 million.
Investors
Investors of alternative funds will be subject to tax incidence on any income or any distributions they received from the funds according to the relevant tax laws and regulations applicable to them based on their tax residence. Singapore investors who are individuals are currently not subject to income tax for the income or distributions they received from funds.
Stamp Duty
Stamp duty is applicable in Singapore when investors transfer their shares in company funds or VCC funds. This is chargeable at 0.2% of the transfer consideration or the value of the shares being transferred, whichever is higher.
Double Tax Agreements
Singapore has entered into more than 90 double tax agreements. Alternative funds that are structured as a company or a VCC established under Singapore law can utilise the relevant double tax agreements.
FATCA and CRS
Singapore has signed a reciprocal Model 1 Intergovernmental Agreement with the USA on 13 November 2018. This came into force on 1 January 2021 and supersedes the previous Model 1 Intergovernmental Agreement signed between Singapore and the USA on 9 December 2014 (collectively, the IGA).
In short, effect is given to the automatic tax information exchange requirements of the US Foreign Account Tax Compliance Act (FATCA). The relevant Singapore regulations and framework for dealing with FATCA requirements have been put in place, and there are also local guidelines published by the IRAS. All financial institutions including Regulated FMCs are required to comply with these regulations.
In addition to the FATCA, the Standard for Automatic Exchange of Financial Account Information in Tax Matters (AEOI), more commonly known as the Common Reporting Standard (CRS) – a framework and set of regulations developed by the Organisation for Economic Co-operation and Development – are also applicable. The relevant Singapore regulations and framework for dealing with AEOI and CRS requirements have been put in place, and there are also local guidelines published by the IRAS. All financial institutions including Regulated FMCs are required to comply with these regulations.
It is important to note that the fund and/or Regulated FMC may be compelled by law to disclose or hand over certain information or documentation to the IRAS pursuant to the rules and regulations concerning the FATCA, AEOI and/or CRS. The IRAS may under certain conditions be required to automatically exchange information with the relevant foreign tax authorities or agencies in accordance with the relevant FATCA and/or CRS regulations.
3. Retail Funds
3.1 Fund Formation
3.1.1 Fund Structures
Retail funds are generally called collective investment schemes (CIS). Retail funds can take the form of a unit trust or a VCC. There is no limit on the number of investors for such structures. By far the most common structure is the unit trust for both listed and non-listed retail funds. Most listed retail funds are REITs, ETFs and BTs, all of which are structured as unit trusts.
See 2.1.1 Fund Structures.
3.1.2 Common Process for Setting Up Investment Funds
Unit Trust Fund
See 2.1.2 Common Process for Setting Up Investment Funds.
VCC Fund
See 2.1.2 Common Process for Setting Up Investment Funds.
For retail VCC funds, at least one of the VCC directors must be independent. The VCC must appoint a custodian that has received approval from the MAS to act as a trustee for authorised CIS pursuant to the SFA.
Additional Requirements
Managers of retail funds must be a Retail LFMC. The requirements here are the most stringent amongst the Regulated FMCs, including having at least three full-time investment professionals that meet the MAS’ requirements and that the CEO must have at least ten years of relevant experience.
The manager of a REIT requires a CMS licence for real estate investment trust management. The requirements for the REIT manager are similar as for the Retail LFMC. A REIT manager can manage only one REIT.
Where the retail fund is a unit trust including a REIT, the trustee of the fund must be licensed as a trust company under the TCA and be approved by the MAS to act as a trustee for authorised CIS pursuant to the SFA.
The retail unit trust fund must be authorised (for Singapore funds) or recognised (for non-Singapore funds) by the MAS prior to an offer being made.
The offer for any retail unit trust fund must also be accompanied by a prospectus that complies with the disclosure requirements of the SFA, the SFR and the Code on CIS. The prospectus must be reviewed and approved by the MAS, and upon receiving approval the prospectus will be registered with the MAS. Compared to a PPM, the prospectus is a lengthier, more detailed and more complex document, with more disclosures and information.
The provisions of the SFA, the SFR and the Code on CIS prescribe certain terms of the trust deed and certain rights, duties and obligations of the fund manager, the trustee and investors under the trust deed. Appendix 6 of the Code on CIS also imposes certain restrictions on REITs in Singapore, including a restriction on the types of investments which REITs in Singapore may hold, a general limit on a REIT’s level of borrowings, and certain restrictions with respect to interested party transactions that a REIT enters into.
Where the retail fund is listed on the Singapore Exchange (SGX), a new listing application for the units of the retail fund must be made to the SGX pursuant to the SGX Listing Manual. The prospectus must also be submitted to the SGX for review and approval. Upon approval, the final prospectus must be registered and made available to the public.
The retail fund must also be properly authorised or recognised before the units will be listed on the SGX for trading.
Subsequent to listing of the units in the retail fund on the SGX, there are continuous reporting requirements and obligations pursuant to the SGX Listing Manual and the SFA.
Insider trading and market manipulation rules pursuant to the SFA are applicable to listed retail funds.
The licence application process for the CMS licence (whether for a Regulated FMC or REIT manager) typically takes a few weeks to a few months. The authorisation/recognition process typically takes a few weeks. The prospectus drafting, review by the MAS and final approval typically takes a few months. The application for new listing of the units in the retail fund on the SGX, the review by the SGX and final approval for listing typically takes a few months.
The total cost of applications, licence fees, authorisations/registrations, filings/lodgements, listing applications and professional fees (ie, for lawyers, auditors, tax advisers, trustees, issue managers, bankers and other services providers) is considered expensive for listed retail funds as it is a large and complex transaction involving many parties, and the process is long. More importantly, it entails greater risks because it is offered to many investors including retail investors, especially if the retail fund is listed on the SGX.
3.1.3 Limited Liability
See 2.1.3 Limited Liability.
The Code on CIS stipulates that the liability of investors of retail funds should be limited to their investment in the fund. For this purpose, the constituent document of the fund should contain a provision limiting the liability of investors to their investments in the fund.
3.1.4 Disclosure Requirements
See 2.1.4 Disclosure Requirements.
The form and content of the prospectus and the product highlights sheet that accompany the offer of the units in the retail fund must contain all relevant and material information to be disclosed to investors and prospective investors, in accordance with the requirements of the SFA, the SFR (in particular the Third Schedule) and the Code on CIS.
3.2 Fund Investment
3.2.1 Types of Investors in Retail Funds
Singapore non-listed retail funds are popular and widely accepted by investors from Singapore. These include retail investors as well as AIs.
Singapore REITs, BTs and ETFs are popular and widely accepted by investors from Singapore and outside Singapore, especially Asian investors. In particular, Singapore REITs have enjoyed prominence and success over the last two decades and are popular with Asian, European and US investors. The investor base includes large corporations, institutional investors, family offices, sovereign wealth funds and foreign funds of funds.
3.2.2 Legal Structures Used by Fund Managers
By far the most common structure is the unit trust for both listed and non-listed retail funds. The large majority of the listed retail funds are REITs, ETFs and BTs, all of which are structured as unit trusts.
3.2.3 Restrictions on Investors
Retail funds can be offered to any types of investors.
There are no restrictions on nationality or domicile of investors for retail funds.
3.3 Regulatory Environment
3.3.1 Regulatory Regime
See 3.1.2 Common Process for Setting Up Investment Funds.
Retail funds must comply with the SFA and the Code on CIS. In particular, the retail funds must be classified according to the types of retail funds. These are:
- traditional funds;
- money market funds;
- hedge funds;
- capital guaranteed funds;
- index funds;
- property funds; and
- precious metals funds.
There are specific restrictions and requirements imposed on the various types of retail funds.
The Code on CIS stipulates the core investment guidelines, concentration limits, limits on use of derivatives other than for efficient portfolio management, borrowing limits and valuation requirements. There are also specific guidelines, requirements and limits applicable to non-traditional funds and these are set out in the Appendixes of the Code on CIS. Where the fund contains a novel or new structure, risk or investment policy, the fund manager (or the VCC, in the case of a fund constituted as a VCC or sub-fund thereof) should consult the MAS prior to application for authorisation of the fund.
Similar to non-retail funds, the critical requirement is that the investment terms and conditions, and risks, are adequately disclosed in the prospectus of the retail fund.
Where the retail fund is listed on the SGX, there are requirements and obligations pursuant to the SGX Listing Manual and the SFA. Insider trading and market manipulation rules pursuant to the SFA are applicable to listed retail funds.
3.3.2 Requirements for Non-local Service Providers
See 2.3.2 Requirements for Non-local Service Providers.
3.3.3 Local Regulatory Requirements for Non-local Managers
Non-Singapore retail funds are usually established under non-Singapore laws and are managed by non-Singapore fund managers.
An application must be made to the MAS to recognise the non-Singapore retail fund before the non-Singapore prospectus can be registered with the MAS and before the fund can be offered. Prior to this, the fund and the non-Singapore fund manager must fulfil a number of criteria, demonstrating that:
- the fund is constituted and regulated in a jurisdiction where the laws and practices afford to investors in Singapore protection at least equivalent to that afforded to investors of funds which are wholly managed in Singapore;
- the fund adheres to investment guidelines and borrowing limits which are substantially similar to those set out in the Code on CIS and the relevant Appendixes; and
- the fund has a non-Singapore fund manager that is reputable and supervised by an acceptable financial supervisory authority.
In addition, the non-Singapore fund manager must be licensed or regulated in the jurisdiction of its principal place of business, must be a fit and proper person in the opinion of the MAS, and there must be a representative in Singapore for the non-Singapore retail fund. The non-Singapore retail fund, the non-Singapore fund manager and the non-Singapore trustee must comply with the SFA and the Code on CIS.
3.3.4 Regulatory Approval Process
See 3.1.2 Common Process for Setting Up Investment Funds.
3.3.5 Rules Concerning Pre-Marketing of Retail Funds
No one is permitted to publish or disseminate, in Singapore or elsewhere, any document relating to any offer or intended offer of units in a retail fund or proposed retail fund, being an offer that is, or an intended offer that will be, made in or accompanied by a prospectus or profile statement that complies with Section 296 of the SFA, if the document resembles or may otherwise be confused with a product highlights sheet.
If a prospectus is required for the offer, or intended offer of units in a retail or proposed retail fund, a person must not advertise the offer or intended offer nor publish a statement that directly or indirectly refers to the offer or intended offer, or is reasonably likely to induce people to subscribe for or purchase the units in the retail fund, unless the advertisement or publication is authorised by Section 300 of the SFA.
3.3.6 Rules Concerning Marketing of Retail Funds
See 2.3.6 Rules Concerning Marketing of Alternative Funds and 3.3.5 Rules Concerning Pre-Marketing of Retail Funds.
The Retail LFMC can market in Singapore the retail funds that it manages, as well as the funds that its related corporations (as defined in the SFA) manage without a CMS-DCMP.
3.3.7 Marketing of Retail Funds
Retail funds can be offered to any types of investors.
3.3.8 Marketing Authorisation/Notification Process
See 3.1.2 Common Process for Setting Up Investment Funds.
There are no specific ongoing legal requirements applicable to firms which have marketed retail funds in Singapore except for ongoing anti-money laundering, countering of financing of terrorism and suspicious transactions monitoring requirements that are generally applicable to all Regulated FMCs.
3.3.9 Post-marketing Ongoing Requirements
3.3.10 Investor Protection Rules
Aside from what has been discussed in 3. Retail Funds and elsewhere, there are no specific investor protection regulations in relation to investing in retail funds.
3.3.11 Approach of the Regulator
See 2.3.11 Approach of the Regulator.
The Singapore Exchange Regulation Pte Ltd (the “SGX RegCo”) is a wholly owned subsidiary of the SGX that undertakes all frontline regulatory functions on behalf of the SGX and its regulated subsidiaries.
For retail funds that are listed on the SGX, the SGX RegCo and the SGX take a strong view on legal and regulatory compliance, especially for professional breaches, professional misconduct and any breach of the SFA and listing rules.
3.4 Operational Requirements
See 3.1.2 Common Process for Setting Up Investment Funds and 3.3.1 Regulatory Regime.
The provisions of the SFA and the Code on CIS prescribe certain terms of a trust deed and certain rights, duties and obligations of the fund manager, the trustee and investors under the trust deed.
The Code on CIS requires the trustee of a retail unit trust fund to be independent of the fund manager, to conduct all transactions with or for a scheme at arm’s length, to send financial statements to the investors, and to inform the MAS of any breach of Section 289(3) of the SFA within three business days after the trustee becomes aware of the breach.
Specifically, the funds, trustees and fund managers for retail property funds must also comply with the requirements of Appendix 6 of the Code on CIS. The trustee of such funds should exercise due care and diligence in discharging its functions and duties, including safeguarding the rights and interests of investors. The trustee should exercise reasonable care in ensuring that the fund has proper legal and good marketable titles to the real estate assets owned by the fund, that material contracts entered into on behalf of the fund are legal, valid, binding and enforceable by or on behalf of the fund in accordance with its terms, and that the fund manager arranges adequate insurance coverage in relation to the real estate assets of the fund.
Appendix 6 also stipulates the requirements and limitations on:
- interested party transactions;
- permissible investments of the retail property funds;
- investments and activities of the funds;
- valuations of the funds’ real estate investments; and
- the aggregate leverage limit of the funds.
Insider trading and market manipulation rules pursuant to the SFA are applicable to funds.
3.5 Fund Finance
See 2.5 Fund Finance.
REITs must comply with the Code on CIS (in particular, Appendix 6 of the Code on CIS), amongst others.
The total borrowings and deferred payments (collectively, the “aggregate leverage”) of a REIT:
- should not, before 1 January 2022, exceed 50% of its deposited property; and
- should not, on or after 1 January 2022, exceed 45% of its deposited property.
The aggregate leverage of the REIT may exceed 45% of its deposited property (up to a maximum of 50%) only if it has a minimum adjusted interest coverage ratio of 2.5 times after taking into account the interest payment obligations arising from the new borrowings.
3.6 Tax Regime
See 2.6 Tax Regime.
The REIT (being a listed property fund) will usually apply to the IRAS for “tax transparency treatment” subject to various conditions. This treatment applies to only certain income of a REIT, including rental income or income from the management or holding of immovable property. Investors of the REIT are assessed for tax on the share of the tax-transparent income they are beneficially entitled to. This makes the REIT attractive for investors because of better returns due to the tax transparency treatment.
4. Legal, Regulatory or Tax Changes
4.1 Recent Developments and Proposals for Reform
See 1.1 State of the Market regarding VCC funds.
For further information, please contact:
Woon Hum Tan, Partner Shooklin & Bok
woonhum.tan@shooklin.com
