23 June, 2017
The Monetary Authority of Singapore (the “MAS”) has issued a consultation paper on 26 May 2017, completing the two-phase consultation on proposals to implement the amendments to the Securities and Futures Act (“SFA”), following the passing of the Securities and Futures (Amendment) Act 2017 (“SFAA”) by the Singapore Parliament on 9 January 2017.
Introduction
The first set of proposals was set out in an earlier consultation paper issued by MAS on 28 April 2017. Our Client Update concerning this consultation is available here.
In the present consultation paper, the proposals cover the following:
(a) Amendments to the Securities and Futures (Licensing and Conduct of Business) Regulations (“SF(LCB)R”), primarily to introduce licensing exemptions and business conduct requirements relating to the activity of dealing in over-the-counter (“OTC”) derivatives;
(b) Consolidating the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 with the Securities and Futures (Offers of Investments) (Business Trusts) (No. 2) Regulations 2005 into a new Securities and Futures (Offers of Investments) (Shares, Debentures and Business Trusts) Regulations 2017, to operationalise changes introduced to Part XIII of the SFA;
(c) Licensing exemption for Remote Clearing Members who clear OTC derivatives on a Singapore-based central counterparty; and
(d) Revisions to the base capital requirements for certain capital markets services (“CMS”) licensees.
Amendments to the SF(LCB)R
MAS is seeking comments on various proposed changes to the SF(LCB)R. These proposed amendments arise from the incoming changes to the SFA, pursuant to the SFAA, as well as other proposals for which the MAS had previously consulted upon.
MAS is proposing to incorporate the following key changes, within a revised SF(LCB)R (a draft of which is included as Annex B to the consultation paper):
Licensing exemptions and business conduct requirements for dealing in OTC derivatives contracts
With intermediaries who deal in OTC derivatives coming within the scope of MAS regulation as a class of CMS licensees under Part IV of the SFA, the SF(LCB)R will be revised to cater to this new category of intermediaries (which will fall under the renamed category of CMS licensees dealing in capital markets products).
A new paragraph 3A will be introduced into the Second Schedule of the revised SF(LCB)R to provide certain licensing exemptions from the requirement for a CMS licence for dealing in capital markets products that are OTC derivatives contracts, comparable with other existing categories. The business conduct requirements in the SF(LCB)R will also be amended to accommodate this new class of CMS licensees.
The proposed amendments give effect to the proposals made by the MAS in a consultation paper issued 11 February 2015 (“11 February 2015 CP”) and a second consultation paper issued on 3 June 2015 (“3 June 2015 CP”) as part of the reform to the regulatory regime for OTC derivatives. Our previous commentary on the 11 February 2015 CP and the 3 June 2015 CP may be accessed here and here, respectively.
Migration of rules for marketing of collective investment schemes (“CIS”) from the Financial Advisers Act (“FAA”) to the SFA
Currently, the activities of “dealing in securities” and “marketing of CIS” are distinctly regulated under the SFA and the FAA respectively. This is despite the fact that marketing of CIS forms a sub-set of the regulated activity of dealing in securities since marketing efforts are often made with the goal of generating sales. While there are currently provisions to address and resolve the overlap in coverage, following a proposal in the 3 June 2015 CP, MAS has decided to move ahead to simplify the framework such that the marketing of CIS will no longer be a type of financial advisory service regulated under the FAA but will instead be subject to regulation only under the SFA as a type of dealing in capital markets products (since the new term “capital markets products” will include units in a CIS).
A new dealing exemption will be provided for, so that a licensed financial adviser or a financial adviser exempt from FAA licensing under section 23(1)(a) to (e) of the FAA will be exempt from the requirement to hold a CMS licence for dealing in capital markets products where it markets (i.e. deals in) units in a CIS (whether listed or not), where such marketing or dealing is incidental to their financial advisory activities.
However, in the interest of maintaining a level playing field for all entities that market in CIS units, financial advisers relying on this new dealing exemption will be subject to the relevant business conduct requirements for dealing in CIS units under the revised SF(LCB)R.
Changes to various definitions of products and regulated activities
Various changes will be made to the SF(LCB)R to support the change in product and activity terminology that will be made pursuant to the SFAA.
When the SFAA comes into effect, the existing regulated activities of “dealing in securities”, “trading in futures contracts”, and “leveraged foreign exchange trading” will, together with the activity of dealing in OTC derivatives, be collapsed and combined together into a new class of regulated activity called “dealing in capital markets products”. The term “securities” will be amended to have a significantly narrower meaning, while the new term “capital markets products” will be inserted to cover securities (as redefined), units in a CIS, derivatives contracts and spot foreign exchange contracts traded on a margin basis.
Enhancing regulatory requirements on protection of customers’ moneys and assets
Part III of the SF(LCB)R will also be amended to implement previous proposals by the MAS to enhance the regulatory requirements governing the protection of client moneys and assets held by CMS licensees and exempt financial institutions such as banks, merchant banks and finance companies which conduct regulated activities under the SFA. A brief overview of these proposals, as set out in the consultation paper issued by MAS on 19 July 2016, is available here.
There will also be a few other proposed amendments to the SF(LCB)R that do not arise or relate to the changes to the SFA as a result of the SFAA.
(a) Record keeping requirements for accredited investors
Under the existing regulation 39(2)(a) of the SF(LCB)R, where a CMS licensee is authorised to operate the customer’s account on a discretionary basis, it is required to keep the power of attorney or other document conferring such authority; but an exception is made for a customer who qualifies as an accredited investor.
MAS is proposing to remove this exception so that the CMS licensee must retain documentary evidence of its authority regardless of whether the customer is an accredited investor or not.
(b) Restrictions on use of title transfer collateral arrangement
A title transfer collateral arrangement works by allowing full title of the customer’s moneys or assets to be transferred unconditionally, with the customer’s consent, to the CMS licensee as collateral in respect of the customer’s existing or future obligations. Unlike a case where the customer’s money or assets are held in a trust account held by the CMS licensee – which would serve to ring-fence such moneys and assets from the consequences of the insolvency of the CMS licensee – with a title transfer collateral arrangement in effect, the customer will be regarded as an unsecured creditor in the case of an insolvency of the CMS licensee, and will be exposed to credit risks in the event that there are no assets of the CMS licensee available for distribution.
MAS is proposing to insert regulations 20A and 34A into the SF(LCB)R, in order to limit the use of title transfer collateral arrangements only to cases where the customer is an accredited investor, an institutional investor or an expert investor. This is intended to provide greater protection to retail customers who may be less capable of assessing the implications and risks associated with a title transfer collateral arrangement.
(c) Exemptions for dealing with expert investors
Currently, the exemptions under the SFA regime are framed with the notion of non-retail investors – referring only to institutional investors and accredited investors – despite the fact that the regulatory framework further recognises a class of expert investors who, given their experience or level of sophistication, would logically fall to be treated similarly as non-retail investors. Hence, MAS is proposing the SF(LCB)R be amended accordingly so that exemptions would similarly be available when one is dealing with such an expert investor as when one is dealing with an accredited or an institutional investor.
MAS has also stated that a similar widening of the exemptions will be made in relation to the Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services Licences) Regulations (“SF(FMR)R”).
Proposed licensing exemption relating to Remote Clearing Members
Under the expanded CMS licensing regime once the SFAA takes effect, overseas-based clearing members of Singapore-based central counterparties (“CCPs”) (i.e. Remote Clearing Members) will be caught by the rules requiring a CMS licence in respect of the new regulated activity of dealing in capital markets products.
On the basis that the systemic and business conduct risks posed by such Remote Clearing Members are limited, MAS is proposing to exempt such Remote Clearing Members from the CMS licensing requirement, provided that the Remote Clearing Member:
(a) Is incorporated outside Singapore;
(b) Does not serve customers resident in Singapore;
(c) Does not carry on the business of providing financial services in Singapore;
(d) Carries on business in a jurisdiction where the relevant regulator has an arrangement with the MAS for information exchange and co-operation in respect of OTC derivatives contracts; and
(e) Is registered, licensed, approved or otherwise regulated in respect of clearing of OTC derivatives contracts by the relevant regulator in its home jurisdiction.
It is intended that this exemption will be effected via amendments to Securities and Futures (Exemption from Requirement to Hold Capital Markets Services Licence) Regulations.
Proposed revisions to the base capital requirements for certain CMS licensees
MAS is also proposing amendments to relax the minimum base capital requirements for certain CMS licensees. The proposal was first raised in the MAS’ consultation paper of 16 February 2015 (“16 February 2015 CP”) on facilitating securities-based crowdfunding (“SCF”), where MAS noted that the financial requirements on minimum base capital may be inhibitive to intermediaries keen on operating a SCF platform. To address such concerns, MAS had already lowered the base capital requirement in the SF(FMR)R from $250,000 to $50,000, when the following criteria were met:
(a) Where the regulated activity is limited to dealing in securities or trading in futures contracts only;
(b) The intermediary serves accredited investors or institutional investors only;
(c) The intermediary does not accept, handle or hold customer moneys, assets or positions; and (d) The intermediary does not act as principal in transactions with investors.
From a policy standpoint, the MAS is recognising that intermediaries who meet the above criteria would pose lower systemic and business conduct risks and as such, any impact on investors in the event the intermediary runs into financial or liquidity difficulties, will likely be limited.
In the present consultation, recognising that the existing base capital category of $250,000 (still recognised within the SF(FMR)R) is now largely superfluous, MAS is proposing to do away with this category altogether.
This proposal is logical, although at this time it is unclear if MAS would permit existing CMS licensees, who are presently required to maintain a base capital of $250,000, to bring down their base capital to the lower amount once the change takes effect.
New Securities and Futures (Offers of Investments) (Shares, Debentures and Business Trusts) Regulations 2017
Another significant revamp to the regulatory regime involves the combination of the offering rules relating to shares and debentures, with the offering rules relating to business trusts. Annex C of the present consultation paper contains a draft of the new Securities and Futures (Offers of Investments) (Shares, Debentures and Business Trusts) Regulations 2017 (the “draft SF(OI)(SDBT)R”) which will collapse the requirements under the existing Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 (“SF(OI)(SD)R”) with the requirements under the existing Securities and Futures (Offers of Investments) (Business Trusts) (No. 2) Regulations 2005 (“SF(OI)(BT)R”). This is to operationalise changes introduced via the SFAA to Part XIII of the SFA.
The changes to Part XIII of the SFA were first proposed by MAS in the 11 February 2015 CP. Broadly speaking, the amendments proposed are as follows:
- To extend the prospectus requirements to cash-settled derivatives contracts where the underlying reference asset are securities (“securities-based derivatives contracts”);
- To provide appropriate exemptions from the prospectus requirement for certain offerings of cash-settled securities-based derivatives contracts, where the underlying reference asset is listed and disclosure requirements apply to the contracts; and
- To collapse the prospectus requirements for offerings of securities (in the current Division 1) and the prospectus requirements for offerings of units of business trusts (in the current Division 1A) into a revised Division 1.
In addition, MAS has highlighted a few other changes associated with the draft SF(OI)(SDBT)R:
Incorporation of information into a prospectus by reference
To implement an earlier proposal to enhance disclosure standards and to facilitate the better understanding of key information presented in a prospectus, the SFAA will amend section 243 of the SFA to enable certain information to be incorporated by reference into a prospectus.
To support the implementation of the amended section 243, MAS is proposing amendments to the Nineteenth Schedule and to regulation 8A(1) of the draft SF(OI)(SDBT)R to prescribe the specific types of information that may be incorporated by reference into a prospectus. This would include: (i) information on relevant laws and regulations; (ii) information on directorships, key executives and employees in the last five years; (iii) audited financial information; (iv) expert reports; and (v) constituent documents.
Offer information statement (“OIS”) requirements for exempted offers by subsidiary of a listed entity
The SFAA will also amend section 277 of the SFA so that the MAS will be empowered to make a declaration and exempt an offer of securities, by a subsidiary of a listed entity, from the prospectus requirements if certain conditions are met (one of which is that an OIS must be issued in lieu of a prospectus). The draft SF(OI)(SDBT)R contains a new regulation 30(1A) to prescribe the form and content of such an OIS.
Disclosure of financial information in prospectuses
On account of the new accounting standards for the preparation of financial statements, MAS is proposing changes to the prospectus disclosure requirements in the current SF(OI)(SD)R and SF(OI)(BT)R. In line with plans by the Accounting Standards Council (the “ASC”) for full convergence of the Singapore Financial Reporting Standards with the International Financial Reporting Standards (“IFRS”), Singapore-incorporated companies listed on the Singapore Exchange will be required by the ASC to apply the new Singapore financial reporting framework (“New Framework”), which is identical to the IFRS, for financial years beginning on or after 1 January 2018. Although adoption of the New Framework by non-listed Singapore-incorporated companies is entirely voluntary, the MAS had already announced on 19 January 2017 that it will require all business trusts that are registered under the Business Trusts Act (Cap. 31A) to similarly prepare financial statements in accordance with the New Framework. However, adoption of the New Framework will not be mandatory for collective investment schemes constituted in Singapore and authorised under the SFA (including real estate investment trusts). Such issuers will instead continue to prepare financial statements in accordance with accounting practices recommended by the Institute of Singapore Chartered Accountants (“ISCA”).
To facilitate comparability between financial information included in prospectuses at the point of offering and those available after the offering, appropriate amendments will be made to replace references to the Singapore Financial Reporting Standards with references to the New Framework. This amendment is projected to take effect on 1 January 2018.
MAS has also warned that once this amendment takes effect, companies issuing shares and debentures, and business trusts issuing units with offers targeted for after 1 January 2018, would have to restate financial information in accordance with the new Framework. To enhance accountability where public monies are accepted and to align the accounting treatment for listed and unlisted registered business trusts and companies, the MAS is proposing that similar prospectus disclosure standards will apply to the unlisted issuers when they make public offers of securities in circumstances where they are not exempted from the prospectus requirements.
In addition, transitional arrangements will be put in place to provide relief from the restating requirement for up to three years of historical annual financial statements.
Other enhancements to prospectus disclosure requirements
On 16 April 2010, the MAS had issued a consultation paper inviting comments on certain enhancements to prospectus disclosure requirements stipulated in the Schedules to the SF(OI)(SD)R. Based on the feedback received, MAS is now proposing a further set of enhancements to the prospectus disclosure requirements.
The proposed amendments are set out in the Schedules to the draft SF(OI)(SDBT)R, with the disclosure requirements for offerings of shares and debentures being set out in the Fifth to Sixteenth Schedules of the draft SF(OI)(SDBT)R, and the disclosure requirements for offerings of units in business trusts being set out in the Seventeenth and Eighteenth Schedules.
To the extent relevant, the proposed disclosure requirements will also be replicated in the Securities and Futures (Offers of Investments) (Shares and Debentures) (Exemption from Subdivisions (2) and (3) of Division 1 of Part XIII for REIT Bonds) Regulations 2011.
Consultation Period
The consultation period for the present consultation paper ends on 23 June 2017. A copy of the consultation paper can be assessed here.
