On 23 February 2023, the Monetary Authority of Singapore (“MAS”) published Notice SFA 04-N21 on Business Conduct Requirements for Corporate Finance Advisers (“Notice”). The Notice imposes mandatory baseline standards of due diligence and conduct requirements for corporate finance (“CF”) advisers.
The Notice applies to holders of a capital markets services licence to advise on CF and persons exempted from holding a capital markets services licence under section 99(1)(a), (b) or (c) of the Securities and Futures Act 2001 (“Act”) in respect of advising on CF (“CF adviser”), and their representatives in respect of advising on CF (“CFA representative”). The Notice is issued pursuant to section 101 of the Act, which gives MAS power to issue written directions to any holder of a capital markets services licence, exempt person or representative, and contravention by any such person of such written directions shall be guilty of an offence.
While the Notice applies to all CF advisory engagements entered into on or after 1 October 2023, MAS encourages CF advisers to start applying the requirements in the interim, in particular when advising on initial public offerings (“IPOs”) and reverse takeovers (“RTOs”).
MAS issued a consultation paper seeking feedback on a draft version of the Notice (“draft Notice”) on 15 December 2021. Allen & Gledhill, representing 20 CF advisers, responded to the consultation. On 23 February 2023, MAS published the Notice and its response to the feedback received, which have generally addressed the key concerns of market participants which were detailed in our response to the consultation.
The Notice is categorised into Part 1 (General Requirements) and Part 2 (Due Diligence Requirements). Part 1 of the Notice applies when a CF adviser advises on CF, whereas Part 2 of the Notice (other than paragraph 19) applies when a CF adviser advises on CF in the capacity of an issue manager, sponsor or financial adviser on a Singapore Exchange Securities Trading Limited (“SGX-ST”) IPO or RTO (including an IPO of a special purpose acquisition company (“SPAC”) and business combination by an SGX-ST listed SPAC).
Paragraph 19 of the Notice (Due Diligence for Transactions Generally) applies when a CF adviser advises on CF, other than as provided in paragraph 3(a)(i) of the Notice. MAS clarified in its response that taking into account the feedback received, CF advisers advising on offers to non-retail investors and transactions not involving any listed companies will not be required to comply with paragraph 19 of the Notice. On the other hand, CF advisers advising on other transactions, including mergers and acquisitions of and corporate actions for listed entities, will be subject to paragraph 19 of the Notice.
MAS also clarified that financial institutions will not be subject to the Notice when acting as bookrunner, placement agent or underwriter, or involved in other roles, where these do not constitute the carrying on of the regulated activity of advising on CF under the Act.
Highlights of the requirements of the Notice are set out below.
Implementation of the Notice
Implementation of policies
A CF adviser is required to, among other things, develop and implement policies, procedures and controls to meet all the requirements of the Notice and periodically consider the need for enhancement.
MAS clarified in its response that CF advisers are to develop and implement policies, procedures and controls commensurate with the scope and scale of their business, and CF advisers that do not advise on IPOs or RTOs are not required to implement policies, procedures and controls pertaining to advising on IPOs or RTOs.
A CF adviser must also prepare and maintain records of all data, documents and information that are necessary to meet the requirements of the Notice and retain such records for at least five years.
MAS clarified that CF advisers need not keep verbatim records of discussions, but should retain proper documentation of discussions, particularly on material issues discussed and decisions made. Further, when relying on third parties to document discussions, CF advisers remain responsible for ensuring that accurate records are kept.
Part 1 of the Notice: General Requirements
Managing conflicts of interest
The Notice requires that a CF adviser, when giving advice on CF to a customer, must (a) identify and mitigate any potential or actual material conflict between its interests and the interests of the customer, and (b) disclose, to the extent appropriate, any such conflict to the customer.
Taking into account feedback received, MAS removed the proposed requirement in the draft Notice for CF advisers to identify and mitigate perceived conflicts of interest (“COIs”) and made adjustments such that CF advisers need only disclose COIs to its customer where appropriate.
The Notice further requires that where a CF adviser is not reasonably satisfied that it is able to mitigate any material COIs, it must decline to accept a new engagement or (if already engaged) cease to give advice on corporate finance. In its response, MAS said that it does not consider disclosures to or waivers from customers to be adequate in mitigating COIs.
A CF adviser must have in place policies, procedures and controls to safeguard the confidentiality of confidential or price sensitive information received by (a) its relevant directors, CFA representatives and specified personnel, and (b) experts and third party service providers engaged by the CF adviser for any transaction which the CF adviser is advising on. These must include, at the minimum, segregation of work premises, separation of roles involving the giving of advice on CF and other activities, and restriction of access to confidential or price sensitive information on a need-to-know basis, as further detailed in paragraph 14 of the Notice. A CF adviser must also have in place a personal dealing policy as set out in paragraph 15 of the Notice.
Governance and supervision
A CF adviser must:
- ensure adequate oversight by its senior management of its business in advising on CF, including the acceptance of an engagement to act as a CF adviser and the appointment of the transaction team, and any subsequent changes to such appointment;
- ensure adequate supervision and management of its CFA representatives; and
- set out clear and effective reporting lines for escalation of material issues to senior management by its CFA representatives.
MAS clarified in its response that senior management may delegate their duties and responsibilities, where such delegation is reasonable, to persons with the necessary capacity, competence, knowledge, skill and authority.
Part 2 of the Notice: Due Diligence Requirements
Due diligence for transactions generally
Paragraph 19 of the Notice provides that a CF adviser must conduct due diligence with reasonable care, skill and diligence, including:
- determining the nature and extent of due diligence work to be performed for a transaction;
- making an assessment of the accuracy and completeness of material statements, confirmations, and representations made or other information given, by its customer or other persons in connection with a transaction (“Information”) and conducting appropriate verification of such Information; and
- monitoring, during the transaction, other information obtained and developments in relation to the customer or transaction, that contradict or bring into question the reliability of the Information.
Advising the listing applicant on regulatory requirements
A CF adviser must ensure that the listing applicant and its directors are informed of their duties and responsibilities under the Act and the listing rules, relevant to its listing application and to its continuing obligations after admission to the SGX-ST.
Performing appropriate verification and senior management oversight
The Notice provides that a CF adviser must:
- assess and have reasonable grounds to be satisfied that a listing applicant is suitable for listing, taking into account any material issues identified as relevant for the assessment; and
- ensure that there is adequate supervision by senior management on the formulation and implementation of any due diligence plan proposed by the transaction team (including any material departures from such due diligence plan).
At a minimum, in performing due diligence, a CF adviser must:
- verify material representations with (a) relevant persons of appropriate authority or with appropriate knowledge of the listing applicant and (where applicable) the trustee-manager or manager, or (b) other credible sources;
- conduct background checks on the listing applicant, trustee-manager, manager, listing group entities, directors, key executives and controlling shareholders / unitholders of the listing applicant, trustee-manager or manager (as the case may be);
- monitor, during the course of the transaction, any material developments related to the transaction or listing applicant, and assess the impact of such information on the suitability of the listing applicant for listing;
- inspect key physical assets, and interview major business customers and other stakeholders (e.g. key suppliers, creditors, counterparties or bankers); and
- where material issues are involved, (1) review relevant underlying records and supporting documents (e.g. invoices, contracts signed with key customers, financial statements, title deeds and regulatory approvals), and (2) obtain additional information from third-party sources (e.g. public records or other databases) or appoint third parties to perform relevant checks, where appropriate.
Further to feedback received, MAS said in its response that it recognises that there could be extenuating circumstances which prevent CF advisers from carrying out certain required due diligence procedures in the Notice. Such circumstances could include when there are pandemic travel restrictions or significant physical safety concerns associated with a specific location.
MAS has therefore introduced paragraph 24 of the Notice which allows a CF adviser, where there are extenuating circumstances, to take mitigating measures to address all associated risks and document its reasons (with supporting documents, where appropriate) for not performing a particular procedure and the mitigating measures taken to address the risks. CF advisers’ senior management are required to review and approve the mitigating measures taken.
Pursuant to paragraph 25 of the Notice, a CF adviser must ensure that its senior management (who has the appropriate seniority, knowledge, skills and experience) reviews and approves (a) the resolution of reportable matters, and (b) the material conclusions from the due diligence performed by the transaction team for the listing application, after examining the bases of all opinions, assurances and conclusions arrived at by the transaction team, which have a material bearing on the suitability of the listing applicant for listing.
Reportable matters which must be identified by the transaction team and escalated to senior management are material issues relating to non-compliance with the Act, the Notice, listing rules and other relevant legal and regulatory requirements, extenuating circumstances mentioned in paragraph 24 of the Notice, conflicting information from a customer or other persons, suspicious circumstances, difficult or sensitive issues, or any other material issues that may be prejudicial to the transaction.
In the draft Notice, MAS proposed that there be a review of the due diligence performed for each listing application by persons who are independent of the transaction team and have appropriate seniority, knowledge, skills and experience. MAS indicated in their response that considering the feedback received on the difficulties of having an independent person with the appropriate seniority, knowledge, skills and experience review the work of the transaction team, MAS has amended the Notice to clarify that the resolution of material issues arising from a listing application should be reviewed and approved by the CF adviser’s senior management.
Engagement of third party service provider
Where a CF adviser engages a third party service provider to perform any due diligence work, the CF adviser must satisfy itself that it may reasonably rely on the due diligence performed by the third party service provider.
In response to feedback provided, MAS stated that CF advisers should not abrogate responsibility for and should exercise professional scepticism in ensuring that reasonable due diligence is performed when third party service providers are engaged to perform specific due diligence work. However, MAS agreed that CF advisers should not be held responsible for the work performed by the third party and hence the requirement in the Notice is for CF advisers to satisfy themselves that they may reasonably rely on the due diligence work performed by the third party.
Allegations or complaints against listing applicant
Where a CF adviser receives or is made aware of any allegation or complaint against the listing applicant, trustee-manager or manager or their directors, key executives or controlling shareholders / unitholders, the CF adviser must assess whether the allegation or complaint has a material bearing on the accuracy or adequacy of information provided by the listing applicant, trustee-manager or the manager, or affect the suitability of the listing applicant for listing. Where it does, the CF adviser must independently investigate such allegation or complaint.
Relying on experts
The Notice provides that a CF adviser must have reasonable grounds to be satisfied with the knowledge, skills, experience, qualifications and independence of any expert appointed to provide an expert’s opinion in connection with the listing application.
In its response to feedback received, MAS said that CF advisers are not expected to audit the work of the expert when reviewing its report. However, if there are material discrepancies between the information in the expert’s report and other information that is known to the CF adviser, it should investigate further and address these discrepancies. MAS has also amended the Notice to clarify that CF advisers should review an expert’s report to the extent a non-expert can make such an assessment, and against information known to them.
Admission of listing applicant
Paragraph 35 of the Notice sets out matters which a CF adviser must be satisfied with (on reasonable grounds) prior to submission of the listing application and the listing applicant’s admission to the SGX-ST.
These include being satisfied that (a) all material issues identified from the due diligence performed have been or will prior to listing be satisfactorily resolved or clearly disclosed in the listing application or the prospectus, (b) the listing applicant has established procedures, systems and controls which, at the point of the listing application and on an ongoing basis thereafter, enable the listing applicant and its directors to comply with the listing rules and other relevant legal and regulatory requirements and provide a reasonable basis for the directors to make a proper assessment of the financial position and prospects of the listing applicant, and (c) the directors collectively have the experience and qualifications to manage the listing applicant’s business and each director understands and is competent to discharge his director’s obligations under the listing rules.
Following feedback that the proposed requirement in the draft Notice for CF advisers to be satisfied with the outcome of due diligence performed prior to the submission of the listing application and the listing could be interpreted to require the resolution of all issues identified through the conduct of due diligence prior to listing, MAS has amended the requirement to clarify that CF advisers should be satisfied that material issues are satisfactorily resolved or are clearly disclosed prior to submission of the listing application and the listing.
In the draft Notice, MAS proposed to require that each director possesses the relevant experience to allow him to discharge his directors’ obligations under the listing rules. However, MAS acknowledged feedback that some directors of listing applicants could be first-time directors and do not possess experience as a director of a listed company. MAS indicated that it recognises that directors can attain the necessary competencies to discharge their obligations through other means such as by attending training courses, and has refined the requirement in the Notice accordingly.
The following materials are available on the MAS website www.mas.gov.sg: