30 March 2020
On 13 March 2020, the Monetary Authority of Singapore (“MAS”) issued a second response (“Response”) to feedback received on Parts 2 and 3 of the consultation paper on the Proposed Framework for Variable Capital Companies. Part 2 of the consultation paper was issued on 30 April 2019 and concerned proposed new regulations for the framework on variable capital companies (“VCCs”), as well as consequential amendments to existing regulations, such as the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 (“SFR(CIS)”). Part 3 of the consultation paper was issued on 24 July 2019 and concerned proposed subsidiary legislation relating to the insolvency and winding up of a VCC and its sub-funds.
MAS issued its first response on 15 January 2020. In that response, MAS responded to feedback on some aspects of its proposals, and indicated that its response to feedback on the following regulations would be issued at a later date:
- Variable Capital Companies (Revision of Defective Financial Statements, or Consolidated Financial Statements or Balance Sheet) Regulations 2020;
- Variable Capital Companies (Prescribed Accounting Standards) Regulations 2020;
- Code on Collective Investment Schemes (“CIS Code”); and
- Variable Capital Companies (Winding Up) Rules.
MAS’ second response addresses feedback received on these regulations (“Response”). This article highlights some of the key aspects of the Response.
Variable Capital Companies (Revision of Defective Financial Statements, or Consolidated Financial Statements or Balance Sheet) Regulations 2020
MAS will proceed with its proposed regulations in relation to the application of sections 100 and 104 of the Variable Capital Companies Act (“VCC Act”) to revised financial statements.
Variable Capital Companies (Prescribed Accounting Standards) Regulations 2020
MAS will proceed with its proposals on the accounting standards to be used by VCCs in the preparation of their financial statements. In summary, VCCs consisting of Authorised Schemes (i.e. collective investment schemes authorised by MAS under section 286(1) of the Securities and Futures Act (“SFA”)) are required to prepare their financial statements in accordance with the CIS Code, whereas VCCs not consisting of Authorised Schemes can prepare their financial statements using International Financial Reporting Standards or the US Generally Accepted Accounting Principle.
Amendments to the SFR (CIS)
MAS responded to feedback on proposed amendments to the SFR (CIS) to effect the VCC framework in relation to Authorised Schemes.
Operational requirements for custodians of VCCs (“VCC Custodians”)
Highlights of MAS’ response to feedback on the proposed operational requirements for VCC Custodians are as follows:
- Application of requirements: In its Response, MAS clarified that a VCC Custodian who is already an approved trustee will not be required to hold a capital markets services licence for providing custodial services. MAS will also not impose a statutory obligation on VCC Custodians to safeguard the rights and interests of VCC shareholders.
- Reporting to MAS: As a VCC Custodian may have limited oversight of a VCC’s operations, MAS clarified in its Response that it would only require a VCC Custodian to report breaches of any legal or regulatory requirements by the VCC or its manager that the VCC Custodian becomes aware of, in the course of undertaking its duties or obligations.
- Take into custody scheme property: MAS agreed with feedback that a VCC Custodian can only take into custody property that has been deposited with it by the VCC, and that not all assets can be held in custody by the VCC Custodian. Accordingly, the SFR(CIS) will be amended to require the constitution of a VCC to contain a provision requiring the VCC to entrust the property of a scheme to the VCC Custodian for safekeeping. A VCC Custodian will also only be required to hold in its custody property which can be so held. However, for all property of the scheme (including property that it cannot hold in custody), the VCC Custodian will be required to (i) take appropriate measures to verify the scheme’s ownership of the property and record the measures taken; and (ii) maintain proper and up-to-date records of the property and perform regular reconciliation.
- Ensure that all property is accounted for: MAS will require the VCC Custodian to maintain proper and up-to-date records of all assets belonging to the scheme and to perform regular reconciliations. MAS expects the VCC Custodian to have its own set of records (rather than only relying on reports issued by other parties) in order to discharge its obligation of ensuring that a scheme’s property is properly accounted for.
- Holding of scheme’s property: MAS had proposed to require the VCC Custodian to keep a scheme’s property separate from the VCC Custodian’s property and the property of its other clients. Following feedback, MAS will allow VCC Custodians to hold a scheme’s property together with the property of its other clients in an omnibus account, if the VCC Custodian has effective safeguards to ensure that the scheme’s property is properly recorded and accounted for, and regular reconciliations are performed.
Provisions to be included in a VCC constitution and in a VCC’s contractual arrangements
MAS reported that respondents were generally supportive of the proposed requirements to be included in a VCC constitution. One respondent commented that the proposed provision requiring a VCC to purchase, at a participant’s request, the participant’s units in a scheme (“Redemption Clause”), appeared to contradict MAS’ policy intent for the VCC structure to be used by closed-end funds (and not just open-ended funds).
In its Response, MAS said that it will revise the regulations such that the Redemption Clause can be excluded from the scheme’s constitutive document if, amongst others, (i) the scheme is listed on an approved exchange, and (ii) its constitutive document contains provisions binding the VCC (or the manager in the case of a unit trust) to offer to purchase the participant’s units if the scheme’s units are suspended from trading or cease to be listed on an approved exchange.
MAS also said that it will retain the requirement for contracts between a VCC and its directors to contain provisions requiring the directors to safeguard the rights and interests of participants of the scheme.
Amendments to CIS Code
For parity with the treatment of authorised unit trusts, MAS had proposed amendments to the CIS Code to extend the requirements currently imposed on approved trustees and managers to VCCs, VCC directors and VCC Custodians and these were generally agreed with by respondents.
Variable Capital Companies (Winding Up) Rules
MAS will proceed with its proposal to adapt the rules relating to the insolvency and winding up of a VCC and its sub-funds from the provisions set out in the Companies (Winding Up) Rules. MAS targets to publish them in Q2 2020. MAS also intends to align the insolvency and winding up regime for a VCC and its sub-funds with that of the corresponding subsidiary legislation for companies under the Insolvency, Restructuring and Dissolution Act, which has not come into force.
The following materials are available on the MAS website www.mas.gov.sg:
- Response to Feedback received on Proposed Framework for Variable Capital Companies Parts 2 and 3
- CIS Code - VCC amendments