14 May 2020
On 4 May 2020, the Monetary Authority of Singapore (“MAS”) issued a set of Frequently Asked Questions on offers of units in collective investment schemes, including real estate investment trusts (“REITs”) (“FAQs”). This set of FAQs provides clarification and additional guidance on the regulatory requirements that REITs and managers of funds are expected to comply with under the Securities and Futures Act (“SFA”) amid the Covid-19 pandemic.
Set out below are some of the clarifications for REITs and fund managers detailed in the set of FAQs.
(a) MAS to amend relevant regulations to remove the requirement for REIT to submit online notification to MAS to obtain “Restricted Scheme” status (“Notification Requirements”) before making offer of units to accredited investors and other persons under section 305 of SFA
To streamline the fundraising process for REITs and bring it in line with the fundraising process for companies and business trusts, MAS has removed the requirement for REITs to comply with the Notification Requirements when they rely on the exemption under section 305 of the SFA. The set of FAQs states that MAS will be amending relevant regulations to remove the Notification Requirements for REITs.
In the meantime, prior to the amendment of the regulations, REITs that are making an offer of units under section 305 of the SFA may use the SGXNet announcement relating to the offering for the purposes of complying with the requirement to submit an information memorandum, without needing to prepare a separate information memorandum (i.e. the SGXNet announcement would be uploaded onto CISNET instead of the information memorandum).
(b) REITs able to refinance existing borrowings, whether from same or different bank, without counting such refinancing towards aggregate leverage limit
A REIT is able to refinance existing borrowings, whether from the same bank or different bank, without counting such refinancing towards its aggregate leverage limit. Paragraph 9.6 of Appendix 6 of the Code on Collective Investment Schemes (“CIS Code”) provides that a REIT may raise debt for refinancing purposes earlier than the actual maturity date of the borrowing to be refinanced without having to count such funds raised for the purposes of the aggregate leverage limit, provided that the funds are set aside solely for the purpose of repaying the maturing borrowing. The refinancing can be from the same bank or a different bank.
In addition, under paragraph 9.4 of Appendix 6 of the CIS Code, the aggregate leverage limit will not be considered breached if, due to circumstances beyond the control of the REIT manager, there is either a depreciation in the asset value of the REIT or a redemption of units or payment made from the REIT.
(c) Other obligations
Paragraphs 2(c) and 2(d) below further elaborate on the obligation of REIT managers to inform MAS and participants (1) at least one month before any significant change takes place and (2) when moving Singapore-based investment advisory and/or management functions to related companies overseas for temporary business continuity purposes.
2. Fund managers
(a) Fund managers are allowed to apply swing pricing as a liquidity risk management tool for authorised schemes provided certain conditions are met
The set of FAQs clarifies that fund managers are allowed to apply swing pricing as a liquidity risk management tool for authorised schemes as permitted under Paragraph 6.4 of the CIS Code, provided that the scheme’s prospectus contains the following disclosures:
- The fact that swing pricing may be applied, and a general description of the trigger event;
- The benefits and limitations of swing pricing, including the risk that investors’ stake may be diluted when net subscription or redemption is below the swing threshold;
- The fact that the scheme’s performance will be calculated based on swung prices and that the returns of the scheme may be influenced by the level of subscription/redemption activity (which may result in the application of swing pricing);
- The possibility of increased variability in the scheme’s returns with swing pricing accounted for in the calculation of performance returns;
- The fact that the fees of the scheme (including performance fees and fees based on net asset value) will be based on unswung net asset value; and
- The maximum amount of price adjustment under normal circumstances.
Given potential liquidity mismatches in schemes due to increased market volatility amid the Covid-19 pandemic, fund managers may be considering the use of liquidity risk management tools as part of their response to the exceptional market conditions. In such instances, the set of FAQs states that (1) fund managers should ensure that the use of any liquidity risk management tools is appropriate and in the best interests of investors and (2) fund managers should also ensure that scheme assets must, at all times, be fairly and accurately valued.
(b) Fund managers can apply swing factor exceeding maximum swing factor disclosed in a fund’s prospectus under certain circumstances when conducting swing pricing
In light of the current Covid-19 situation, the set of FAQs states that MAS is cognisant that fund managers may require additional flexibility to respond to volatile market conditions to better safeguard the interests of investors. In this regard, fund managers may temporarily increase the swing factor for a fund beyond the maximum level stated in the prospectus provided that:
- The fund’s constituent document and prospectus provide fund managers with the discretion to, under certain pre-defined circumstances, apply a swing factor that is beyond the maximum swing factor disclosed in the prospectus;
- The decision to exceed the current maximum swing factor is duly justified and is made in the best interest of all investors (i.e. both existing and new investors);
- The adjustment to the swing factor complies with the applicable laws and regulatory requirements imposed by the home regulators; and
- The fund manager notifies and clearly explains to existing and new investors that a swing factor which exceeds the limit disclosed in the fund’s prospectus may be applied.
(c) Fund managers (including REIT managers) are required to inform MAS and existing participants at least one month before any significant change takes place
Fund managers or the responsible person should inform MAS and existing participants at least one month before any significant change takes place, as required under Chapter 3.2(d) of the CIS Code.
Where the responsible person cannot determine or foresee a significant change at least one month in advance, Chapter 3.2(e) of the CIS Code provides that the responsible person should inform MAS and existing participants as soon as practicable. Examples of such changes are understood to include suspension of dealings as a result of exceptional circumstances and the implementation of swing pricing or activation of swing pricing beyond such maximum swing factor disclosed in a fund’s prospectus as a result of exceptional circumstances.
(d) Fund managers (including REIT managers) required to inform MAS when moving Singapore-based investment advisory and/or management functions to related companies overseas for temporary business continuity purposes, temporary arrangements to comply with conditions
For a temporary arrangement such as moving Singapore-based investment advisory and/or management functions to related companies overseas for temporary business continuity purposes (“BCP arrangement”), the set of FAQs provides that the responsible person should inform MAS and scheme participants of such temporary arrangements and the circumstances under which the arrangement would be triggered, and update the prospectus, as soon as practicable.
The responsible person should retain effective oversight over the temporary arrangements, and ensure that the temporary arrangements comply with the following conditions:
- The overseas entity and representatives shall be licensed in the overseas jurisdiction and for the regulated activity that they are conducting under the BCP arrangement;
- The overseas entity shall ensure proper segregation of client information and put in place necessary measures to preserve client confidentiality;
- The overseas entity shall put in place proper controls to address any potential conflicts of interest; and
- The overseas entity shall provide a written confirmation that the overseas representatives do not solicit Singapore clients.
(e) Authorised schemes can increase their cash holdings and borrow on temporary basis to meet increased redemption requests during Covid-19, subject to CIS Code
The set of FAQs clarifies that authorised schemes may:
- Hold eligible deposits as permitted under the CIS Code, and in accordance with their investment strategies; and
- Borrow from licensed deposit-taking institutions on a temporary basis, for the purposes of meeting redemptions, as provided under paragraph 7 of Appendix 1 of the CIS Code.
(f) Fund managers are permitted to change the settlement period of redemption requests from T+4 as disclosed in the prospectus to T+7 as allowed under the CIS Code, subject to fund’s constituent document and prospectus
Fund managers are permitted to change the settlement period of redemption requests if the fund’s constituent document and prospectus provide the fund managers with the discretion to increase the settlement period under certain predefined circumstances. However, the settlement period must be kept within the T+7 business days required under Chapter 3.7(a) of the CIS Code.
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