Revisions To MAS Notices Concerning Sale And Recommendation Of Investment Products

Transcription

1 Revisions To MAS Notices Concerning Sale And Recommendation Of Investment Products Introduction The following notices ("Notices") issued by the Monetary Authority of Singapore ("MAS") contain regulatory requirements to be followed when selling or recommending investment products to retail customers (i.e. individuals who are not accredited investors, institutional investors or expert investors): - Notice on the Sale of Investment Products ("Notice SFA 04-N12"); and - Notice on Recommendation on Investment Products ("Notice FAA-N16"). The Notices provide that certain types of investment products, generally those which contain derivatives or which have complex terms and features, are classified as Specified Investment Products ("SIPs"). Financial institutions are required to assess a customer's investment knowledge and experience before selling or recommending a SIP to the customer. Investment products which are not SIPs are referred to as Excluded Investment Products ("EIPs"). A prescribed list of EIPs is found in Notice SFA 04-N12 as well as Notice FAA-N16. In May 2012, MAS announced that it would refine the list of EIPs to include EIP-equivalent investment products listed on foreign exchanges, certain collective investment schemes ("CIS") and sub-funds of investment-linked life insurance policies ("ILP sub-funds"). The two Notices have recently been revised to reflect the above changes and also to make technical amendments. Concurrently, MAS Notice 307 on Investment Linked Policies ("Notice 307") was amended to incorporate certain regulatory requirements for units of ILP sub-funds which are EIPs. The effective date for the amendments was 11 December 2012, with two exceptions: - The requirements for the product summary and the product highlights sheet of an ILP sub-fund to reflect whether the units of the ILP sub-fund are EIPs took effect on 1 ; and 1 Rajah & Tann LLP

2 - A risk warning statement in respect of overseas-listed investment products must be given to first-time customers transacting on or after 28 February Revised List of EIPs The following investment products have been introduced into the list of EIPs: - Units in a CIS where the scheme contains restrictions or covenants which bind the manager: (a) to invest only in deposits or in EIPs, and (b) not to engage in securities lending or repurchase transactions for the scheme ("EIP-CIS"); - Derivatives of units in a business trust registered under the Business Trusts Act; - Two or more products specified as EIPs in Paras (a) to (i) of the Notice that are "stapled" together such that one product may not be transferred or otherwise dealt with without the other product; - Life insurance policies (excluding investment-linked policies); and - Units in an ILP sub-fund where the investment objectives and focus of the ILP subfund are limited such that (a) it can only invest in deposits or in EIPs, and (b) it cannot engage in securities lending or repurchase transactions. The recent amendments have also revised the regulatory treatment of overseas-listed investment products ("OLIPs"). OLIPs are any capital markets products that are listed for quotation or quoted only on overseas securities exchanges or overseas futures exchanges. Previously, such products were specifically excluded from the list of EIPs (i.e. they were considered SIPs). Now, OLIPs may be classified as EIPs if they fall within the list of EIPs in Annex 1 of SFA 04-N12 and if the licensed person or exempt financial institution (referred to as "intermediary" in this update) who wishes to sell them complies with the regulatory procedures set out in SFA 04-N12. This is elaborated upon in the paragraph titled "New Regulations for OLIPs" below. New Regulations for EIP-CIS The amended SFA 04-N12 recognises that certain CISs may be considered less "complex" and refers to these as EIP-CISs. EIP-CISs invest only in deposits or EIPs. They are also restricted from engaging in securities lending or repurchase transactions. Note that not all CISs will qualify to be EIP-CISs under the definition; those which do not qualify will be considered SIPs and will be subject to the SIP regulatory requirements such as assessing of customers' investment knowledge and experience. 2 Rajah & Tann LLP

3 SFA 04-N12 provides for certain precautionary measures to protect investors of EIP-CIS units. If an EIP-CIS invests in an underlying EIP-CIS, and the underlying EIP-CIS units cease to be classified as EIPs, the first-mentioned EIP-CIS will have to decide whether to dispose of or retain the underlying EIP-CIS units. Dispose units and retain EIP-CIS status: If the EIP-CIS disposes of the underlying units, it can continue to maintain its status as an EIP-CIS. The responsible person for the EIP-CIS must dispose of the underlying units within 3 months from the date they cease to be EIP- CIS units, or (if it is able to satisfy the trustee that a longer period is in the best interest of the participants of the scheme) extend the retention time on a month-to-month basis up to a maximum of 12 months from the cessation date. Hold units and change status to SIP: If the EIP-CIS holds on to the underlying units, it will have to change its investment objective, focus or approach such that the units in the EIP- CIS will be classified as SIPs instead of EIPs. The change should be carried out as soon as is practicable, and in any event within 4 months from the date the underlying units cease to be EIPs. Prior to any change in investment objective, focus or approach, the responsible person for the EIP-CIS must obtain approval for the proposed change from the EIP-CIS participants through an extraordinary resolution. In the case that the EIP-CIS's units are listed and it is changing its status to an SIP, an intermediary will have to carry out a customer account review ("CAR") for each existing participant or show good reason why it is unable to do so. In the case that the EIP-CIS's units are not listed and it is changing status to an SIP, the intermediary (or the participant's financial adviser, as the case may be) must carry out a customer knowledge assessment ("CKA") instead. If the intermediary or financial adviser is unable to carry out the CAR or CKA as the case may be, or the testing shows that the participant does not have adequate knowledge or experience to transact in SIPs, the intermediary or financial adviser will be restricted to allowing the participant to either maintain his current position or reduce his position in that CIS. New regulations for EIP-ILP sub-funds If the units of an ILP sub-fund are EIPs, the ILP sub-fund is referred to as an EIP-ILP subfund. When an EIP-ILP sub-fund invests in an underlying EIP-CIS, and where such underlying EIP-CIS ceases to be classified as an EIP, the insurer of the ILP which contains this EIP-ILP sub-fund may either choose to maintain the classification of the EIP-ILP subfund as an EIP by selling off the underlying CIS or to reclassify the EIP-ILP sub-fund as a SIP. The regulatory requirements are similar to those mentioned above for an EIP-CIS which invests in an underlying EIP-CIS, including: 3 Rajah & Tann LLP

4 - Decision to maintain classification as EIP and sell the units must be made within 3 months or longer time (up to a maximum of 12 months) provided that the insurer is satisfied that it is in the interest of the policyholders to hold on to the units; and - Decision to reclassify the units in the ILP sub-fund as SIPs must be made within 4 months and the ILP sub-fund policyholders will have to undergo CKA. The insurer issuing an ILP with an EIP-ILP sub-fund must state in the product summary and the product highlights sheet that the units in the EIP-ILP sub-fund are EIPs. These requirements took effect on 1. New regulations for OLIPs As mentioned above, OLIPs may be classified as EIPs or SIPs depending on whether they fall within the list of EIPs in Annex 1 of Notice SFA 04-N12 or not. An intermediary may choose to implement a system to identify and determine which of its OLIPs that it markets are EIPs or SIPs. If it decides to do so, it will be held responsible for the implementation and accuracy of the classification. Even if the intermediary outsources the classification process to another party, it will still be held responsible for the classification. Moreover, if the product is classified as EIP, the intermediary is also responsible to ensure that the classification is accurate and current at all times. This is an onerous responsibility. The alternative is not to implement a classification system. In that case, all the OLIPs which the intermediary markets will be considered SIPs and will attract the regulatory requirements applicable to listed SIPs. Any customer who wishes to transact in OLIPs for the first time on or after 28 February 2013 must be given a risk warning statement in the terms set out in Annex 4 to Notice SFA 04-N12. The risk warning statement highlights the following risks which may be present in OLIP transactions: - Differences in regulatory regimes may result in different levels of investor protection and safeguards; - Differences in legal systems may affect an investor's ability to recover his funds; - Tax implications, currency risks, additional transaction costs may apply to overseas transactions; - Counterparty and correspondent broker risks; and - Political, economic and social developments may have an influence on the overseas markets the customer is investing in. 4 Rajah & Tann LLP

5 The customer must acknowledge the risk warning statement, whether in writing or otherwise. Records of the acknowledgement must be kept by the intermediary for not less than 5 years. References Please click on the following links to access the relevant regulations: 1. Notice on Sale of Investment Products 2. Notice on Recommendation of Investment Products 3. Notice 307 on Investment-Linked Policies 5 Rajah & Tann LLP

6 Contacts David Yeow Partner D (65) F (65) david.yeow@rajahtann.com Larry Lim Partner D (65) F (65) larry.lim@rajahtann.com Regina Liew Partner D (65) F (65) regina.liew@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is the largest law firm in Singapore and Southeast Asia, with regional offices in China, Lao PDR, Vietnam and Thailand, as well as associate and affiliate offices in Malaysia, Indonesia, Cambodia and the Middle East. Our Asian network also includes regional desks focused on Japan, South Asia and Myanmar. As the Singapore member firm of the Lex Mundi Network, we are able to offer access to excellent legal expertise in more than 100 countries. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or the Knowledge & Risk Management Group at eoasis@rajahtann.com. 6 Rajah & Tann LLP