R H T C o m p l i a n c e S o l u t i o n s e - D i g e s t Securities and Futures Amendment Bill 2016 What You Must Know V o l 1 6 / 3 1 1 N o v e m b e r 2 0 1 6 Introduction On 7 November 2016, the Monetary Authority of Singapore ( MAS ) moved the Securities and Futures (Amendment) Bill 2016 ( Bill ) in Parliament. The Bill introduces changes to the Securities and Futures Act (Cap. 289) ( SFA ). The Bill has been long anticipated. MAS had issued a series of public consultation papers on significant policy changes between 2012 and 2015. The Bill was finalised taking into consideration responses from the public consultation exercise. The amendments can be grouped into the following key areas: i. Regulating over-the-counter ( OTC ) derivatives; ii. iii. iv. Enhancing regulatory safeguards for retail investors; Enhancing credibility and transparency of capital markets; and Strengthening market conduct enforcement. Key Changes & Implications (I) Regulating OTC Derivatives Expansion of Regulatory Scope of the SFA to Regulate Derivatives This round of amendments marks the last leg of regulatory reform for the regulation of derivatives, in line with Dodd-Frank in the US. This empowers MAS to regulate market operators and capital market intermediaries in respect of their OTC derivatives activities. In relation to commodity derivatives, the regulatory oversight, which is currently governed by the Commodity Trading Act and administered by the International Enterprise Singapore Board ( IES ), will be transferred to the SFA, and administered by MAS. MAS therefore will be the regulator for markets and intermediaries dealing with commodity futures and commodity derivatives, while IES will regulate spot commodities. Organised Trading Facilities or Exchanges MAS will have the power to require certain derivatives contracts that meet prescribed criteria, to be traded on organised trading facilities or exchanges, instead of being traded on an OTC basis. Key factors determining the criteria will include account liquidity conditions in Singapore and international developments on this front. Revisions to the Definitions of securities, derivative contract, and futures contract etc. With the inclusion of OTC derivatives under the regulatory ambit of SFA, the Bill will introduce principles-based definitions which are more easily understood by the industry and general investing public. New terms such as exchange-traded derivatives contracts will also be introduced to provide more clarity of the different sets of financial instruments. Page 1
The Bill will also introduce the regulated activity of dealing in capital markets products, which encompasses the current regulated activities of dealing in securities, trading in futures contracts and leveraged foreign exchange trading, as well as the new regulated activity of dealing in OTC derivatives. Hence, in line with the current regulatory regime, dealing in OTC derivative would now require a Capital Markets Services licence. Similarly, a licence holder wishing to add the activity of dealing in OTC derivatives would be required to seek licensing approval from MAS. (II) Enhancing Regulatory Safeguards for Retail Investors This next cluster of regulatory changes seeks to widen the scope of regulatory oversight over certain investment products, which are currently unregulated, as well as to extend more protection to accredited investors. Buy-back Arrangements involving Gold, Silver and Platinum ( precious metals ) MAS to now treat buy-back arrangements linked to precious metals as debentures. These will fall under the securities definition and trigger of licensing and conduct requirements for markets or intermediaries dealing with these. While direct sale and repurchase of non-financial assets are not subject to MAS regulatory requirements, MAS is concerned about some forms of buy-back arrangements that are being marketed to consumers as financial instruments such as arrangements that involve precious metals. MAS is of the view that such arrangements are in effect debentures and pose to investors risks similar to those in collateralised debt obligations. Collectively-Managed Investment Schemes MAS will regulate collectively-managed investment schemes. These are arrangements in respect of property that display all characteristics of a regulated Collective Investment Schemes ( CIS ), other than the pooling of investors contributions. MAS has noticed a number of offerings to retail investors which fall outside the statutory definition of CIS as these arrangements offer investors direct interests in underlying assets. In such arrangements ( collectively-managed investment schemes ), the participants cede day-to-day control over management of their property and MAS is of the view that these participants are essentially exposed to the same risks as a traditional CIS. The Bill will allow MAS to remove the requirement for the pooling of investors contributions to be present for an arrangement to be regarded as a CIS. This is so that MAS can subject collectively-managed investment schemes to the CIS regulatory regime in its entirety. Given this requirement, MAS will now require operators of such schemes that are offered to retail investors to be regulated as licensed fund managers. These will also be subject to prospectus requirements. Refining the Definitions of Accredited Investors ( AIs ) and Institutional Investors ( IIs ) Under the current regime, AIs and IIs are exempt from certain regulatory protection that affects retail investors. MAS is tightening the AI wealth criterion for individuals such that the net equity in an individual s primary residence can only contribute up to S$1 million of the minimum net assets threshold of S$2 million required of an AI. Further, MAS also clarifies that any corporation that is wholly owned by AIs would be AI-eligible. MAS is also introducing an opt-in regime for AIS, where investors who meet the AI eligibility criteria are not automatically treated as AIs, but will have to make a conscious decision to opt-in to be treated as an AI, while bearing in mind the lower level of regulatory protection afforded to AIs. MAS believes this would enhance investor protection and ensure investors are aware of their AI classification and its accompanying business conduct requirements when dealing with financial institutions ( FIs ). Page 2
When an AI client has converted to non-ai status, FIs now have the choice whether to continue providing services to that client on that basis. The exception would be where the FI is registered to serve a restricted clientele including AIs, in which case the FI may be required to discontinue its business relationship with such client in order to comply with its registration conditions. In respect of IIs, MAS is expanding the scope to include FIs regulated by foreign regulators, foreign central governments and sovereign wealth funds given their degree of financial knowledge in the capital markets. Further, statutory bodies, other than prescribed statutory boards, will be excluded from the II definition. (III) Enhancing Credibility and Transparency of Capital Markets Introduction of Short Selling Reporting Regime To enhance the transparency into the level of short selling activities in Singapore s securities market, the Bill will introduce requirements to mark short sell orders and report short positions above a prescribed threshold amount to MAS. Details on how these positions should be calculated and aggregated for reporting will be consulted at a later stage. (IV) Strengthening Enforcement Regime against Market Conduct MAS has introduced certain provisions to raise the bar for market abuse, and also facilitating enforcement action and prosecution of market abuse. These changes also reflect statutory overruling of Lew Chee Fai Kevin v MAS [2012] 2 SLR 913 in relation to the definition of persons who commonly invest. Clarification on Scope of Prohibition against False or Misleading Disclosures The Bill will clarify that the term material under section 199 of the SFA only describes the nature of the false or misleading particular, and not the extent of the price effect. As long as the material aspect of such false or misleading information has a likelihood of price movement, SFA prohibits such disclosure. Introduction of a Statutory Definition of the Phrase persons who commonly invest The introduction of a statutory definition on persons who commonly invest will strengthen MAS ability to pursue insider trading cases without having to meet an unrealistically high standard for persons who commonly invest. A set of guidelines will be issued in due time to elaborate on MAS policy stance behind the statutory definition and provide guidance on its interpretation. Revision of Civil Penalty Ceiling Currently, for scenarios where the value of benefits gained or losses avoided ( Benefit ) is small, the maximum civil penalty available is incongruent with the maximum civil penalty of S$2 million that can be awarded for cases where no Benefit is obtained. The Bill will standardise the civil penalty ceiling that can be awarded to the greater of (i) S$2 million, or (ii) 3 times the amount of Benefit for all civil penalty cases. Page 3
Impact Analysis Proposed Enhancement Regulating OTC Derivatives Affected Party(ies) 1) Persons dealing with derivatives 2) Commodity Derivatives Brokers ( CDB ) 3) Capital Market Services Licence ( CMSL ) holders Potential Impact 1) Persons dealing with derivatives need to apply for a CMS licence for dealing in OTC Derivatives 2) CDBs, which play an intermediating role and not hold customer assets, will be required to register with MAS. 3) CMSL holders will be required to seek MAS approval if they wish to expand their scope of dealing activity into OTC derivatives. 4) Exemptions for certain persons 4) E.g. persons which deal for their own account in OTC derivatives with a regulated FI, and do not receive a commission in return Enhancing Regulatory Safeguards for Retail Investors 1) Offerors of buy-back arrangements involving precious metals 2) Persons dealing in or advising others concerning such arrangements 3) Operators of collectivelymanaged schemes 1) Offerors will need to lodge and register prospectuses with MAS (unless they rely on certain exemptions). MAS-approved trustees must be appointed for offers of unlisted debentures which require a prospectus to be issued. 2) These groups of persons will need to be licensed by MAS as intermediaries (CMS licence or FA licence). 3) Operators of such schemes are required to be regulated as CMS licence holders for fund management. Schemes wishing to raise funds from retail investors would first need to be authorised by MAS and register a prospectus with MAS. 4) AIs 4) Wealth criterion of an AI is tightened such that the net equity of the individual s primary residence can only contribute up to S$1 million of the current S$2 million net personal assets threshold. FIs need to review their due diligence process for determining AI eligibility. AI need to consciously decide whether or not they want to be treated as retail or lose protection (but get exposure to a broader range of investment options) 5) IIs 5) The scope of IIs now includes financial institutions regulated by foreign regulators that are professionally active in the capital market, foreign central governments and sovereign wealth funds. 6) FIs dealing with AIs 6) FIs have two-year transitional period to migrate existing AI clients to the opt-in regime. FIs have the choice whether to continue providing services to an AI-client who converts to non-ai status, unless it is prohibited in its licensing conditions. FIs need to review their account opening documentation or draft opt-in forms for AIs. Page 4
Impact Analysis Proposed Enhancement Enhancing Credibility and Transparency of Capital Markets Affected Party(ies) Short Sellers and CMS licence holders which are exchange members Potential Impact They are required to report net short positions above certain thresholds, and indicate short-sell orders. The requirements will be in line with the principles set by International Organization of Securities Commissions. Strengthening Enforcement Regime against Market Conduct Investors CMS licence holders, and exempt licence holders The scope of market abuse is widened and the risk of being prosecuted for market abuse is higher. Civil penalty ceiling for market abuse has been raised. Page 5
For more information, please contact: Nizam Ismail Co-Founder Direct: +65 6381 6843 Email: nizam.ismail@rhtlawtaylorwessing.com Christopher Mansfield Associate Director Direct: +65 6381 6771 Email: christopher.m@rhtcs.com Alvin Lu Senior Compliance Manager Direct: +65 6381 6334 Email: alvin.lu@rhtcs.com Daniel Seet Compliance Manager Direct: +65 6381 6337 Email: daniel.seet@rhtcs.com Lim Hong Jie Compliance Manager Direct: +65 6381 6779 Email: hongjie.lim@rhtcs.com About RHT Compliance Solutions The team at RHT Compliance Solutions comprises experienced and certified professionals with extensive regulatory, compliance and risk experience from Singapore, Malaysia, Indonesia and the broader region. The team is the largest governance, compliance and risk consultancy in Southeast Asia and is wellequipped to provide clients with intelligent, risk-focused and cost-effective solutions. We aim to be the partner of choice not just for clients seeking to meet their regulatory obligations, but also for those eager to leverage on their governance, risk and compliance capabilities as a competitive advantage. For more information, please visit www.rhtcs.com RHT Compliance Solutions Pte Ltd 2016 RHT Compliance Solutios Pte Ltd is incorporated in Singapore (UEN No. 201317144R), and is a separate legal entity under the RHT Group of Companies. It is not an affiliate, branch or subsidiary of RHTLaw Taylor Wessing LLP, which is a Singapore law practice separately registered as a limited liability law partnership in Singapore. RHT Compliance Solutions Pte Ltd is also not a Singapore law practice and is not authorized to provide legal advice. Page 6