Singapore Kah Keong Low WongPartnership LLP www.practicallaw.com/9-501-3516 Retail funds: overview 1. Please give a brief overview of the retail funds market in your jurisdiction. (How developed is the market? Has it been active in the past year?) Please highlight the changes in market practice in the past year. The open-ended retail funds market in Singapore is well developed. Retail funds are offered as collective investment schemes (CISs) for investment by the public (that is, Singapore retail investors). A closed-ended fund is defined under the Securities and Futures Act (Chapter 289 of Singapore) (SFA) as an arrangement under which the units issued cannot (or primarily cannot) be redeemed at the unitholders discretion. Certain closed-ended funds constituted as entities or trusts are specifically excluded from the CIS definition, and are funds which both: Legislation and regulation 2. What are the key statutes, regulations and rules that govern retail funds in your jurisdiction? What regulatory bodies are involved in regulating retail funds? The key legislation and regulations are the: SFA. Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations (SFR). Financial Advisers Act (Chapter 110 of Singapore) (FAA). Financial Advisers Regulations (FAR). Code of Collective Investment Schemes (last updated on 11 November 2009) (CIS Code). The relevant regulatory body is the MAS. Invest in real estate and real estate-related assets. Are listed on the Singapore Stock Exchange. There are no known closed-ended retail funds offered in Singapore. Fund managers typically offer shares in closed-ended funds to accredited investors or institutional investors through a private placement. Assets managed by the Singapore asset management industry reached a new high in 2009. The 2009 Singapore Asset Management Industry Survey, published by the Monetary Authority of Singapore (MAS) in July 2010, reports that as at the end of 2009, total assets managed by Singapore-based asset managers that responded to the survey grew by 40% to reach S$1.2 trillion (as at 1 November 2010, US$1 was about S$1.3), compared to S$864 billion as at the end of 2008. This latest assets under management (AUM) size has exceeded the pre-crisis peak in 2007. The recovery in AUM level has brought the rolling five-year average AUM growth rate to 19% per annum in 2009, up from 16% in 2008, which highlights the continued dynamism of the fund management industry in Singapore. More than 80% of total AUM were sourced from outside Singapore, demonstrating Singapore s primary role in serving regional and international investors. In 2009, total CIS AUM increased 35% to S$31 billion. Investments into most types of CIS funds increased, with the allocation into equities funds experiencing the highest year-on-year growth of 72%. Asia Pacific markets accounted for 71% of CIS investments in 2009, compared to 67% in 2008, reflecting continued robust interest in the region. The key legislation is the SFA. 3. Do the retail funds themselves have to be authorised or licensed? If so, what are the main steps involved? Are there differences between local funds and foreign funds? The MAS must: Authorise the CIS, if the fund is constituted in Singapore. Recognise the CIS, if the fund is constituted outside of Singapore. The offeror must, on the appropriate application and lodgement form: Submit an application for authorisation or recognition. Lodge a prospectus to be registered with the MAS. The application must be accompanied by a cheque for the application and lodgement fee. The prospectus is registered between 14 and 21 days from the date of lodgement. The offeror or its solicitor is informed in writing when the prospectus is registered. do not require authorisation or licensing before they are offered to the public. However, a prospectus must be lodged with the MAS (see above, ). This article was first published in the PLC Cross-border Investment Funds 2011 and is reproduced with the permission of the publisher, Practical Law Company.
Foreign funds A foreign retail fund is not subject to the investment guidelines set out in the CIS Code. However, the MAS would only recognise a foreign retail fund if it is subject to investment guidelines in its home jurisdiction which are substantially similar to those of Singapore. There must also be a representative for the foreign retail fund in Singapore to act as a liaison between investors and the foreign manager. The representative must be: An individual. A company incorporated in Singapore. A foreign company registered in Singapore under the Companies Act. The manager of the foreign retail fund (together with its related companies) should be managing at least S$500 million of discretionary funds in Singapore. Marketing 4. Who can market retail funds? Are there differences between local funds and foreign funds? Managers and operators 6. What are the key requirements that apply to managers/operators of retail funds? Are there differences between local funds and foreign funds? Can a foreign manager manage a local fund? Domestic CIS. For a CIS constituted in Singapore, the manager must: Hold a CMS licence for fund management (or be exempted from holding a CMS licence or be a public company in certain cases). Be considered fit and proper for the role by the MAS. A trustee must be approved by the MAS to act as trustee for a CIS if the CIS is constituted as a trust (which is invariably the market practice in Singapore). The trust deed for the CIS must comply with prescribed requirements in the SFR. The CIS must comply with the CIS Code (including any applicable investment guidelines). A prospectus that complies with the SFA must be lodged and registered with the MAS using a prescribed form (see Question 3, ). The following can market open-ended retail funds: An offeror that holds a capital markets services (CMS) licence for fund management (or is exempted from holding a CMS licence). A distributor licensed under the Financial Advisers Act (Chapter 110 of Singapore) as a financial adviser. A distributor requires a CMS licence for dealing in securities (see above, ). Foreign funds The same licensing requirements for marketing apply to both local and foreign retail funds. 5. To whom can retail funds be marketed? Are there differences between local funds and foreign funds? As fund management is a regulated activity under the SFA, a fund manager must either hold a CMS licence in fund management or qualify for an exemption from holding a CMS licence in fund management under the SFA. A foreign fund manager can manage a local fund if it is able to obtain a CMS licence in fund management or has qualified for an exemption from holding a CMS licence in fund management. Overseas CIS/foreign fund. For a CIS constituted outside of Singapore, the manager must be: Licensed or regulated in the jurisdiction of its principal place of business. Be considered fit and proper by the MAS. The laws and practices of the jurisdiction in which the CIS is constituted must afford investors in Singapore protection at least equivalent to that provided by the SFA. The MAS would consider, for example, whether there is: A legal requirement for the manager to manage the CIS in the interests of investors. An authorised or recognised CIS can be freely marketed to Singapore retail investors, subject only to prospectus filing requirements (see Question 4, ). can be freely marketed to Singapore retail investors, subject only to prospectus filing requirements (see Question 4, ). Foreign funds Local and foreign retail funds can be freely marketed to Singapore retail investors, subject only to prospectus filing requirements and authorisation or recognition requirements for openended funds. Independent adequate safekeeping of the assets of the CIS. An independent party which exercises oversight over the manager, such as: an independent trustee in the case of a unit trust; or independent directors in the case of a mutual fund company. Recognised CIS are not subject to the investment guidelines set out in the CIS Code. However, the MAS only recognises a foreign CIS if it is subject to investment guidelines in its home jurisdiction which are substantially similar to Singapore s guidelines. There must be a representative for the CIS in Singapore to act as a liaison between investors and the foreign manager. The representative must be: An individual. A company incorporated in Singapore. A foreign company registered in Singapore under the Companies Act (Chapter 50 of Singapore).
A prospectus that complies with the SFA must be lodged and registered with the MAS using a prescribed form. The foreign prospectus can be used if it (either on its own, or together with a Singapore wrapper ) contains all the information required under the SFA. The manager (together with its related companies) must manage at least S$500 million of discretionary funds in Singapore. There are no applicable regulations. Assets portfolio 7. Who holds the portfolio of assets? What regulations are in place for its protection? This provides investors with the opportunity to tailor their investment requirements within the same fund and to switch easily between sub-funds. Participants interests in the fund are referred to as units. Only a CIS constituted as a trust can apply for favourable tax incentives under the designated unit trust (DUT) scheme (see Question 13, : Funds). The limited partnership structure was introduced as an alternative structure in Singapore in 2009. However, no retail fund has used this structure, and is unlikely to do so, because of the DUT scheme. Not applicable. The assets are held by the trustee who must be approved by the MAS to act as a trustee for the CIS. The trustee should be independent of the manager and must conduct all transactions with or for a CIS at arm s length. The trustee has certain operational requirements, including that it must (CIS Code): Inform the MAS of any breach of the CIS financial requirements and criteria set out by the SFA and MAS. Send, or cause to be sent, to participants certain semiannual and annual reports (see Question 12, Open-ended retail funds: Investors). Submit to the MAS a statement within two weeks of the termination or maturity of the CIS (see Question 12, Openended retail funds: Investors). The trustees must keep a copy of the statements at the fund s registered office for six years. The copy must be made available to any requesting participant that is a current participant or was a participant between: The end of the financial year covered by the last set of annual accounts and annual report. The termination or maturity date. Not applicable. Legal vehicles 8. What are the main legal vehicles used to set up a retail fund and what are the key advantages and disadvantages of using these structures? What are the participants interests in the fund called (for example, share or unit)? A CIS takes the form of a trust, and is established through a trust deed between the manager and trustee. The advantage in using this structure is that: There are no statutory rules on preservation of capital and distribution of profits. The CIS can be structured with several sub-funds under an umbrella trust deed, with each sub-fund having a different investment objective (for example, geographical or sectoral). Investment and borrowing restrictions 9. Describe the investment and borrowing restrictions to which retail funds are subject. The investment guidelines and borrowing limits are, in relation to non-specialised funds investing in equities and/or fixed income instruments, that (Appendices, CIS Code): Not more than 10% of the fund s deposited property can be held in: unlisted securities, including unlisted derivatives; securities issued by a single issuer. Not more than 20% of the deposited property can be held in securities issued by a group of companies. Exposure to financial derivatives must not exceed 100% of the deposited property at any time. The fund can borrow only to meet redemption and short-term (not more than four weeks) bridging requirements. Aggregate borrowings for those purposes must not exceed 10% of the deposited property at the time the borrowing is incurred. The fund must not invest in: metals, including gold, commodities and their derivatives; or infrastructure projects and real estate. The fund must not engage in: direct lending of monies or the granting of guarantees; underwriting; or short selling. Specific investment and borrowing limits apply to the following: Property funds. Money market funds. Hedge funds and fund of hedge funds. Fund of funds. Futures and options funds. Currency funds. Not applicable.
10. Can the manager/operator place any restrictions on the issue and redemption of interests in retail funds? of Certified Public Accountants in Statement of Recommended Accounting Practice 7: Reporting Framework for Unit Trusts. The manager must also prepare quarterly reports. In relation to the contents of the quarterly report, see Appendix 4 of the CIS Code. The manager can place restrictions on the issue and redemption of units in a CIS if this is provided for in the trust deed constituting the CIS. The trust deed would typically be drafted to: Give the manager discretion over the issue of units in the CIS. Allow the manager to impose a percentage restriction on the redemption of units in a CIS if investors request redemptions of more than a certain aggregate percentage (usually 10%) of the net asset value (NAV) of the fund to: protect the operation of the fund; and preserve the value of the fund s assets. This can be drafted as either: a wide discretionary power; or a mechanism exercisable only in specified circumstances, for example, where: a stock or trading exchange on which any significant portion of the fund s investments are dealt in, is closed, restricted or suspended; the manager considers that the NAV of the fund s investments cannot be reasonably or fairly ascertained; or the redemption or realisation of the fund s investments cannot in the opinion of the manager be effected at normal prices or normal rates of exchange. Not applicable. 11. Describe any restrictions on the rights of participants in retail funds to transfer or assign their interests to third parties. There are no restrictions on a holder of a unit in a CIS transferring that unit to a third party, subject to filing an instrument of transfer in the prescribed form with the manager. The MAS requires the trust deed to provide a means for holders to transfer their units. However, the trust deed can enable the manager to impose conditions for transfer. Not applicable. Reporting requirements 12. Describe the periodic reporting requirements to: Investors. Regulators. Investors. The manager must prepare half-yearly financial statements and audited financial statements for the semi-annual report and annual report, in the manner prescribed by the Institute The trustee must send, or cause to be sent to the participants: The semi-annual accounts and semi-annual report relating to the CIS within two months from the end of the period covered by the accounts and report. The annual accounts, report of the auditors on the annual accounts and annual report relating to the CIS within three months from the end of each financial year of the CIS. The semi-annual report and annual report, based on a scheme s financial year, contains a large amount of information. The following is a summary of some of the information these reports must contain: Investments at market value and as a percentage of NAV as at the end of the period under review classified by: country; industry; asset class such as equities, debt securities and cash; and credit rating of debt securities such as A, B, C and unrated. The top ten holdings at market value and as a percentage of NAV as at the end of the period under review and a year ago. The performance of the scheme and where applicable, the performance of the benchmark, in a consistent format, covering the following periods of time: three months, six months, one year, three years, five years and ten years since inception of the scheme. Returns must be calculated on a bid-to-bid basis with dividends reinvested at the bid price. Where there has been a change in the benchmark used, this should also be disclosed. Any material information that will adversely affect the valuation of the scheme such as contingent liabilities of open contracts. Regulators. The trustee must send to the MAS, within two weeks of the termination date of the CIS (that is, the termination date stated in a notification to the participants) or, in the case of a CIS with a fixed maturity date, within two weeks of the maturity date: A statement that all the CIS assets as at the date of termination or maturity have been realised and the resultant proceeds (net of outstanding liabilities) distributed to participants in the same proportion as their holdings of units in the CIS. Where liabilities have accrued to the CIS and been excluded from the final distribution, the trustee must include: a statement of that fact; a description of those outstanding liabilities; and where the amount accrued is an estimate, a statement of how the trustee intends to settle the balance between that estimate and the final liability amount. A statement affirming that since the end of the financial year covered by the last set of annual accounts and annual report, the manager has, in all material respects, managed the CIS:
in accordance with the limitations imposed on the investment and borrowing powers set out in the trust deed, laws and regulations; otherwise in accordance with the provisions of the trust deed. Investors. No applicable regulations. Regulators. No applicable regulations. Tax treatment 13. Describe the tax treatment for: Funds. Resident investors. Non-resident investors. Singapore one-tier exempt dividends. Singapore normal-exempt dividends paid out of exempt profits or income assessed at concessionary tax rates. Distributions made by the fund to unitholders will not attract Singapore withholding tax. Resident investors. Subject to certain conditions, distributions made by any CIS constituted as a unit trust that is authorised under SFA (excluding distributions out of Singapore franked dividends) to a resident or non-resident individual on or after 1 January 2004 are exempt from Singapore income tax (Income Tax Act). However, individuals who hold the units as trading assets or through a partnership are subject to income tax on the gross amount of distributions, at the applicable rates. Non-resident investors. See above, Resident investors. Funds. If the Inland Revenue Authority of Singapore (IRAS) grants the fund DUT status under the Income Tax Act, subject to certain conditions (see Question 8, ), the following income (designated income) will not form part of the fund s statutory income and will not be taxable at the fund level: Gains or profits derived from Singapore or elsewhere from the disposal of securities. Interest (other than where Singapore withholding tax has been deducted). Dividends derived from outside Singapore and received in Singapore. Gains or profits derived from: foreign exchange transactions; transactions in futures contracts; transactions in interest rate or currency forwards; swaps or option contracts; and transactions in forwards, swaps or option contracts relating to any securities or financial index. Distributions from foreign unit trusts derived from outside Singapore and received in Singapore. Fees and compensatory payments (other than those where Singapore withholding tax has been deducted) from certain securities lending and repurchase arrangements with specified counterparties. Rents and any other income derived from immovable property situated outside Singapore and received in Singapore. Discount derived from outside Singapore and received in Singapore. Discount from qualifying debt securities (QDS). Gains or profits from the disposal of debentures, stocks, shares, bonds or notes issued by supranational bodies. Any non-designated income is generally subject to tax at the general corporate rate of 17% at the fund s level. However, the fund is not taxable in relation to the following non-designated income received: Funds. are not eligible for DUT status. The tax treatment of a closed-ended fund depends on the structure chosen to set up the fund. There is no known closed-ended retail fund marketed in Singapore at present (see Question 1, ). Resident investors. See above, Funds. Non-resident investors. See above, Funds. Reform 14. Please summarise any proposals for the reform of retail fund regulation in your jurisdiction. Please also summarise any litigation or enforcement action relating to fund regulation in your jurisdiction. On 17 May 2010, MAS released a consultation paper on the proposed amendments to the CIS Code. The review of the CIS Code focuses on investment guidelines that apply to authorised retail schemes and the proposed changes by MAS aims to provide greater clarity and increased flexibility in the management of funds, as well as to enhance investor protection. The following are some of the proposed changes: Diversification limits. Under the present CIS Code, investments by non-specialised funds in unlisted securities, including over-the-counter financial derivatives, should not exceed 10% of the deposited property of the scheme. MAS has proposed to introduce a list of permissible investments which fulfil certain criteria to assure their suitability for retail funds. This list will comprise listed securities but also over-the-counter financial derivatives which meet the specified criteria. Unlisted securities which do not meet the specified criteria will continue to be the subject of a limit of 10% of a scheme s NAV. Naming of non-specialised funds. MAS has proposed establishing principles to guide the naming of non-specialised funds. There are presently no rules to guide the naming of funds in the CIS Code. MAS has proposed that the manager of a scheme should adopt fund names that are clear and not misleading, and which reflect the scheme s investment geographical focus, asset type and sector focus.
Reports to investors. Under the present CIS Code, the annual and semi-annual reports that trustees must send to unitholders can be sent through electronic means if the unitholders have consented to this. MAS has proposed to allow trustees to send these reports to unitholders through electronic means. However, trustees must send hard copies of these reports to unitholders that are aged 55 years and above as at a specified date, because these unitholders may not be computer literate. Reports on valuation error. Under the present CIS Code, the manager must notify the MAS as soon as practicable when the manager becomes aware of an error in the calculation of a scheme s NAV per unit. However, there is no prescribed format to report the valuation error. MAS has proposed a prescribed format to report these valuation errors. Performance fees. The present CIS Code does not currently provide guidelines for performance fees being charged by managers to the scheme. MAS has proposed introducing guidelines to standardise the methods used for calculating performance fees where the fund manager imposes these fees. MAS has proposed that either the fulcrum fee or high water mark method should be used. Back-testing and simulated performance data. MAS has taken the view that the use of back-tested or simulated past performance data may be subject to manipulation as managers may pick a desired performance period. MAS has requested industry feedback on whether to allow the use of this data for the disclosure of performance fees. The submission of feedback to the consultation paper closed on 25 June 2010 and there have not been any further updates to the consultation exercise. However, the MAS has proposed that fund managers and approved trustees for authorised retail schemes are given three months to comply with the new revised CIS Code when it is issued. Hedge funds: overview 15. Please give a brief overview of the hedge funds market in your jurisdiction. (How developed is the market? Has it been active in the past year?) Please highlight the changes in market practice in the last year, including any changes to investment strategies being pursued and the terms of investment. A hedge fund can be classified as an open-ended or closedended fund. An investment in a hedge fund can be classified as a CIS if the fund is an open-ended fund. If a hedge fund is a CIS, it is subject to the CIS Code, including investment restrictions. Hedge funds can also be constituted as corporations and limited partnerships (see Question 23). The Singapore hedge fund industry has weathered the crisis reasonably well despite the global financial crisis in 2009 and the global general downward trend. Despite the year-on-year decline in the number of hedge fund managers from 350 to 320 as at the end of 2009, the AUM of the Singapore hedge fund industry was steady at S$59 billion as at the end of 2009. The profiles of hedge fund managers and their strategies remained highly varied. This diversification has helped to sustain the industry during the difficult period. Legislation and regulation 16. What are the key statutes and regulations that govern hedge funds in your jurisdiction? What regulatory bodies are involved in regulating hedge funds? See Question 2,. 17. How are the following areas regulated (if at all) in relation to hedge funds: Risk. Valuation and pricing. Systems and controls. Insider dealing and market abuse. Transparency. Money laundering. Short selling. Risk As with other forms of investment scheme, hedge funds must lodge a prospectus with the MAS (whether the fund takes the form of a CIS, corporation or limited partnership). The prospectus must state the material differences between the hedge fund and other types of investment scheme, including that (SFR): Some of the underlying investments cannot be actively traded and there may be uncertainties involved in the valuation of those investments. Compared to other types of schemes, relatively little information on how the hedge fund and underlying hedge funds are managed will be available. There is limited liquidity. The redemption price may be affected by fluctuations in the value of the underlying investments from the time a redemption request is submitted and the date the redemption price is determined. Most of the underlying hedge funds are subject to minimal regulation. The performance of the hedge fund is substantially dependent on individual fund managers. The hedge fund of funds manager receives compensation from the managers to which it is allocating. The marketing material for a hedge fund that is constituted as a CIS must (CIS Code): State that an investment in the hedge fund carries risks of a different nature from other types of CIS which invest
in listed securities and do not engage in short selling. The hedge fund may not be suitable for persons who are averse to such risks where the hedge fund is: not capital guaranteed or capital protected, in which case investors may lose all or a large part of their investment in the hedge fund; or capital guaranteed or capital protected, in which case investors are subject to the credit risk of the guarantor or default risk of the issuer of the securities providing the protection. State that: an investment in the hedge fund is not intended to be a complete investment programme for any investor; and prospective investors should carefully consider whether an investment in the hedge fund is suitable for them in the light of their own circumstances, financial resources and entire investment programme. Make reference to the other inherent risks of investing in the hedge fund. as qualified to value such assets. When the fair value of a material portion of the assets of a CIS cannot be determined, the manager must suspend valuation and trading in the units of the CIS. Calculation of NAV using a basis other than market quotations. The NAV of a CIS can be determined using alternative methods provided that the trustee agrees with the alternative method at the time the CIS is authorised. That valuation can be performed by a person approved by the trustee of the CIS as qualified to value the CIS s assets. Once the NAV is established, the units in a CIS must be issued, redeemed or repurchased at a price arrived at by dividing the NAV by the number of units outstanding. The price of units can be adjusted by adding or subtracting fees and charges, provided that those fees and charges are disclosed in the CIS s prospectus or trust deed. At the maturity of a capital-guaranteed CIS which complies with Appendix 5 of the CIS Code, the units must be redeemed at a price equal to the higher of the guaranteed amount and the NAV of the CIS, divided by the number of units outstanding. Valuation and pricing The following valuation guidelines apply to all CIS (and not just hedge funds) (CIS Code). They therefore apply to hedge funds constituted as a CIS that are offered to retail investors. There are no prescribed valuation rules that apply to hedge funds constituted as a corporation or partnership and offered to accredited or institutional investors. Valuation of units is based on the fund s NAV. The NAV can be calculated in one of two ways: Calculation of NAV using market quotations and fair value. This depends on the nature of the assets: Quoted securities. These are valued according to the price on the securities exchange or overseas exchange on which the securities are listed, or an organised overthe-counter market on which the securities are traded. The price can either be: the official closing price or the last known transacted price of those securities; the transacted price at a cut-off time specified in the CIS s prospectus and applied consistently by the manager, unless that price is not representative or not available to the market. The manager of a CIS is responsible for determining, with due care and in good faith, whether the price should be considered representative. Quoted securities where the transacted price is not representative or not available to the market and assets that are not quoted securities. The valuation must be based on the fair value of the assets. For this purpose, the fair value of an asset is the price that the CIS would reasonably expect to receive on the current sale of the asset. The fair valuation must be determined with due care and in good faith. The basis for determining the fair value of the asset must be documented. Except for quoted securities, all the assets of a CIS must be valued by a person approved by the trustee of the CIS Systems and controls There are no prescribed systems and controls that apply to a hedge fund constituted as a corporation or limited partnership, and offered to accredited or institutional investors. For retail hedge funds constituted as a CIS, the hedge fund manager must have in place proper risk management and monitoring procedures and internal controls (CIS Code). The MAS requires the senior management of a hedge fund manager to certify annually that the procedures and controls for monitoring the management and risk of the fund are as set out in the prospectus. There must be at least one regular dealing day per quarter. In addition, redemption proceeds must be paid to the end investor within 95 days from the dealing day the redemption request is accepted. The liability of investors must be limited to their investment in the scheme. For this purpose, the scheme s constitutive documents should contain a provision to limit the liability of investors to their investment in the scheme. Insider dealing and market abuse There is no specific legislation or regulation on these issues. Transparency No transparency requirements apply to a hedge fund constituted as a corporation or limited partnership and offered to accredited or institutional investors. The following requirements apply to all CISs, not just hedge funds constituted as a CIS: The manager must prepare annual audited accounts and reports, semi-annual accounts and reports, and quarterly reports for each of the four quarters of each financial year. The manager must provide to the trustee the accounts and reports in sufficient time for the trustee to have them audited, where necessary, and sent to participants (see below). The requirement to prepare quarterly reports does not apply to capital protected and capital guaranteed hedge funds. Where the manager prepares monthly reports and incorporates the required contents for quarterly reports in the monthly reports, the manager need not prepare separate
quarterly reports. Where the manager incorporates the required contents for quarterly reports in the semi-annual report, the manager need not prepare a separate quarterly report for the second quarter of the financial year. The trustee must send or cause to be sent the reports according to the same time limits as for other CISs (see Question 12, : Investors). In addition, the trustee must send the quarterly report (where applicable) within one month from the end of the period covered by the report. The reports must be prepared in the manner prescribed by the Institute of Certified Public Accountants in Statement of Recommended Accounting Practice 7: Reporting Framework for Unit Trusts. The reports must include the same information as for the other types of CISs, subject to a number of modifications (see Question 12, : Investors). For example, the requirement to disclose the portfolio statement and top ten holdings can be waived where the manager and trustee consider that this disclosure is prejudicial to the interests of the scheme. In that case, the relevant report must disclose aggregate exposure for the scheme categorised according to: country; industry; asset class and/or credit rating of debt securities. Money laundering The hedge fund manager must comply with MAS Notice SFA04- N02 on Prevention of Money Laundering and Countering the Financing of Terrorism, particularly the following due diligence measures: Identification of the customer by obtaining certain information relating to the customer, and where the customer is not a natural person, certain other persons associated with that customer. Verifying the identification information obtained. Where the customer is not a natural person, identifying and verifying the identity of the natural persons appointed to act on the customer s behalf. Determining if there exists any beneficial owner and applying the identification and verification procedures to those beneficial owners. Where business relations are to be established, obtaining information concerning the nature and purpose of the intended business relations. After business relations are established, conducting ongoing monitoring of business relations. Reviewing periodically the adequacy of customer information, after business relations are established. Short selling There is no specific legislation or regulation on insider dealing and market abuse issues (see above, Insider dealing and market abuse). MAS has proposed that retail hedge funds, like other schemes, should be prohibited from short selling of securities, whether or not backed by securities borrowing, in its 17 May 2010 consultation paper on proposed amendments to the CIS Code. The Singapore Stock Exchange, in consultation with the MAS, will institute the marking of short-selling orders in 2010. This is to enhance the transparency of the extent of aggregate short selling activities in individual securities listed on the Singapore Stock Exchange. This would help to deter manipulative conduct and may provide additional information for market participants in making their investment decisions. Marketing 18. Who can market hedge funds? Are there differences between local funds and foreign funds? The fund manager, or an appointed distributor holding a financial adviser s licence, can market both local and foreign hedge funds in Singapore. 19. To whom can hedge funds be marketed? Are there differences between local funds and foreign funds? Local and foreign hedge funds can be offered to: Retail investors. Accredited investors. Institutional investors. This will affect the prospectus and licensing requirements of the fund, as will whether the fund is classified as a closedended or open-ended fund. There are no differences in marketing local or foreign hedge funds to accredited investors and institutional investors. For the requirements for marketing foreign hedge funds to retail investors, see Question 3. Assets portfolio 20. Who holds the portfolio of assets? What regulations are in place for its protection? If the hedge fund is constituted as a CIS in Singapore, the assets must be held by the trustee or a custodian appointed by the trustee. The trustee must be approved by the MAS to act as a trustee for a CIS (see Question 6, : Domestic CIS). There is no requirement that a trustee must be approved or appointed to hold the portfolio of assets if the hedge fund is constituted as a corporation or limited partnership. The manager can hold the portfolio of assets or appoint a custodian to do so.
Requirements 21. Describe the key disclosure or filing requirements (if any) that must be done by the fund (for example, in relation to the prospectus or offering memorandum and side letters). The rules depend on whether the fund is constituted as a CIS or a corporation or limited partnership (see Question 23). CIS Authorisation and prospectus requirements under the SFA are not required for offers of units in a CIS to institutional investors (which includes a wide range of investors, such as a bank licensed under the Banking Act (Cap. 19), the government, a pension fund or CIS). If the CIS is offered to retail investors, the prospectus must contain the following information: Basic information. The identity of the: manager; representative; trustee; other parties. The structure of the scheme. The investment objectives, focus and approach. Fees and charges. Risks. Subscription of units. Switching of units. Obtaining prices of units. Any suspension of dealings in securities. Performance of the scheme. Soft dollar (that is, brokerage) commissions or arrangements. Conflicts of interest. Reports. Any specialised collective investment scheme. which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor, and so on); or a prescribed person (including a person who acquires the securities as principal for a consideration of at least S$200,000 for each transaction). Satisfies the following conditions: the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; and no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred: for administrative or professional services; by way of commission or fee for services by certain individuals holding a CMS licence (or exempted from such a licence). The offer of any securities to any person other than an institutional investor, a relevant person or a prescribed person, must be accompanied by a prospectus registered under the SFA, if the securities are both: Acquired in reliance on any of the exemptions above. Subsequently sold within the period of six months from the date of initial acquisition. 22. What are the key requirements that apply to managers/operators of hedge funds? Are there differences between local funds and foreign funds? Can a foreign manager manage a local fund? The manager of a hedge fund must hold a CMS licence for fund management (or be exempted from holding a CMS licence) and be considered fit and proper (see Question 6, ). Legal vehicles and structures 23. What are the main legal vehicles used to set up a hedge fund and what are the key advantages and disadvantages of using these structures? What are the participants interests in the fund called (for example, share or unit)? CIS See Question 8,. Queries and complaints. Other material information. Corporation In relation to the offer of shares or other securities in a fund which is constituted as a corporation, the fund is not required to have a prospectus if the offer of securities: Is made only to: a relevant person (this can be, under the SFA, an accredited investor, or a corporation the sole business of Corporate entity The key advantages of using a corporate structure to set up a hedge fund are that: The hedge fund is a separate legal entity from the manager and investors, and has the capacity to sue and be sued. There is limited liability protection for the shareholders (that is, the investors of the hedge fund). There are the following disadvantages: The hedge fund will not benefit from tax transparency (see Question 13, : Funds).
The capital maintenance rules under the Companies Act (Chapter 50 of Singapore) apply, including rules on: capital reduction; financial assistance; share buyback; share redemption. Limited partnership The investors of the hedge fund benefit from a tax pass through (that is, tax is payable at the level of the investors, not the level of the fund). The limited partnership is also not subject to the capital maintenance rules under the Companies Act (see above, Corporate entity). 24. What are the advantages and disadvantages of using onshore and offshore structures? Onshore The MAS has introduced several fund management tax incentive schemes for funds domiciled in Singapore: Basic tier exemption scheme. A qualifying fund is granted tax exemption on specified income derived by the resident fund company in relation to designated investments (Income Tax (Income from Funds Managed for Foreign Investors) Regulations 2003). To qualify as a qualifying fund, the fund must: be a company incorporated in Singapore; be tax resident in Singapore where the control and management is exercised in Singapore; use a Singapore-based fund administrator; be managed by a fund manager who has a CMS licence or is exempt from holding a CMS licence; incur at least S$200,000 expenses in each financial year; not change its investment objective or strategy after being approved for the tax exemption; and not be a person that was previously carrying on a business in Singapore, where that business in Singapore generated income that would not have been tax-exempt. The fund is subject to corporate income tax at the current corporate tax rate of 17% on non-qualifying income (subject to certain exceptions). Enhanced-tier tax exemption scheme. A qualifying fund is granted tax exemption on specified income derived by the resident fund vehicle in relation to designated investments (section 13R, Income Tax (Income from Funds Managed for Foreign Investors) Regulations 2003 (Regulations)). To qualify as a qualifying fund, the fund must: be a: company; trust (other than a trust that is an approved pension or approved provident fund, an approved central provident fund (CPF) unit trust or designated unit trust, or a real estate investment trust); or limited partnership; have a minimum fund size of S$50 million in committed capital; be managed or advised directly throughout each basis period relating to any year of assessment by a fund management company. The fund management company must: hold a CMS licence for fund management or be exempt from the requirement to hold a CMS licence under the SFA, or otherwise be approved by the Minister or such other persons as he may appoint; and employ at least three investment professionals who earn more than S$3,500 per month and are engaged substantially in the activity of fund management. Examples include portfolio managers, research analysts and traders. incur at least S$200,000 local business spending in each basis period (according to accounting principles and including, but not limited to, expenses paid to local entities in relation to remuneration, management fees and other operating costs) relating to any year of assessment; not change its investment objective/strategy after being approved for the tax exemption scheme; and not concurrently enjoy other tax incentive schemes. The MAS is the approving authority for these schemes, and approval is entirely at the MAS discretion and cannot be guaranteed. The MAS must be satisfied that the conditions are fulfilled and that the fund is not being established to circumvent the antiavoidances rule of Singapore taxation through converting its existing investment business into a fund. A hedge fund organised as a trust will not be granted DUT status (see Question 13, : Funds). Offshore The disadvantages of an offshore domicile is that if the fund manager is based in Singapore and most of the fund management activities are conducted out of Singapore, the Singapore tax authorities are likely to consider that the fund has permanent establishment status in Singapore. This will subject the fund to Singapore taxation. Tax treatment 25. Describe the tax treatment for: Funds. Resident investors. Non-resident investors. Funds. See Question 24, Onshore and Question 13. Resident investors. If the hedge fund s application for the basic or enhanced tier tax exemption schemes is approved by the MAS,
income from the Singapore-domiciled hedge fund is exempt from tax at the entity level. Therefore, a shareholder is exempt from tax on its share of the income from the fund, regardless of its individual or corporate status, and regardless of its tax residency status. non-resident investors. See above, Resident investors. Restrictions 26. Can participants redeem their interest? Are there any restrictions on the right of participants to transfer their interests to third parties? offers of units in a Cis See Question 10,. offers of shares in a closed-ended fund Participants in a closed-ended fund do not typically have a right to redeem their shares in the fund. Fund managers typically impose certain restrictions on the right of participants to transfer their interests to third parties to prevent any legal, fiscal, regulatory, pecuniary or material administrative complications for the fund or the shareholders of the fund as a whole. Reform 27. Please summarise any proposals for the reform of hedge fund regulation in your jurisdiction. Please summarise any litigation or enforcement action relating to fund regulation in your jurisdiction. See Question 14. On 27 April 2010, MAS issued a consultation paper proposing changes to the fund management regulatory regime in Singapore. The proposed changes represent an evolution of the existing regulatory regime and seek to: Enhance the supervisory control over entities that currently operate under the exemption regime. Raise the quality of market entrants to the fund management industry. The following are some of the changes proposed by the MAS: Competency requirements. All fund management companies must have at least two directors with experience in the financial services industry and employ at least two representatives. The CEO, directors and representatives of all fund management companies are required to meet MAS Fit and Proper Criteria. Business conduct requirements. The business conduct requirements that apply to Capital Market Licence Holders in the Securities and Futures (Licensing and Conduct of Business) Regulations will apply to all fund management companies. MAS has also proposed business conduct requirements for fund management companies relating to custody and fund administration, compliance arrangements and professional indemnity insurance. Base capital requirements. Fund management companies whose assets under management are not more than S$250 million, and who serve not more than 30 qualified investors, must have a base capital of at least S$250,000. The submission of feedback to the consultation paper closed on 31 May 2010. On 28 September 2010, the MAS issued its response to the feedback received on its consultation paper. The current regulatory regime for fund managers will remain in place and the MAS will consult on draft legislative amendments in the coming months before putting into effect the legislative amendments in the second half of 2011. There will be a six-month transitional period before the legislative amendments take effect. ContRiButoR details KAH Keong low WongPartnership LLP t +65 6416 8209 f +65 6532 5711 e kahkeong.low@wongpartnership.com w www.wongpartnership.com Qualified. England and Wales, 2009; Singapore, 1998 Areas of practice. Mergers and acquisitions; corporate finance; asset management and collective investment schemes. Recent transactions. Acting for EPURON Pte Ltd in establishing Renewable Energy Trust Asia, the first private business trust investing in Asia-Pacific renewable energy projects. Acting for DBS Asset Management Ltd in the establishment and IPO of DBS Singapore STI ETF. Acting for Executives Meeting of East Asia and Pacific Central Banks, in the establishment and IPO of the ABF Singapore Bond Index Fund, the first Singapore bond tracker fund to be listed on the Singapore Exchange.