Regulatory round-up for Fund Managers
13 February 2017
As we move from one new year (January 2017) into another (Chinese New Year), we take stock of some of the interesting regulatory and associated developments that are relevant for fund managers based in Asia.
(a) Introduction of new short-selling requirements
The recent Securities and Futures Amendment Bill introduced requirements to enhance the transparency on the level of short-selling in securities listed on Singapore’s approved exchanges. Detailed requirements were introduced in a consultation paper on short selling by the Monetary Authority of Singapore (MAS) in December 2016.
According to the IOSCO Technical Committee’s Task Force on Short Selling, “short selling plays an important role in the market for a variety of reasons, such as providing more efficient price discovery, mitigating market bubbles, increasing market liquidity and facilitating hedging and other risk management activities. However, there is also a general concern that especially in extreme market conditions, certain types of short selling, or the use of short selling in combination with certain abusive strategies, may contribute to disorderly markets.”
Some examples of the destabilising effect of short-selling were volatility in the shares of Noble Group in 2015 and Olam International in 2012. As a regulator MAS wants to preserve the sanctity of an efficient and orderly financial market and hence the introduction of these new rules and guidelines around short-selling. These changes would largely affect fund managers, particularly hedge fund managers, and other institutional investors.
The proposed changes will bring Singapore in line with international market practice on transparency in short selling. The changes include the following requirements:
- Mark short sell orders
- Disclose short-sell orders to the approved exchanges
- Report short positions above a prescribed threshold amount to MAS.
The consultation paper also includes details on securities that would be subject to the reporting requirements and persons responsible for reporting short-sell orders would be the legal owners and not the beneficial owners. For example, in the case of a trust or unit trust, the reporting obligation would sit with the trustee rather than the unitholders. For funds structured as companies, the reporting obligation will be imposed on the company.
It is important for fund managers to understand the details of how positions should be calculated and aggregated for reporting, and where the reporting obligations of the funds they manage would lie (i.e. with the trustee or the company structured as a fund) and the implementation of the short position reporting system by MAS on its website by the end of March 2017.
(b) Clarification on licensing requirement for single family offices
Some good news for single family offices in Singapore. MAS does not intend to license or regulate single family offices. Since a single family office is not defined under the Securities and Futures Act (SFA) or the Financial Advisers Act (FAA), MAS clarified that a ‘single family office’ would mean an entity which manages assets for or on behalf of only one family and is wholly owned or controlled by members of the same family. The term ‘family’ in this context may refer to individuals who are lineal descendants from a single ancestor, as well as the spouses, ex-spouses, adopted children and step children of these individuals. A single family office may rely on the exemption provided for a corporation which manages funds for its related corporations, under paragraph 5(1)(b) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations.
In cases where an entity manages funds on behalf of a single family in substance, but does not fall neatly within the scope of existing class licensing exemptions, the entity may seek a licensing exemption from MAS under section 99(1)(h) of the SFA which may be granted by MAS on a case-by-case basis. The processing time for a licensing exemption application is between two and four months.
Any entity seeking such exemption should apply to MAS with information on the shareholding structure and the shareholders and directors of the single family office, description of how the single family office is related to the investment fund vehicle and the family/beneficiaries and the profile of the family whose assets will be managed.
As a general guide, MAS considers the following arrangements to be broadly typical of single family office arrangements:
- Where there is no common holding company, but the assets managed are held directly by natural persons of a single family
- Where assets are held under a discretionary trust and the settlor of the trust and the beneficiaries are members of the same family
- Where non-family members such as key employees of the single family office are shareholders in the firm for the purpose of alignment of economic interest and risk-sharing but the initial assets and additional injection of funds are funded exclusively by a single family.
(c) India-Singapore DTAA
India and Singapore have amended a two-decade old tax treaty to gradually phase out the capital gains tax exemption for investments in India from 1 April 2017. As a result, shares acquired prior to 1 April 2017 will be grandfathered such that the existing tax exemption on capital gains of such shares would be preserved. However for shares acquired on or after 1 April 2017, with the exception of a two-year transition period where capital gains from investments will be taxed at 50% of India’s domestic tax rate, investments into India from Singapore will attract the full prevailing capital gains tax.
This provides a level playing field into all jurisdictions from Singapore and removes any preferential use of the jurisdiction for investments into India. It also plugs the ability of round-tripping of funds and tax arbitrage by setting up funds in tax friendly jurisdictions. Funds being set-up offshore for investments into India will now depend on a jurisdiction’s regulatory framework, efficiency, administrative convenience, costs and countries from where foreign investors’ are sought.
This may impact short term investors, but not long-term investors like the VC/PE industry players as tax tends not to be the primary driver for such players in deciding on investments.