CSDR – being disciplined in your settlement discipline

The new VCC framework for Singapore fund managers was launched last month. The Variable Capital Companies – or VCC – regime is designed to attract more fund managers to Singapore. Here we summarise the key features of the new VCC regime and what you need to keep in mind if you’re thinking of applying.

What is the VCC regime?

The VCC regime is a new corporate structure for all types of collective investment schemes in Singapore, governed by the Variable Capital Companies Act (VCC Act). The regime, which became effective on 15 January 2020, will be jointly governed by the Accounting and Corporate Regulatory Authority (ACRA) and the Monetary Authority of Singapore (MAS).

What are the key features of the VCC structure?

  • The VCC structure is applicable to both open-ended and closed-end funds.
  • Each share in a VCC equals to a unit of a collective investment scheme (CIS). So a member of a VCC can receive profits from the VCC’s property in accordance with the number of VCC shares held and the rights set out in the VCC’s constitution.
  • The paid-up capital of the VCC should be equal to its net asset value at all times.
  • The shares of the VCC must be issued, redeemed and repurchased at a price representing its proportionate share of the VCC’s net asset value (subject to any adjustments for fees and charges provided for in the constitution), except for certain closed-end funds listed on a securities exchange.
  • While normal companies are restricted to paying dividends only out of profits in Singapore, in the case of Variable Capital Companies, dividends can be distributed, and capital can be redeemed or repurchased out of the VCC’s net asset value.
  • The holding of an Annual General Meeting can be determined by the Board of Directors of the VCC by providing a minimum of 60 days’ written notice to the members of the VCC.
  • One of the directors of the VCC must be a Singapore resident and a director or a qualified representative of VCC’s fund manager. All directors of a VCC must comply with the “fit and proper” criteria.
  • A VCC is required to have its registered office in Singapore and to appoint a local company secretary in Singapore.
  • A VCC is not required to have its register of members open for public inspection.
  • The VCC must have a MAS-licensed manager to manage its property or to operate the CIS unless the it is exempted from holding a MAS license under the Securities and Futures Act.
  • The VCC cannot be its own manager.

What are the fund structures allowed under the VCC regime?

  • The VCC can be set up as a stand-alone fund or as an umbrella fund with multiple sub-funds.
  • Sub-funds can be created by the approval of the VCC’s directors but not the members of the VCC.
  • Sub-funds can share the same board of directors and group of service providers, for example, fund manager, custodian, auditor and administrative agent.
  • Members may hold shares of a particular sub-fund held by the VCC.
  • The VCC Act does not allow the assets of a sub-fund to be discharged against the liabilities of or claims against the VCC or any other sub-fund of the VCC. Only the assets of that particular sub-fund can be discharged against any liability incurred on behalf of or attributable to the same sub-fund.

Is a custodian required for a VCC?

  • Yes, an approved custodian must be appointed to supervise custody of the assets of a VCC which is an authorised (ie. retail CIS) or restricted CIS (ie. offered only to accredited/institutional investors).

What about tax?

  • A VCC is treated as a company and a single entity for tax purposes, that is, only one set of income tax returns is required to be filed with the Inland Revenue Authority of Singapore.
  • The VCC will be eligible for existing tax exemptions for Singapore-domiciled funds, such as the Singapore Resident Fund Scheme and the Enhanced Tier Fund Scheme, if it could meet the qualifying conditions for these schemes.

Can existing funds in other jurisdictions be re-domiciled to Singapore under VCC?

  • Yes, funds domiciled in other jurisdictions which have a comparable structure can redomicile in Singapore as a VCC by applying to the ACRA to transfer their registration.

Any other VCC requirements to keep in mind?

  • VCCs are required to audit their accounts (only required to be available to shareholders but not the public).
  • For umbrella VCC, there should be separate audit performed for each sub-fund.
  • The audited financial statements must be prepared consistently across all sub-funds in accordance with accounting standards from the Singapore Accounting Standards Council (ASC) or International Financial Reporting Standards (IFRS), or US GAAP if the VCC is offered only to non-retail investors.
  • A VCC may be wound up by either its members voluntarily, by passing a special resolution for winding up, or by a court order provided the conditions under the VCC Act are satisfied.
  • Other grounds for winding up: the VCC is being used to conduct non-CIS related business; the VCC is not managed by a MAS-licensed fund manager; or the VCC breaches its AML/CFT obligations.

How long does it take for the incorporation of a VCC?

  • It will usually take no more than 14 days to process an application form (from the date of submission of all required documents).
  • For Transfer of Registration, it may take up to 60 days.
  • If referral to another government agency is required, it may take up to 60 days.

Anti-money laundering (AML) requirements for VCCs

  • A VCC is required to comply with Notice VCC-N01 with respect to AML and Countering the Financing of Terrorism (AML/CFT), and be supervised by MAS for compliance.
  • The VCC must appoint one single eligible financial institution (EFI) to conduct the necessary checks in relation to AML/CFT, based on the VCC’s own AML/CFT policies. EFIs are required to provide information/documents on the checks they have performed upon the VCC’s request.
  • The VCC will be responsible for any breaches of its AML/CFT requirements.
  • The VCC will need to appoint a person who is suitably qualified and in the management level to be the AML/CFT compliance officer of the VCC.
  • While the VCC does not require any dedicated employees, and could rely on the EFI for its internal audit, training and record-keeping functions, the VCC will still be ultimately responsible. VCC can rely on due diligence done by fund distributors for the underlying investors.
  • An EFI can rely on another financial institution to carry out the CDD in relation to AML/CFT. As always, the EFI should assess and document why such reliance is appropriate, and cannot rely on the third party to conduct ongoing monitoring of business relations with customers.

Accessing the VCC Grant Scheme

To encourage fund managers to adopt the VCC framework, the MAS has introduced a VCC Grant Scheme to help with some of the costs.  For a 3-year period, up to 70% (or S$150k, whichever is lower) of the costs of incorporating and registering the VCC would be co-funded by the Financial Sector Development Fund.

How can we help?

Bovill can provide advice on the application of the VCC, the MAS licensing for the fund manager of VCC, and to establish/review the AML/CFT framework of the VCC.