CONSENT PROVISIONS IN PLAIN ENGLISH
As at 21/4/2019
From 8 April 2019, accredited investors (“AI” or “accredited investors”), as defined in the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), are entitled to choose to be treated as AIs or choose not to be (in a process known as “opt-in”). Non-AIs enjoy certain protections under the SFA and the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”) and the regulations, notices and guidelines issued under the SFA and FAA (collectively and including the regulations, notices and guidelines, the “Acts”).
The Acts contain certain provisions for the protection of retail (non-AI) customers which are known as the “consent provisions”. We are required by law to explain to all AIs in plain language what these consent provisions are. This page will be updated from time to time as we receive feedback from our customers to make the explanation more reader-friendly. We also need to make changes to the explanation because of amendments to the Acts. Please refer back to this page constantly for the latest version of the explanation. At the top of the page, we will indicate the date of the latest version of the explanation.
The SFA consent provisions:
Compensation from fidelity fund under Section 186(1) of the SFA
Section 186(1) of the SFA provides for a fidelity fund to be held and applied for the purposes of compensating persons who suffer pecuniary loss because of what the SFA terms as a “defalcation” committed by a member of an approved exchange’s members or their agents. In Singapore, this fidelity fund is established by an exchange approved by the Monetary Authority of Singapore (“MAS”) which is the financial services regulator in Singapore. Section 186 makes it clear that this fidelity fund is not available to accredited investors. If you are an accredited investor, you lose the protection of this fidelity fund if you deal with an approved exchange and suffer losses as a result of a defalcation by a member of the approved exchange dealing with capital markets products in relation to any money or property entrusted to it.
Sections 275 and 305 of the SFA – offer of capital markets products
All offers of securities and securities-based derivatives contracts, and units of collective investment schemes must be accompanied by a prospectus, and the prospectus be lodged with MAS, unless these offers are exempted from the prospectus requirement. The prospectuses that accompany the offers must also not contain statements that are false and misleading, otherwise the issuers and manager and underwriter may be criminally liable and also be liable to compensate any person who suffers losses because of the false or misleading statement(s). There is therefore a duty on those who issue prospectuses to ensure that the contents are accurate.
However, sections 275 and 305 of the SFA allow issuers to make offers to accredited investors (and other non-retail investors) without a prospectus, although in some cases, an information memorandum which contains less information than a prospectus, must still accompany the offer. This means that as an accredited investor, you may receive less information that a retail investor would when you subscribe for the securities and other capital markets products from an issuer. You may also not be able to rely on the provisions in the SFA regarding compensation claims under civil proceedings against an issuer of the capital markets products.
As an accredited investor, you will be able to purchase the capital markets products in the secondary market from another accredited investor.
Restrictions on Advertisements under Sections 251 and 300 of the SFA
These sections prohibit any advertisement or similar publication to be made for an offer of capital markets products. But these sections allow a preliminary document containing oral and written materials to you. You should consider if such communications may influence you in the same way as advertisement or other marketing and promotional materials do.
Part III of the Securities and Futures (Licensing and Conduct of Business) Regulations (“LCBR”)
Holders of a capital markets services licence (“”) are required by the LCBR to hold the monies of their customers in a trust account opened with a specified financial institution, and the assets of their customers in a separate custody account. This is to ensure that the customer’s money and assets are not commingled with that of the CMSL holder. Thus, if the CMSL holder becomes insolvent, its customers’ monies and assets cannot be used to pay its debts. Accredited investors have the option of directing the CMSL holder to deposit monies and assets into accounts that they themselves designate whereas for retail investors, all monies and assets must be held in the trust or custody account respectively.
In addition, retail customers have the benefit of receiving disclosures about how their assets are held. There are also restrictions on a CMSL holder’s rights on the transfer of a retail customer’s assets to itself. These restrictions may affect your flexibility to enter into certain arrangements with us or other CMSL holders, such as providing collateral and margin, but they are intended to protect you since the CMSL holder cannot transfer your assets to itself if you are a retail investor.
Regulations 47BA and 47E
Regulation 47BA prohibits a CMSL holder from acting for its retail customers as an agent when dealing in capital markets products that are over-the-counter derivatives contracts and/or spot foreign exchange contracts for the purposes of leveraged foreign exchange trading. Regulation 47E requires a CMSL holder to make risk disclosures to its retail customers before it can open a trading account for them or provide fund management services, if the account or the fund management services are for trading in futures contracts, spot foreign exchange contracts for the purposes of leveraged foreign exchange trading or FX OTC derivatives contracts. Although we may still provide these risk disclosure to you, we are not required by law to do so when you are an accredited investor.
Regulations 3A(5)(c), (d), (e) and (7)
These regulations provide that when a representative of a CMSL holder meets with a member of the public or a retail investor, the representative must be accompanied or duly supervised by an appointed representative, a director, a compliance officer or other supervisor. There is no such requirement when meeting with or communicating with an accredited investor. Section.
A CMSL holder for dealing in certain capital markets products is required to lodge with MAS a deposit of S$100,000 for the duration of its licence. This deposit will be used by MAS for the purpose of compensating any person (other than an accredited investor, expert investor or institutional investor) who suffers pecuniary loss as a result of any defalcation committed by the CMSL holder or any of its agents in relation to any money or other property which were entrusted to it in the course of the regulated activity. If the CMSL holder deals in capital markets products only with accredited investors, the deposit is not even required. This means you will not have the benefit of being compensated from this deposit if you opt to be treated as an accredited investor.
Generally, a CMSL holder for fund management must hold the customers’ assets with an independent custodian, but there is an exemption for closed-end funds which are offered only to accredited investors.
A CMSL holder can only lend or arrange for a custodian to lend the specified products of its customer if it has explained the risks involved to the customer and obtained the customer’s written consent to lend those products. There is no requirement imposed by law on us to explain these risks although in practice we will do so.
Retail customers are entitled to receive from a CMSL holder a monthly statement of account containing certain particulars prescribed under Regulation 40(2) of the LCBR, as well as a quarterly statement. Accredited investors can choose not to receive the monthly statement or to receive the statements in the form of electronic records stored in an electronic facility.
If a CMSL holder borrows certain assets from its customers, it usually must provide collateral for borrowing the assets but this does not apply when borrowing from accredited investors. Even if the CMSL holder does provide collateral, the agreement with the accredited investors doe not need to include a requirement to mark the value of the assets to the market on every business day.
This regulation provides that accredited, institutional and expert investors need not receive disclosures of certain interests in respect of underwriting agreements including a CMSL holder’s interests in specified products when offering to sell specified products otherwise than in the ordinary course of trading on an approved exchange or recognised market operator or recommending specified products.
This regulation exempts the CMSL holder from making general risk disclosures to accredited, institutional and expert investors in respect of specified capital markets products (capital markets products other than futures contracts, spot foreign exchange contracts for the purposes of leveraged foreign exchange trading and foreign exchange over-the-counter derivatives contracts) when opening trading accounts for transactions relating to these specified capital markets products. The CMSL holder also cannot enter into transactions for the sale and purchase of specified capital markets products unless it has informed the retail customer whether it is acting as principal or agent.
The FAA consent provisions
Regulations 4A(4)(c), (d), (e) and (6) of the Financial Advisers Regulations (“FAR”)
Similar to regulation 3A of the LCBR, regulation 4A(4)(c), (d) and (e) of the FAR provides that where an FA appoints an individual as a provisional representative in respect of any financial advisory service, this representative has to be accompanied or duly supervised by an appointed representative, a director, a compliance officer or other supervisor. There is no such requirement when meeting with or communicating with an accredited investor.
Regulation 28 of the FAR provides an exemption to a corporation, not being a financial adviser licensed or exempted under the FAA (“FA”) ,which carries on the business of advising others either directly or through publications or writings or by issuing or promulgating research analyses or research reports, concerning bonds to an expert investor or an accredited investor, from having to hold a financial adviser’s licence. FAs who carry on the business described above (relating to bonds) are exempted from having to comply with requirements set out in sections 26 to 29 and 36 of the FAA. These requirements are:
an obligation not to make any false or misleading statement or to employ any device, scheme or artifice to defraud,
have a reasonable basis for any recommendation on an investment product that is made to a customer,
comply with regulations issued by MAS as to how an FA may receive or deal with customer’s money or property in relation to specified activities.
to furnish information about any matter related to its business to the MAS if required by MAS, and
an obligation to disclose its interests when an FA sends a circular or other written communication in which a recommendation is made in respect of specified products (securities, specified securities-based derivatives contracts or units in a collective investment scheme).
A licensed or exempt financial adviser that issues research analysis or research reports under an agreement with a foreign research house is not legally responsible for the contents of such analysis or reports if these are issued to an accredited investor. The analysis or report will also not need to contain a disclaimer of legal responsibility.
This regulation exempts an FA from the obligation under section 25 of the FAA to disclose to its customers and prospective customers all material information relating to any designated investment product recommended by the FA, and provides that MAS may prescribe the form and manner in which the information shall be disclosed.
Section 25 needs to be read with the “MAS Notice on Information to Clients and Product Information Disclosure” [Notice No. FAA-N03] which sets out the standards to be maintained by a FA and its representatives with respect to the information they disclose to customers.
The MAS Notice contains the general principles that apply to all disclosures by an FA to its customers and the specific requirements as to the form and manner of disclosure that the FA has to comply with in relation to, among others, section 25 of the FAA. Accredited investors may not be provided with all material information as mandated or suggested by the MAS Notice referred above and other relevant guidance.
This regulation exempts an FA from the obligation under section 27 of the FAA for an FA to have a reasonable basis for any recommendation on an investment product that is made to a customer. The FA is required to assess the investment objectives, financial situation and needs of the customer, and to conduct investigation on the investment product that is the subject matter of the recommendation, as is reasonable in all the circumstances. If the FA does not do so, the customer may have a statutory cause of action to file a civil claim against the FA for investment losses suffered by the customer. The conditions are that the customer suffers loss or damage as a result of doing a particular act (or refraining from doing a particular act) in reliance on the recommendation, where it is reasonable (having regard to the recommendation and all other circumstances) for the customer to have done so in reliance on the recommendation. The FA is also subject to an MAS notice known as
Some of the requirements of the Notice
the type of information the FA needs to gather from its customer as part of the “know your customer” process,
the manner in which the FA should conduct its analysis of the customer’s financial needs and how it should present its investment recommendations; and
documentation and record keeping requirements relating to this process. An FA must ensure that, before it makes any recommendation on an investment product which is neither listed nor quoted on an organised market, it has been informed by the product manufacturer of the investment product as to whether the investment product is a “Specified Investment Product” (which includes units of a collective investment schemes and structured notes).The FA is required provide details of the Specified Investment Product to a customer who intends to transact in the investment product.
An FA is required to conduct a review of a customer’s knowledge and experience in derivatives for the purpose of making a recommendation to the customer on, or allowing the customer to transact in, a Specified Investment Product which is listed for quotation or quoted on, an organised market, before making a recommendation on any listed Specified Investment Product. If an investment product is an unlisted or unquoted Specified Investment Product, prior to making a recommendation on such investment product, an FA is required to conduct an assessment of the customer’s knowledge and experience in unlisted and unquoted Specified Investment Products. For individual customers (that is natural persons), the FA must take into account information on the customer’s educational qualifications, investment experience and work experience
An FA is also required to furnish a customer with certain prescribed risk warning statements before making a recommendation on any overseas-listed investment product and obtain the customer’s acknowledgement in respect of such risk warning statement.
An FA need not comply with these procedures when dealing with an accredited investor.
This regulation exempts an FA from the obligation under section 36 of the FAA to include a concise statement of any interest that FA may have in the securities, specified securities-based derivatives contracts or units in a collective investment scheme that it is recommending, with a circular or other written communication relating to the recommendation.
When dealing with accredited investors, the FA therefore will not need to disclose its interest in those products that it is recommending to them.
Regulations 34A and 35
Regulation 34A exempts an FA from the obligation under section 38 of the FAA for an FA to establish and maintain a remuneration framework that contains terms consistent with the requirements prescribed by MAS for the purpose of (a) reviewing and assessing the performance of its representatives and supervisors; and (b) determining the remuneration of its representatives and supervisors. The FA must review and assess the performance, and determine and pay the remuneration, of its representatives and supervisors in accordance with such remuneration framework.
Regulation 35 exempts an FA from the obligation under section 39 of the FAA to have an independent sales audit unit that reports to the board of directors and chief executive officer of the FA or such unit determined by the board of directors or chief executive officer which is independent from all units of the FA which provide financial advisory services. Such independent sales audit unit is required to audit the quality of the financial advisory services provided by the representatives of the FA and to carry out the functions and duties prescribed by MAS, in the prescribed manner. MAS had issued notices and guidelines relating to a balanced scorecard framework that provide guidance relating to the FA’s obligations under sections 38 and 39 of the FAA.
An FA who deals only with an accredited investor who is a natural person is therefore not required to have a framework as described above for its representatives.
Regulation 18B of the FAR
Regulation 18B of the FAR provides that before selling or marketing certain new products, an FA is required to carry out a due diligence exercise to ascertain whether such new product is suitable for a targeted client. The due diligence exercise must include an assessment of those areas listed in regulation 18B(2), including (i) an assessment of the type of targeted client the new product is suitable for and whether the new product matches the customer base of the FA; (ii) investment objectives of the product and the key risks for a customer who invests in it; (iii) the processes in place for a representative of the FA to determine whether the new product is suitable for the targeted client; (iv) costs and fees of the new product compared with existing products; and (v) the training of representatives and support system for the new product. The FA is prohibited from selling or marketing any new product to any targeted client unless every member of its senior management has, on the basis of the result of the due diligence exercise, personally satisfied himself that the new product is suitable for the targeted client and personally approved the sale or marketing of the new product to the targeted client.
Regulation 18B(9) exempts an FA from this due diligence process if the targeted client is not an accredited, expert or sophisticated investor.