Circular to Fund Management Companies and Unit Trust Management Companies - Ensuring Investor's Interests are Protected

9 April 2020

ENSURING INVESTORS’ INTERESTS ARE PROTECTED

Given the unprecedented conditions within which intermediaries are operating under the Movement Control Order (MCO) to curb the spread of Covid-19 in the country and the increase in volatility of markets that is presently seen, the SC as the capital market regulator remains resolute to ensure that markets operate in a fair and orderly manner, and investor protection is upheld.

This circular serves to reiterate that good governance, proper conduct and continuous compliance to applicable rules and regulations are imperative to the functioning of capital market intermediaries, especially the investment management professionals licensed by the SC who are responsible for the management of investors’ monies.

The following are the SC’s expectations of Capital Market Services Licence (CMSL) holders managing investors’ monies and funds, among others: -

Fair treatment of investors and acting in the best interests of clients – This is imperative for the business conduct of product issuers, fund managers, distributors and agents. Among others, this includes a product distributor’s duty to act honestly, fairly and professionally, and undertake suitability assessment before recommending any capital market product to an investor.
Client asset protection – Fund managers need to monitor their custodians to ensure that custodians discharge their responsibilities as prescribed by the Guidelines on Compliance Function for Fund Management Companies, including reconciliation of clients’ accounts and delivery of third-party confirmation of clients’ transactions directly to the respective clients, as well as ensuring that custodians maintain full set of records of all clients’ assets.
Communication with investors/clients – Given the increase in market volatility, intermediaries must ensure that clients are informed of the potential risks in funds they intend to invest in. Among others, intermediaries should explain to the client the risks and features of the investment product, including its credit quality, liquidity, termination conditions and transaction costs.
Liquidity risk management (LRM) – Exercise due care, skill and diligence in managing liquidity of funds, in particular, in mitigating potential mismatches between liquidity of the fund’s underlying assets and the redemption terms under which the fund is offered to investors, and in ensuring that actions taken in meeting redemption obligations should not have any material adverse impact on the fund and its remaining investors.

Additionally, liquidity stress testing should be conducted more regularly to assess the impact of market disruptions / conditions on the liquidity and redemption levels of the fund; as well as to pre-empt an emerging liquidity shortage before it occurs and make informed decisions in respect of the fund’s asset composition, LRM and contingency planning.
Cyber risk management – With the increasing use of online avenues to transact and operate businesses, intermediaries are expected to heighten their cyber risk monitoring and management. In addition, intermediaries are reminded to immediately report to the SC via the established channels in the event of a cyber incidence.
Close monitoring and reporting to the SC – Closely monitor the dealing and trading of funds under management and immediately report to the SC on any anticipated adverse circumstances relating to the funds under management, including without limitation, the use of any liquidity risk management tools (i.e. suspension of redemptions or the imposition of dilution fee/transaction cost adjustment). Intermediaries must proactively engage with the SC should they foresee any material challenges in managing liquidity of any of their funds or experience significant decrease in the value of their funds. Additionally, it is imperative that intermediaries continue to ensure that the required reporting obligations are met, including timely notification of unusual redemptions exceeding the prescribed threshold.
Business continuity preparedness – It is important to ensure that there are appropriate measures in place to ensure any disruption to operations can be properly managed, particularly in the face of uncertainty of being able to operate in normalcy in the coming months.