The Monetary Authority of Singapore ("MAS") has on 15 October 2021 promulgated the Securities and Futures (Closed-End Fund) (Excluded Arrangements) Notification 2021 ("Closed-End Fund Notification 2021"). The Closed-End Fund Notification 2021 takes effect from 21 October 2021 and brings within the fold of collective investment schemes foreign funds that are established prior to 1 July 2013 and re-domicile to Singapore as registered variable capital companies ("VCCs") under the Variable Capital Companies Act 2018 (No. 44 of 2018) ("VCC Act").

Background

Under the Securities and Futures Act (Chapter 289) ("SFA"), closed-end funds were generally not considered to be included in the meaning of collective investment schemes. This is by reason of the explicit exclusion that is contained in the statutory definition of a collective investment scheme in section 2(1) of the SFA.

However, since 1 July 2013, because of the Securities and Futures (Closed-end Fund) (Excluded Arrangements) Notification 2013 (the "Closed-End Fund Notification 2013"), many classes of closed-end funds were brought back into the fold and deemed to be collective investment schemes if they met certain requirements.

The SFA contains in section 2(1) an elaborate definition of what a collective investment scheme means. A collective investment scheme is essentially an investment arrangement that has the various elements stipulated in the statutory definition. However, if the units of the scheme are exclusively or primarily non-redeemable at the election of the holder of the units, then such a scheme is instead considered to be a closed-end fund. A closed-end fund is explicitly excluded from being regarded as a collective investment scheme by virtue of a carve-out in the statutory definition of a collective investment scheme.

The term "closed-end fund" is also defined in section 2(1) of the SFA. Essentially, it is an arrangement that would have fallen within the statutory definition of a collective investment scheme but for the fact that its units are exclusively or primarily non-redeemable at the election of the holder of the units.

Prior to 1 July 2013, exclusive or primary redeemability was a feature that served to clearly distinguish between what investment arrangements were considered to be collective investment schemes on the one hand, and what investment arrangements were considered to be closed-end funds on the other hand.

With effect from 1 July 2013, paragraph 2 of the Closed-End Fund Notification 2013 blurred this distinction by providing that, for the purposes of a statutory definition of a closed-end fund, an arrangement that is referred to in paragraph (a) of the statutory definition of a collective investment scheme, will not be considered to be a closed-end fund if it has all of the following additional characteristics:

  1. the arrangement is constituted on or after 1 July 2013;
  2. all or most of the units issued under the arrangement cannot be redeemed at the election of the holders of the units;
  3. under the investment policy of the arrangement, investments are made for the purpose of giving participants in the arrangement the benefit of the results of the investments, and not for the purpose of operating a business; and
  4. the arrangement has one or more of the following characteristics:
    1. the investment policy of the arrangement is clearly set out in a document that is provided to each participant in the arrangement before, or at the time, the participant invests in the arrangement;
    2. there is a contractual relationship between the entity in which the investments are made and every participant in the arrangement, which requires the entity to comply with the investment policy, as amended from time to time, of the arrangement; and
    3. the investment policy of the arrangement sets out the types of authorised investments, and the investment guidelines or restrictions, that apply to the arrangement.

In a nutshell, a collective investment scheme is defined as an arrangement having certain features, but it specifically does not include a closed-end fund. A closed-end fund is in turn defined as an arrangement having the same features as a collective investment scheme but which units are exclusively or primarily non-redeemable.

Along came the Closed-End Fund Notification 2013 which provided that an arrangement that is formed after 1 July 2013 and having features that would have made it a closed-end fund is nevertheless not a closed-end fund if it had certain additional characteristics (set out above). The result is that an arrangement that would have been a closed-end fund (and therefore not a collective investment scheme) but having the additional characteristics set out above would in the overall result, be a collective investment scheme afterall.

Foreign funds re-domiciled to Singapore as VCCs

Pursuant to the VCC Act which came into force in January 2020, foreign funds that intend to be re-domiciled to Singapore as VCCs may do so under Part 12 of the VCC Act.

However, the statutory definitions of a collective investment scheme and of a closed-end fund in the SFA were not amended in tandem to account for foreign funds established prior to 1 July 2013 that re-domiciled to Singapore pursuant to Part 12 of the VCC Act. The result is an apparent regulatory gap in that such foreign funds, despite after having re-domiciled to Singapore as VCCs under Part 12 of the VCC Act, are still not considered to be collective investment schemes but are instead closed-end funds.

The Closed-End Fund Notification 2021

To address this gap, the MAS has now promulgated the Closed-End Fund Notification 2021, which takes effect from 21 October 2021. The 2021 notification adopts a structure similar to the 2013 notification.

Pursuant to paragraph 2(1) of the Closed-End Fund Notification 2021, for the purpose of the statutory definition of a closed-end fund, an arrangement that is referred to in paragraph (a) of the statutory definition of a collective investment scheme in section 2(1) of the SFA, will not be considered to be a closed-end fund if it has all of the following additional characteristics:

  1. the arrangement is constituted in the form of, or as part of, a foreign corporation before 1 July 2013;
  2. the foreign corporation has applied to be registered as, or is registered as, a VCC under Part 12 of the VCC Act;
  3. under the investment policy of the arrangement, investments are made for the purpose of giving participants in the arrangement the benefit of the results of the investments;
  4. the arrangement does not carry on any business other than investment business and does not carry on any activity other than any activity that is solely incidental to the investment business; and
  5. at least one of the following is satisfied:
    1. the investment policy of the arrangement is clearly set out in a document that is provided to each participant in the arrangement before, or at the time, the participant first invests in the arrangement;
    2. the foreign corporation is contractually bound to every participant in the arrangement to comply with the investment policy of the arrangement, as may be amended from time to time; and
    3. the investment policy of the arrangement sets out the types of property which the arrangement is authorised to invest in, and the investment guidelines or restrictions that apply to the arrangement.

The net result that a foreign fund that is re-domiciled as a Singapore VCC and that meets all of the above requirements will be treated as a collective investment scheme rather than as a closed-end fund.

However, one must also take note of paragraph 2(2) of the Closed-End Fund Notification 2021, which effectively provides that the arrangement would revert to being a closed-end fund (and consequently not a collective investment scheme) if:

  1. the foreign corporation's application to be registered as a VCC under Part 12 of the VCC Act is refused; or
  2. the registration of the foreign corporation as a VCC is revoked under the VCC Act.

In effect, starting from 21 October 2021, foreign funds that are converted into VCCs as a result of re-domiciliation under the VCC Act would be regarded as collective investment schemes (rather than as closed-end funds) and would be subject to the usual suite of regulatory rules relating to collective investment schemes.

Impact assessment

The introduction of the Closed-End Fund Notification 2021 is timely, as it addresses the inconsistency in the regulatory treatment between foreign funds established before 1 July 2013, and those on or after 1 July 2013, in circumstances where the funds are applying to re-domicile as Singapore VCCs.

It is unfortunate that the language used in the statutory definitions and in the two sets of notifications have taken such a convoluted form. But perhaps too much water has now passed under the bridge for us to consider further changes to simplify the wording.

A copy of the Closed-End Fund Notification 2021 may be obtained here.

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