Law of Malaysia
Funds Management Regulation
Program Agenda
Reference Materials
1. eGuide Module 9: Funds Management Regulation (First Edition 2022)
5. Guidelines – refer to next slide
SC’s Guidelines
Note:
Coverage/Exam Weightage
Section
(Slide)
Composition of Questions (Max)
Number of Question (Max)
Related Topics
5
Guidelines
30%
10
10. SC’s Guidelines relating to fund management
Eligibility requirements for fund management company
Fund management companies are typically engaged in the process of managing investment portfolios in the following ways:
Fund management activities would thus be permitted to be carried out by the following persons without requiring a CMSL:
Significance of the Fund
Management Industry
Significance of the Fund
Management Industry
Significance of the Fund
Management Industry
Providers of Fund Management Services
Fund Structures in Malaysia
(i) Objectives - Growth, Income, Balanced, Conservative
(ii) Assets - Equity, Fixed Income, Money Market, Indices, Properties, Alternatives
Support Services
(Fund Services)
• Unit pricing
• Valuations
• Custody
reconciliations
• Corporate actions
• Performance
reporting
• Trade matching and
bookings
• Post trade
compliance
•Financial
statements
• Business activity
statements
• Fund audit
facilitation
• Distribution
calculation
(Transfer Services)
• Client contact
centre
• Client reporting
• Client transactions
• Distribution
processing
• Asset safe-keeping
• Enhanced cash
solution
Support Service Provider
Why we need regulations?
Overview of Law
Overview of Law
Overview of Law
Overview of Law
The preamble to the Capital Markets and Services Act 2007 (CMSA) states that it is:
“an Act to consolidate the Securities Industry Act 1983 [Act 2801 and Futures Industry Act 1993 (Act 499], to regulate and provide for matters relating to activities, markets and intermediaries in the capital markets and for, matters consequential and incidental thereto”
The CMSA is important because, among others, it provides a definition of securities and then prescribes how these securities may be traded. Securities are defined as:
“debentures, stocks or bonds issued or proposed to be issued by any government; shares in or debentures of, a body corporate or an unincorporated body; or units in a unit trust scheme or prescribed investments, and includes any right, option or interest in respect thereof”
The Securities Industry (Central Depositories) Act (SICDA) covers the operation of the Bursa Malaysia Securities Berhad’s scripless settlement system implemented through Bursa Malaysia Depository Sdn Bhd.
To assist in the interpretation of the securities industry laws and regulations, the SC issues numerous Guidelines for the benefit of securities industry participants. In this section we provide a list of those that are particularly relevant to the fund management industry.
• Licensing Handbook
• Guidelines on Compliance Function for Fund Management Companies
• Guidelines on Unit Trust Funds
• Guidelines on Public Offerings of Securities of Closed-end Funds
• Guidelines for the Establishment of Foreign Fund Management Companies
• Guidelines on Prevention Of Money Laundering and Terrorism Financing for Capital Market Intermediaries
• Guidelines on Wholesale Funds
• Guidelines on Exchange-Traded Funds
• Guidelines on Islamic Fund Management
• Guidelines on Outsourcing for Capital Market Intermediaries
Overview of Law
Overview of Law
Overview of Law
Overview of Law
Overview of Law
Overview of Law
Overview of Law
Overview of Law
Capital Market Regulatory
Framework
SSM
INVESTMENT BANK
COMMERCIAL BANK
ISLAMIC BANK
FUND MANAGER
FUND DISTRIBUTOR
ADVISOR/ ANALYSTS/ FINANCIAL PLANNERS
BROKERS
LISTED COMPANIES
Securities Commission (SC)
SC – Regulating the fund industry
SC - Areas of responsibilities include:
The SC’s many regulatory functions include:
Other Regulators
Regulators
Functions
Bank Negara Malaysia (BNM)
• Management of the financial system that
is used by all participants in the unit trust
industry
• Regulation of insurance companies
• Responsible for foreign exchange
markets – Overseas investment activities
of UTS
Companies Commission of Malaysia (SSM)
• Regulates the activities of all companies and business within Malaysia
• Bursa Malaysia
Securities/Clearing/Depository
• Bursa Malaysia
Derivatives/Clearing
• Lay down business rules and other
requirements relating to trading of quoted
shares, ETFs and derivatives in Malaysia
Federation of Investment Managers of Malaysia
The Functions
• The representative body for its
members and the asset (fund)
management industry in Malaysia
• Membership is open to the holder of a
CMSL who carries on the business of
fund management.
“…in awarding over £22 million in damages against the investment manager and its Chief Executive in SPL Private Finance (PF1) IC Ltd and others v Arch Financial Products LLP and others, the court found that the investment manager acted in breach of fiduciary duty, in breach of contract and in breach of its duty to act with reasonable skill and care in managing assets for the Funds.
Although fact specific, the case acts as a useful reminder to investment managers of the duties they owe and the circumstances in which they can be held liable for the management of a client's investment portfolio.”
The Law of Contract
The Law of Contract
The Law of Contract
The Law of Contract
The Law of Contract
The Law of Contract
The Law of Contract
The Law of Contract
Elements of a valid contract
To be enforceable, a contract must have:
• Offer and acceptance
• Consideration
• Intention to create legal relations
• Capacity to contract
• Certainty
Offer & Acceptance
• Offer
– an act of signifying to another the willingness
to do or to abstain from doing anything, with a view
of obtaining the assent of that other to the act of
abstinence.
– only effective if it is communicated to the
acceptor...
• Offer should be distinguished from. “invitation to
treat”.
– An invitation to treat is an attempt to induce
another party to make an offer..
– It is not an offer by itself and not bound by law.
Termination of Offer
• Revocation of the offer – before the offeree accepts.
• Rejection of the offer by the offeree
• Counteroffer by the offeree
• Lapse of time
• Destruction of the subject matter
• Death or incompetence of the offeror/ offeree.
Acceptance
• When a person to whom the promise is made
signifies his assent thereto, the offer is said to be
accepted.
• Acceptance must be communicated/made known
• Acceptance is said to be communicated if it reaches
the proposer/offeror
– communication of acceptance by post is complete when it is
put in the course of transmission to him
The Consideration
• The price which one party pays to buy the promise
or act of the other
• No need to be adequate but must be sufficient
• Can be given by another person
• Cannot be unlawful
• Cannot be past
Intention to Create Legal Relation
• Intention relates to somebody’s state of mind
• Law cannot read the mind – use presumption
• In a business agreement, there is a presumption
that the parties intend to enter into a contractual
relationship/to enforce the contract
• In a social/domestic agreement, it is implied that
no legal relations are contemplated
Capacity to Contract
• Every person is competent to contract who is:
– of the age of majority
– sound mind
– not disqualified from contracting from any law to
which he is subject
Certainty
• Terms in the contract must be certain
• If the terms are uncertain, not capable of being
made certain - the agreement is void
• Unenforceable
– Offers to sell a property for RM50,000 or RM70,000
– a piece of land (where is the land?)
Legal Effects
• Valid contract - Contractual obligations, legal
remedies in the case of breach
• Voidable contracts - can affirm or repudiate the
contract
• Void contracts - cannot be enforced in the court of
law
Voidable Contracts
• Coercion (threat)
• Undue influence
• Fraud (any act to induce another party to enter a
contract)
• Misrepresentation (true/false statement)
• Mistake
Void and Illegal Contracts
• Not enforceable by law
• The consideration or object of an agreement is lawful
unless:
– forbidden by law
– if permitted, would defeat any law
– fraudulent
– it implies injury to a person or property of another
– the court regards it immoral or opposed to public policy
Remedies for breach of contract
• Rescission of contract
• Damages - courts will not award loss if it is too
remote
• Specific performance
• Injunction
Law of Torts & Negligence
• Law of torts - a body of law that
– addresses, and
– provides remedies for,
civil wrongs not arising out of contractual obligations.
• Persons suffer legal damages may law of torts to
receive compensation from those legally responsible,
or liable, for those injuries.
• Negligence - conduct that is culpable because it falls
short of what a reasonable person would do to protect
another individual from foreseeable risks of harm
What is Negligence?
The concept
The concept of negligence describes some activity (such as the discretionary investment of the funds of an investment portfolio) or the making of a statement (such as the giving of investment advice to the trustee of a pension fund) which falls below the standard regarded as normal or acceptable in society. Negligence covers many areas of activity, including road accidents, factory accidents, injuries caused by defective products and financial damage or loss.
Negligent covers
Negligence covers many areas of activity, including road accidents, factory accidents, injuries caused by defective products and financial damage or loss.
Traditionally, a person could only take action in the tort of negligence when they suffered physical damage as a result of a negligent act, such as that described earlier where the plaintiff became ill after drinking a bottle of ginger beer. However, the question of whether damages are recoverable for negligent advice or a negligent misstatement causing financial (rather than physical) damage has been a vexed one and courts have been reluctant to make persons liable in tort for such negligence.
Case study
Today, however, it is more likely that a plaintiff will be successful in a claim for purely economic loss for negligent conduct or negligent misstatement, providing the general principles of negligence are satisfied.
Essential elements of torts
Onus of proof by the plaintiff
• Duty of care
• Breach of duty
• Damage (but not too remote)
Duty of Care
• Duty of care owed by the defendant to the complainant
• Obligation - May arise out by law, which requires a
person to conform to a certain standard of conduct
• Reasonably foreseeable
- Actions result in harm or loss
- Extent of relationship
- Proximity of the parties.
Breach of Duty & Negligent Misstatement
– Candler v. Crane Christmas & Co.
– Hedley Byrne v. Heller & Partners
Damages
• Damage or injury resulting from that
breach – some direct and consequential loss
must have been suffered by the complainant
• Types of compensation for damages
– General damages
– Special damages
– Nominal damages.
– Punitive damages
Res ipsa loquitur
• In Latin, meaning literally, "the thing speaks for
itself“
• Applied to claims which, as a matter of law, do not
have to be explained beyond the obvious facts
• It is most useful to plaintiffs in negligence cases
Volenti Non Fit Injuria
• In Latin, …. "to a willing person, injury is not done“
• If someone willingly places themselves in a position
where harm might result, knowing that some degree
of harm might result, they are not able to bring a
claim against the other party in tort
• Applies to the risk which a reasonable person would
consider as having assumed by their actions.
• Also known as a "voluntary assumption of risk"
Negligent Misstatement
What are the Preconditions for Liability?
Liability in tort for negligent misstatement can arise only in the following circumstances:
(a) Where one person owes a duty to another person to exercise care. This can be based on:
– the known or apparent skill and competence of the maker of the statement, or
– the fact that the maker of the statement intends it to operate as a direct inducement to act, i.e. that the maker intends the recipient to rely on the statement.
(b) The duty of care has been breached, i.e. the maker of the misstatement has been negligent.
(c) If the statement was not made as an inducement to act, whether it was reasonable for the recipient, nevertheless, to rely on it.
(d) The person has suffered loss or damage as a result of relying on the misstatement.
Exclusion Clauses and Disclaimers
"For your private use and without responsibility on the part of this bank or its officials".
Hedley Byrne case
A negligent misstatement may give rise to an action for damages for economic loss. When a party seeking information or advice from another – possessing a special skill – and trusts him to exercise due care, and that party knew or ought to have known that the first party was relying on his skill and judgment, then a duty of care will be implied.
Statutory Liability
Civil Liability Imposed by Statute
What we have considered so far has been liability for misstatement imposed by common law. Remedies for losses arising from misstatements by licensed persons or any other persons are also available under statute.
Detailed discussions of the provisions about misstatements are discussed later in this course. Liability for misstatement under the Capital Markets and Services Act, the Companies Act, and the specific provisions for misleading recommendations, however, warrant closer examination.
CMSA 2007
Prohibits the making of a statement or dissemination of information that is false or misleading - s.177
Prohibits a person from improperly inducing another person to deal in securities – s.178
Prohibits a person from making untrue statements or omitting to state a material fact for a purchase or sale of securities – s.179
Required to disclose the nature of any relevant interest in, or interest in the acquisition or disposal of, those securities – s.91
Must have a reasonable basis for making the recommendation – s.92
CA 2016
Subscribers or purchasers of shares or debentures who act on the basis of a prospectus, have a right of action against the directors, promoters or others authorising the issue of the prospectus, for compensation for loss or damage sustained by reason of any untrue statement – s.168
Criminal liability for false and misleading statements, false reports and fraudulently representing to creditors or inducing people to invest money – s. 524, 591- 4
Reasonable Basis and Know Your Client Rule
Relationship Between a Fund Management Company and Its Client
The relationship between a fund management company and its client is a complex one and a number of areas of law are involved:
(a) The fund management company acts as the agent of the client. The general Law governing the relationship between principal and agent therefore applies.
(b) The Investment Management Agreement between the fund management company and a client is a contract. The basic principles of contract law have been covered in topic The Law of Contract.
(c) The fund management company’s actions in managing a client’s portfolio must not be negligent. We look at the law of negligent misstatement in topic Negligent Misstatement.
(d) The fund management company owes certain duties to its client in its role as a fiduciary. The fiduciary duties of a fund management company are also relevant to the relationship.
(e) The fund management company may hold monies or property on behalf of its client. If so, the law of trusts applies to this element of the fund management company/client relationship.
(f)
• Statutory laws, such as the Capital Markets and Services Act 2007 (CMSA), also impact upon the relationship between fund management companies and client. The impact of the CMSA on a fund management company’s relationship with its client is described in several topics. Other relevant laws that may affect the relationship are )described in Topic 2.
Laws Governing the Fund Management Company/Client Relationship
(A) Principal and Agent
(i) Liability of Fund Management Company
(ii) Mistakes of an Agent
(iii) Indemnity from Client
(B) Investment Management Agreement
(C) Fiduciary Duties of a Fund Management Company
(D) Trust Law
(E) Capital Markets and Services Act 2007
Principal & Agent Relationship
• When an investor buys into a fund, he is the principal, and the fund
manager becomes his agent
• Express in a written contract - Investment management agreement
(IMA)
• Creates a fiduciary relationship – agent to carry out the assigned
tasks with the principal's best interest as priority
• Agent is responsible for completing tasks given by the principal
• Obligation to perform tasks with a certain level of skill and care and
may not intentionally or negligently complete the task.
• A duty of loyalty is also implied – no conflict of interest
Relevant Laws – CMSA 2007
Ethical Considerations
• Conduct with integrity and professionalism when dealings with
the clients
• Act with competence and should strive to maintain and
improve their competence
• Exercise due diligence and professional judgement with
proper care in the conduct of their business
Ethical Considerations
Code of Ethics
The principal areas covered by MAAM’s Code of Conduct are:
• Compliance with laws and regulations
• Risk management
• Management of conflict of interests
• Safeguarding clients’ interests
• Duty to exercise due care and skill
Major offences
Entering into a transaction of purchase or sale of securities in priority to client's order.
Inducing or attempting to induce another person to deal in securities by making or publishing any statement, promises or forecast that the maker knows to be misleading, false or deceptive.
Use of any device, scheme or artifice to defraud investors
Bursa Malaysia
1
2
3
4
5
Carrying on a business in any regulated activity without a licence or is a registered person
Fail to maintain secrecy of information relating to depositors' accounts in the Central Depository System
Fraudulently inducing persons to invest money
Destruction of Documents/ Falsification of Records
Failure to Cooperate with the Securities Commission Malaysia
Licences under the CMSA
(Chapter 2)
What is a CMSL and a CMSRL?
• The CMSA provides for two types of licences:
− Capital Markets Services Licence (CMSL) which entitles an
institution to carry on the business in any one or more
regulated activities; and
− Capital Markets Services Representative's Licence
(CMSRL) which entitles an individual to carry on any one
or more regulated activities on behalf of his principal.
• Only a holder of a CMSL or a CMSRL can carry on
any of the regulated activities
Regulated Activities
CMSA Sch 2 Part 1
The CMSL and CMSRL are issued for the following regulated activities:
1. Dealing in securities.
2. Dealing in derivatives.
3. Fund management.
4. Advising on corporate finance.
5. Investment advice.
6. Financial planning.
7. Dealing in private retirement schemes.
8. Clearing for securities or derivatives.
Licenses For Fund Management
Fund Management
To manage a portfolio of securities or derivatives or a combination of both.
To manage a portfolio of securities or derivatives or a combination of both.
To manage a portfolio of securities or derivatives or a combination of both.
To manage business trust only
To manage REITS only
If a subsidiary is licensed, the
holding company must be:
(a) a company involved in the
financial services industry in
Malaysia;
(b) a property-development
company;
(c) a property-investment holding
company; or
(d) any other person as the SC
deems appropriate
Requirement of CMSL
1 CMSRL holder => with 10 years of experience in the regulated activity and approved by the SC
Registered with FIMM => 10 years of relevant experience
1 CMSRL holder => 5 years of experience in the regulated activity and approved by the SC
N/A
=> 2 CMSRL holders for the regulated activity
=> 2 individuals registered with FIMM
=> 2 CMSRL holders for the regulated activity
=>2 CMRSL holders, 1 if AUM ≤ RM300 mio and the CMSRL holder is a substantial shareholder and/or director
Minimum Financial Requirements for a CMSL Holder
REGULATED ACTIVITY
Fund management
Minimum Financial Requirement
Portfolio management company
Paid-up capital of RM2 million; and
Shareholders’ funds of RM2 million.
Minimum licensed director, 10 years experience
CMSRL Holder = 2 persons for regulated activity
Unit trust management company
Paid-up capital of RM10 million; and
Shareholders’ funds of RM10 million.
Minimum licensed director, 10 years experience
CMSRL Holder = 2 persons registered with FIMM
Digital investment management company
Paid-up capital of RM2 million; and
Shareholders' funds of RM2 million.
Minimum licensed director = 1 with 5 years experience
CMSRL Holder = 2 persons for regulated activity
Boutique portfolio management company
Paid-up capital of RM500,000; and
Shareholders' funds of RM500,000
Minimum licensed director = N/A
CMSRL Holder = 2 persons for regulated activity
Unit Trust Management Companies
We have already seen that unit trusts can be provided by a range of promoters whose primary activity may be the provision of fund management services to in-house or external clients. However, in many markets overseas, there are a number of specialist unit trust promoters whose main activity is the operation of unit trusts. Such organisations derive fee income from management of the unit trust (including the management of the investment pool) and also derive income from the sale or distribution of units to investors. The clients of such unit trust management companies are predominantly retail rather than institutional.
Boutique Fund Management Companies
A noticeable overseas trend in the fund management industry has been the formation of independent fund management companies whose ownership lies all or mainly amongst its senior executives. Usually such organisations start as a ‘breakaway’ by some or all of the executives of a larger fund management organisation and hence tend to be much smaller (in terms of funds under management and resources). Often, boutique fund management companies perform well (albeit with limited funds to manage in the early years) and consequently grow to be significant in terms of funds under management and in relative investment performance. Boutique fund management companies can manage assets up to RM750 million with a clientele of not more than 50 sophisticated investors.
Alpha Asset Management Sdn. Bhd. is an example of boutique fund management companies.
Licensing Requirements
CMSA Schedule 2 Part 1
• Exempted
‐ Specified persons (CMSA Schedule 3)
‐ Registered persons (CMSA Schedule 4)
– Licensed FIs, VC
companies, rating agencies, Danaharta)
• External Auditors – Registered with AOB
• Penalty for operating without a licence
- CMSL - <=RM10m/<=10 years imprisonment/both (CMSA S58)
- CMSRL - <=RM5m/<=5 years imprisonment/both (CMSA S59)
- a further fine =< RM5k for every day or part thereof during which
the offence continues after conviction.
- Appeal within 14 days
Case Study
January 2010 – PP v Muhamad Khalid Ismail and Anuar
Abdul Aziz.
Muhamad Khalid was charged in 2003 for criminal breach
of trust, providing false statements relating to the business
activity of Corporate Eight Asset Management Sdn Bhd
(Oasis), concealment of records and for failure to maintain a
trust account for the funds invested by Koperasi Angkatan
Tentera Malaysia Bhd. Anuar was charged in the same year
for acting as a fund manager’s representative for Oasis
without a licence.
Licensing Criteria
Chapter 4
SC consider the following criteria:
• Organisational requirements
• Shareholding composition
• Adequacy of financial resources
• Requirements relating to CMSRL
Organisation Requirements
• Incorporated in Malaysia
• A member of an alternative dispute resolution body that is
approved by the SC
• At least 2 CMSRL holders (a CMSRL holder may be licensed for more than one
regulated activity, provided he is fit and proper, and there is no conflict in him performing such
activities)
• At least one director with a minimum of 10 years' relevant
experience (5 years for Digital Investment Management)
• Directors can be appointed without prior approval of the SC but
notify the SC in writing on the appointment or reappointment
within 2 working days (new director to attend CMDP within 6
months)
Prior Approval of SC
(a) Change in controller of CMSL
• is entitled to exercise, or control the exercise of, not less than
15% of the votes attached to the voting
• has the power to appoint or cause to be appointed a majority of
the directors
• has the power to make or cause to be made, decisions in
respect of the business or administration.
(b) Appointment of CEO
Prior Approval of SC
(a) Change in controller of CMSL
• is entitled to exercise, or control the exercise of, not less than
15% of the votes attached to the voting
• has the power to appoint or cause to be appointed a majority of
the directors
• has the power to make or cause to be made, decisions in
respect of the business or administration.
(b) Appointment of CEO
(c) Director
– at least one Bumiputra director, does not apply to:
− a special scheme fund managers
− digital, boutique and asset management
(d) Representatives - at least 30% Bumiputra composition, does not
apply to:-
- Islamic fund management companies
- digital, boutique and asset management
Shareholdings & Financial
(a)Shareholding composition – no restriction
(b) Financial requirements
(i) Portfolio Management/Digital Investment Management
• Minimum paid-up capital of RM2 million
• Minimum shareholders' funds of RM2 million to be
maintained at all times.
• If own by individuals, two shareholders must have =>10
years capital market experience and one of them has =>5
years fund management experience.*
(*Not-applicable to DIM
)
(ii) Boutique Portfolio Management
− Minimum paid-up capital and shareholder’s fund of RM500k
− Maximum value of portfolio
– RM750 million (RM300 1
CMSRL shareholder/director)
− 50 clients or 15 funds, sophisticated investors
(iii) REIT
• Minimum shareholders’ funds of RM1 million at all times
(iv) Trustee Manager
• No specific financial requirements.
CMSRL
(a) At least 21 years old.
(b) Fit and proper – not a undischarged bankrupt or convicted of a criminal
offence or sanction by SC
(c) Pass Licensing exams – Module 9 & Module 10 and apply within 2
years of passing
(d) Qualifications
• For Portfolio Management
- recognised degree or professional qualification with at least two
years of relevant experience; or
- without any degree or professional qualification must have at
least five years of relevant experience.
• For asset management
- No specific qualification requirement
CMSL - Expectation of a Licensee
• Acting in the clients' best interests
• Avoiding conflicts of interest
• Taking all reasonable steps to "know-your-client“
• Exercising due care and diligence before making recommendations
to the clients
• Making recommendations that are reasonably suitable to the
clients
• Helping the clients make informed decisions
• Having an adequate level of knowledge and skill to provide good
advice
• Setting out clearly the terms, obligations and scope of services in
the agreements
• Keeping proper records.
Revocation and Suspension of Licence
(a) Revoke a CMSL, if the holder:
• there exists a ground on which the Commission may refuse an
application or renewal – S64(1) CMSA;
• the holder fails or ceases to carry on the business in all or any
of the regulated activities for which it was licensed for a
consecutive period of three months;
• the holder contravenes any condition or restriction in respect
of its licence or any direction issued to it;
• the holder contravenes any of the rules of the stock
exchange, futures exchange, approved clearing house or
central depository which is binding upon it; or
• fail to pay fees
(b) Revoke a CMSL, without hearing, if the holder:
• the holder is in the course of being wound up or otherwise
dissolved, whether within or outside Malaysia;
• a receiver, a receiver and manager or an equivalent person
has been appointed, whether within or outside Malaysia in
respect of any property of the holder; or
• the holder or any of its directors, chief executive, managers
or controller has been convicted of any offence
(c) Revoke a CMSRL, if the holder:
• there exists a ground on which the Commission may refuse an
application or renewal S65(1) CMSA;
• he fails or ceases to act as a representative in respect of all
or any of the regulated activities for which he was licensed;
• the holder contravenes any condition or restriction in respect
of his licence or any direction issued to him; or
• fail to pay fees.
(d) Revoke a CMSRL, without hearing, if the holder:
• the holder is an undischarged bankrupt, whether within or
outside Malaysia; or
• the holder has been convicted of any offence
Appeal s80
(a) Appeal within 14 days of the decision of SC
• Person who -
-carries on a regulated activity after its licence has been revoked;
-carries on a regulated activity which its licence has been suspended or is in breach of a restriction imposed.
liable to a fine =imprisonment for a term =<10 years or; both
(b) Continuing offence
-a further fine = < rm5k for every day or part thereof during which the offence continues after conviction.
(b) Continuing offence
-a further fine = < rm5k for every day or part thereof during which the offence continues after conviction.
Licence Holders Duties & Obligations
• Immediately inform SC of any disqualifying event (s74 of CMSA),
• Notification of changes (s78 of CMSA), in particulars where:
− CMSL holder ceases to carry on investment advice
− CMSRL holder ceases to be a representative of the CMSL holder in relation
to whom the CMSRL was issued
− licence has not been varied under Section 69 of the CMSA, e.g. changing
of name or principal, names of the directors and the secretary of the
corporation, address of the principal place of business, etc.
• Licence holder should notify SC in the specified form, particulars in
writing not later than 14 days after the occurrence of the event under
S78.
Duties & Obligations
Register of Securities
• Maintenance of register of securities in which he* has an interest
• s83 of the CMSA
• keep the register at a place nominated by the CMSL/CMSRL
• notify the SC in writing where the register is kept
• Update register within 7 days after the date of the change in
interest.
Statutory Liability
Remedies for losses arising from misstatement by licensed persons or any other persons are also available under statute.
Liable Parties
Who is responsible for offences committed?
• Members of the Board of Directors
• Chief Executive Officer
• Compliance Officer
• Licensed Representatives
Investment Management Agreement
1. Clients’ risk profiles and investment objectives including any
investment limitations, restrictions or instructions
2. Notification of any significant changes to the investment policy or
investment recommendation
3. Clear authorisation from the clients for discretionary mandate
4. Scope of services that will be provided by the fund management
company including frequency of written statements and reports
relating to the clients’ portfolios
5. Fees and charges to be paid by the clients or any other
remuneration received by the fund management company from
any other person in relation to services provided to the clients
6. Details of custodial arrangement
7. Basis of valuation to be used for any type of investments
products
8. Terms and conditions relating to soft commission, where
applicable
9. Liability of fund management company where there is a breach of
the IMA
10. Conditions for alteration and termination to the IMA and its
implications thereof in respect of settlement, repayment
obligations and surrender of documentation; and
11. Details of delegation of the fund management company’s
function (if any).
Duties to Clients
• Direct Client Investment Activities
• Provide Investment Advice
• Reports to the client
• Act in the best interest of client (cross trade, best
execution, trade allocation, soft dollar dealing etc)
• Ensure Adherence to Financial Regulations
Records and Segregation of Assets
(a) Client’s funds must be held on trust for them.
(b) Hold client money account for each client and on an aggregate
basis.
(c) Records should set out the following information:
✓ the balance of reportable client money owed to each of the clients
✓ records of transactions that affect the balance of reportable client
money held, including:
o withdrawals and deposits relating to the purchase and sale for,
on behalf of, or for the benefit of the client
o withdrawals of client funds
o investment of client funds
Substantial Shareholders Notices
(a) Notify the SC within 14 days any change in: – Shareholding – Paid-up capital – Any establishment of a new business or acquisition of shares/interests in or outside Malaysia – Disposal of business or shares/interests in or outside Malaysia (b) SC approval is required for a change in shareholding, directly or indirectly results in a change of your controller and there is a proposal for the establishment of a new business or acquisition of shares/interests in or outside Malaysia in relation to capital market-based activities.
Insurance Cover
(a) Protect company and the funds managed from a
range of potential liabilities that can lead to loss.
(b) The policy covers exposures relating to:
✓protection of individuals for specific management
and personal liabilities i.e. (D&O and PI
insurance); and
✓Protection of company and funds from theft by
employees or third parties (fidelity insurance,
electronic and computer crime insurance)
Compliance & Compliance System
(a) Definition of compliance:
➢ systems or departments at companies and public agencies to
ensure that personnel are aware of and take steps to comply
with relevant laws and regulations
➢ Examples: Legal compliance, due diligence & risk
management
(b) Guidelines on Compliance Function for Fund Managers – assist FMs
in their efforts to substantially strengthen the internal controls
and elevate the overall standards of ethical and prudential
conduct in the investment management industry.
➢ contribute towards enhancing investor protection and
promoting the levels of market integrity.
CO’s Authority
• A compliance officer is responsible for ensuring the company
and its employees complies with the company’s internal
policies and external regulations.
• A compliance officer may participate in the design or update of
internal policies to mitigate the risk of the company breaking
laws and regulations and lead internal audits of procedures.
• Reports to the Board of Directors.
CO’s Responsibilities
1. Acting as a liaison person with the SC
2. Establishing and maintaining a comprehensive compliance
manual
3. Establishing, administering the implementation of and maintaining
policies and procedures
4. Reviewing and updating the compliance policies and procedures
5. Keeping abreast of changes to securities laws, regulations and
relevant guidelines
6. Co-ordinating the fund management company’s compliance
efforts
7. Establishing a compliance programme and carrying out an annual
review of the programme
8. Monitoring that only licensed persons conduct the activities
9. Assisting in training and educating staff members on compliance
matters;
10. Reviewing reports to ensure that clients’ portfolios are managed in
accordance with agreed mandate;
11. Monitoring that account opening procedures are strictly adhered
to
12. Furnishing the Board/Board Committee (and SC, if requested) at
least on quarterly basis, a written report on:
• any material changes to compliance policies and procedures
• all breaches of securities laws, regulations, relevant guidelines
• all clients’ complaints
13. Reviewing all marketing, advertising and promotional materials
prior to issuance
Tools of Compliance
• Board's commitment to the compliance plan and programme, and to its
implementation
• CEO’s endorsement of the compliance programme
• A properly documented and detailed compliance programme
• Up-to-date manuals and checklists
• Education of all directors and employees in the importance of compliance
• Training of all directors and employees in compliance
• A process for effective monitoring of the compliance programme
• Identification and control of high-risk areas (i.e. risk management system)
• A legal audit
• An effective system for complaints monitoring and resolution
• Incorporation of compliance checks into all operating procedures
• A system to report compliance framework breaches
• Prompt changes to the system where identified breaches occur, and appropriate
disciplining of those responsible
• Maintenance of detailed and complete records and statistics relating to
compliance.
Corporate Governance
• FMs must have good CG practices. SC takes into account:
– Breach of laws, guidelines or rules
– Failure to comply with SC’s notice/condition
• Declaration by the applicant and its directors
• Actions which the SC may take if not satisfied with CG practices of the
applicant co. or directors and management:
– Reject any proposal
– Approve a proposal subject to conditions such as –
▪ improvement on governance structure
▪ disclosure of past records in relevant public documents
▪ director in question to step down
▪ prohibition of directors’ participation
▪ imposition of moratorium/prohibition on trading
Performance Reporting Standards
Ensures funds can be compared on an apples-to-apples basis with and among each other.
To minimise “jazz-up” a report
Global Investment Performance Standards (GIPS)
– ethical standards that apply to the way investment
performance is presented to potential and existing
clients
– covers calculation of returns, presentations &
disclosures
– voluntary and are not forced-upon the companies by the
regulators
Key Elements
Performance Reporting Standards
Relevant Guidelines
1. Guidelines on Compliance Function for Fund Management Companies
(Chapters 3-13)
2. Guidelines on Unit Trust Funds (Chapters 2,4,6,9)
3. Guidelines on Exchange-Traded Funds (Chapters 2,4,6,11)
4. Guidelines on Islamic Fund Management (Chapters 2-11)
5. Guidelines for Public Offerings of Securities of Closed-end Funds (Chapters 6
and 8)
6. Guidelines on Sales Practices of Unlisted Capital Market Products (Parts 1-4)
7. Guidelines on Unlisted Capital Market Products under the Lodge and Launch
Framework (Section A Chapter 3, Section B Part Chapter 1-5, Section C
Chapter 1-2, Section D 4B)
8. Guidelines on Prevention of Money Laundering and Terrorism Financing for
RIs in the Capital Market(Parts 3-14)
9. Guidelines on Implementation of Targeted Financial Sanctions Relating to
Proliferation Financing for Capital Market Intermediaries (Part 1-6)
Core Principles
1. Integrity
2. Skill, care and diligence
3. Acting in clients’ interests open, co-operative and timely manner.
4. Supervision and control i.e. organise and control its affairs responsibly and effectively,
5. Adequate resources
6. Business conduct i.e. promotes a fair and orderly market.
7. Client asset protection
8. Communication with investors and clients
9. Avoid conflict of interest
10. Compliance Culture - sound compliance framework which safeguards clients’ interests.
11. Dealing with the SC in an open, co-operative and timely manner.
BOD’s Responsibilities
• Ensure only licensed person carried out regulated activities
• At least one director is a CMSRL
• Internal control system and regular review
• Written policies and procedures and communicated to all staff
• Adequate resources and business continuity plan
• Appoint a compliance officer
• Safeguard client’s assets and information
(Chapter 4 - Guidelines on Compliance Function for FMC)
Organisation & Management
(a) Must establish the followings:
‐ Internal audit
‐ Risk management, may outsource (at least yearly to
review RM framework)
‐ Business continuity plan
‐ Adequate education and training for directors and
employees
(b) May outsource risk management, internal audit, fund
management etc
(Chapter 5 - Guidelines on Compliance Function for FMC)
Disclosure & Conduct
(a) By company, directors, investment committee members and
managers, upon joining, at least yearly or when there is a
change.
(b) Information to be disclosed
‐ Interest and holdings of securities holdings
‐ Matters having conflict with client’s interest
‐ Receipts and provision of benefits
‐ Rebates and soft commission arrangements
(c) Members of the investment committee must abstain from
meetings where their presence may cause any conflict or
potential conflict of interest.
(Chapter 6 - Guidelines on Compliance Function for FMC)
Dealings with clients
• Fees and charges – fair, reasonable and transparent
• Valuation of portfolio, on agreed method – at least monthly
• Statement of account – at least monthly
- Statement showing the client’s actual portfolio position
- Fees and charges payable by the client.
• Reports – at least quarterly
- Performance of each client’s portfolio against appropriate
benchmarks;
- Any changes in risk (if any) and its impact
• Confidentiality of customer information
• Complaints from clients
(Chapter 7 - Guidelines on Compliance Function for FMC)
Marketing & Promotional Materials
• Provide information with due care
• Update client with key company information
• Advertisement and promotional materials – include risks of
investments, features of services and products and independently
verified return or performance
• Investment performance – at least for period > 1 year
• Marketing and promotional materials – review by Compliance
Officer by issuance
(Chapter 8 - Guidelines on Compliance Function for FMC)
Portfolio Management
• Establish suitable investment policy
• Be fair & equitable in allocation of orders
• Not to misuse information/participate in insider’s trading
• Client’s interest take preceding in transaction
• Disclose conflict of interest
• Provide sufficient research
• Take all effort in identifying, managing & mitigating risks
• Execute Investment Management Agreement (IMA) with clients
(Chapter 9 - Guidelines on Compliance Function for FMC)
Safeguarding Client’s Assets
• Separate assets of clients from company
• Not to transfer client’s assets to a third party
• Appoint a custodian to maintain a trust account for its clients’
assets
‐ Obtain client’s approval to appoint custodian
‐ Evaluate performance of custodian at least annually
• Trust account - full name of client, IC/passport/company number
or code
• No co-mingling of client’s assets with those of other fund
management company
(Chapter 10 - Guidelines on Compliance Function for FMC)
Conflict of Interests
• Avoid conflict of interest between the fund management company’s
proprietary transactions and clients’ transactions
‐ establish information barriers or firewalls; and
‐ closely supervise internal communication to prevent flow of
information.
• CMSRL holder conducting its proprietary transactions does not
manage clients’ assets
• Must not offer or accept any gifts or benefits which conflicts with the
interest of, or the duties owed to the clients. Must maintain a register
of gifts or benefits received or given.
• Rebates be directed to client’s account.
• ‘Soft’ commission for trades.
⁻ With client’s consent and report to client, for benefits of clients
⁻ Maintain a register
(Chapter 11 - Guidelines on Compliance Function for FMC)
Best Execution and Allocation
• Ensure “best execution” of trades for clients
• < 50% of trades in any brokers per year (not applicable to
Digital IM)
• “Arm’s length” transactions with related parties
• The transaction are within client’s mandate and limits
• Fair allocation of investment to client’s account
- For block trades, allocation of securities should be
conducted on a pro-rata basis and using an average price.
- Commission or management fee earned from any particular
clients or transaction must not be the determining factor in
the allocation of orders.
(Chapter 11 - Guidelines on Compliance Function for FMC)
Best Execution and Allocation
• Ensure “best execution” of trades for clients
• < 50% of trades in any brokers per year (not applicable to
Digital IM)
• “Arm’s length” transactions with related parties
• The transaction are within client’s mandate and limits
• Fair allocation of investment to client’s account
- For block trades, allocation of securities should be
conducted on a pro-rata basis and using an average price.
- Commission or management fee earned from any particular
clients or transaction must not be the determining factor in
the allocation of orders.
(Chapter 11 - Guidelines on Compliance Function for FMC)
Cross Trades between Clients
• Written prior authorisation obtained in advance from clients.
• Transactions are executed on an arm’s length and fair value
basis
• Document reason(s) prior to execution
• Activity is identified to both clients in their respective periodic
transaction reports or statements
• Transaction is executed through a dealer/financial institution
• Cross trades prohibited for staff/proprietary and client’s
accounts
(Chapter 11 - Guidelines on Compliance Function for FMC)
Record Keeping
• Maintain records of all transactions:
- Proprietary -trading and accounting records
- Client – accounts and transactions
• Internal auditor and compliance officer have access to
all records of transactions
• Reconciliation immediately records with those of 3
rd
parties.
• Retention of records of transaction for at least 7 years
(Chapter 12 - Guidelines on Compliance Function for FMC)
Digital IM Company
• In addition of requirements IM companies, must have adequate
technology capabilities and support to undertake digital IM
• Disclose and display prominent to client:
- that an algorithm is used and its function
- assumption and limitation of the algorithm
- risks inherent in the use of technology
- direct and indirect fees, charges and other remunerations
related to services provided
- investment strategies used and any future changes to the
strategy
- information about complaints handling or dispute resolution and
its procedures.
(Chapter 13 - Guidelines on Compliance Function for FMC)
Omnibus Custodial Arrangement
• Co-mingling of assets at custodian or the issuer of assets level is
confined to clients of the same digital investment management
company
• Proper naming conventions
• Clients agree to have their assets held under an omnibus structure
• Clients are notified of the risk of such structure and naming
convention
• Custodian to:
- Conducts reconciliation of the trust account on a daily basis
against third-party records
- Maintains records that enable identification of assets to IM
company
- Credits into the Client’s trust account immediately all proceeds
and revenue generated from investments
UTF Guidelines - Introduction
▪ Regulates:
▪ Persons establishing a UT fund in Malaysia
▪ Issue, offer and invite others to subscribe/buy
units
Outsourcing Fund Management
• UTMC may appoint a fund manager to undertake its
fund management function, with prior notice to SC
• Fund manager appointed must:
- be duly licensed or authorised by the relevant authority
- has adequate financial resources, internal control system and
track record in the performance of the function
• A foreign fund manager must
• give letter of understanding that it kept financial records for 7
years
• Adequate training with management company
• Give access to SC, management company and trustee for
inspections and examinations
• Must have a service agreement
Service Agreement
• Contain clear provisions on:–
- the services to be provided
- the fees, remuneration and other charges (fund
manager’s remuneration paid by management
company)
- any restriction or prohibition regarding the
performance of the function to be undertaken
- reporting requirements, including the line of
reporting to the management company, and
means of evaluating the performance of the fund
manager.
Officer of Fund Managers
• Must NOT hold office as a member of–
a) the investment committee of any fund for which
the fund manager is appointed to manage*
b) the Shariah adviser of any fund for which the
fund manager is appointed to manage
c) the panel of advisers of any fund for which the
fund manager is appointed to manage*
* Not applicable if fund manager and management company are related
Investment of the Fund
• Inform trustee in writing within one business day
• If exceed power, cancel transaction or make corresponding
transaction at own expense to secure restoration of the previous
position
• Generally, may invest in
‐ Equities, debentures and warrants
‐ Cash, deposits and money market instruments
‐ Units/shares in collective investment schemes
‐ Derivatives.
‐ Unlisted securities (exclude approved listed shares, debentures &
structured products, leverage/inverse ETFs) <=10% of NAV
• Foreign investments - limited to markets where the regulatory
authority is a member of IOSCO
Chap 6 – Guidelines on UFT
Criteria for Gold ETFs
• Gold bullion/bars are held in trust and is segregated from the
assets of the manager, sponsor, trustee and/or custodian
• Adopts a passive management strategy with the objective of
tracking the price of gold
• Maximum potential loss limited to the amount paid for it
• Shares or units of the gold ETF are liquid
• Shares or units of the gold ETF are subject to reliable and verifiable
valuation on a daily basis
• Appropriate information available to the market on the gold ETF
• Shares or units of the gold ETF must be listed for quotation and
traded on an eligible market, and the regulatory authority for such
market is an ordinary or associate member of the IOSCO
Types of CIS
Target Funds
REITs/Property Funds
Gold ETFs
Leverage/ Inverse ETFs
Investment in Derivatives
• Both exchange-traded and OTC
• Underlying includes transferable securities; deposits and money
market instruments; units or shares in CIS, derivatives, indices,
interest rates and foreign exchange rates
• Exposure should not exceed the fund’s NAV
• Able to provide a reliable and verifiable valuation on a regular
basis
• Counterparties - FIs with strong credit rating and who must be
ready to unwind, buy-back or close out the transaction.
• If rating declined or become unrated, take necessary action
within 6 months
• No shorting except using futures for hedging purposes
Target Fund Internally Managed
(including by related companies)
• No cross-holding between the fund and the target fund
• All initial charges on the target fund is waived
• Management fee must only be charged once, either at the fund
or the target fund.
Investment in Structured Products
• Issued by eligible issuers i.e. locally and outside Malaysia.
• Counterparty must have rating indicating adequate capacity for
timely payment of financial obligations
• If rating declined or become unrated, take necessary action
within 6 months
• Able to provide a reliable and verifiable valuation on a regular
basis
• Counterparties - must be ready to unwind, buy-back or close out
the transaction.
Investment Restriction & Limits
Funds Investment in
• Ordinary shares in a single issuer
• OTC derivatives with a single counter-party
Exposure Limits
<= 10% of NAV
Investment Spread Limits
Funds Investment in
Spread Limits
• Ordinary shares issued by a single issuer
<= 10% of NAV
• Transferable securities (equities, debentures and warrants)
and money market instruments issued by a single issuer
• CIS in real estate
<= 15% of NAV
• Deposit placement with a single institution*
• Collective Investment Scheme
• Transferable securities (equities, debentures and warrants)
and money market instruments in a group of companies
<= 20% of NAV
Transferable securities (equities, debentures and warrants), money market instruments, and derivatives by a single issuer
<= 25% of NAV
A foreign government, foreign government agency, foreign central bank or supranational, that has a minimum long-term credit rating of investment grade by an international rating agency.
<= 35% of NAV
*exclude subscription monies, liquidation of investment and settlement of redemption
Investment Concentration Limits
Funds Investment in
• Equities & Warrants
• Debentures
• Money market (exclude those do not have a pre-determined issue size)
• Collective Investment Schemes
Limit
<=10% of a single issuer
<= 20% of a single issuer
<= 10% of a single issuer
<=25% of the units in a single CIS
Money Market Funds
Funds Investment in
Limit
Limit
Limit
• Short-term (=<397 days) debt
securities, money market
instruments and deposit placements
• High quality debt securities and
money market funds
>=90% of NAV
=<10% of NAV
• Debt securities and money market instruments issued by any single issuer
=<20% of NAV
• Debt securities issued by any single
issuer with highest long-term rating
• Debt securities and money market
instruments issued by any group
=<30% of NAV
• Non-government debt
securities/money market
instruments =<397 days
• Govt securities =<2 years
=<20% of a single issuer
Fixed Income/Bond/Index Fund
Spread Limits
Fixed Income/Bond Fund
Spread Limit
• Transferable securities/money market
instruments issued by a single issuer
• With highest long-term rating
<= 20% of NAV
<= 30% of NAV
• Transferable securities/money market
instruments - Aggregate Single Issuer/Group
• Government with long-term investment grade
<= 30% of NAV
Index Limit
Spread Limit
• Equities, debentures, warrants and money market instruments in a single issuer/group of companies
No limit BUT within respective weightings in the underlying index.
Fund of Funds
▪ Must not invest in–
➢ a Fund-of-Funds
➢ a Feeder Fund
➢ a sub-fund of an umbrella scheme which is a Fund-of-Funds or a
Feeder Fund
Funds Investment in
Exposure Limit Spread Limit
Spread Limit
Other CIS
=>85% of NAV
• At least in 5 CIS at all times
• < = 30% of NAV
Money market and deposit placement (<=12mths) and derivatives for hedging
<=15% of NAV
Feeder Funds
▪ Must not invest in–
➢ a Fund-of-Funds
➢ a Feeder Fund
➢ a sub-fund of an umbrella scheme which is a Fund-of-Funds or a
Feeder Fund
Funds Investment in
Exposure Limit
Other CIS
Money market and deposit placement (<=12mths) and derivatives for hedging
=>85% of NAV
<=15% of NAV
Index Funds
To track, replicate or correspond to an index on permissible
investments
Words ‘index’, ‘tracking’ or ‘tracker’, must appear in the name of the
fund
Acceptable indices must be diversified - the maximum weight per
constituent does not exceed 20% of the index.
Feeder Fund
Strategies
Full replication
Description
Investing all or substantially all of its assets in the constituents of the underlying index
Optimisation
Investing all or substantially all of its assets in the constituents of the underlying index
Sampling
stratifying or dividing an index into manageable risk elements or buckets
Synthetic
use of derivatives or embedded derivatives to replicate the index performance.
Umbrella Funds
Comprises at least two sub-funds
Must provide favourable switching facilities between its subfunds, compared with switching facility involving other funds
under the same management company
Must not consist of units/shares of another subfund within
the same umbrella fund
Each sub-fund
✓ Is subject to investment restrictions and spread limits within which it is
categorised under; and
✓ will be treated as a single fund.
Investment concentration limits at the umbrella fund level
Capital Protected Funds
▪ The word “protected” must appear in the fund’s name
▪ Invest primarily in:
✓ Strong/High safety-rated Debentures
✓ Money market instruments with FI with credible ratings
Capital Protected Funds
Funds Investment in
Exposure Limit
Spread Limit
Concentration Limit
• Debentures and money market instruments
>=85% of NAV
<=20% of NAV
(for single issuer)
<=30% of NAV
(for a group of
companies)
<=20% of a single issuer
• Debentures and money market instruments
>=85% of NAV
<=20% of NAV
(for single issuer)
<=30% of NAV
(for a group of
companies)
<=20% of a single issuer
• Unlisted securities
<=10% of NAV
<= 25% of the CIS’s units/shares
• CIS
<= 25% of the CIS’s units/shares
Guaranteed Funds
• The word “Guarantee” must appear in the fund’s name
• Guarantee cover 100% of capital invested
• Guaranteed by a licensed bank, licensed merchant bank or
an Islamic bank with adequate safety rating
• If rating declined below required rating, 6 months to find
replacement guarantor
• Investment Spread and Concentration Limit – similar to nonspecialised or specialised fund
Other Activities
▪ Lending of securities must–
▪ be permitted under the deed and disclosed in the prospectus
▪ comply with the Guidelines on Securities Borrowing and Lending
▪ comply with relevant rules and directives issued by Bursa Malaysia
▪ Borrowing – prohibited except cash for meeting repurchase
requests for units and for short-term bridging requirements
▪ only on a temporary basis and are not persistent;
▪ should not exceed one month;
▪ the aggregate <= 10% of NAV
▪ only from financial institutions
▪ 5% allowance in excess of any limit or restriction is permitted due
to breaches through an appreciation or depreciation of NAV, to
rectify within 3 months.
Operational Matters
• Maintain an up-to-date register of unit holders at
registered office
• Cooling-off period (invest for first time)
‐ > 6 days (from date of application) but not available for:
✓ a corporation or institution
✓ a staff of management company
✓ a person registered with a body approved by the SC to deal in
unit trusts.
‐ Should be the sum of the purchase price + charges imposed
‐ Settlement – within 10 days of notice
Income Distribution
• Only from realised gains or realised income
• After considering:
✓ Total returns for the period
✓ Income for the period
✓ Cash flow for distribution
✓ Stability and sustainability of distribution of income
✓ The investment objective and distribution policy
• Statement - Nature & amount of income distributed,
total fund return and NAV before and after distribution.
• Interim distribution - may publish in at least one
national BM and one national English newspaper.
Unit Split
▪ May only be conducted
✓ once in any financial year
✓ when the monthly average NAV per increases from one month
to another over the six-month period
o submit for trustee’s verification within 14 days
▪ Send statement
✓ detailing the ratio of the split
✓ NAV per unit prior and subsequent to the unit split exercise
✓ Reasons for conducting the unit split exercise.
▪ …or publish at least one national Bahasa Malaysia
newspaper and one national English newspaper.
Use of Broker or Dealer
▪ Must be approved by Investment Committee
▪ Investment Committee to ensure
✓ Most favourable (best execution basis)
✓ Prescribed the limit (%) for each broker
▪ Must =<50% of NAV for each broker (for equities and
fixed income transactions)
Rebates and Soft Commissions
• Rebates be directed to client’s account
• ‘Soft’ commission may be retained if:
- Benefits the clients
- In the form of research and advisory services
- Deal executed on most favourable terms for the fund
- Adequately disclosed in prospectus and fund reports
- Compliance Officer verify and report to BOD
Documents for Inspections
• Management company/trustee to make available, during
business hours:
✓ Deeds/Supplementary deeds
✓ Prospectuses and documents therein i.e. materials
contracts, valuation reports, consent statements
✓ Current and last 3 years’ financial statements of
management company and the fund
Termination of a fund
• SC’s authorisation is withdrawn
• A special resolution is passed at a unit holders’ meeting to
terminate the fund
• Reached its maturity date as specified in the deed
• Being left with no asset (after an approved transfer scheme).
- Sell all the fund’s assets remaining in its hands
- Distribute to unit holders cash proceeds after cost and
liabilities (transfer to UM after 12 months)
• Inform SC and unitholders of terminations
• Arrange for the auditor of the fund to conduct a final review
and audit of the fund’s accounts
Transfer Schemes
• The transferee fund must be authorised by SC
• Sanctioned by special resolution of unit holders of both the
transferor and transferee funds.
• No material prejudice to the interest of unit holders of the
transferee fund
• Is consistent with the investment objective of the transferee
fund
• Comply with limits i.e. spread, investment, concentration
limits
Meetings
• Unless otherwise stated in the trust deed, must give 14 days
written notice to unit holders
• A copy of notice to SC and trustee
• Chairman of meeting
• If meeting called by unitholders, a unitholder or trustee
• If meeting called by management company, a person
appointed by the company
• Quorum
• 5 unitholders;
• For meetings require special resolution, 5 unitholder
representative =>25% of unitholders
• If no quorum, meeting called by unitholder must be dissolved –
adjustment only after =>7 days
Voting and Voting Rights
• One unitholder present one vote (for joint unitholders, only one
unitholder can vote)
• By poll, in proportion of number/value of units held
• Management company cannot vote in all meetings
• Related parties must not vote and counted in the quorum
• Voting must be by show of hands, unless poll voting is requested by
either:
• Chairman
• Trustee
• Management company
• => 10% of unit holders
• Chairman declaration is of the result is conclusive, unless otherwise
demanded
Notification of Changes to Fund
• A management company of a fund must inform unit holders of any
change made to the fund.
• The management company or trustee must convene a unit holders’
meeting to obtain unit holders’ approval where the interests of the
unit holders may be materially prejudiced by any changes to the
deed, examples:
- changes to the nature or objective of the fund
- changes to the risk profile of the fund
- change in distribution policy
- introduction of a new category of fees or charges
- increase in fees or charges
Changes to Prospectus
• If significant, give a written notice informing unit holders:
• A supplementary or replacement prospectus will be or has been
registered by the SC
• The significant change to the fund, highlighting the current and
revised positions i.e.
- change in investment strategy of the fund
- change in distribution policy of the fund
- change in minimum balance
• Effective date (=>14 days of notice) of the significant change.
• If NOT significant, inform unitholder via annual or interim report
(whichever earlier) of changes and effective date.
These Guidelines apply to—
(a) a person who is a Shariah adviser or intending to apply to be registered as a Shariah adviser;
(b) an Islamic fund management company;
(c) a fund management company that carries on an Islamic fund management business under an Islamic ‘window’;
(d) an issuer seeking to make available, issue or offer an Islamic capital market product;
(e) a Registered Corporation undertaking Islamic venture capital or private equity activity; and
(f) a recognized market operator seeking to facilitate the making available, issuance or offering of an Islamic capital market product through its platform.
These Guidelines must be read together with the relevant provisions in the securities laws and the relevant guidelines issued by the SC including—
(a) Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework (LOLA Guidelines);
(b) Guidelines on Issuance of Corporate Bonds and Sukuk to Retail Investors;
(c) Guidelines on Unit Trust Funds;
(d) Guidelines on Listed Real Estate Investment Trusts;
(e) Guidelines on Real Estate Investment Trusts;
(f) Guidelines on Exchange-traded Funds;
(g) Business Trusts Guidelines;
(h) Guidelines on Private Retirement Schemes.
Shariah Adviser
• Appoint one of the Shariah advisers approved/
registered by SC:
– Independent shariah advisor who is:
➢ Not an undischarged bankrupt;
➢ Not convicted for any offence;
➢ Of good repute & character; and
➢ Possess necessary qualifications & expertise esp. in fiqh &
muamalah & Islamic jurisprudence with minimum 3 years
experience/exposure in Islamic finance.
– A corporation – must engaged at least one Shariah expert
– Islamic banks or approved licensed bank
Appointment of Shariah Adviser
• May appoint a non- resident Shariah adviser.
• Must notify the SC of any resignation or cessation of services
by a Shariah adviser within 2 weeks of resigning or ceasing of
services.
• A new Shariah adviser must be appointed within 1 month
from the resignation or cessation of services.
Role of Shariah Adviser
• Advising on all aspects of capital market products in accordance
with Shariah principles
• Providing Shariah expertise and guidance on all matters,
particularly in documentation, structuring and investment
instruments, and ensure compliance with relevant securities laws
and guidelines issued by the SC
• Ensuring that the applicable Shariah rulings, principles and
concepts endorsed by the SAC are complied with
• Applying ijtihad (intellectual reasoning) to ensure compliance with
Shariah, in the absence of any rulings, principles and concepts
endorsed by the SAC.
Islamic “Window”
• Islamic fund management business under an Islamic “window” must segregate the accounts from its Islamic fund management business and those from its conventional fund management business.
Role of Shariah Adviser
• Advising on all aspects of capital market products in accordance
with Shariah principles
• Providing Shariah expertise and guidance on all matters,
particularly in documentation, structuring and investment
instruments, and ensure compliance with relevant securities laws
and guidelines issued by the SC
• Ensuring that the applicable Shariah rulings, principles and
concepts endorsed by the SAC are complied with
• Applying ijtihad (intellectual reasoning) to ensure compliance with
Shariah, in the absence of any rulings, principles and concepts
endorsed by the SAC.
Bai` bithaman ajil (BBA) (Deferredpayment sale)
A contract that refers to the sale and purchase of assets on a deferred and instalment basis with pre-agreed payment period.
Bai` ‘inah (Sale with immediate repurchase)
A contract which involves the sale and buy back transaction of an asset by a seller. A seller will sell the asset to a buyer for cash. The seller will immediately buy back the same asset on a deferred payment basis at a price that is higher than the cash price. It could also be applied when a seller sells the asset to a buyer on a deferred basis. The seller will later buy back the same asset for cash at a price which is lower than the deferred price.
Bai` istijrar (Supply sale)
A contract between a client and a supplier, whereby the supplier agrees to supply a particular product on an ongoing basis, for example monthly, at an agreed price and on the basis of an agreed mode of payment.
Bai` salam (Advance purchase)
Concepts Description Bai` salam (Advance purchase) A sale and purchase contract whereby the payment is made in cash at the point of contract but the delivery of the asset purchased will be deferred to a pre-determined date.
Bai` wafa’ (Sale and repurchase)
A contract with the condition that when the seller pays back the price of goods sold, the buyer returns the goods to the seller.
Ijarah (Leasing)
A contract whereby a lessor (owner) leases out an asset to a lessee at an agreed lease rental for a predetermined lease period. The ownership of the leased asset shall always remain with the lessor.
Ijarah thumma bai` (Lease to purchase)
A contract which begins with an ijarah contract for the purpose of renting out a lessor’s asset to a lessee. Consequently, at the end of the lease period, the lessee will purchase the asset at an agreed price from the lessor by executing a purchase contract.
Istisna` (Purchase order)
A purchase order contract where a buyer requires a seller or a contractor to deliver or construct the asset to be completed in the future according to the specifications given in the sale and purchase contract. The payment term can be as agreed by both parties in the contract.
Murabahah (Costplus sale)
A contract that refers to the sale and purchase of assets whereby the cost and profit margin (mark-up) are made known.
Musawamah (Negotiated sale)
A contract that refers to the sale and purchase of asset where the selling price of the asset is negotiated between the seller and the buyer, with the cost price not being disclosed or made known to the buyer.
Musharakah (Profit and loss sharing)
A partnership arrangement between two or more parties to finance a venture whereby all parties contribute capital either in the form of cash or in kind for the purpose of financing the said venture. Any profit derived from the venture will be distributed based on a preagreed profit sharing ratio, but a loss will be shared on the basis of capital contribution.
Qardh hasan (Benevolent loan)
A contract of loan between two parties on the basis of social welfare or to fulfil a short-term financial need of the borrower. The amount of repayment must be equivalent to the amount borrowed. It is however legitimate for a borrower to pay more than the amount borrowed as long as it is not stated or agreed at the point of contract.
Tawarruq (Tripartite sale)
Purchasing a commodity on a deferred price and then selling it to a third party for cash.
Wakalah (Agency)
A contract where a party authorises another party to act on behalf of the former based on the agreed terms and conditions as long as he is alive.
Bai` dayn (Debt trading)
A transaction that involves the sale and purchase of debt.
Bai` muzayadah (Open-bidding trading)
An action by a person to sell his asset in the open market through a bidding process among potential buyers. The asset for sale will be awarded to the person who has offered the highest bid/price. This is also known as the sale and purchase transaction based on tender.
Kafalah (Guarantee)
A contract of guarantee whereby a guarantor underwrites any claim and obligation that should be fulfilled by an owner of the asset. This concept is also applicable to a guarantee provided on a debt transaction in the event a debtor fails to fulfil his debt obligation.
Haq tamalluk (Ownership right)
An asset in the form of ownership rights as classified by Shariah which are tradable.
Hibah (Gift)
A gift awarded to a person on voluntary basis.
Hiwalah (Transfer of debt)
A contract that allows a debtor to transfer his debt obligation to a third party.
Ibra’ (Release of rights)
An act of releasing absolutely or conditionally one’s rights and claims on any obligation against another party which would result in the latter being discharged of his/its obligations or liabilities towards the former. The release may be either partially or in full.
Ju`alah (Reward)
Contract of reward; a unilateral contract promising a reward for a specific act or accomplishment.
Rahn (Collateral)
An act whereby a valuable asset is made as collateral for a debt. The collateral will be utilised to settle the debt when a debtor is in default.
Tanazul (Waiver of rights)
Waiver of right by one party to another party in musharakah, mudharabah and wakalah bi al-istithmar contracts where the right waived is transferred to other party.
Ujrah (Fee)
A financial fee for the utilisation of services or manfa`ah (usufruct). In the context of today’s economy, it can be in the form of salary, allowance, commission and any other permissible form of assets.
Wadi`ah yad amanah (Safekeeping based on trust)
Goods or deposits kept with a custodian (who is not the owner) for safekeeping based on trust. The custodian is not allowed to use the deposits nor entitled to any share of the profits.
Wadi`ah yad dhamanah (Safekeeping with guarantee)
Goods or deposits kept with a custodian (who is not the owner) for safekeeping. When the custodian utilises the deposits, the custodian guarantees the repayment of the whole amount of the deposits or any part of it, when demanded. In this case, the rule of qardh shall apply and the depositors are not entitled to any return on the deposits. However, the custodian may provide rewards to the depositors as a token of appreciation in the form of hibah.
The business activity benchmarks
If the Islamic business trust comprises both Shariah-compliant and Shariah-noncompliant activities, the contribution of Shariah non-compliant activities to the total revenue and profit before tax of the Islamic business trust must be less than the business activity benchmarks as follows:
The 5% benchmark
This benchmark is used to assess the level of mixed contributions from
the activities that are clearly prohibited such as—
(A) conventional banking and lending;
(B) conventional insurance;
(C) gambling;
D) liquor and liquor-related activities;
(E) pork and pork-related activities;
(F) non-halal food and beverages;
(G) tobacco and tobacco-related activities;
(H) interest income from conventional accounts and instruments (including interest income awarded arising from a court judgement or arbitrator;
(I) dividends from Shariah non-compliant investments;
(J) Shariah non-compliant entertainment;
K) other activities deemed non-compliant according to Shariah principles as determined by the SAC
The 20% benchmark
This benchmark is used to assess the level of mixed contributions from
the activities that are generally permissible according to Shariah and have
an element of maslahah (public interest), but there are other elements
that may affect the Shariah status of these activities. Activities that fall
under this category include but not limited to—
(A) share trading;
(B) stockbroking business;
(C) rental received from Shariah non-compliant activities; and
(D) other activities deemed non-compliant according to Shariah
principles as determined by the SAC.
Fit and Proper
A person is considered to be fit and proper if—
(1) the person—
(a) has not been convicted, whether within or outside Malaysia, of an offence involving
fraud or dishonesty, or violence or the conviction of which involved a finding that
he acted fraudulently or dishonestly;
(b) has not been convicted, whether within or outside Malaysia, of an offence under
securities laws or any laws relating to capital market;
(c) has not been issued, whether within or outside Malaysia, with any compounds or
subject to any administrative action taken by a regulator or law enforcement
agency for any offence involving bribery, fraud, dishonesty, mismanagement of a
company or violence;
(d) has no pending investigations or criminal charge against him in any court of law,
whether within or outside Malaysia, for an offence involving bribery, fraud,
dishonesty, mismanagement of a company or violence;
(e) has not had any civil enforcement action filed against him in any court of law by
any regulator or law enforcement agency, whether within or outside Malaysia;
(f) is not an undischarged bankrupt or is in the course of being wound up or otherwise
dissolved, as the case may be, whether within or outside Malaysia;
(g) has no execution against him in respect of a judgment debt, whether within or
outside Malaysia;
(h) has not, whether within or outside Malaysia, entered into a compromise or scheme
of arrangement with its creditors, being a compromise or scheme of arrangement
that is still in operation;
(i) is not disqualified to be a director, whether within or outside Malaysia, under the
corporation laws or securities laws; and
(j) has not have any receiver, receiver and manager or an equivalent person
appointed, whether within or outside Malaysia, in respect of any of his property;
Fit and Proper
the SC is satisfied that—
(a) the person is not engaged in any business practices appearing to the SC to be
deceitful, oppressive or otherwise improper, whether unlawful or not, or which
otherwise reflect discredit on his method of conducting business;
(b) the person is not engaged in or has not been associated with any other business
practices or has not conducted himself in such a way as to cast doubt on his
competence and soundness of judgment;
(c) the person is not engaged in or has not been associated with any conduct that cast
doubt on his ability to act in the best interest of investors, having regard to his
reputation, character, financial integrity and reliability;
(d) the person is suitably qualified to assume the position including having the relevant
experience and track record;
(e) there are no other circumstances which are likely to lead to the improper conduct
of operations by the person, or reflect discredit on the manner the person would
carry out his duties; and
(f) it would not be contrary to public interest to register the person.
• Inform trustee of any acquisition and disposal of ETF assets in
writing within one business day
• If exceed power, cancel transaction or make corresponding
transaction at own expense to secure restoration of the previous
position
• Generally, may invest in
‐ Equities, debentures and warrants (”transferable securities”)
‐ Deposits and money market instruments
‐ Units/shares in collective investment schemes
‐ Derivatives.
• Foreign investments - limited to markets where the regulatory
authority is a member of IOSCO
Spread Limits - ETFs
Concentration Limits - ETF
Investment Limit - ETFs
Investment Limit - ETFs
Collateral for OTC Derivatives
• The exposure to a single counterparty for OTC may be construed as
being lower if receive collateral, subject to:
- It is marked-to-market daily and liquid
- It is free from all prior encumbrances
- Only consist of cash, money market instruments, liquid ordinary
shares, bonds or sukuk (subject to investment and spread limits,
see net slide) and free of encumbrance
- Not issued by the counterparty or any of its related corporation;
- Must be held by the trustee in trust account for the ETF
- Subject to prudent haircut policy.
• Top up collateral no later than the close of the next business day if
the current value of the collateral decline
• Cash collateral may be reinvested but not in FI which is the same
counterparty
Constituent of ETF Assets
• Weighting can be based on either:
• Full replication of the tracked index
• Representative sampling of the constituent of the tracked
index
• Synthetic replication of the constituent of the tracked
index
• Need not consist of the exact composition and weighting of
the constituents if poor liquidity.
Acceptable Indices
• Have a clearly defined objectives; or clear market or sector
• Objectively calculated and rules-based
• Diversified – maximum weight per constituent is 20%. For nonequities, maximum weight of one constituent is 30%. (Not
applicable to commodity/futures-based ETF)
• Sufficient liquidity
• Transparency and easily accessible by investor
• Constructed, maintained and reviewed by a reputable 3
rd
party index provider.
Wholesale Funds
• Responsible parties:
- The issuers
- Licensed person
- A person who has authority/responsible to make
statement about the product/fund
- Directors and officers of the fund
Wholesale Funds
• Units offer exclusively to sophisticated investors
▪ Can be established either under trust or custodian structure, or
both
▪ Trustee (with deed) and Custodian (with custodial agreement)
must be registered with SC
▪ Islamic funds – appoint a Shariah Advisor
▪ If => 85% is invested in a target fund, the target fund must be
approved by SC
▪ May invest in Gold ETF
Wholesale Fund Investments
• Must not be detrimental to the interest of the investors or
contrary to public interests
• Nature and structure of fund’s investments must not result in
the circumvention of any regulatory provisions or
requirements i.e. invest via a SPV in assets other than
- conventional and Shariah-compliant securities
- derivatives
- money market instruments
- deposits in conventional and Islamic deposit accounts
- real estate located outside Malaysia
Lodgement
• Lodgement:
▪ Local funds – by the fund management company
▪ Foreign funds – by adviser (initial
lodgement)/representatives
• Must be launched =< 60 days business day of
lodgement
▪ Content of Lodgement Document: Refer to Lodgement Kit: Unlisted Capital Market Products under the Lodge and Launch Framework Part 1 : Section 2 : Information to be provided to the SC at the initial lodgement/revision to lodgement
Fund Valuation
• At least once at month
• With real estate outside Malaysia, at least once every three
years
• Valuation must be consistent, objectives and verifiable
• If incorrect pricing, reimbursement
- by management company/operator, to fund and investors
(past/present)
- by fund to management company/operator
• Fund liquidity must be constantly be management by
management company/operator
Fund Register
• Maintain name, address/registered address, identity card
number, company registration number, if applicable, of
investors
• Additional details in register:
- the number of units held by each investor
- the date on which the name of each investor was entered
in the register
- the date on which any person ceased to be an investor in
the wholesale fund
- any other relevant information or particulars of the
investor.
• Maintain above records for at least 7 years
Reporting Requirements
Submission to SC for Revision of T&Cs
• A letter to the SC which includes rationale for revision,
confirmation of compliance with guidelines, and details of the
contact person of the principal advisor
• A marked-up version copy of the revised principal terms and
conditions
• A copy of the written consent from the relevant parties in relation
to the revision
• Others:
- Supplementary information memorandum/offering circular;
- Executed supplementary trust deed
- Shariah Pronouncement, if applicable
- Other offer documents
Requirements of Service Provider
• Made fair treatment to investor as an integral part
of corporate culture
• Give due regard to the interest of the investors in
the development, marketing and sales of products
• Perform suitability assessment
• Produce Product Highlight Sheet (PHS)
Fair Treatment to Investors
Product Issuer
• Have policies and processes that give due regard to the interest
of investors must be in place
• Ensure suitability of product for investors
• Ensure fees and charges are fair
• Investors must be fully informed of product features
• No fault or misleading information
• Proper complaint channel for investors and deal with them
immediately
Fair Treatment to Investors
Product Distributor
• Have policies and processes that give due regard to the interest
of investors must be in place
• Ensure employees and sales agent act honestly, fairly; and
professionally
• Adequate training for sales staff/agents
• Maintain confidentiality of investors’ information
• Perform suitability assessment and provide PHS
• Remuneration system must not lead to mis-selling
Treatment of Investors
Categories of Investors
Suitability Assessment
Suitability Assessment
Accredited Investor
Not Required
Not Required
High Net-Worth Entity
Required (UNLESS OPT- OUT)
Required (UNLESS OPT-OUT)
High Net-Worth Individual
Required
Required
Retail Investor
Required
Required
“Opt out” – at the discretion of the investors, not to receive a product highlights sheet or undergo suitability assessment, as the case may be.
Definitions - ML
Definitions - ML