Module 9: Examination Guides

Law of Malaysia

Funds Management Regulation

Reference Materials

1. eGuide Module 9: Funds Management Regulation (First Edition 2022)

5. Guidelines – refer to next slide


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

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


Why Does the Fund Management Industry Need to be Regulated?


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


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 - Areas of responsibilities include:

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

“…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

An acceptance is assent (unconditionally) to the terms of the proposal. The Contracts Act 1950 states that acceptance must be communicated in some usual and reasonable manner if no particular method of acceptance is specified in the proposal.
The following are a few exceptions to the general rule that acceptance must be communicated:
(a) The proposer has dispensed with the need for it.
(b) The proposer allows the party to whom the proposal is made to accept in the form of an act stated in the proposal.
This exception requires that something positive be done. Generally, silence, absence of response or just total disregard of the proposal is not acceptance as there is no positive act that can be related to the proposal.
(c) The proposer allows the acceptance of any consideration for a reciprocal promise (a promise which forms the consideration for another promise) which may be offered with a proposal.
For example, if A sends B a cheque for RM500 with the proposal that it will be the consideration for B’s agreement to sell his motorcycle, B will be deemed to have accepted the proposal if he cashes the cheque even though he has not communicated his acceptance to A. B has accepted a consideration for a reciprocal promise offered with a proposal.
(d) The postal acceptance rule.
The illustration given in the Contracts Act 1950 concerning an acceptance that it is mailed is as follows:
(i) B accepts A’s proposal by a letter sent by post
(ii) The communication of the acceptance is complete:
– As against A, when the letter is posted – As against B, when the letter is received by A.
As with proposals, acceptance can be revoked or withdrawn before acceptance is complete, but not afterwards.


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.

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.

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.

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

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

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

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.

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.


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


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)

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.

The Guidelines on Prevention of Money Laundering and Terrorism Financing for Reporting Institutions in the Capital Market (Guidelines) are issued pursuant to section 66B, section 66E and section 83 of the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA) read together with section 158(1) and section 160A of the Securities Commission Malaysia Act 1993 (SCMA).
These Guidelines are drawn up in accordance with the AMLA and the Financial Action Task Force (FATF) 40 Recommendations.
These Guidelines provide-
(a) requirements and obligations imposed on reporting institutions in preventing and combating money laundering and terrorism financing; and
(b) guidance for reporting institutions to comply with the obligations imposed under the AMLA.
These Guidelines are made in addition to and not in derogation of any other guidelines issued by the Securities Commission Malaysia (SC) or any requirements as provided under the securities laws and the AMLA. Therefore, a reporting institution must comply with other relevant guidelines and requirements.
A reporting institution that is jointly regulated by Bank Negara Malaysia (BNM) and the SC, is required to comply with these Guidelines and the Anti-Money Laundering, Countering Financing of Terrorism and Targeted Financial Sanctions for Financial Institutions (AML/CFT and TFS for FIs) issued by BNM. Where there are differing requirements between the said guidelines, the more stringent requirements shall apply...Read more


Definitions - ML

“Conduct/acts designed in whole or in part to conceal or disguise the nature, location, source, ownership or control of money (can be currency or equivalents) to avoid a transaction reporting requirement under state or federal law or to disguise the fact that the money was acquired by illegal means”.

• A process whereby the origin of funds generated by illegal means is concealed (drug trafficking, gun smuggling, corruption, etc.).

• Examples:
– criminals disguise the illegal origins of their wealth and protect their asset bases, so as to avoid the suspicion of law enforcement agencies and prevent leaving a trail of incriminating evidence.

1. Placement

Placing illegally obtained monies into the financial system or retail economy or are smuggled out of the country - to remove the cash from the location of acquisition to avoid detection from the authorities and to then transform it into other asset forms.

2. Layering

Attempt at concealment or disguise of the source of the ownership of the funds by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity

3. Intergration

The money is integrated into the legitimate economic and financial system and is assimilated with all other assets in the system

Definition of Terrorism Financing

..carrying out transactions involving funds or property, whether from a legitimate or illegitimate source, that may or may not be owned by terrorists, or those have been, or are intended to be used to assist the commission of terrorist acts, and/or the financing of terrorists and terrorist organisations

• Providing or collecting property for terrorist acts;
• Providing services for terrorism purposes;
• Arranging for retention or control of terrorist property; or
• Dealing with terrorist property.

Consequences

• Unintentional becoming criminally involved with the activity - risk of criminal prosecution
• Generate adverse publicity
• Suffer high costs associated with the subsequent loss of business on top of vast legal costs.
• Reputation risk

Combating Money Laundering/Terrorism Financing

Combating ML/TF

1. Compliance with laws

2. Co-operation with law enforcement agencies

3. Establishing internal controls

4. Risk-based approach

5. Customer Due Diligence

Combating Money Laundering/Terrorism Financing

Ultimate responsibility for proper supervision, reporting and compliance pursuant to AMLA and these Guidelines

Responsible for effective implementation of AML/CFT internal programmes, policies and procedures that can manage the ML/TF risks identified

Responsible for the compliance of the AML/CFT internal programmes, policies and procedures

Required to implement appropriate group- wide ML/TF programmes appropriate to its holding company, branches and majority- owned subsidiaries

Customer Identification

• Must obtain satisfactory evidence of the identity and legal existence of the clients before doing business
– Learning essential facts about clients’ backgrounds
– Determining the risk profile of a particular customer or type of customers
• Avoid keeping anonymous accounts or accounts in fictitious names of their clients.
• Not to enter into business relationship with clients who fail to provide evidence of their identity.

Customer Due Diligence

• Conduct ongoing due diligence and scrutiny of customers’ identity and investment objectives.
• Risk-based approach to CDD

Risk Categories

High-risk customers

Low-risk customers

– Non-resident customers;
– Customers from locations known for its high crime or countries lacking in anti-money laundering system
– Politically exposed persons (PEPs) and connected persons/companies
– complex legal arrangements
– companies that have nominee shareholders.

– Licensed financial institutions in Malaysia and in a jurisdiction that is a FATF member;
– public companies that are subject to regulatory disclosure requirements.
– government or government related organisations in a non-NCCT jurisdiction

Enhanced CDD

Wire Transfer of Digital Assets

• Instruction for cross-border wire transfer are accompanied by the following:
✓ Originator name; I/C or passport no.; account /digital wallet no.; and address or date and place of birth
✓ Beneficiary name; I/C or passport no.; and account /digital wallet no.
• Beneficiary institution to identify the transfers that lack the required originator information or required beneficiary information.

Record Keeping

• Retain up-to-date details of customers • Keep record of customer’s transaction involving the domestic currency or any foreign currency exceeding a specified amount.
• Record retention period:
– financial transaction documents relating to the opening of an account are to be kept for 6 years after the date of the account is closed;
– other financial transaction documents are to be kept for 6 years after the date on which the transactions take place or are terminated; and
– where the records relate to on-going investigations or transactions which have been the subject of a suspicious transaction

Suspicious Transactions

• Report immediately suspicious transaction.
• Compliance officer to document if there are no reasonable grounds for suspicion.
• Compliance officer maintains a complete file on all internal suspicious transaction reports received and any supportive documentary evidence.
• Report is to be completed as soon as possible but not in the presence of the suspicious character.

Examples of Suspicious Transactions

• Buying and selling of a security with no discernible purpose or in circumstances which appear unusual.
• Larger or unusual settlements of securities transactions in cash form
• A client for whom verification of identity proves unusually difficult and who is reluctant to provide details • Unusually large cash deposits made by an individual or company whose apparent business would normally involve cheques and other instruments.

Risk-based Approach Application

• To direct supervisory resources to where risks are higher.
• To enable RI to make decision on how to allocate its resources in the most effective way.
• RI shall conduct an institutional risk-assessment comprehensive exercise to identify, assess and understand its ML/TF threats, vulnerabilities and consequential risks to mitigate the illicit flow of funds and transactions.
• Conducted at least once every two years, or as often as the board or senior management, the commission, or the AMLC may direct, using quantitative and qualitative information obtained from relevant internal and external sources.

Risk-based Approach

When conducting customer due diligence, a RI may take into account the following risk factors and risk parameters when determining circumstances of higher risk:

Customer risk factors

Country or geographical risk factors

Transaction or distribution channel risk factors

The act of providing funds or financial services which are used, in whole or in part, for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of nuclear, chemical or biological weapons and their means of delivery and related materials (including both technologies and dual use goods used for non- legitimate purposes), in contravention of national laws or, where applicable, international obligations.

What is proliferation financing (PF)?
In essence, proliferation financing (PF) is an act of providing funds or financial services which are used to develop nuclear, chemical or biological weapons and any related materials to weapons of mass destructions (WMD).

What is targeted financial sanctions (TFS)?
Targeted financial sanctions (TFS) is an act of asset freezing, blocking and rejection of transactions and persons to prevent, suppress, and disrupt the proliferation of WMD and its financing in line with sanctions imposed by the United Nations Security Council (UNSC) through its resolutions (UNSCR).

Targeted Financial Sanctions relating to Proliferation Financing

TFS-PF are applicable to persons designated by the UNSC or the relevant committees set up by the UNSC i.e.
• person engaging in or providing support for, including through illicit means, proliferation-sensitive activities and programmes;
• acting on behalf of or at the direction of designated person;
• owned or controlled by designated person; and
• person assisting designated person in evading sanctions, or violating UNSCR provisions.

Combating PF

1. Policies and procedures for keeping updated with UNSC resolutions

2. Maintain an Maintain updated database of names /particulars of designated persons in the UN Consolidated Lis

3. Conduct screening on customers

4. Freeze, block and reject funds, properties and accounts of designated persons

5. Report to the SC on any freezing, blocking or rejection actions

Governance and Strategy

BOD

Senior Management

• Guiding the FMC towards developing and adopting a systematic and effective responsible investment framework
• Governs and sets strategic direction for the responsible investment framework
• Sets clear roles and responsibilities for the Board and senior management
• Ensures allocation and investments of adequate and competent resources
• Ensures remuneration and incentives structure promotes and cultivates the achievement of investment objectives, targets and performance.

• Responsible for the development and implementation of comprehensive and adequate responsible ESG investment framework, business strategies, risk management policies, tools, metrics, policies and processes and internal controls
• Assign roles and responsibilities and allocate adequate resources to manage ESG risks
• Provide prompt updates and recommendations to the Board on the effectiveness of ESG framework, strategies, tools, metrics, policies and other related matters
• Maintain oversight of the FMC’s disclosures

Investment process

Senior Management

Screening

Thematic

Explicitly and systematically including ESG factors in investment analysis and decision, to better manage risks and/or improve returns.

Applying filters to list of potential investments to rule companies in or out of contention for investment, based on an investor’s preferences.

Seeking to combine attractive risk return profiles with an intention to contribute to a specific environmental or social outcome. This may also include impact investing.

Risk Management Process

• ESG risks should be monitored, assessed and managed on a continuous basis
• Have in place appropriate policies, procedures and systems to monitor and evaluate material ESG risks of its investment portfolio
• Incorporate adequate risk management of the identified material ESG risks Establish integrated monitoring and reporting process to appraise material impact of ESG risks
• Periodically reassess the identification methodology of material ESG risks Findings of ESG risk monitoring and evaluation exercise should be communicated to relevant stakeholders6.
• Adopt an appropriate and reasonable approach to risk management which can include a quantitative approach, qualitative approach or a combination of both i.e. scenario analysis
• Periodic assessment are to be adequately documented.

Stewardship

• Establish clear stewardship including engagement and voting policy which outlines its responsible investment practices
• Monitor investee companies and engage with them on material ESG issues
• Encourage investee companies to provide comprehensive and meaningful disclosures
• Exercise its voting rights and monitor compliance with voting policy on ESG issues

Disclosure

• Disclose entity level information on:
− its objectives, targets, strategies and governance in relation to its responsible investment framework;
− the description of the FMC’s approaches and processes towards the incorporation of ESG factors in the investment decision-making process;
− the process of how ESG risks have been identified, assessed and managed as well as the extent that the process has been integrated into its risk management framework; and
− the description of its proxy voting and investee engagement policies and activities.
• Should also disclose the relevant and material impact of ESG risks on the investment portfolio using metrics, where data and information are available.