Securities Commission introduces Foreign Exempt Scheme Framework for Accredited Investors and High Net Worth Entities
04 September 2023
The Securities Commission Malaysia (“SC
”) introduced the Foreign Exempt Scheme (“FES
”) framework on 29 August 2023 through amendments to the Guidelines for the Offering, Marketing and Distribution of Foreign Funds
”). The amendments took effect on the day of issuance of the amended OMDFF Guidelines.
On the same day, the SC announced amendments to the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework (“UCMP Guidelines
”) to allow wholesale fund managers to invest in alternative investment products.
This Article will highlight the salient amendments to the OMDFF Guidelines while our article on the amendments to the UCMP Guidelines can be accessed here
The following new definitions have been added to paragraph 2.01 of the OMDFF Guidelines:
- “ASEAN SRFS” which refers to the ASEAN Sustainable and Responsible Fund Standards, and “ASEAN Sustainable and Responsible Fund” which refers to a Qualifying Collective Investment Scheme that complies with the ASEAN SRFS; the latter replaces the definition of “ASEAN CIS”;
- “Main Market Listing Requirements” which refers to the Main Market Listing Requirements issued by Bursa Malaysia Securities;
- “digital assets” which means a digital currency or digital token, and “digital currency” and “digital token” are given the same meanings as ascribed to them in the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019;
- “digital investment management” which means the business of fund management incorporating innovative technologies into automated discretionary portfolio management;
- “exchange-traded fund (ETF)” which refers to a listed fund whose principal aim is to: (a) track; (b) deliver multiples of; or (c) deliver opposite of, the performance of an index or a benchmark using a passive investment strategy;
- “Foreign Exempt Scheme” which means a fund that complies with paragraph 3.01(e) of the OMDFF Guidelines; and
- “inverse ETF” which refers to an exchange-traded fund (“ETF”) whose aim is to deliver the opposite of the daily performance of the index or benchmarking being tracked, “leveraged ETF” which refers to an ETF whose aim is to deliver multiples of the daily performance of the index or benchmark, and “synthetic ETF” which refers to an ETF that adopts a synthetic replication strategy by entering into over-the-counter derivative contracts to replicate the index’s performance without directly holding the underlying constituents of the index or benchmark.
Among others, the definition of “Qualifying CIS” has been amended to provide greater clarity.
Foreign Exempt Scheme
A new subparagraph (e) has been added to paragraph 3.01 of the OMDFF Guidelines to permit a foreign fund specified in Appendix 4 (Foreign Exempt Scheme) (“FES”) of the OMDFF Guidelines to be offered, marketed, or distributed in Malaysia.
The requirements of Chapters 4 to 13 of the OMDFF Guidelines are disapplied to an FES but the FES must comply with the requirements in Appendix 4 (new paragraph 3.03).
Criteria for FES
Paragraph 1 of Appendix 4 of the OMDFF Guidelines requires an FES to meet the following criteria:
- established and managed by an operator1 that is: (a) licensed or otherwise regulated and supervised by the relevant regulator in a foreign jurisdiction to carry on the activity of fund management and must be a related corporation to a holder of a Capital Markets Services Licence for fund management in relation to portfolio management (“Relevant CMSL”), but does not include digital investment management; or (b) a holder of a Relevant CMSL, but does not include digital investment management;
- only offered, marketed or distributed to accredited investors and high-net worth entities in Part 1, Schedules 6 and 7 of the Capital Markets and Services Act 2007 (“CMSA”). However, in the case of accredited investors, the FES must not be offered, marketed or distributed to (a) a chief executive officer or a director of any person referred to in paragraphs 3, 4, 5, 6 and 7 of Part 1, Schedules 6 and 7 of the CMSA; and (b) an individual who is a licensed person or a registered person; and
- is not a listed collective investment scheme that invests primarily in real estate.
Offering of FES
All information and documents as set out in the UCMP Guidelines must be lodged with the SC before an FES may be offered, marketed or distributed in Malaysia.
Any advertisement to promote the FES through any means must be disseminated exclusively to the investors set out in sub-item (2) above.2
Any person offering the FES must ensure investors are informed that: (a) the FES is established in a foreign jurisdiction and regulated by the relevant regulator in the foreign jurisdiction; (b) the FES is not authorised or recognised by the SC; and (c) investors must rely on their own evaluation to assess the merits and risks of investing in the FES (collectively “Mandatory Statements
The operator of the FES remains responsible for all continuous obligations to its investors, including informing investors of any material and significant changes affecting the FES as well as any changes to the material information previously provided to its investors.
Representative of FES
For the offering, marketing or distribution of the FES, the operator must: (a) appoint a representative in Malaysia who is the holder of a Relevant CMSL and is a related corporation to the operator; and (b) ensure that there is a representative (i) throughout the duration of the FES being offered; and (ii) so long as there is a unit holder in Malaysia for such FES.
The representative is to submit or make available to the SC any information relating to the FES as set out in the UCMP Guidelines.
Where the operator is a holder of a Relevant CMSL, the operator must carry out all the duties of the representative in Appendix 4 of the OMDFF Guidelines.
The operator is to be responsible for the conduct and obligations of the representative. Where the position of the representative becomes vacant, the operator is required to notify the SC of the appointment of the new representative and immediately cease the offering, marketing and distribution of the FES.
Distributor of the FES
For the purpose of offering, marketing or distribution of the FES, the operator must appoint: (a) a registered distributor3
; or (b) a distributor who is a holder of a Relevant CMSL and is a related corporation to the operator.
The distributor must provide relevant information relating to the FES as requested by the appointed representative of the FES. It must also ensure that investors are informed of the Mandatory Statements.
Statistical returns and documents
The representative of the FES must provide the statistical information and documents as specified by the SC within 14 business days after 31 December of each year or a longer period as may be allowed by the SC, including the year in which the offering, marketing or distribution of the FES ceases.
Other key amendments
Requirements for investments, borrowing and lending
The requirement under paragraph 4.03(c) of the OMDFF Guidelines for a foreign fund specified under Part 2 of Appendix 2 and Appendix 3 has been clarified to state that the rules on investments, borrowing and lending applicable to such foreign fund must be substantially similar to the requirements imposed on a fund primarily regulated in Malaysia.
The table in paragraph 6.04 of the OMDFF Guidelines which sets out the persons who are eligible to be appointed as a representative of a foreign fund has been amended in respect of foreign funds specified under Part 2 of Appendix 2 of the OMDFF Guidelines.
Additional obligations of an operator of a Foreign Exchange-traded Fund
A new Chapter 7 has been introduced to set out additional obligations applicable to an operator of a foreign ETF as specified under Part 1 of Appendix 1 and Part 2 of Appendix 2 of the OMDFF Guidelines. These include, among others, the following requirements:
- to maintain a website that includes information prescribed in sub-paragraphs (a) to (k) of paragraph 7.01 of the OMDFF Guidelines;
- to ensure that the documents prescribed in sub-paragraphs (a) to (d) of paragraph 7.02 of the OMDFF Guidelines, such as the offering document, latest annual report, other periodic reports and all notices and public announcements issued by the foreign ETF, are available to Malaysian investors through its website or such other channels as the SC considers appropriate; and
- to notify the SC of the events specified in sub-paragraphs (a) to (b) of paragraph 7.03 of the OMDFF Guidelines, such as a change in the composition or weightings of the constituents of the index.
Submission of applications and documents
Paragraph 9.11 of the OMDFF Guidelines has been amended so that an application for approval or recognition of a foreign fund that is offered to retail investors is to be submitted in accordance with, and accompanied by the documents, as specified on the SC’s website. Paragraphs 8.11 and 8.13 of the superseded corresponding guidelines set out the documents and information to be submitted and provide for the submission by hardcopies of such documents.
Additional Obligations of Adviser
A new Chapter 10 of the OMDFF Guidelines sets out the additional obligations of an adviser4
making a submission to the SC. Among others, these include:
- the duty to ensure (after making due and careful enquiries) that the submission meets the SC’s requirements as set out in the securities laws and the Main Market Listing Requirements;
- having sufficient personnel with relevant experience, competency and qualifications at all times and ensuring it has adequate resources to supervise diligently, and to actually supervise diligently, the persons employed or appointed to conduct business on its behalf;
- having effective policies and procedures for the proper performance of its obligations under the OMDFF Guidelines, including procedures to continuously review such policies and procedures to address any inadequacies and gaps; and
- documentation retention requirements for at least seven years from the SC’s decision or termination of its engagement after a submission has been made to the SC or submission to or deposit of documents with the SC in relation to the submission, whichever is the latest.
Obligations of Operator in relation to a Submission by an Adviser
A new Chapter 11 of the OMDFF Guidelines sets out additional obligations of an operator5
who is not making a submission to the SC for the offering of a foreign fund. These obligations include extending its full cooperation and participation to other parties involved in the submission to the SC including: (a) providing and verifying relevant information to enable an adviser to perform its obligations in relation to the submission; (b) informing the adviser of any change to information that was previously made available or provided as well as new information that may impact the submission; and (c) responding in a prompt and complete manner to any queries and concerns raised by the SC and the adviser in relation to the submission.
Application for recognition for offering of foreign fund to sophisticated investors
The requirements relating to the submission of an application for recognition for the offering of a foreign fund to sophisticated investors under paragraph 3.01(d) (i.e. a one-time offering of units in a foreign listed fund that proposes to invest primarily in income-generating real estate) of the OMDFF Guidelines has been amended in the following respects:
- paragraph 12.05 has been clarified to state that the principal adviser making the submission is to comply with the requirements set out in paragraphs 9.05 to 9.10 of the OMDFF Guidelines and Chapter 5 of the Guidelines on Submission of Corporate and Capital Market Product Proposals; and
- a new paragraph 12.05A has been inserted to provide that the application is to be submitted online (instead of hardcopy) and accompanied by the documents as specified on the SC’s website.
Permitted foreign funds specified under paragraph 1 of Part 1 of Appendix 2
A new paragraph 2 has been added to Part 1 of Appendix 2 of the OMDFF Guidelines to state that an unlisted fund specified in paragraph 1 of Part 1 of Appendix 2 (i.e. a permitted foreign fund for non-retail investors under the ACMF NRI MOU6
) must not be a fund that invests in digital assets or assets of a similar nature.
Other permitted foreign funds
Part 2 of Appendix 2 of the OMDFF Guidelines has been amended to allow a foreign ETF operator to list up to five non-plain vanilla ETFs (i.e. leveraged ETF, inverse ETF and synthetic ETF).7
The introduction of the FES will provide accredited investors and high net worth entities with greater onshore access to foreign investment funds, and to that extent will add greater depth and breadth to the domestic capital market. The amendments also provide greater clarity on the responsibilities of the operator, representative and adviser of a foreign fund under the OMDFF Guidelines.
Article by Phua Pao Yii (Partner), Kok Chee Kheong (Partner) and Tan Wei Liang (Senior Associate) of the Corporate Practice of Skrine.
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact firstname.lastname@example.org.
An “operator” is a person that operates or manages and is responsible for a foreign fund (paragraph 2.01 of the OMDFF Guidelines).
See Question 1.1 of the Frequently Asked Questions on the OMDFF Guidelines (issued by the SC on 29 August 2023) for non-exhaustive examples of prohibited advertisements.
A “registered distributor” in relation to an FES is (a) an institution, a corporation or an organisation registered with the Federation of Investment Managers Malaysia (“FIMM
”) as an institutional unit trust adviser (IUTA); or (b) an institution, a corporation or an organisation of financial planners registered with FIMM as a corporate unit trust adviser (CUTA) (paragraph 2.01 of the OMDFF Guidelines).
An “adviser” is a holder of a Capital Markets Services Licence for advising on corporate finance or such other person as may be approved by the SC based on the person’s qualification, expertise and experience (paragraph 2.01 of the OMDFF Guidelines).
For the purposes of Chapter 11, references to an operator includes the directors, promoters and any employee
authorised to act on behalf of the operator (paragraph 11.01 of the OMDFF Guidelines).
The expression “ACMF NRI MoU” refers to the memorandum of understanding concerning co-operation and exchange of information on cross-border offers of ASEAN collective investment schemes to non-retail investors (paragraph 2.01 of the OMDFF Guidelines).