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Securities Commission revises the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework

04 September 2023

The Securities Commission Malaysia (“SC”) issued the 15th revision of the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework (“UCMP Guidelines”) on 29 August 2023. This revision of the UCMP Guidelines took effect on the date of issuance and replaced the 14th revision of the Guidelines of the same name (“Superseded Guidelines”).
 
The amendments introduced under the UCMP Guidelines will, inter alia, enable operators1 and fund management companies to make available wholesale funds that invest in alternative investment products, such as digital assets.
 
On the same day, the SC announced amendments to the Guidelines for the Offering, Marketing and Distribution of Foreign Funds (“OMDFF Guidelines”) to, among others, introduce a Foreign Exempt Scheme (“FES”) framework to provide accredited investors and high net worth entities with greater onshore access to foreign investment funds.
 
This Article will highlight the salient amendments to the UCMP Guidelines while our article on the amendments to the OMDFF Guidelines can be accessed here.
 
New definitions
 
The following new definitions have been added to paragraph 2.01 of Section A of the UCMP Guidelines:
 
  • “CMSL” means a Capital Markets Services Licence granted to a person pursuant to section 61 of the Capital Markets and Services Act 2007 (“CMSA”);

  • “digital assets” means a digital currency or digital token, and “digital currency” and “digital token” have the meanings assigned to them in the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019;

  • “Foreign Exempt Scheme” has the meaning assigned to it in the OMDFF Guidelines;

  • “IEO operator” has the meaning assigned to it in the SC’s Guidelines on Digital Assets; and

  • “investment account” has the meaning assigned to it in the Islamic Financial Services Act 2013.
The definition of “corporate bonds” has been amended to refer to “debentures as defined in the CMSA but do not include structured product” to be aligned with the existing definition in other guidelines issued by the SC.
 
Wholesale funds – Part 1 of Section B of the UCMP Guidelines
 
Distribution of income
 
Under paragraph 2.15 of Part 1 of Section B of the Superseded Guidelines, the guidance provided in the guidance box only applies to sub-paragraph (b) of paragraph 2.15 (i.e. for distribution out of capital). The amended paragraph 2.15 of Part 1 of Section B of the UCMP Guidelines now provides that the guidance applies to both forms of income distribution set out in sub-paragraphs (a) and (b) of paragraph 2.15.
 
Expansion of permitted investments
 
Paragraph 2.20(b) of Part 1 of Section B of the Superseded Guidelines prohibits a fund management company that pools its clients’ monies to invest through an SPV from investing in any asset other than: (a) conventional and Shariah-compliant securities; (b) derivatives; (c) money market instruments; (d) deposits in conventional and Islamic deposit accounts; and (e) real estate located outside Malaysia.
 
Paragraph 2.20(b) of Part 1 of Section B of the UCMP Guidelines has been amended to allow an operator or fund management company that pools its clients’ monies to invest through an SPV, to invest in assets other than those mentioned in sub-paragraphs (a) to (e) of the preceding paragraph, provided it has a risk management policy and procedures of the fund in a standalone document that will enable the fund management company or operator to effectively monitor, measure and manage risks of the investment positions of the fund and their contributions to the risk profile of the fund including all relevant risks associated with investments in the underlying assets.
 
Additional requirements for investment in digital assets
 
A new paragraph 2.22 has been added to Part 1 of Section B of the UCMP Guidelines to require the fund management company of a local wholesale fund that invests in digital assets to:
 
  1. ensure that any digital currency trading platform outside Malaysia or other counterparty it relies on: (i) is registered with, or regulated by, one or more laws of a foreign country giving effect to the Financial Action Task Force’s recommendations relating to customer due diligence and recordkeeping; and (ii) has a risk-based Anti-Money Laundering/Combating the Financing of Terrorism systems and controls that are supervised or monitored by a body empowered by law to supervise and enforce the customer due diligence and record-keeping obligations; and

  2. have a risk management policy and procedures of the fund in a standalone document that will enable the fund management company to effectively monitor, measure and manage risks of the investment positions of the fund and their contributions to the risk profile of the fund, including all relevant risks associated with investments in digital assets; and

  3. ensure that any investment in digital token is limited to those which has been hosted for offering through an electronic platform by an IEO operator and such other digital token as may be permitted by the SC from time to time.
A new paragraph 2.23 of Part 1 of Section B of the UCMP Guidelines clarifies that for any investment in digital currency, such investment is not limited to those that have obtained the SC's concurrence to be traded on an electronic platform which facilitates the trading of a digital currency.
 
A new paragraph 3.01A of Part 1 of Section B of the UCMP Guidelines requires the fund management
company of a wholesale fund that intends to invest in digital assets, to submit the risk management policy and procedures under paragraph 2.22(b) of Part 1 of Section B of the UCMP Guidelines to the SC, eight weeks prior to the lodgement of the wholesale fund under the UCMP Guidelines.
 
Investments in investment accounts
 
A new paragraph 2.24 has been added to Part 1 of Section B of the UCMP Guidelines to require the fund management company or operator of a local wholesale fund that invests in restricted investment account (RIA) or unrestricted investment account (UIA) which is not regarded as a money market instrument, to:
 
  1. ensure that the investment account identified for investment by a fund is consistent with the objective of the wholesale fund;

  2. have a risk management policy and procedures of the fund in a standalone document, that will enable the fund management company or operator to effectively monitor, measure and manage risks of the investment positions of the fund and their overall contributions to the risk profile of the fund including all relevant risks associated with investments in the underlying assets including credit risks and liquidity risks; and

  3. verify the valuation methodology of the said investment account independently.
A guidance box is added to paragraph 2.24 to provide clarity on investments in an investment account.
 
Minimum requirements for offering document
 
A new Chapter 7 has been added to Part 1 of Section B of the UCMP Guidelines to set out the minimum disclosure to be included in the offering document of a wholesale fund. Among others, these include the following requirements:
 
  1. the fund management company or operator must provide investors of a wholesale fund with an offering document containing all necessary information that will enable investors to make an informed assessment of the offer;

  2. the offering document must contain the information listed in sub-paragraphs (a) to (k) of paragraph 7.02 of Part 1 of Section B of the UCMP Guidelines, including, among others, the following: (i) the constitution of the fund; (ii) the management company or, in the case of a foreign wholesale fund, the operator and the representative in Malaysia; (iii) the trustee or custodian, and the custodial arrangements; (iv) the fund’s investment objective, policy(ies) and strategy; (v) the risks associated with the fund’s investment portfolio, or where the investments are held via a SPV, the underlying assets of the SPV; (vi) the fund manager; (vii) the rights and liabilities of unit holders; (viii) asset valuation, including the determination of the fund’s NAV and NAV per unit; (ix) procedures for subscription and redemption of units; and (x) fees and charges relating to the fund; and

  3. the offering document being lodged with the SC before it is provided to investors.
Foreign Exempt Scheme - New Part 6 of Section B of the UCMP Guidelines
 
A new Part 6 of Section B of the UCMP Guidelines sets out the requirements relating to an FES, i.e. a Foreign Exempt Scheme. These include the following:
 
  1. an FES must comply with the OMDFF Guidelines before being lodged and launched in Malaysia;

  2. the Responsible Party2 and Lodgement Party3 of an FES must be: (i) a holder of a Capital Markets Services Licence for fund management in relation to portfolio management and is a related corporation to the operator; or (ii) the operator, if it is the holder of a capital markets services licence mentioned in paragraph (b)(i) hereof;

  3. the Lodgement Party must lodge all information and documents as set out in the Lodgement Kit4 with the SC via e-mail or in any other manner as may be specified by the SC;

  4. the Responsible Party is to provide information as specified in the Lodgement Kit to the SC for the FES’s annual submission within 14 business days after 31 December of each year; and

  5. the Responsible Party must notify the SC of the cessation of distribution of the FES in Malaysia; the notification is to be made as soon as practicable and in any event, no later than the next annual submission of statistical information and documents of the FES to the SC5.
Transitional arrangement
 
Fund management companies of existing wholesale funds which have been lodged and launched before 29 August 2023 are granted a transitionary period of six months (i.e. until 28 February 2024) to make the necessary amendments to the wholesale funds’ documentation and are required to lodge their revised documentation under the LOLA Online Submission System6 by the end of the transitionary period.7

Comments
 
The expansion of the range of investments that may be included in wholesale funds under the UCMP Guidelines, including digital assets, is to be welcomed. To safeguard investors, the offering of digital assets is subject to additional requirements.
 
The requirement for mandatory information to be included in the offering document for a wholesale fund under the new paragraph 7.02 of Part 1 of Section B of the UCMP Guidelines will ensure that investors are provided a level of information that will enable them to make informed decisions as to whether or not to invest in the fund.
 
Article by Phua Pao Yii (Partner), Kok Chee Kheong (Partner) and Tan Wei Liang (Senior Associate) of the Corporate Practice of Skrine.
 
1 An “operator” has the meaning assigned to it in the OMDFF Guidelines (paragraph 2.01 of Part A of the UCMP Guidelines).
2 The “Responsible Party” refers to any person who is accountable or responsible, whether solely or jointly with other persons in the lifecycle of an unlisted capital market product (paragraph 2.01 of Part A of the UCMP Guidelines).
3 The “Lodgement Party” refers to the Responsible Party specified in Section B of the UCMP Guidelines who is required to lodge the relevant information and documents with the SC (paragraph 2.01 of Part A of the UCMP Guidelines).
4 The “Lodgement Kit” is a manual that provides for the relevant information and documents that must be lodged with the SC as required under the UCMP Guidelines (paragraph 2.01 of Part A of the UCMP Guidelines).
5 See Question 3.1 of the Frequently Asked Questions on the UCMP Guidelines (issued by the SC on 29 August 2023).
6 The LOLA Online Submission System is an online platform for lodgement of documents and information under the Lodge and Launch Framework of the UCMP Guidelines.
7 See Question 2.1 of the Frequently Asked Questions on the UCMP Guidelines (issued by the SC on 29 August 2023).

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 skrine@skrine.com.

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