MAS' OBSERVATIONS FOR VENTURE CAPITAL FUND MANAGERS AND OTHER FUND MANAGEMENT COMPANIES
The MAS on 14 Mar 2023 published a circular to all fund management companies (“FMCs”) regulated by it to share observations from inspections conducted from March to November 2022 on holders of capital markets services licences conducting venture capital fund management (“VCFMs”).
MAS’ observations were on whether:
a) VCFMs’ business activities were focused on venture capital fund management;
b) Venture capital funds managed by the VCFMs complied with the specified criteria for assets under management of VCFMs;
c) VCFMs had disclosed in writing to investors that they were not subject to certain business conduct and financial requirements imposed on other licensed fund management companies (“LFMCs”) and registered fund management companies (“RFMCs”); and
d) VCFMs had requisite policies and internal controls, in particular, to manage potential conflicts of interest.
MAS stated that some observations applied to other types of FMCs and all FMCs were expected to note its supervisory expectations and recommended practices and address any gaps in their own operations.
a) Whether the VCFMs’ business activities were focused on venture capital fund management;
The VCFMs inspected did not carry out any regulated activities other than the management of “venture capital funds”. Some VCFMs provided administrative or support services to the portfolio companies, such as assisting the portfolio companies with recruitment or the development of business strategies, which were incidental to the VCFM’s role as a venture capital fund manager. VCFMs that carry out such incidental activities should nonetheless ensure that they remain focused on venture capital investing, and that all potential conflicts of interest that may arise are fully mitigated. In this regard, the VCFMs that provided these services did not charge fees to the portfolio companies or the funds for the services rendered, as a way of mitigating potential conflicts of interest. iii) VCFMs are reminded to ensure that their core business remains focused on managing venture capital funds, and where incidental activities are carried out, that all potential conflicts of interest are fully mitigated.
b) Whether venture capital funds managed by the VCFMs complied with the specified criteria for assets under management of VCFMs;
VCFMs may only manage closed-ended funds offered to accredited and/or institutional investors which invest at least 80% of committed capital (excluding fees and expenses) in specified products that are directly issued by an unlisted business venture that has been incorporated for no more than ten years at the time of initial investment (“qualifying investments”), with up to 20% of committed capital (excluding fees and expenses) being allowed to be invested in anything that is not a qualifying investment.
In its circular, MAS stated that it did not observe any breaches by the VCFMs inspected in respect of exceeding the cap on non-qualifying investments, or the onboarding of non-accredited or non-institutional investors. However, some VCFMs failed to:
- Maintain documentation evidencing that investors satisfied the “accredited investor” definition;
- Complete customer due diligence on investors prior to onboarding; and/or
- Obtain the accredited investor “opt-in” from their investors.
MAS highlighted that “[a]ll FMCs are subject to the same requirements in respect of customer due diligence, and obtaining the “opt-in” from investors that are accredited investors”.
c) Whether VCFMs had disclosed in writing to investors that they were not subject to certain business conduct and financial requirements imposed on LFMCs and RFMCs
VCFMs are required to disclose in writing to all investors that they are not subject to the conduct of business requirements and financial requirements that apply to other types of FMCs under the Securities and Futures (Licensing and Conduct of Business) Regulations and Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services Licences) Regulations. The MAS found that most VCFMs inspected had requisite disclosures in their funds’ private placement memorandums and/ or investor subscription documents. However, MAS observed that some VCFMs inspected had not made the requisite disclosures. MAS reminded VCFMs to ensure regulatory compliance at all times and to ensure the requisite disclosures are made before accepting capital commitments from investors.
d) Whether the VCFMs had requisite policies and internal controls, in particular, to manage potential conflicts of interest.
VCFMs are required to have positive levels of base capital at all times. Some VCFMs inspected had negative base capital, often due to accumulated operating losses. The MAS reminded VCFMs to monitor their base capital on an ongoing basis and ensure positive base capital at all times. VCFMs with negative base capital had to immediately rectify this such as by injecting additional capital.
All FMCs must mitigate conflicts of interest that arise in the course of their business. MAS reminded FMCs that potential conflicts of interest could arise without adequate segregation of duties between the firm’s business activities and control functions. MAS stated that it expected FMCs to ensure clear segregation of duties amongst employees with expanding operations or growing headcount. Other good practices for proper conflict management included:
- Having formalised policies and procedures on conflict management, in areas such as handling related party transactions, deal allocation across multiple funds, and co-investments; and
- Establishing governance committees such as advisory committees or risk committees to deliberate on issues involving potential conflicts of interest. In this regard, committees should be suitably independent from the FMC, having for example, independent members or investor representatives.
Last, while VCFMs are not subject to the conduct of business requirements applicable to other LFMCs and RFMCs, MAS found most of the VCFMs inspected to have written policies and procedures such as those governing investment and divestment, valuation, conflict management, cash management, and/or compliance. A few VCFMs did not have formalised policies and procedures in certain areas. MAS stated it that it was good practice for FMCs to have formalised policies and procedures in key areas to mitigate operational risk and encouraged VCFMs to formalise key operating policies and procedures and review these periodically to ensure they remain current and are effective in mitigating potential risks.
Integrity Consulting is a specialist compliance consulting firm that assists all types of capital markets services licence holders with licence applications, registrations, ongoing ad hoc advice, policy drafting, AML consulting services, ensuring that every part of the business stays compliant with MAS regulations. We have advised FMCs on matters noted by the MAS such as capital adequacy, conflicts of interest, accredited investor opt-ins, drafting policies and procedures, for many years.
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